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Italian Insurers to Consolidate in Four-Way Merger

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The result: an insurance company that's WAY too big to fail.

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Unipol Gruppo Finanziario SpA, the third-largest insurer in Italy, plans to take over Premafin, the parent company of two other rival insurance companies, making the second-largest insurance company in Italy.

Unipol announced plans to buy a 51.3% stake in Premafin at 36.53 euro cents per share through a capital increase that was made available for the takeover, as reported in Bloomberg. Premafin is the controlling investor in the debt-laden Fondiaria-SAI, which owns Milano Assicurazioni SpA. Under the terms of the deal, Unipol will take over the two flagging insurance companies.

Unipol said that it would give itself until July 20 to finalize the deal with regulators.

Shares of Premafin surged 21% on the news of the takeover. Premafin shareholders such as the powerful Ligresti family can expect their stakes in the company to be diluted.

The merger aims to save Fondiaria and Milano from insolvency. Fondiaria is bracing for a loss of 925 million euros for 2011, and its solvency rate is at 90%. European regulators require a minimum of 100% solvency.

While this deal saves one insurer in Italy, it consolidates risk in the Italian insurance sector. After the takeover, Unipol will have 32% of the non-life insurance segment and 10% of the Italian life insurance market, according to analysts. If the unprofitable Fondiaria brings down Unipol, the ripple effects of such a failure might be the sort of thing that would warrant a government bailout. In chronically indebted Italy, that might not be possible.

Twitter: @vincent_trivett
No positions in stocks mentioned.
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