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Feb 27 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Italian insurer ITAS Mutua’s (ITAS) Insurer Financial Strength (IFS) rating at ‘BBB’ with a Stable Outlook.
The affirmation reflects ITAS’ improved net profitability in 1H13 and Fitch’s expectation that the group’s net profitability and underwriting performance will have further improved in FY2013 compared to FY2012. The group solvency margin is also expected to remain robust and commensurate with the current rating level, although declining marginally as ITAS continues to grow its non-life business. Partially offsetting these positive rating factors is ITAS’ large exposure to the eurozone debt crisis through its holdings of Italian sovereign and bank debt (around 4x consolidated shareholders’ funds as at 30 June 2013), which represents a key concentration risk.
ITAS has been growing its non-life business during times when Italian insurers’ non-life underwriting performance has improved due to strong tariff increases and reduced claims frequency. Fitch expects a marginal deterioration in technical profitability in 2014 in Italy as pricing conditions deteriorate and claims frequency increases as a result of slightly more buoyant economic activity. However, growth is expected to continue and ITAS has targeted around 10% compound annual non-life premium growth until 2015. Fitch expects ITAS to continue exercising strong underwriting discipline in acquiring new business and is therefore forecasting that the group’s underwriting profitability will be maintained.
Fitch considers ITAS’ regulatory solvency at end-2013 to be strong for the current rating level. Nonetheless, the solvency margin is sensitive to changes in values of Italian government bonds and Fitch anticipates that some capital will be used to fund growth until 2015. Fitch expects ITAS to maintain a capital position of at least 1.5x the minimum regulatory requirements.
Fitch considers ITAS’ investment policy as prudent, with 74% of the investments consisting of fixed income instruments at 1H13. Exposure to equity investments also remains low, which Fitch views positively. However, the quality of asset allocation continues to be negatively affected by the large exposure to sovereign debt issued by the Republic of Italy, which ITAS holds to match its Italian life liabilities. This exposure puts negative pressure on ITAS’ rating. ITAS Vita’s profitability is expected to have recovered in 2013. This was a result of the narrowing of credit spreads on Italian government bonds as well as declining lapse rates and positive net inflows, which Fitch views positively.
A downgrade of Italy’s rating by two or more notches could lead to a downgrade of ITAS’s rating.
Other key rating triggers for a downgrade include the consolidated group’s combined ratio deteriorating to above 103% (1H13: 99%) or regulatory solvency falling below 150% for a prolonged period of time.
Conversely, if Italy’s sovereign rating was upgraded, ITAS’ ratings could also be upgraded if net profitability and strong capital ratios were maintained. Greater scale and diversification through profitable growth, a combined ratio that remains below 100% or below the market average, and robust group regulatory solvency (no lower than 175%) could also lead to an upgrade.