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Fitch Ratings : Italian and Spanish insurers – Eurozone crisis implications

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Fitch Ratings says in a newly-published comment that the majority of the Italian and Spanish insurers rated by the agency would be likely to see their ratings affirmed, even in the hypothetical scenario of a modest downgrade in the sovereign rating of their respective countries.

The comment explores the current relative ratings levels of Italy (‘AA-‘/Stable Outlook) and Spain (‘AA+’/Negative Outlook), the insurance organisations in these countries, and how Fitch would expect to react if the sovereign rating fell below the rating of the insurance companies. Fitch does not employ a rigid “sovereign cap” for insurance ratings, but it is also rare that insurance company ratings would be significantly higher than that of a sovereign.

Fitch currently rates seven insurers in Italy, three of which are rated at the same level as the sovereign (i.e. ‘AA-‘), and four of which are rated several notches below the sovereign. Thus, a hypothetical one notch downgrade of Italy’s sovereign rating would place it below the ratings of the three noted insurers.

“Fitch would not expect to downgrade the ratings of the majority of rated Italian insurers, even in the event of a one-notch downgrade of Italy’s sovereign rating,” says Federico Faccio, Senior Director in Fitch’s insurance team. “Nevertheless, there is some linkage between the strength of the Italian economy, the rating of a domestic insurer and the rating of the sovereign. It is unlikely that the rating of a domestic insurer could be more than one notch higher than the sovereign, thus creating downgrade risk were the sovereign to be downgraded by more than one notch.”

Fitch also rates six insurers in Spain. The highest rated is Generali Espana at ‘AA-‘ /Stable Outlook, two notches below the sovereign rating. Accordingly, even if Spain’s sovereign rating was hypothetically downgraded by three notches, this is unlikely to affect the ratings of these six insurers, given the relatively significant gap between the insurers’ ratings and Spain’s sovereign rating. Thus, it would take a severe downgrade before it could lead to downgrades of the Spanish insurers.

Fitch’s comment “Italian and Spanish Insurance Ratings: Widespread Rating Actions Not Expected in the Hypothetical Scenario of a Sovereign Downgrade” is available at www.fitchratings.com.

Source : Fitch Ratings