OREANDA-NEWS. November 17, 2015. Fitch Ratings has affirmed Italian insurer ITAS Mutua's (ITAS) Insurer Financial Strength (IFS) rating at 'BBB', and the 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 improving niche market position in the Italian insurance market, strong capital adequacy, improved non-life underwriting result and strong life premium growth in 2014, as well as its large concentration risk in Italian sovereign debt.

ITAS is in the process of acquiring the Italian subsidiary of Royal & Sun Alliance (RSA, A/Stable). The acquisition is expected to increase ITAS's geographic diversification in the north west of Italy given that the current business is concentrated in the north east. Growth has consumed solvency capital but at the same time has strengthened the franchise and reduced the cost base as a percentage of premiums.

Fitch considers ITAS's regulatory solvency of 191% at end-2014 as strong for the rating level. The solvency margin is sensitive to changes in values of Italian government bonds and the agency expects that some capital will be used to fund growth until end-2015 but also expects that ITAS will maintain a capital position of at least 1.5x the minimum regulatory requirement.

The quality of ITAS's assets continues to be negatively affected by the large exposure to sovereign debt issued by the Republic of Italy (BBB+/Stable), which stood at around 4x consolidated shareholders' funds at end-2014.

The combined ratio for ITAS's non-life division was 99.8% in 2014, which was a significant improvement from 2013 (103.9%). Fitch expects ITAS's improved non-life underwriting performance to be maintained through continued discipline, when acquiring new business. Strong life premium growth has also contributed to ITAS's overall profitability.

In 2015, ITAS issued subordinated notes of EUR60m to help fund the RSA purchase. Prior to this issue leverage for the group's insurance operations was zero, as ITAS had not used external financing to fund its operations. On a pro-forma basis, taking into account the recent EUR60m issue, the end-2014 leverage ratio would have been 15%, which is still low and supportive of the rating level.

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.

Greater scale and diversification through profitable growth while maintaining a combined ratio below 100% or below the market average and robust group regulatory solvency (no lower than 175%) could also lead to an upgrade.

Regulatory solvency falling below 150% for a prolonged period, materialisation of execution risk associated with the recent RSA acquisition, or the combined ratio increasing to above around 103% could also lead to a downgrade.