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Fitch Affirms Unipol Gruppo's IDR at 'BBB-'; Outlook Stable
May 25, 2017 / 3:54 PM / 6 months ago

Fitch Affirms Unipol Gruppo's IDR at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) LONDON, May 25 (Fitch) Fitch Ratings has affirmed Unipol Gruppo's (Unipol) Long-Term Issuer Default Rating (IDR) at 'BBB-'. Fitch has also affirmed UnipolSai's (Unipol's primary insurance subsidiary) Insurer Financial Strength (IFS) rating at 'BBB' and Long-Term IDR at 'BBB-'. The Outlooks on the IFS rating and the Long-Term IDRs are Stable. A full list of rating actions is at the end of this commentary. KEY RATING DRIVERS The ratings reflect Unipol's strong market position in Italy, where it is the largest non-life insurer by premiums, with a market share of 21%. However, Unipol's ratings are heavily influenced by its large exposure to Italian sovereign debt as well as Fitch's expectation that the extremely weak credit quality of its banking operations (Unipol Banca; IDR: BB/Stable Viability Rating: ccc) is likely to negatively affect its strong capital position. Fitch's view on Unipol's capital is driven by the company's score under Fitch's Prism Factor Based Model (Prism FBM). Unipol's Prism FBM score was 'Strong' based on end-2016 data, in line with 2015. However, Fitch believes that Unipol's ownership of Unipol Banca could weaken its capital, in view of the likely need to support the banking operations. The financial leverage ratio (FLR) was high at 34% at end-2016. Fitch expects FLR to decrease in 2017, but to remain commensurate with the ratings. The exposure of Unipol to Italian government debt (IDR: BBB/Stable) was EUR36 billion at end-2016, about 4x consolidated shareholders' funds. As is the case for most Italian insurers, this exposure creates concentration risk in Unipol's investment portfolio. However, Unipol plans to reduce this exposure in favour of corporate bonds and other asset classes. In addition, Unipol's exposure to real-estate assets (about 7% of total investments at end-2016) weighs on its ratings, as some of these are loss-making. Unipol is committed to reducing its exposure to real estate although the difficult Italian property market hampers this policy. Unipol's non-life combined ratio net of reinsurance deteriorated to 96% at end-March 2017 (end-March 2016: 95%), but remained well above the median for its rating category. Unipol's net income increased to EUR107 million at end-March 2017 (2016: EUR92 million). However, non-insurance operations still make a weak or negative contribution to overall net profitability. Consequently, Unipol's 2012-2016 average return on equity was 5%, a level commensurate with the ratings. Fitch expects Unipol's net profitability to remain at least at this level in 2017, but net profit can be volatile due to the uncertainty linked to non-insurance operations. Unipol's consolidated regulatory Solvency II ratio, calculated using undertaking specific parameters (USP), decreased to 137% at end-March 2017 from 141% at end-2016. Unipol expects its consolidated Solvency II ratio for 2016-2018, calculated using USP, to be in the range of 120%-160%. However, like many other Italian insurers, Unipol could face a significant increase in regulatory capital charges if European authorities remove the zero risk-weighting for European sovereigns. Fitch considers Unipol's exposure to interest rate risk as low. This reflects adequate asset and liability matching and lower minimum guarantees on new business (0% for the newest products), which also reduces the proportion of the in-force life reserves that carry financial guarantees. Furthermore, most of the guarantees only have to be paid at maturity rather than annually (which would be more onerous), allowing Unipol greater flexibility in dealing with low investment returns in any particular year. RATING SENSITIVITIES Unipol's ratings could be downgraded if Prism FBM score falls below 'Strong' or return on equity falls below 3%, for a sustained period. Unipol's ratings are likely to be downgraded if Italy's sovereign rating is downgraded. Unipol's ratings could be upgraded if Italy is upgraded, provided that its Prism FBM score remains 'Strong' and return on equity remains above 6% for a sustained period. FULL LIST OF RATING ACTIONS Unipol Gruppo Long-Term IDR affirmed at 'BBB-'; Outlook Stable EMTN programme: affirmed at 'BB+' Senior unsecured debt: affirmed at 'BB+' UnipolSai IFS rating affirmed at 'BBB'; Outlook Stable Long-Term IDR affirmed at 'BBB-'; Outlook Stable EMTN programme: Senior debt: affirmed at 'BBB-' Dated/undated subordinated debt: affirmed at 'BB' Dated subordinated debt: affirmed at 'BB+' Undated subordinated debt: affirmed at 'BB' Contact: Primary Analyst Federico Faccio Senior Director +44 20 3530 1394 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Nicola Caverzan Associate Director +44 20 3530 1642 Committee Chairperson Chris Waterman Managing Director +44 20 3530 1168 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com. 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