Fitch Affirms Generali's IFS at 'A-'; Outlook Stable
03 JUL 2018 11:48 AM ET
Fitch Ratings-London-03 July 2018: Fitch Ratings has affirmed Assicurazioni Generali SpA's (Generali) and core subsidiaries' Insurer Financial Strength (IFS) Ratings at 'A-' (Strong). The agency has also affirmed Generali's Long-Term Issuer Default Rating (IDR) at 'A-'. The Outlooks are Stable. A full list of rating actions is at the end of this commentary.
KEY RATING DRIVERS
The ratings reflects the group's strong and resilient capitalisation, improved financial leverage and very strong business profile, in particular strong market positions in Italy, Germany and France. The group's ratings remain influenced by Italy's sovereign rating of 'BBB'/Stable through the group's exposure to Italian-based debt securities. To back domestic liabilities in Italy the group held EUR64 billion of Italian sovereign bonds at end-2017 (2.5x consolidated shareholders' funds).
Generali's exposure to Italian sovereign debt creates a large concentration risk and a potential source of volatility for capital adequacy. However, based on the results of scenario tests, Fitch believes that Generali's capital position is resilient against potential stress on the Italian sovereign debt. Moreover, Fitch expects Generali's exposure to Italian securities to remain stable.
We apply a sovereign constraint on Generali's ratings of 'A-', two notches above Italy's sovereign rating. This is in recognition of Generali's geographical diversification and strong resilient capital position. Generali's unconstrained IFS assessment is 'A'. The group generates around 66% of its operating profit and 67% of its gross written premiums from outside Italy. Generali is the third-largest European insurance group by premiums, with a leading position in core western Europe countries and a significant presence in central and eastern Europe and in Asia.
Fitch's view of Generali's capitalisation is driven by the group's score under Fitch's Prism Factor Based Model (Prism FBM). Generali's Prism FBM score was 'Very Strong' based on end-2017 financials, in line with 2016's. Its consolidated Solvency II regulatory ratio, calculated according to the group's partial internal model, improved to 207% at end-2017 (2016: 178%). The ratio remains exposed to volatility in sovereign bond markets, especially Italian sovereign bonds spreads.
Generali's Fitch-calculated financial leverage ratio (FLR) improved to 31% at end-2017 (2016: 33%), following the repayment of debt maturing in 2017. Fitch views Generali's financial leverage as high for the ratings. However, we expect the FLR will further improve in 2018 and 2019 as the group's planned debt maturities will likely exceed refinancing over the same period.
Generali's fixed-charge coverage (FCC) ratio, including unrealised and realised gains and losses, was strong at 6.9x in 2017, up from 5.4x in 2016. A decline in the stock of subordinated debt over 2017 drove interest expenses lower. We expect the FCC ratio to improve further as the group deleverages and refinances debt at lower coupons. Generali also has very strong financial flexibility, as demonstrated, for example, by pre-funding activities carried out during the past four years.
Generali's operating performance remained strong in 2017. The non-life combined ratio reported by the group stood at 92.8% in 2017 (2016: 92.3%), which Fitch views as very strong. Its operating profit also increased to EUR4,895 million in 2017 (2016: EUR4,783 million). Generali's 2013-2017 average return on equity as calculated by Fitch was 9%, a level that we view as commensurate with Generali's ratings. We expect Generali to improve its earnings through cost efficiencies, better underwriting margins and optimisation of its geographical and business mix, despite persistent low interest rates.
Low Interest rates are a key risk for Generali's life business, as the majority of in-force life reserves carry financial guarantees. However, Generali's balance sheet is well-shielded from interest-rate movements, as the duration gap between its assets and liabilities is close to zero. Generali put into run-off its largest German life entity, Generali Leben, in 1Q18, as part of the restructuring of its German operations. We view this move as positive for asset and liability management, as Generali will have more flexibility to manage the policyholders' guarantees attached to Generali Leben's life liabilities.