Standard & Poor’s has revised the outlook of Italian Fondiaria-SAI and its core subsidiary Milano Assicurazioni to negative from stable. The financial strength and counterparty credit ratings on both companies have been affirmed to ‘BBB-‘.
Standard & Poor’s report :
The outlook revision reflects ongoing negative pressures on the group’s capitalization stemming from volatility in capital markets. We view the group as being more exposed than its peers to market risk through its equity portfolio which is heavily invested in the Italian financial sector and features, in our view, some degree of concentration risk. Uncertainties surrounding future operating conditions, what we regard as negative management and corporate strategy, and marginal financial flexibility represent major hurdles for the current ratings. The group’s strong competitive position in the Italian property/casualty (P/C) market and improving operating performance represent key positive rating factors in our view.
We see increasing risk to the group’s creditworthiness from ongoing turmoil in capital markets, as falling asset prices weigh on the group’s solvency position. With more than 22% of assets invested in equities and property at year-end 2010, we see Fondiaria-SAI as being particularly exposed to the current capital market downturn. Concentration risk arising from high single-name exposure to the Italian financial sector increases, in our view, such exposure.
Uncertainties surrounding future operating conditions weigh negatively on our current assessment of the group’s risk profile, as deteriorating economic and capital market conditions pose growing challenges to the management team, which is currently struggling with a turnaround of the business, a restructuring of its agency network, and meaningful operational changes. Although we regard favorably management’s intention to refocus on insurance-carrying and strengthening operating performance, we see substantial execution risks arising from the magnitude of the changes to be implemented in the current environment.
With gross premiums written of €12.9 billion in 2010, we view Fondiaria-SAI as continuing to benefit from a strong competitive position in the Italian market, which represents a major positive rating factor, in our view. Fondiaria-SAI’s competitive strength stems from its established positioning in the Italian P/C market, wide distribution capabilities, and well-recognized brands. Lesser diversification in non-motor relative to peers’ and comparatively high exposure to geographic areas with high claims experience continue to represent relative weaknesses in the group’s business profile, in our opinion. Life business adds to competitive position, although the significant percentage of premiums collected through one single nonproprietary channel–Banco Popolare branches–negatively affects Fondiaria-SAI’s position in the life market. We expect non-life premium generation to remain sluggish over the next two years, reflecting limited growth prospects for the Italian market as a whole and Fondiaria SAI’s increasing focus on risk selection. Conversely, we expect life premiums to fall by a high double-digit figure in 2011, as increasing competition from bank liquidity products, amid challenging operating conditions should constrain bank insurance business generation.
We view operating performance as adequate and improving, reflecting some early results of management’s actions and the recovery of the Italian P/C market. However, these are constrained by continuing negative pressures from volatility in capital markets. After posting a record-high loss of €929 million in 2010, earnings are now gradually recovering on the back of improving claims experience in P/C, tariff hikes, some restructuring of the agency network, and reorganization of claims settlement processes. This resulted in a net combined ratio improving to 101.9% and net losses contracting to €62 million in first-half 2011.
We expect noncore activities to continue weighing negatively on operating performance. As a result, we consider it unlikely that earnings will return to what we consider strong levels by year-end 2012. We expect Fondiaria-SAI to post a loss of about €150 million in 2011 and a modest profit of about €100 million in 2012. In non-life, we expect the net combined ratio at or below the 102% mark by year-end 2011 and below 100% in 2012. We expect life profitability to benefit from management’s emphasis on regular premium policies and efforts to increase life sales at agencies.
We believe that the group’s corporate governance, high risk tolerance, aggressive underwriting policy, and high dividend payouts (in 2009) have been weighing until recently on the ratings of Fondiaria-SAI and Milano Assicurazioni SpA. Although we understand that the group has been addressing these issues (in particular by not paying dividends in 2010), we believe it will take time before relevant changes are developed across the organization and start bearing fruit.
High capital and liquidity needs at Premafin HP SpA, the group’s holding company, in our view constrain Fondiaria-SAI’s financial flexibility. This is evidenced by the payment of a €68 million dividend in 2010, when Fondiaria-SAI’s capital position was particularly stretched. Although it is listed, we see the group as having only limited access to capital markets in the current environment.
Source : Standard & Poor’s
