(The following statement was released by the rating agency)
Sept 17 - Fitch Ratings says that the Italian insurance sector’s rating outlook remains negative, indicating that most Italian life insurer ratings could be downgraded over the next 12-24 months. Fitch’s outlook factors in the expectation that the eurozone debt crisis, despite showing signs of stabilisation, will continue to exert negative pressure on Italian insurers’ ratings in the short to medium term.
The Italian insurance industry is highly exposed to the eurozone debt crisis through its significant holdings of Italian sovereign debt. Italian insurers hold EUR230bn of government bonds in their investment portfolios and another EUR90bn of corporate bonds, most of them from banks, according to the latest estimates released by ANIA (the association of insurance companies). Fitch rates Italy at ‘A-'/Negative.
While this large exposure is explained by the need to minimise the risk of lapses by investing in Italian bonds yielding more than the average guaranteed return, Fitch believes that a prolonged period of wide credit spreads on Italian sovereign debt and a volatile equity market could threaten insurers’ capital adequacy.
In 2011 and 2012 the Italian insurance regulator introduced forms of forbearance to shelter insurers’ solvency margins from investment market volatility. These forms of regulatory intervention proved key for insurers to maintain acceptable levels of regulatory capital.
Italian life insurers are generally exposed to credit and interest rate risks through their traditional with-profits business, known as segregated accounts (gestioni separate). The income yield on assets is currently sufficient to cover the guaranteed returns on these policies, which have to be met annually . In addition, most new guarantees apply only at maturity, rather than accruing year-by-year, allowing companies greater flexibility in dealing with low investment returns. However, the risk remains that the credit default experience could be greater than expected.
Life growth is likely to remain subdued in 2012 and most of 2013, as the adverse macroeconomic environment and austerity measures constrain households’ available income. Life profitability continues to be affected by the persistent market volatility, wide credit spreads and low swap rates. Nonetheless, in comparison with 2011, Fitch anticipates that embedded-value losses on participating products could turn into small profits in 2012 due to narrower credit spreads.
Life insurers suffered from higher lapses in 2011 (in particular Q411), as customers surrendered their policies to invest in high-yielding government debt. Although this trend has stabilised in 2012, the risk remains that lapses could increase in times of depressed asset values, triggering sales-at-loss actions to satisfy any cash call in the event of higher surrender rates. While insurers are generally able to impose surrender charges to mitigate this risk, some generations of products have guaranteed surrender values which have to be satisfied in the case of early redemption.
Trading conditions in the non-life segment have improved significantly since the insurance market recorded underwriting losses in 2009 and 2010. The recovery in profitability has been largely driven by better risk selection and strong pricing actions, in particular in the dominant motor business. The insurance market now underwrites profitable business on an accident-year basis, although some legacy issues related to prior years’ reserves in liability lines persist for some insurers. Nonetheless, Fitch believes that growth will continue to be sluggish in 2012 and 2013, due to the fact that premium rates are flattening out in motor third-party liability and premium levels for other motor products have dropped as households reduce cover and new car sales languish.
In addition, pricing in non-motor (particularly commercial) lines is under pressure due to tough competition, and low disposable income and net borrowings among households.
As part of its forthcoming series of insurance roadshows, Fitch will visit Milan on 20 November 2012. Fitch analysts will give presentations on the Italian insurance market, the global reinsurance market and the impact of the eurozone crisis on insurers.