Ratings agency says move reflects decline in Italian giant's performance and capital strength.
Fitch has changed the Italian insurance company Assicurazioni Generali outlook to negative from stable.
In a statement Fitch said the Negative Outlook reflected a decline in the group's capital strength and the resilience of operating performance in increasingly challenging market conditions.
Generali's Issuer Default Rating (IDR) and Insurer Financial Strength (IFS) were affirmed at 'AA-' (AA minus) and 'AA'.
Fitch said: "The ratings continue to reflect the strong business franchise of the Generali Group, solid underwriting performance, prudent reserving, strong diversification and limited exposure to structured credit."
The agency said that the recent acquisition of Banca del Gottardo as well as the establishment of a joint venture with the PPF group had weakened the group's capital position.
The Outlook could revert to Stable, fitch said, if Generali builds up additional capital to bring it more into line with Fitch's expectations for a company rated in the 'AA' range, maintains strong earnings generation and successfully copes with the challenges of its main insurance markets. Conversely, if Generali is unable to achieve these objectives, the ratings could be downgraded.
The statement continued: "In addition, in 2007 the amount of available capital decreased, following the completion of the EUR1.5bn share buy-back programme and the negative movements of AFS fair value reserves caused by adverse investment markets. As a result, Fitch regards Generali as thinly capitalised for a company rated in the 'AA' range.
"Offsetting this, the issuance of EUR4.8bn hybrid debt in 2006 and early 2007 helped to enhance Generali's capital structure.
"The Italian non-life market is facing critical changes following the implementation of a number of reforms, including those relating to claims settlement and distribution.
"A general trend of claims inflation mitigation has been observed as a result of the implementation of a direct settlement system. Fitch expects Generali to cope well with the new framework, although, for the market as a whole, there appears little room to raise tariffs given the current competitive and macroeconomic environment.
In 2007, a group profit of EUR2.9bn was realised, compared to EUR2.4bn in 2006. During 2007, Generali set new financial targets through the 2007-2009 strategic plan, as the profit target of EUR 2.9bn was achieved ahead of schedule.
The 2007 non-life combined ratio stood at 95.8%.
Fitch said it noted that Generali's balance sheet proved resilient during the last three quarters, given its immaterial exposure to structured credit.
Generali aims to increase its risk appetite by investing in more high-risk bonds and in alternative investments. Although this could expose Generali's financial result to volatility, Fitch said it expected this impact to be limited.
