February 10, 2017 / 2:57 PM / a year ago

Fitch Affirms SACE's IDR at 'A-'; Outlook Negative

(The following statement was released by the rating agency) LONDON, February 10 (Fitch) Fitch Ratings has affirmed SACE S.p.A.'s (SACE) Long-Term Issuer Default Rating (IDR) at 'A-' with Negative Outlook and Short-Term Foreign Currency IDR at 'F2'. Fitch has also affirmed SACE's perpetual subordinated notes at 'BBB'. KEY RATING DRIVERS The ratings reflect SACE's strong capitalisation and business profile as Italy's export credit agency as well as its financial exposure to Italy. Fitch views SACE's capitalisation as very strong and the insurer's risk management framework as robust. This view is based on SACE's relatively low multiple of nominal credit exposure to equity and appropriate reserving. SACE uses Solvency II risk metrics to assess its solvency capital position, although it is not regulated as an insurance company, and therefore is not subject to Solvency II. At end-2015, SACE's risk-based solvency margin, calculated according to its partial internal capital model, was 1.4x risk capital based on a prudent confidence level of 99.85%, which SACE regards as compatible with a 'AA' rating. We expect SACE's capitalisation to have remained strong in 2016. SACE's off-balance sheet exposure to pledged guarantees and insured credits (EUR49bn at end-September 2016) is well-diversified by geography and sector. Its largest exposures are to Italy, UK (AA/Negative), Russia (BBB-/Stable) and US (AAA/Stable). The insurer's assets are, however, concentrated in Italy. At end-2015, SACE held EUR1.5 billion (25% of total invested assets) of Italian sovereign bonds and EUR3.6bn (60% of total invested assets) of cash balances with Cassa Depositi e Prestiti, SACE's parent company, and some Italian banks. SACE's ratings are therefore influenced by the credit quality of Italy (BBB+/Negative), Cassa Depositi e Prestiti (BBB+/Negative) and the Italian banking sector. This influence is reflected in our view of SACE's asset concentration risk and sovereign constraint on its ratings at 'A-'. We have set the sovereign constraint at one notch higher than the sovereign rating of Italy, in recognition of SACE's strong credit profile and diversification by geography. SACE's Fitch-calculated financial leverage ratio (FLR) was strong at 5% in 2015. The company issued a subordinated bond with perpetual features in 2015 to bolster its capitalisation ahead of an equity reduction, but is unlikely to borrow again and we expect its FLR to remain stable in the near future. SACE plans to increase further its use of reinsurance. The ratio of net written premiums at 81% of gross written premiums in 2015 reflected the change in policy (2014: 92%). The increased use of reinsurance improves SACE's portfolio mix and stabilises financial results. However, this approach introduces additional counterparty credit risk, as the main reinsurance provider is the Italian government, and intensifies significant concentration risk. SACE's 2011-2015 average return on equity was 5%, a level commensurate with the 'BBB' rating category. We expect SACE's return on equity to have remained around this level in 2016. SACE's consolidated net income was EUR309 million in 2015 (2014: EUR471 million), but its underwriting profits can be volatile, due to the timing and magnitude of recoveries from debtors. Investing and hedging activities allow the company to smooth volatile underwriting results, and stabilise net profitability. In the medium term, Fitch expects SACE to rebalance its sources of profit towards underwriting results and, to a lesser extent, to investment income. SACE is Italy's export credit agency supporting the internationalisation of Italian companies. With gross written premiums of EUR560 million at end-2015, SACE provides insurance coverage against commercial and political risks, financial guarantees and supports business development of small and medium-sized Italian enterprises. RATING SENSITIVITIES If Italy's sovereign rating were downgraded, it is probable that SACE's ratings would be downgraded. If Italy's rating were downgraded to BBB- or lower, it is likely that Fitch would reconsider its approach of rating SACE one notch above the sovereign and would equalize its rating with the sovereign. Deterioration in the credit quality of SACE's investments could lead to a downgrade of SACE, as could a significant weakening in SACE's capitalisation. Contact: Primary Analyst Nicola Caverzan Associate Director +44 20 3530 1642 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Harish Gohil Managing Director +44 20 3530 1257 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. Additional information is available on www.fitchratings.com Applicable Criteria Insurance Rating Methodology (pub. 15 Sep 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1018847 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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