S&P Cuts Italy’s Cattolica Ratings to ‘A-‘; Off CreditWatch

January 26, 2007

Standard & Poor’s Ratings Services announced that it has lowered its long-term counterparty credit and insurer financial strength ratings on Italy’s composite insurer Società Cattolica di Assicurazione to “A-” from “A” and removed them from CreditWatch, where they had been placed on Nov. 17, 2006, with negative implications. The outlook is stable.

“The downgrade reflects the weakened competitive position of Cattolica arising from the termination of its shareholder agreement concerning Banco Popolare di Verona e Novara SCRL’s life insurance unit BPV Vita SpA and related exclusive distribution agreement,” explained S&P credit analyst Paola Del Curatolo.

S&P said that “as a result, Cattolica’s life business will drop and concentration in property/casualty (P/C) insurance will consequently increase. Concentration in the motor business is somewhat alleviated by Cattolica’s new 50-50 joint venture with Mapfre, Mapfre Cattolica Auto (MCA).

“With the end to its exclusive distribution agreement, Cattolica will lose the life business generated through BPVN’s bank branches, which accounted for 29 percent of Cattolica’s total life insurance business in the first nine months of 2006. As a consequence, Cattolica will become a second-tier player in the Italian market with 43 percent of gross premiums written stemming from P/C.

“In addition, Cattolica’s operating performance in the non-life business weakened both in 2005 and first nine months of 2006, with reported combined ratios of 101.7 percent and 106.1 percent, respectively, well above market average–largely due to a jump in third-party liability (TPL) and motor TPL reserves.”

However, S&P noted that its ratings on Cattolica remain underpinned “by strong capitalization and strong financial flexibility. The insurer has no hybrid capital or debt on the balance sheet, and has never tapped the capital market since its flotation in 2000. In addition, recent measures, such as the creation of MCA in partnership with Mapfre and sale of the real estate portfolio, have generated some temporary excess liquidity.”

“We expect Cattolica to maintain its current competitive position and resume growth in line with the Italian market,” Del Curatolo indicated. “We expect operating performance to improve, following pruning of the third-party liability portfolio. We particularly expect no further reserve increase after the reinforcement at year-end 2006.”

In conclusion S&P did note that the “outlook could be revised to negative if either the business profile continued to deteriorate due to further loss of life business or the operating performance failed to improve. A positive outlook is unlikely at present given the business profile of the company.”

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