OREANDA-NEWS. Fitch Ratings has assigned Italian insurer ITAS Mutua's (ITAS) proposed issue of dated euro-denominated subordinated notes an expected rating of 'BB(EXP)'.

The final rating is contingent on the receipt of final documents conforming to information already received.

Fitch has simultaneously affirmed ITAS's Insurer Financial Strength (IFS) rating at 'BBB' and published a Long-term Issuer Default Rating (IDR) of 'BBB-'. The Outlooks are Stable.

KEY RATING DRIVERS
ITAS is proposing to issue subordinated fixed rate notes due in 2025. The proceeds of the subordinated notes will be used to improve the company's capital position following the purchase of the Italian subsidiary of Royal & Sun Alliance.

Fitch classifies Italy as an effective group solvency regulatory environment. As a result, Fitch uses a recovery assumption of 'Good' for the IFS rating, and notches down the IDR from the IFS rating by one notch, resulting in the IDR of 'BBB-'.

The baseline recovery assumption for the debt, based on Italy's regulatory environment, is 'below average' which results in one downward notch being applied to the IDR for expected recovery. Furthermore, the issuance is a Solvency II Tier II hybrid with mandatory deferral triggers referencing a Solvency Capital Event, which result in a 'Moderate' risk of non-performance and consequently a further notch down from the IDR. As a result the expected rating on the debt is two notches below the IDR at 'BB(EXP)'.

According to Fitch's methodology, this subordinated bond is classified as 100% capital due to regulatory override within Fitch's risk-based capital calculation and is classified as 100% debt for the agency's financial leverage calculations.

ITAS's ratings reflect the company's niche position in the Italian insurance market as well as their strong capital adequacy. The solvency margin is sensitive to changes in the value of Italian government bonds but Fitch expects ITAS to maintain a capital position that is at least commensurate with the 'BBB' category.

ITAS is expected to complete the acquisition of the Italian subsidiary of Royal & Sun Alliance with an effective date of 1 January 2016. The acquisition will increase ITAS's size and scale but carries significant execution risk.

On completion, Fitch expects ITAS's net written premium and non-life liabilities to increase to over EUR1bn, respectively, from EUR462m and EUR678m in 2014. ITAS also has life liabilities of EUR1.4bn. The transaction is expected to increase ITAS's geographical diversification in the north west of Italy given that the insurer's current business is concentrated in the north east. The company will also start writing engineering and transport business in addition to motor.

RATING SENSITIVITIES
Key rating triggers for a downgrade of ITAS's ratings include the consolidated combined ratio increasing to above 103% for a sustained period (2014: 99%), regulatory solvency falling below 150% for a prolonged period (2014: 176%) or materialisation of execution risk associated with a transaction of this size. A downgrade of Italy by two or more notches could also lead to a downgrade of ITAS's ratings.

Greater scale and diversification through profitable growth, a combined ratio that remains below 100% or below the market average, and robust group regulatory solvency of no lower than 175% could also lead to an upgrade. If Italy's sovereign rating is upgraded ITAS's rating could also be upgraded provided that net profitability and strong capital ratios are maintained.