Best Affirms Generali’s ‘A+’ Ratings; Outlook Stable

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘A+’ (Superior) and issuer credit rating of “aa-” of Italy’s Assicurazioni Generali S.p.A., both with stable outlooks. Best also affirmed the ratings of the debt instruments issued or guaranteed by Generali.

The ratings reflect Generali’s “excellent business position, its good and resilient profitability and improving risk-adjusted capitalization, which is supportive of the company’s current ratings,” said Best.

As offsetting factors Best cited the “prospective challenges Generali is facing both in its life business, primarily ensuring margins and customer retention in the medium to long term, and its non-life business, aiming at a recovery of technical margins, which deteriorated in recent years.”

Generali is one of the main insurers in Europe, where the group writes approximately 95 percent of its consolidated premiums amounting to €66.5 billion [$92.6 billion] (excluding €4 billion [$5.57 billion] of premiums related to investment contracts) at year-end 2009 (two-thirds proceeding from the life business).

The group is also “among the leading insurers in the Western European countries (combined business from Italy, France and Germany accounts for more than 70 percent of Generali’s consolidated premiums),” Best noted. “At the same time, the group is increasing its focus on emerging markets with high potential, as demonstrated by the company’s expansion in Central and Eastern Europe (ensuing from the joint venture with the prominent PPF Group in 2008) and its growing footprint in the Far East.

Best also said that Generali’s profitability “has been resilient to, albeit impacted by, the financial and economic crisis in the last two years. Since 2009 and through the first half of 2010, life business has been experiencing a growth both in terms of volume and accounted technical results, underpinned by the customer attitude to prefer traditional insurance products with minimum guarantee (an alternative more attractive than low remunerated bank savings) and a recovery of linked investment products started in the second half of 2009.

“Since the bottom hit in March 2009, the rally in the capital markets has been supporting increasing life results, although the volatility in the markets remains high. In A.M. Best’s opinion, the shift in product mix results in lower margins and higher capital requirements, and future profitability will depend on Generali’s ability to face changes in the conditions of the financial markets and customer preferences, as well as retain its customer base in the medium to long term.”

However, Best added that it “views positively Generali’s decreasing trend of surrenders and increasing net cash inflows, as well as the group’s actions aiming at mitigating lapse risk including surrender penalties and guarantees only provided at maturity.

“In the non-life segment, persistent market pressure has eroded the company’s technical results in recent years, as the 2009 combined ratio deteriorated to 98.8 percent (from 96.6 percent in 2008).

“Notwithstanding, Generali has been able to perform better than the market average in its major markets, also benefiting from lower than average exposure to motor in some countries, such as Italy and France. Despite severe weather conditions in 2010 in Europe,” Best said it “believes that Generali is likely to maintain a combined ratio below 100 percent, benefiting from the selective underwriting approach and tariff increases (namely motor in France and Italy), as well as cost reduction programs in place.”

The rating agency also noted that Generali’s “risk-adjusted capitalization has recovered in 2009 to a level supportive of its superior ratings. The improvement benefited primarily from the increase in the re-valuation reserves of the financial investments and the amount of retained earnings, more than compensating for the limited cash dividend distributed during the year. Traditionally, Generali’s risk-adjusted capitalization benefits from its prudent investment strategy, with assets principally held in highly-rated bonds (accounting for approximately 70 percent of total investments).

“Government bonds represent 55 percent of Generali’s total bond portfolio (namely, 40 percent of government bonds are Italian issuances), while the group is increasing the weight of corporate bonds as well as lengthening the portfolio’s duration in order to support investment profitability affected by the current steep yield-curve.

“Although Generali’s present levels of capitalization and leverage support the ratings in relationship to the group’s existing business profile, in A.M. Best’s view, should potential large-scale acquisition opportunities be pursued, they could exert pressure on the company’s risk-adjusted capitalization.”

Source: A.M. Best