Eurozone crisis and Solvency II undermine Italian insurers' profitability

Italian insurers' growth and profitability is likely to remain subdued until the end of 2013, according to the latest report by Fitch.

This will negatively affect their operating performance despite better underwriting profitability, according to the ratings agency.

Based on these assumptions, Fitch's outlook for the Italian insurance sector remains negative.

"The eurozone crisis continues to represent the greatest challenge facing Italian insurers," said Federico Faccio, senior director in Fitch's insurance team. 

"This, together with a challenging transition to Solvency II for the Italian insurance market, is likely to keep ratings under negative pressure in the next 12-24 months."

2011 results have shown a general decline of insurers' capital adequacy and life operating profitability, as a consequence of the impact of the eurozone crisis on the Italian bond market and equity markets in general.

However, better technical results also indicate that life insurers have taken some effective actions on product guarantees and pricing, Fitch said.

"Non-life underwriting margins have benefited from portfolio pruning and price adjustments over the last few years," the ratings agency added.

"However, growth is likely to remain subdued as households reduce cover, new car sales languish and competition remains tough in commercial lines."

Mark-to-market of assets under Solvency II could also make Italian insurers' solvency capital volatile owing to its dependence on market values of government bonds, which is not offset by a corresponding change in the value of liabilities, Fitch believes.

Other issues noted as relevant to the Italian insurance market were the final calibration of non-life charges and the calculation of the counter-cyclical premium.