Fitch Affirms Generali at IFS 'A-'; Outlook Stable

Fri Jul 25, 2014 11:46am EDT

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(The following statement was released by the rating agency) LONDON, July 25 (Fitch) Fitch Ratings has affirmed Assicurazioni Generali SpA's (Generali) and its core subsidiaries' Insurer Financial Strength (IFS) ratings at 'A-' and Long-term Issuer Default Rating (IDR) at 'BBB+'. The Outlooks are Stable. Fitch has also affirmed Generali's senior and subordinated notes at 'BBB+' and 'BBB-', respectively. A full list of rating actions is at the end of this commentary. KEY RATING DRIVERS The affirmation reflects Fitch's expectations that Generali's operating performance (in particular in the property and casualty segment) will continue to be strong and the ongoing focus of the new management to preserve capital and reduce debt. Nonetheless, Fitch believes that Generali's capital is vulnerable to stress due to its substantial exposure to Italian sovereign debt and its high investment leverage. Furthermore, Generali's significant levels of goodwill and intangibles negatively affect the quality of its capital. Generali's ratings are heavily influenced by the group's exposure to Italian sovereign debt (EUR55bn or 2.8x consolidated shareholders' funds at end-2013). This exposure represents a large concentration risk and a potential source of volatility for capital adequacy. The group's exposure to Italian sovereign debt, which is to match domestic liabilities in Italy, is underlined by the alignment of Generali's IDR with Italy's 'BBB+' IDR. Generali's insurance activities are internationally diversified, including significant operations in France and Germany. These operations are not exposed either to the investment risk or to the economic environment of Italy and therefore possess stronger credit characteristics. Fitch consequently believes that the group's ability to meet its policyholder obligations is superior to the risk expressed in its IDR, resulting in the IFS ratings for Generali being a notch higher at 'A-'. Generali's Fitch-calculated financial leverage ratio (FLR) was high at 35% at end-2013. However, the group plans to reduce financial debt by EUR1bn by 2015. Therefore, Fitch expects the FLR to fall below 35% in the medium term. Fixed-charge coverage (FCC) including unrealised and realised gains and losses was low at 4.1x at FY13, up from 3.2x in 2012. FCC is expected to improve over time as the group deleverages and the new debt carries a lower coupon than the existing outstanding notes. Fitch also views that Generali has high financial flexibility, as demonstrated, for example, by the sale of treasury shares to fund the buy-out of Generali Deutschland's minorities and the pre-funding activities carried in 2013 and 2014. The affirmation follows Generali's announcement that it has agreed the sale of BSI (a private banking service provider in Switzerland) to BTG Pactual for a total consideration of CHF1.5bn. The sale is part of Generali's broad strategic plan to refocus on selected core markets and strengthen the group's solvency margin. Management has also undertaken a thorough review of the group's investments and streamlined its processes and operations. Fitch views the agreed disposal of BSI positively. The transaction is expected to be solvency accretive by 9ppts, although Generali would make a small loss of around EUR100m upon completion. This would more than offset the effects of the option Generali has to buy the remaining 24% of PPF Group's shareholding in Generali PPF Holding in December 2014. The sale of BSI would complete the disposal plan ahead of time. Generali has agreed to dispose of a number of operations worldwide by 2015 and has sold assets for EUR3.7bn so far to strengthen its capital position and repay its debt. The disposal plan boosted its consolidated solvency margin by 9% in 2013 and the sale of BSI would add another 9% to the group's Solvency I ratio, which will stand at 160% based on pro-forma calculation using 1Q14 financials. This level is consistent with the 'A' category rating under Fitch's rating methodology. RATING SENSITIVITES An upgrade of Generali's ratings is unlikely in the medium term given the group's large exposure to Italian government debt. Nonetheless, an upgrade could occur if Generali's consolidated Solvency I ratio is consistently above 150% (end-2013: 141%) and Italy's rating is upgraded to the 'A' category. Generali's ratings could be downgraded if its consolidated Solvency I ratio falls below 120% on a sustained basis or its consolidated financial leverage ratio remains at or above 35% over the next 12-18 months (end-2013: 35%). Generali's ratings are also likely to be downgraded if Italy is downgraded. The rating actions are as follows: Assicurazioni Generali SpA: IDR affirmed at 'BBB+'; IFS affirmed at 'A-'; Outlook Stable Generali Iard: IFS affirmed at 'A-'; Outlook Stable Generali Vie: IFS affirmed at 'A-'; Outlook Stable Generali Deutschland Holding AG: IFS affirmed at 'A-'; Outlook Stable Generali Deutschland Pensionskasse AG: IFS affirmed at 'A-'; Outlook Stable Cosmos Versicherung AG: IFS affirmed at 'A-'; Outlook Stable Cosmos Lebensversicherungs-AG: IFS affirmed at 'A-'; Outlook Stable AachenMuenchener Lebensversicherung AG: IFS affirmed at 'A-'; Outlook Stable Generali Lebensversicherung AG: IFS affirmed at 'A-'; Outlook Stable AachenMuenchener Versicherung AG: IFS affirmed at 'A-'; Outlook Stable Generali Versicherung AG: IFS affirmed at 'A-'; Outlook Stable Central Krankenversicherung AG: IFS affirmed at 'A-'; Outlook Stable Generali Espana, S.A. de Seguros Y Reaseguros IFS affirmed at 'A-'; Outlook Stable Generali Versicherung AG (Austria) IFS affirmed at 'A-'; Outlook Stable Envivas Krankenversicherung AG IFS affirmed at 'A-'; Outlook Stable Advocard Rechtsschutzversicherung AG IFS affirmed at 'A-'; Outlook Stable Dialog Lebensversicherungs-AG IFS affirmed at 'A-'; Outlook Stable Generali (Schweiz) Holding AG: IDR affirmed at 'BBB-'; Outlook Stable Generali's debt ratings are as follows: Assicurazioni Generali SpA Senior unsecured: EUR750m 4.875% notes due 11 November 2014: affirmed at 'BBB+' EUR1,750m 5.125% notes due 16 September 2024: affirmed at 'BBB+' EUR1,250m 2.875% notes due 14 January 2020: affirmed at 'BBB+' Hybrid capital instruments/notes: GBP495m perpetual notes 6.416% affirmed at 'BBB-' GBP350m perpetual notes 6.269% affirmed at 'BBB-' Senior subordinated notes: EUR1,250m 7.75% until December 2022, due 12 December 2042: affirmed at 'BBB-' EUR750m 10.125% until July 2022, due 10 July 2042: affirmed at 'BBB-' EUR 1bn 4.125% due May 2026: affirmed at 'BBB' Generali Finance BV Senior unsecured: EUR500m 3.875% notes due 6 May 2015: affirmed at 'BBB+' Hybrid capital instruments/notes: EUR1,275m perpetual notes 5.317% affirmed at 'BBB-' EUR1,250m perpetual notes 5.479% affirmed at 'BBB-' GBP700m perpetual notes 6.214% affirmed at 'BBB-' Contact: Primary Analyst Federico Faccio Senior Director +44 20 3530 1394 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Harish Gohil Managing Director +44 20 3530 1257 Committee Chairperson David Prowse Senior Director +44 20 3530 1250 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable criteria, 'Insurance Rating Methodology', dated 13 November 2013, are available at www.fitchratings.com. Applicable Criteria and Related Research: Insurance Rating Methodology here Additional Disclosure Solicitation Status 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 WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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