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Fitch Ratings recently said that Italian insurers managed to maintain a “very strong level of profitability in 2023”, despite record natural catastrophe (nat cat) claims and elevated life insurance outflows.
It also said that strong investment returns helped stabilise the market after a volatile time. “Earnings were supported by better investment income,” said the paper.
Fitch’s “Italian Insurance Dashboard: 2023 Results” report said that in non-life insurance, weather events caused record natural catastrophe claims that led to a rise in combined ratios. In life insurance, the rise in interest rates led to an increase in lapse rates and a fall in new production.
“Solvency remained very strong thanks to a tightening in credit spreads.”
The natural catastrophe losses experienced by insurers over the past few years have been some of the costliest on record. In a report in January, Aon noted that Italy was one of several countries that in 2023 recorded its costliest weather-related insurance events in history.
“Solvency remained very strong thanks to a tightening in credit spreads,” said Fitch Ratings’ report. Some of Italy’s biggest insurers such as Generali, said its 2023 solvency ratio was 220%; others including Intesa Sanpaolo Vita and Poste Vtia were higher and Unipol was lower.
However, strong returns were unlikely to continue, Fitch Ratings recently said about the wider European insurance market. “The past year’s high incomes are likely to have peaked and could begin to weaken,” it said in early April.
A report analysed major European commercial insurers’ underwriting margins – finding that they would likely peak in 2024 and weaken thereafter. “Price momentum was increasingly subdued in 2023 and is unlikely to be above claims inflation in 2024,” said Fitch.
“High underwriting losses caused by high claims inflation, insufficient reserving, and the pandemic have led to global price increases for 25 consecutive quarters,” it said in the “European Commercial Insurers’ Profits to Decline After 2024 Peak” report.
Italy’s specific economic conditions, however, had caused a profitable 2023 but with continued issues that could change in 2024.
“Net inflows for the Italian life insurance sector turned negative in 2023 for both traditional savings and unit-linked products,” said the report authored by Federico Faccio, Senior Credit Analyst and Robert Mazzuoli, Director of EMEA Insurance. “The rise in interest rates made alternative investments, such as Italian government bonds and savings products from banks, more attractive.”
This hampered gross net inflows for the industry said the report. In addition to this, surrender rates – measured as surrender amounts over prior year reserves – increased massively in 2023 to 10.6% from 8.7% in 2022, a level not seen since 2012. “We expect this trend to moderate in 2024 as interest rates trend lower,” said the report.
“European equities surprisingly outperformed, led by Italy and Spain,
despite predicted downturns."
Over the course of 2023, there were green shoots in the wider Italian economy and investment market.
Morningstar said in its March Active/Passive Barometer that global equities saw a resurgence despite economic slowdown risks, with double-digit growth rates in developed markets, whilst emerging markets showed modest recovery. “European equities surprisingly outperformed, led by Italy and Spain, despite predicted downturns,” it said.
According to Generali Investments, Q1 round-up, an important aspect that has received little attention in the market is “not only that net issuances remain at a high level in 2024 (despite the slight decline), but also that there are large differences between countries”.
“For example, countries with balanced budgets (e.g., Portugal, Ireland) are contrasted with some large countries (notably France and Italy) that have not managed to significantly reduce their high Covid-19-related deficits,” said the report, authored by Florian Spaete, Senior Bond Strategist. “Net issuance of France will even increase slightly this year compared to 2023 to €130 billion (by far, the highest value among all euro zone countries), and Italy will have the highest gross issuance in 2024 with a new record of almost €360 billion.”
Also, according to the report, the weighted average maturity of new (or tapped) bonds increased compared to last year. The average maturity of new bonds in Q1 was over 11 years. Italy was fewer than nine years, which was at the lower end of the average maturity.
Other areas to watch included lapse risk, which has been at heightened levels in the post-pandemic years.
“We expect lapse risk to ease in 2024 as interest rates have trended lower since autumn 2023, making investment alternatives to traditional savings products less attractive,” said Fitch.
In September last year, a report from Gallagher Re, said that the life insurance sector in Europe – and its investments – were at risk due to the recent economic volatility that could see their customers abandon them and cause a hole in their finances.
“Lapse risk is distributed unevenly across Europe, with insurers in some markets more exposed than others, and different mitigating factors involved,” Gallagher Re’s paper said.
“We expect Italian insurers to remain exposed to elevated levels
of natural catastrophe claims due to climate change."
Italy and France were identified as the two markets where insurers were the most exposed to the risk. This was due partly to the laws in these countries that enabled consumers to withdraw from or lapse their policies with little to no financial consequences.
Other areas listed to watch were traditional savings products, which Fitch said were “back in favour”,
“[We expect] life insurers to accelerate the new production of traditional savings products with guarantees in 2024 to remain competitive with alternative investment products, such as Italian government bonds,” they said.
Capital was also expected to “remain very strong”. “Italian insurers’ solvency ratios [are likely to] remain very strong in 2024, provided the spreads of Italian government debt does not deteriorate significantly.”
Catastrophe risk also remained high. “We expect Italian insurers to remain exposed to elevated levels of natural catastrophe claims due to climate change and an increase in insured values for property,” said Fitch.
