OREANDA-NEWS. Fitch Ratings has affirmed Italian insurer Societa Reale Mutua di Assicurazioni's (Re) and core Spanish subsidiary Reale Seguros Generales' (Reale Seguros) Insurer Financial Strength (IFS) Ratings at 'BBB+'. The Outlooks are Stable.

KEY RATING DRIVERS

The ratings of Reale Mutua are capped by the Italian sovereign (BBB+/Stable), given the group's concentrated exposure to Italian sovereign debt (around 2x shareholders' funds) and the concentration of its business on the domestic market. The ratings also reflect Reale Mutua's strong capital position, lack of financial leverage, and solid underwriting performance as well as prudent reserving practices.

The ratings of Reale Mutua are affected by the group's exposure to asset risk through its holding of Italian sovereign debt. Reale Mutua holds these assets to match local liabilities and to achieve satisfactory yields to meet investment guarantees and minimise the risk of policyholder lapses. The credit risk associated with Italian debt holdings is therefore key to Reale Mutua's ratings.

Fitch views Reale Mutua as strongly capitalised, with a regulatory Solvency I ratio of 250% at end-2015. Its group regulatory Solvency II ratio, calculated using the standard formula, was 265% at end-2015 and underpins the insurer's high level of capitalisation. However, given the large exposure to Italian sovereign debt, Reale Mutua could face a significant increase in capital charges if European authorities remove the zero risk-weighting for European sovereigns.

The group reported healthy, albeit declining, underwriting profitability in 2015, with a non-life combined ratio of 96% (91% in 2014), driven mainly by soft motor rates in Italy and higher large claims experience. Pre-tax profit was at EUR215m (EUR250m in 2014). Fitch expects Reale Mutua to maintain profitable underwriting performance, despite a competitive environment.

Reale Seguros continued to be a contributor to Reale Mutua's results in 2015. Fitch takes a positive view of Reale Mutua's diversification into Spain, which is a key market for the insurer. Fitch views Reale Seguros as a "core" entity of Reale Mutua under its insurance group rating methodology and the company's rating is based on the credit profile of the Reale Mutua group as a whole.

RATING SENSITIVITIES

An upgrade of Italy could lead to an upgrade of Reale Mutua, provided that net profitability and strong capital ratios are maintained.

A downgrade of Italy could lead to a downgrade of Reale Mutua. The ratings could also be downgraded if the group's combined ratio deteriorates to above 105% or if capitalisation declines significantly.