DBRS Morningstar Assigns A (high) Financial Strength Rating to Siat Societa Italiana Assicurazioni e Riassicurazioni p.A; Negative Trend

DBRS Limited (DBRS Morningstar) assigned an A (high) Financial Strength Rating (FSR) to Siat Societa Italiana di Assicurazioni e Riassicurazioni p.A (Siat or the Company). The trend on the rating is Negative.

KEY RATING CONSIDERATIONS
As a wholly owned, strategically important subsidiary of UnipolSai Assicurazioni S.p.A (UnipolSai; rated A (high) with a Negative trend by DBRS Morningstar), Siat’s ratings are primarily driven by the Parent’s rating. As per DBRS Morningstar’s “Global Insurance Methodology,” the equalization of Siat’s FSR with that of UnipolSai reflects the expectation of support from its parent for this subsidiary given its linkages to its parent and its importance to UnipolSai’s overall insurance operations.

On an intrinsic basis, DBRS Morningstar views Siat as a strong player in the European marine insurance sector, where it has a leading market presence in the Italian hull and cargo business lines. Moreover, Siat has consistently demonstrated good revenue generation and sound underwriting capabilities but has a more limited franchise and product diversification that results in lower level of earnings, relative to UnipolSai. The operations of Siat are interconnected with the operations of UnipolSai, as the latter provides many operational functions, including risk management, audit, information technology, and actuarial services, among others.

The Negative trend reflects the Negative trend on the ratings of the Parent.

RATING DRIVERS
As Siat’s ratings primarily reflect the ratings of UnipolSai, any ratings upgrade of UnipolSai would result in a ratings upgrade of Siat. Conversely, a downgrade of UnipolSai’s ratings would also result in a ratings downgrade of Siat. In addition, any indication of a reduced ability or willingness of UnipolSai to support Siat would result in a ratings downgrade.

RATING RATIONALE
Siat operates as the marine insurance arm of UnipolSai, and is a small but consistent contributor to overall premium revenues. Siat operates in two primary business segments, hull and cargo, and has leading market positions in both segments. A smaller amount of premiums are generated in the growing aviation business. Revenues are generated primarily through bespoke marine brokers with Siat also able to utilize UnipolSai’s extensive distribution network to its advantage. UnipolSai cedes its maritime premium exposure to Siat. In turn, Siat cedes a sizable portion of its premiums to a number of reinsurance counterparties.

While revenue generation has been consistent, profitability has eroded in the past few years as a result of poor experience in the hull business line, where the Company is currently experiencing elevated loss ratios. The Company has implemented several action plans to reverse this trend, including taking pricing actions and reducing the proportion of poor risks in its portfolio. Conversely, the cargo business line is quite profitable, with Siat aiming to expand in this area in order to boost overall profitability. The Company’s expenses are managed prudently, as evidenced by a stable expense ratio.

Siat is adequately capitalised with a Solvency Capital Requirement (SCR) ratio of 147% at year-end 2019, above the regulatory minimum of 100%. Reinsurance helps reduce some of the demands of required regulatory capital, particularly the amount of capital to be held for catastrophic risks. As a nonlife insurer, there remains the risk of outsized claims occurring; however, Siat has a comprehensive reinsurance program comprised of high-quality reinsurers and appropriate risk retention levels that helps mitigate this risk. Siat has conservative risk management practices, with the Company exercising good pricing and underwriting discipline.

The Company’s investment portfolio is highly marketable and liquid, comprised largely of sovereign bonds, followed by corporate bonds and real estate, primarily own use. The Company does not use riskier asset classes, such as equities or derivatives, in its portfolio, reducing some market risk. The proportion of Italian sovereign bonds in the investment portfolio is high, making it vulnerable to weaknesses and volatility in Italian macroeconomic conditions. Additionally, the low interest rate environment is expected to continue putting pressure on yields, affecting profitability.

ESG CONSIDERATIONS

DBRS Morningstar views the Climate and Weather Risk subfactor as a material ESG factor for this rating. This is included in the Environmental category. As a nonlife insurer, the company’s profitability is impacted by severe weather events that can increase insured losses.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology is the Global Methodology for Rating Life and P&C Companies and Insurance Organizations (July 21, 2020, https://www.dbrsmorningstar.com/research/364260/global-methodology-for-rating-life-and-pc-insurance-companies-and-insurance-organizations).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found on the issuer page at www.dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This rating is endorsed by DBRS Ratings Limited (DBRS Morningstar) for use in the European Union. The following additional regulatory disclosures apply to endorsed ratings:

This is the first DBRS Morningstar rating on this financial instrument.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Lead Analyst: Komal Rizvi, Vice President
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer
Initial Rating Date: October 6, 2020

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

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