FITCH: Italy Life Sector Outlook Negative on Wider Gov't Spreads

Fitch Ratings has changed, on 14 March 2017, its sector outlook for the Italian life insurance market to negative from stable, as wider spreads on Italian sovereign debt may weaken insurers' capitalisation and business retention. Domestic government debt accounts for around half of the investments of Italian insurers. Fitch's rating Outlooks for most Italian life insurers remain Stable.

The Fitch press release reads:

Wider spreads lead to lower capital scores for insurers in Fitch's Prism factor-based capital model, our primary tool for assessing European insurers' capital strength, as we expect insurers will pass only some of the associated reduction in market value to their customers. Similarly, wider spreads usually lead to lower coverage of regulatory capital requirements under Solvency II, although many Italian insurers make use of the Solvency II volatility adjustment to dampen the impact.

The spread between 10-year Italian treasury bonds and German Bunds widened to around 200bp during February from around 160bp at end-2016. Our scenario analysis shows that if the spread were to widen more substantially, to as much as 350-400bp, average Prism scores for rated Italian life insurers would fall to 'Adequate' from 'Strong' and we would expect to downgrade some ratings as a result. Spreads during the eurozone sovereign debt crisis peaked at around 550bp.

Rising spreads that drive higher yields on Italian government bonds could make them an attractive alternative for customers who have long-term savings contracts with life insurance companies. This could lead to more customers cashing in their contracts to reinvest in government bonds, meaning net outflows for the life sector, reduced assets under management and lower profitability. When spreads on Italian government debt peaked during the eurozone sovereign crisis, withdrawal rates from long-term savings contracts also peaked, at around 11% of reserves, compared with 7% in 2016.

Most Italian life insurers have capital headroom relative to their rating level, meaning that they can absorb a degree of capital depletion due to wider spreads without being downgraded. Our Stable rating Outlooks for the majority of the sector reflect this. Italian life ratings are typically constrained by factors other than capital, such as asset concentration in domestic government bonds.

We have Negative Outlooks on two Italian life insurers, Intesa Sanpaolo Vita and Poste Vita. These are driven by Negative Outlooks on their parent companies, linked to our Negative Outlook on Italy.

The report "Italian Life Insurance: Negative Sector Outlook" is available at www.fitchratings.com.

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