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Fitch Ratings : Italian insurance outlook revised to negative from stable

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Fitch Ratings has revised the rating outlooks for the Italian life and non-life insurance sectors to negative from stable. This indicates that the majority of Italian life and non-life insurance ratings could be downgraded over the next 12-24 months.

The revision of the rating outlooks follows the downgrade of the Italian sovereign rating (see ‘Fitch Downgrades Italy to ‘A+’; Outlook Negative’ dated 7 October 2011 at www.fitchratings.com).

As indicated in the previous comment “Italian Insurance: Fundamentally Strong Amid Concerns Over Sovereign Risk” dated 27 September 2011 and available at www.fitchratings.com, there is an intrinsic linkage between Italian insurer ratings and the sovereign rating. Italian insurers generally hold material volumes of Italian government bonds as well as securities issued by Italian financial and other institutions. In addition, most Italian insurers rated by Fitch are domestic players with no sizeable operations abroad and therefore highly linked to an economy where government austerity measures are likely to dampen private consumption and investment.

The negative rating outlooks also reflect Fitch’s expectations that Italian insurers’ growth and profitability will remain subdued in the next 12-24 months, which could negatively affect their operating performance.

Mitigating factors are the Italian insurers’ ability to share losses with policyholders, for instance, in the case of unit-linked or participating (with-profit) life insurance contracts, where holdings of Italian sovereign debt back Italian life liabilities. However, Fitch assumes 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 companies’ capital.

Fitch’s outlooks continue to factor in weak prospects of GDP growth in Italy and deteriorating economic conditions for households. This could exert negative pressure on sales of insurance products in 2011 and 2012. However, underwriting profitability in the non-life segment continues to recover as pricing and claims experience improve. In addition, life insurers’ credit profile remains solid, with technical profitability and margins expected to hold up due to a better business mix.

The rating outlooks could be revised to stable if the Outlook on the Italian sovereign rating is revised to Stable and the degree of uncertainty surrounding the operating environment fades.

As part of its forthcoming series of insurance roadshows, Fitch will visit Milan on 26 October 2011. Chris Waterman, Managing Director in Fitch’s insurance team, will speak on European insurance and implications from the euro zone crisis, Federico Faccio will speak on the Italian insurance market, and Clara Hughes will discuss Solvency II and its Impact on Insurance, Ratings and Asset Allocation. This will be followed by a Solvency II Panel discussion, where Fitch’s analysts will be joined by leading figures from the Insurance market.

Source : Fitch Ratings Press Release