Fondiaria, Unipol May Struggle on Cost Goal, Fitch Says

Fondiaria-SAI SpA (FSA) and Unipol Gruppo Finanziario SpA (UNI) may struggle to reach their cost-savings goal after they merge to become Italy’s second-largest insurer, according to Fitch Ratings.

“This is a very complex integration,” Federico Faccio, director of the insurance team for London-based Fitch, said in an interview in Milan. “The ongoing due diligence may unveil unexpected issues.”

Unipol, Italy’s No. 3 insurer, targets more than 300 million euros ($392 million) of additional revenue and cost savings by 2015 for the merged group. Fitch said Jan. 31 it may upgrade the rating of Fondiaria, Italy’s No. 2 insurer, by as much as three levels if the merger is successfully completed. Fitch downgraded Fondiaria to B+ from BB-.

Unipol agreed in January to buy new shares in Premafin Finanziaria SpA (PF), the holding company controlling Fondiaria. The purchase will allow Premafin to participate in the 1.1 billion- euro stock sale announced by Fondiaria on Jan. 30. After the capital increase, Unipol, Premafin, Fondiaria and its unit Milano Assicurazioni SpA (MI) will merge to challenge Italy’s biggest insurer, Assicurazioni Generali SpA. (G)

Merged Group

Unipol, based in Bologna, forecast the new entity will have a combined ratio, or claims and expenses as a percentage of premiums, of 93 percent at the end of 2015, indicating profitable underwriting. Non-life gross written premiums may rise to 10.5 billion euros, the company said March 15.

It’s forecasting net income of 970 million euros in 2015. “Post-merger targets presented by Unipol look reasonable, even if there are risks linked to cost synergies and network integration” Faccio said. “If the due diligence doesn’t surprise, the targets will be reachable. Still, Fondiaria’s track record is not the best.”

Fondiaria, which gets most of its revenue from property and casualty businesses, is suffering from rising claims and tougher competition at home. The insurer posted a net loss of 852.7 million euros last year, after it wrote down the value of non- strategic assets and real estate by 657 million euros.

Capital Level

“Fondiaria urgently needs to increase its capital level as it’s the only Italian insurer with a solvency margin below the regulatory threshold,” Faccio said. Fitch will “probably” upgrade Fondiaria by one level if the share sale is completed, while it would consider downgrading the company if it fails.

The rating outlook for the country’s insurance industry remains negative because of credit risk associated with Italian sovereign debt, according to Fitch. “We still see a dangerous situation and with government bond spreads staying at current levels we cannot say that the crisis is over,” Faccio said.

A rebound in Italian government bond prices in the first quarter will positively affect the earnings of Italian insurers, he said. “That’s not enough to improve the ratings.”

Editors: Dan Liefgreen, Marco Bertacche

To contact the reporters on this story: Sonia Sirletti in Milan at ssirletti@bloomberg.net Francesca Cinelli in Milan at fcinelli@bloomberg.net

To contact the editors responsible for this story: Frank Connelly at fconnelly@bloomberg.net James Ludden at jludden@bloomberg.net

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