Fitch Ratings has affirmed Italian insurance company Fondiaria-SAI’s (FonSAI) and its main subsidiary, Milano Assicurazioni’s (Milano) Insurer Financial Strength (IFS) ratings at ‘BB+’ and removed them from Rating Watch Negative (RWN) where they were placed on 24 November 2010. The Outlook for the ratings is Negative.
The affirmation reflects Fitch’s view that concerns over FonSAI and Milano’s capital increases have eased, following shareholders’ strong support for the planned capital increase. The ratings are also underpinned by FonSAI’s strong domestic franchise, which generates sustained revenues. The Negative Outlook reflects the challenges facing management in implementing its new business plans, including sluggish economic growth and increased volatility in capital markets in Italy.
Although Q111 results disclosed preliminary signs of a recovery in underwriting profitability for non-life business, the operating environment in Italy remains challenging, with weak prospects for economic growth and growth in household discretionary income following the government’s tight fiscal consolidation strategy. In addition, although raising EUR800m of equity is a clear benefit for the group, FonSAI’s capital adequacy remains weak and its investment leverage is relatively high in Fitch’s view, exposing the company to investment market fluctuations.
FonSAI is exposed to euro zone sovereign credit risk. The company has disclosed that, had it not made use of an option granted by the local regulator to all Italian insurers, it would have breached its regulatory consolidated Solvency I margin at end-March 2011. As a result, should the financial dislocation affecting Italian sovereign and corporate debt securities and market values of Italian financial institutions materially deteriorate, Fitch believes the risk would increase that FonSAI could again breach regulatory capital requirements, causing the company to need to strengthen its capitalisation. In this scenario, Fitch notes that FonSAI’s financial flexibility may be restricted because it may well be harder for it to seek additional fresh capital from shareholders in the short term and as a consequence the ratings could be downgraded.
The rating could also be downgraded if FonSAI fails to implement successfully its turnaround plan, resulting in a combined ratio above 105% at year-end 2011.
Conversely, the Outlook could be revised to Stable if FonSAI succeeds in executing its turnaround plan, maintains the group’s consolidated Solvency 1 regulatory capital position above 120% for a prolonged period of time, the non-life business generates sustainable earnings as evidenced by a decrease in the reported combined ratio to around 100% at year-end 2011 and the group shows resilience to capital market volatility.
FonSAI is the parent company and main operating entity of the second-largest domestic insurance group in Italy, with consolidated gross written premiums of EUR12.9bn in 2010. The group, created by the merger between Fondiaria and SAI in 2002, holds leading positions in the Italian non-life market through FonSAI and its 60% ownership of the other main operating entity, Milano. The group’s presence in the life sector is more limited than non-life but increasing, following a bancassurance joint venture with Banco Popolare.
Source : Fitch Ratings
