ITAS Mutua's outlook revised to stable

The rating actions follow ITAS's improved underwriting performance in 2010 and expectations that the company will continue to maintain strong underwriting discipline in acquiring new business.

ITAS's combined ratio was 102.8% at end-2010, well below the 109.5% recorded in 2009, but still unprofitable. The loss ratio also reduced, despite a deterioration of the motor third-party liability results for the accident year 2010.

ITAS targets growth both in non-life and life (through ITAS Vita) over the 2010-2012 period. In 2010, tight risk controls on the new business continued to suggest that a satisfactory degree of underwriting discipline is being maintained.

In addition, Fitch said it expects life sales will slow down in 2011, in line with market trends, and growth in non-life (in particular, motor) will be more restrained. This should result in the solvency margin declining only marginally from current levels.

Nevertheless, Fitch cautioned that it could take some time before the true value of the new business underwritten in 2010 can be assessed. This is particularly the case in the Italian insurance market, where a fragile recovery is underway in property & casualty. In addition, a slow down and change of product mix in life is expected ahead of Solvency II.

Fitch considered ITAS's regulatory solvency and risk-adjusted capitalisation based on the agency's own assessment as strong. The Solvency I ratio for the group was 200% at the end of 2010, although it fell from 240% in 2009, as a result of the strong growth in the year. However, as a mutual, Fitch noted ITAS has limited financial flexibility.

Trading conditions in the Italian non-life market are improving after two years of weak operating performance. Higher premium rate increases and better risk selection will continue to drive this recovery in 2011, in Fitch's view. Nevertheless, the macroeconomic environment remains challenging. Fitch forecasts weak growth for 2011 (1%) and 2012 (1.5%).

Fitch considers ITAS's investment portfolio is prudent, with little exposure to equities. The vast majority of the fixed income portfolio (96%) is rated 'A' or above. Offsetting this conservative portfolio is the large exposure to sovereign debt issued by the Republic of Italy (57% of the fixed income portfolio), resulting in some concentration risk.

It believes an upgrade of ITAS's rating is unlikely in the medium term, as the ultimate profitability of the new business can only be assessed two to three years after the business is initially underwritten. However, increased scale and diversification through profitable growth, combined ratio steadily below the 100% mark or below market average and robust group solvency (no lower than 175%) would be seen as positive rating factors.

Conversely, if the group Solvency I was to fall below 175% for a sustained period or the combined ratio deteriorated (ie from the 2010 levels) in 2011, the rating could be downgraded. In addition, a significant deterioration of macroeconomic conditions in Italy, combined with persistent pressure on Italian sovereign credit spreads, resulting in significant losses on ITAS's financial assets, could exert negative pressure on ITAS's rating.

Established in 1821, ITAS is the oldest Italian insurance company. It is predominantly a local non-life insurer with a significant position in the Trentino Alto Adige region in north-east Italy. It also distributes life products through ITAS Vita. The ITAS Group is the 14th-largest insurer in Italy. Total group gross written premiums in 2010 were 665m.