OREANDA-NEWS. Fitch Ratings has affirmed Italian insurer ITAS Mutua's (ITAS) Insurer Financial Strength (IFS) rating at 'BBB', and Long-term Issuer Default Rating (IDR) at 'BBB-'. The Outlook is Stable. Fitch has also affirmed ITAS's subordinated notes at 'BB'.

KEY RATING DRIVERS

The affirmation reflects ITAS's small but improving market position in the Italian insurance market, strong capitalisation, improved non-life underwriting result and life premium growth in 2015, as well as the insurer's large concentration risk in Italian sovereign (BBB+/Stable) debt.

ITAS finalised in 2015 the acquisition of the Italian subsidiary of Royal & Sun Alliance (RSA, IFS: A/Stable). The transaction, which took effect on 1 January 2016, increased ITAS's geographic diversification in the north-west of Italy, given that the current business is concentrated in the north east. It has also strengthened ITAS's franchise and reduced the cost base as a percentage of premiums.

The quality of ITAS's assets continues to be negatively affected by the large exposure to Italian sovereign debt, which amounted to EUR1.6bn at end-2015 or 4x total shareholder's equity.

ITAS reported a regulatory Solvency I ratio of 181% at end-2015 (end-2014: 191%). Its Solvency II ratio, calculated using the standard formula, was at 195% at end-2015 and underpinned the insurer's strong capitalisation. However, given the large exposure to Italian sovereign debt, ITAS could face a significant increase in capital charges if European authorities remove the zero risk-weighting for European sovereigns.

ITAS's financial leverage ratio increased to 15% at end-2015, following the issue of EUR60m subordinated notes to help fund the RSA purchase. Prior to this issue, leverage for the group's insurance operations was negligible, as ITAS had not used external financing to fund its activities. The leverage ratio is still low and supportive of the rating.

ITAS's underwriting profitability improved, as the combined ratio decreased to 97% at end-2015 from 99% at end-2014. Fitch expects ITAS to maintain healthy non-life underwriting profitability, despite a competitive environment, through selective new business acquisition. Life premium growth also contributed to ITAS's overall profitability in 2015.

RATING SENSITIVITIES

A downgrade of Italy by two or more notches could lead to a downgrade of ITAS's rating. Conversely, if Italy's sovereign rating is upgraded, ITAS's rating could also be upgraded if net profitability and strong capital ratios are maintained.

An upgrade could result from greater scale and diversification through profitable growth or the successful integration of RSA, while maintaining a combined ratio below 100% and robust capital metrics. Materialisation of execution risk associated with the RSA acquisition, or a combined ratio increasing to above 103% could lead to a downgrade.