A.M. Best Co. has affirmed the financial strength rating of A (Excellent) of Italy’s Societa Cattolica di Assicurazione Coop a RL (Cattolica) with a “stable” outlook.
“The rating reflects the company’s excellent consolidated risk-adjusted capitalisation, excellent operating performance and established business position in the Italian market,” said the bulletin. “Offsetting factors include the potential exposure to life products sold with a minimum guarantee and the increasingly competitive market conditions in the Italian life sector.”
Best noted that according to its “risk-based capital model” it “expects pressure to be placed on the capital due to prospective growth in premiums; however, retention of earnings and gains from the spin-off of property assets are likely to maintain capitalisation commensurate with the current rating level.”
“Cattolica has produced an average return on equity (ROE) of 7% over the five years 1997 to 2001,” said Best. “Non-life underwriting profitability has improved steadily over this period, including a marked reduction in the combined ratio from 99.1% in 2000 to 95.2% in 2001.” It forecast a “slight deterioration” in the combined ratio to approximately 101% in 2002, “primarily due to an increase in acquisition costs.”
The report also indicated that the “group benefits from established relationships with a number of banking partners, providing a diversified spread of business throughout Italy.” The company focuses on its customers and has one of the highest rates of retention of business in the market – 88 percent. Best said, however that “the increasingly competitive insurance market conditions in Italy (life insurance in particular) could negatively affect Cattolica’s business profile.” This in turn would be partially offset by its continued strong banking connections.
The company’s exposure to diminished investment returns in the current global market makes it potentially vulnerable concerning the minimum guaranteed life products it has placed, which according to Best constitute a “significant proportion of life technical reserves (34.5%).” It noted that Cattolica is attempting to reduce the exposure to these policies, but still feels that the “potential adverse effects associated with a further downturn in market conditions could be detrimental to operating performance and the rating level.”
Best expects that Cattolica’s “excellent overall operating performance will continue, with ROE of approximately 6% in 2002 and 10% in 2003, subject to no adverse developments with respect to guaranteed products.”