Fitch: Outlook on Italy’s insurance sector remains negative

The outlook on the Italian insurance sector remains negative, and most Italian life insurer ratings could be downgraded over the next 12-24 months, according to Fitch Ratings.

In a note, the agency said 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 €230bn of government bonds in their investment portfolios and another €90bn of corporate bonds, most of them from banks, according to the latest estimates released by ANIA, the association of insurance companies,” Fitch said.

The rating for the country is 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,” Fitch said.

Italian life insurers are generally exposed to credit and interest rate risks through their traditional with-profits business, known as segregated accounts.

The income yield on assets is currently sufficient to cover the guaranteed returns on these policies, which have to be met annually. However, the risk remains that the credit default experience could be greater than expected.

Meanwhile, 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, 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,” Fitch said.


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