Moody’s Comments on Italian P/C Insurers Outlook and Ratings

January 9, 2004

A report from Moody’s Investors Service notes a stable rating outlook for Italy’s rated P/C insurers and a steady improvement in results since 2001.

“The continued upturn for most of the seven rated entities is based on the improved quality of underwriting results in the whole P&C market, the fourth-largest in Europe,” said Moody’s. “Financial fundamentals are good, and compared to some of their European peers, Italian insurers have maintained conservative balance sheets, with equities representing 13 percent of the invested assets and fixed-income 58 percent, thus minimizing their exposure to volatility in financial markets.”

The rating agency warned, however, “as investment returns can be expected to remain subdued in the medium term, it will be critical for these entities to maintain strong underwriting performance and tight cost control.” It also noted that “in the year under review three of the rated entities were downgraded by one notch around mid-2003.”

Timour Boudkeev, Moody’s Vice President and lead analyst of Italian Insurance, explained: “In the case of Riunione Adriatica di Sircurta (RAS) and Lloyd Adriatico, the rating action was ‘triggered by downgrades on their parent company, Germany’s Allianz AG. The third downgrade for Assicurazioni Generali reflected prospects for lower earnings on the back of subdued investment returns, and to a lesser degree, by the company’s leverage profile.'”

Following the recent rating actions, Moody’s said it “believes that the companies’ ratings are now well positioned in their categories. Thus far, much of the growth in the P&C market has been driven by motor third-party liability (TPL), which is Italy’s largest line of insurance business. The loss ratio for this business line fell by 15 percentage points between 2000 and 2002, resulting in the first ever positive technical result.

“In addition, P&C consolidation has given the top 10 groups an approximately 90 percent market share, which strengthens influence over pricing. However, in Moody’s opinion, this business line is under pressure from consumers’ associations and the Government to reduce tariffs, which we believe would likely have an adverse impact on profitability.”

The report also noted that “Italy is still relatively under-insured compared with the rest of Europe, due largely to the significant role of the State in Accident & Health insurance, and to a “negative cultural approach to Property insurance,” according to Gianandrea Roberti, Moody’s Associate Analyst and co-author of the report.” Moody’s said it nonetheless believes “there is scope for growth, particularly in property retail.” Any progress, however, will “likely occur over the long term.”

Moody’s said that, “both frequency and size of motor and bodily injury claims were positively affected by recent regulatory changes. Such changes include the introduction of a penalty point system in July 2003 and a new law according to which courts are now allowed to apply a maximum 20 percent loading over the statutory award limits. With the exception of Generali and RAS, most of the rated Italian P&C insurers have very limited revenue diversification outside Italy. Nonetheless, at a domestic level, virtually all these entities are composite insurers, therefore large losses in the non-life business could be potentially compensated by strong earnings from life business.”

As of Dec. 16, 2003, the insurance financial strength ratings for the seven Italian Property & Casualty insurers rated by Moody’s were as follows:

Assicurazioni Generali SpA (rated Aa3 with stable outlook),
Riunione Adriatica di Sicurta (rated Aa3 with stable outlook),
Lloyd Adriatico (A1 with stable outlook),
Compagnia Assicuratrice Unipol SpA (rated A2 with stable outlook),
Net Insurance (Ba1 with stable outlook),
Societa Italiana Cauzioni (rated A2 — under review for possible upgrade), and
SCOR Italia Riassicurazioni (rated Baa3 — developing outlook).

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