S&P Maintains Stable Outlook on Italian Insurance Industry

January 9, 2006

In a recently issued study “Insurance Industry Risk Analysis: Italy (Republic of),” Standard & Poor’s Ratings Services said it is maintaining its stable outlook on the Italian insurance industry. S&P notes that as a consequence “insurer financial strength ratings on the country’s insurers are consequently more likely to remain the same than to change.”

“The key factors underpinning the industry’s stability are strong overall profitability; positive growth prospects, particularly in the life sector; and strong capitalization, sustained by conservative investment policies,” stated S&P credit analyst Antonello Aquino, author of the report.

S&P rates Italy’s country-risk as “AA-/Negative/A-1+.” It “has a relatively prosperous and well-diversified economy that has, however, been stagnant for the past decade,” said the bulletin. “This sluggish environment, which has led to a sustained loss of competitiveness and moribund productivity growth, nevertheless has had a limited impact on the insurance industry’s strong growth and profitability.”

Aquino notes that in the life insurance industry risk is moderately low. He indicated that “despite persistently low yields, market players are protecting profitability by improving risk management and redesigning product offerings. Future growth will likely be supported by the still-low penetration of insurance products, coupled with high savings rates.”

S&P found that in the P/C sector “risk is also moderately low. The dominance of personal lines; the relatively short duration of policies (mainly motor) with limited exposure to long-tail business; and the absence of Italy-based reinsurance companies protect the industry from the perils depressing this sector in other countries.”

The rating agency also notes two distinctly positive factors enjoyed by Italian P/C insurers: “The P/C industry has been immune to environmental and asbestos risks, and has no exposure to catastrophic risk, the cost of which is fully borne by the state. Profitability is high, with a combined ratio of 95.6 percent for the sector in 2004 that has progressed continuously over the past 10 years.”

In the report itself S&P explained: “The dominance of personal lines; the relatively short duration of policies (mainly motor), with limited exposure to long-tail business; and the absence of Italy-based reinsurance companies protect the industry from the perils depressing this sector in other countries.”

S&P did indicate that some “marginal risk to P/C insurance may come from slight downward pressure on motor rates. Other risks for P/C are factors external to the sector itself, such as political intervention and upward pressure on motor claim costs from court rulings.”

Aquino added that “growth opportunities remain in nonmotor lines, which in Italy are still underdeveloped compared with those of European peers.”

In its overall analysis S&P said: “Italy enjoys a relatively prosperous and well-diversified economy, with projected GDP per capita of nearly $31,000 for 2005. The country’s EMU membership has cut borrowing costs and offers protection from potential balance-of-payments pressures. With an estimated nominal GDP of about $1.7 trillion in 2004, Italy is the world’s sixth-largest economy. In the past decade, however, the economy has stagnated, resulting in a loss of competitiveness and moribund productivity growth. » S&P said this was the proinciple reason it had lowered the country’s foreign currency and local currency sovereign credit ratings “to the actual ‘AA-‘ in 2004, from foreign currency ‘AA’ and local currency ‘AAA’ in 1995.”

The report is available to subscribers of RatingsDirect, Standard & Poor’s Web-based credit research and analysis system, at www.ratingsdirect.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-9823 or sending an e-mail to research_request@standardandpoors.com. Ratings information can also be found on Standard & Poor’s public Web site at www.standardandpoors.com; under Credit Ratings in the left navigation bar, select Find a Rating, then Credit Ratings Search.

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