‘Impaired capital’ undermines strong position, says S&P
Standard & Poor's has downgraded its outlook on Italian composite insurer Assicurazioni Generali from stable to negative along with related core entities and Generali Holding Vienna.
The rating agency affirmed the AA long-term counterparty credit and insurer financial strength ratings on Generali group core entities, as well as the A+ long-term counterparty credit and insurer financial strength ratings on Generali Holding Vienna but warned that could drop too.
"The outlook change reflects increasing pressure on the group's capitalization," said Standard & Poor's credit analyst Paola Del Curatolo. "The negative outlook reflects our expectation that we might lower the ratings on Generali and its core subsidiaries if the group does not succeed in rebuilding its capitalization to a level in line with the current ratings in the next 12 to 24 months."
The ratings on Generali reflect its strong competitive position and very strong, albeit pressured, earnings. Offsetting factors are the group's medium-term capitalization that is not in line with the ratings and still only adequate enterprise risk management, S&P said.
S&P’s statement said: “Generali entered the current financial crisis with an impaired capital base due to the impact of share buybacks, acquisitions, and minority buyouts, only partially offset by hybrid debt issuance. The impairments experienced so far (€2.2bn before taxes and policyholders' share), negative income from financial investments (€850m before taxes and policyholders' share), and a decline in the available-for-sale reserve (of €3.2bn net) have further weakened capitalisation. We have some tolerance for highly rated insurers operating with a level of capital lower than the rating would normally imply, particularly during times of significant market dislocation. Nevertheless, although Generali has a very strong earnings track record, we believe that the current weak operating environment constrains its ability to rebuild capital to a more supportive level over the rating horizon. In addition, we have concerns about the significant amount of debt to be refinanced in the next 12 to 24 months, amid market conditions that reduce the availability and raise the cost of funding sources. If the group is not able to successfully refinance the expiring debt, capitalisation will be even tighter.”
