But the rating firm noted that positive factors are offset by sluggish demand for those products sensitive to economic growth, including workers' compensation and auto insurance. Moody's attributed this to a continuing contraction in Portugal's Gross Domestic Product as well as the strong competition in the automobile insurance sector.

The report written by Lynn Exton, a Moody's senior vice-president, found the Portuguese insurance market has a strong medium-term growth potential, especially for life insurance products, based on the country's relative lack of progress in developing a supplemental pension scheme for an aging underinsured population.

Moody's also said it views favorably the extensive internal restructuring of claims management, underwriting and distribution carried out by the sector leaders, which has started to yield positive results in terms of efficiency and claims ratios.

The fact that all major insurance players are owned by banks or foreign insurance companies and are, with one exception, composite insurers, creates a strong ownership situation, which combined with robust brands constitutes a key credit strength, Moody's said.

The rating firm noted that the Portuguese insurance sector experienced a period of stress in 2001, which persisted until mid-2003 and was largely linked to insurers' equity exposures. The sharp correction in equity valuations until mid-2003 also impacted the solvency levels of most sector players. "However, we believe that the industry's financial fundamentals will show improved trends for the year 2003 and that these trends will continue in 2004," Ms Exton said.

Moody's does not currently rate any Portuguese insurance company, but it does rate each of the banks that own the country's three leading insurers. Caixa Geral de Depositos (Aa3/P-1/B) owns Fidelidade-Mundial; Banco Comercial Portugues (BCP) (A1/P-1/B-) owns Seguros e Pens?es; and Banco Espirito Santo (A1/P-1/B-) owns Tranquilidade Group.