Most Italian and Spanish insurers likely will not suffer ratings downgrades if the sovereign debt ratings of their countries are downgraded modestly, according to Fitch Ratings Ltd.

Italy and Spain are frequently cited as two of the major European economies most at risk from any spread of the euro zone crisis that has so far affected the smaller economies of Greece, Ireland and Portugal.

Fitch rates Italy’s sovereign debt at AA- and Spain’s at AA+.

One-notch downgrade

Fitch said in a report Monday that in the event of a sovereign debt rating downgrade of Italy or Spain. it likely would affirm the ratings of the majority of the seven Italian and six Spanish insurers it rates.

Fitch said of the insurers it rates in Italy, three have the same rating as the country’s sovereign level while the rest are rated at several notches below the sovereign level.

“Fitch would not expect to downgrade the ratings of the majority of rated Italian insurers even in the event of a one-notch downgrade of Italy’s sovereign rating,” Federico Faccio, a senior director in Fitch’s insurance team in London, said in a statement. “Nevertheless, there is some linkage between the strength of the Italian economy, the rating of a domestic insurer and the rating of the sovereign,” he said. “It is unlikely that the rating of a domestic insurer could be more than one notch higher than the sovereign, thus creating a downgrade risk were the sovereign to be downgraded by more than one notch.”

Gap between insurers, sovereign rating

Of the six insurers that Fitch rates in Spain, the highest rated—Generali Espana, the Spanish arm of Assicurazioni Generali S.p.A.—is rated at two notches below the sovereign debt rating, Fitch said.

“Accordingly, even if Spain’s sovereign rating was hypothetically downgraded by three notches, this is unlikely to affect the ratings of these six insurers, given the relatively significant gap between the insurers’ ratings and Spain’s sovereign rating,” Fitch said in the statement.