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Fitch Ratings : Generali outlook downgraded to negative from stable

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Fitch Ratings has changed Italian insurer Generali’s outlook to negative from stable. This rating action is related to the downgrade of the Italian sovereign rating on 7 October 2011.

Assicurazioni Generali SpA’s issuer default rating (IDR) and insurer financial strength (IFS) are affirmed at ‘A+’ and ‘AA-‘ respectively. Generali’s ratings are influenced by the creditworthiness of the Italian state as the company holds around EUR51bn of Italian government bonds, and also by the broader Italian economic environment. The company holds a material volume of securities issued by Italian financial and other institutions which, in view of the prospects for weaker economic growth in Italy, could reduce earnings and cause it to be exposed to adverse investment market fluctuations. In 2010 Generali derived 29% of premiums and 39% of life operating profit from Italy.

Under Fitch’s criteria ‘Insurance Rating Methodology’, in some circumstances, insurance organizations can be rated up to two notches above the Local Currency Sovereign rating. Generali’s internationally diversified sources of earnings means that its ratings are not automatically correlated with the sovereign rating of Italy, but also are not insulated from an economy where government austerity measures are likely to dampen private consumption and investment.

The Negative Outlook reflects Fitch’s expectations that Generali’s growth and profitability in Italy will remain subdued in the next 12-24 months, which could affect the group’s operating performance. Increasing financial market volatility could also strain Generali’s capitalisation which for the current ratings level is considered by Fitch to be no stronger than adequate.

Positive elements considered in the rating include the group’s ability to share losses with policyholders, for instance, in the case of unit-linked or participating (with-profit) life insurance contracts, as the vast majority of holdings of Italian sovereign debt back Italian life liabilities. Fitch assumes, however, that the greater the level of financial distress of securities backing participating contracts, the less the scope for insurers to share losses with policyholders, as underlying guarantees would start to erode the company’s capital.

Other positive elements include the group’s strong and internationally diversified franchise, its good earnings record and generally conservative management.

Generali’s ratings are likely to be downgraded if the Italian sovereign rating were further downgraded. The ratings could also be downgraded if the operating environment in the group’s core markets deteriorate to the extent that its ability to improve efficiency, consolidated solvency margin and operating performance are impaired.

Conversely, Generali’s Outlook could be revised to Stable if the Outlook on the Italian sovereign rating is revised to Stable.

Generali is the parent company and main operating entity of one of Europe’s largest insurance groups. Total group-wide life sales in 2010 were EUR51bn. It holds a dominant position in Italy through its ownership of INA Assitalia and Alleanza Toro. Generali is also well established in Germany (through Generali Deutschland), France (Generali Iard and Generali Vie), Spain (Generali Espana), Switzerland (BSI and Generali Switzerland) and central and eastern Europe through its joint venture, Generali PPF Holding.

Source : Fitch Ratings