Fitch Ratings has revised Italian insurer Societa Reale Mutua di Assicurazioni’s (RMA) and its Spanish subsidiary Reale Seguros Generales’ (Reale Seguros) Outlooks to Stable from Negative. At the same time, Fitch has affirmed RMA’s and Reale Seguros’ Insurer Financial Strength (IFS) ratings at ‘A-‘.
The rating action follows more tangible evidence that RMA is successfully executing its turnaround plan for its non-life operations in Italy. However, some weaknesses persist within RMA’s main Italian subsidiary, Italiana Assicurazioni (Italiana), whose recovery, in Fitch’s opinion, remains more challenging.
Fitch expects RMA’s combined ratio to have improved in 2010 (2009: 106.2%). This improvement is mainly due to a reduction of the current accident year loss ratio for property and general liability lines. In motor, claims frequency (i.e. the number of reported claims) has also reduced in 2010, however this line of business has continued to suffer from worse than expected claims experience, particularly on prior years business and for large risks.
Fitch considers RMA’s regulatory solvency continues to compare favourably to Italian peers. Fitch’s own risk-adjusted assessment of group capital adequacy also indicates that RMA Group’s capital is strong which Fitch views as a positive rating factor. RMA trimmed its exposure to equities during 2010, reducing the balance sheet sensitivity to future volatility in the equity markets.
Fitch considers RMA’s investment portfolio to be prudent and well diversified across industries. The vast majority of the fixed income portfolio is rated ‘AA-‘ or above.
Marginally offsetting this conservative portfolio is the large exposure to sovereign debt issued by the Republic of Italy. Italy remains rated ‘AA-‘, with a Stable Outlook, but a prolonged period of wide credit spreads on Italian sovereign debt and a volatile equity market could exert negative pressure on RMA’s strong capital adequacy.
Trading conditions in the Italian non-life market are improving after two years of poor operating performance in 2009 and 2010. There is a stronger degree of consensus among market participants regarding the need to raise tariffs to restore profitability, as well as more evidence that the operating environment, and regulatory aspects in particular, could support the non-life industry in its recovery (see “Non-Life: Recovery Underway; Life: Sales Fading, But Profitability Holding Up”, dated 28 March 2011 and available on www.fitchratings.com).
Fitch views RMA diversification into the Spanish market through Reale Seguros as a positive rating factor. Fitch believes Spain is a key territory for RMA and that support would be provided to Reale Seguros from RMA if needed. As a result, Fitch continues to view Reale Seguros as a “core” entity to RMA.
Reale Seguros’ rating reflects its core status in the RMA group. The rating is also supported by Reale Seguros’ profitable underwriting results, solid capitalisation and strong reserving policies, amid challenging trading conditions in the Spanish non-life insurance market. The company has been an important contributor to RMA’s earnings over the period 2008-2010, when earnings from the Italian operations have been under pressure.
RMA’s rating could be upgraded if the company reports an underwriting profit for 2011 (i.e. combined ratio below 100%), maintaining a balance between growth and capital adequacy (i.e. non-life premium growth above 3%, regulatory solvency margin above 200%). This should also be accompanied by improving technical results for Italiana (combined ratio strengthening to close to100% at end-2011).
Reale Seguros’ rating could also be upgraded if RMA is upgraded and if Fitch continues to consider it as a core operating entity in the RMA group.
Conversely, RMA’s rating could be downgraded if its combined ratio was to deteriorate beyond its 2009 level and if the company’s regulatory solvency should fall below 150%.
Reale Seguros’s rating could also be downgraded if the company were no longer viewed as a core subsidiary of RMA.
RMA is the parent company of the fifth-largest non-life insurance group in the Italian market. RMA is also well-established in Spain through Reale Seguros Generales. Total group sales in 2010 were EUR3.4bn.
Source : Fitch Press Release
