DBRS Morningstar Confirms UnipolSai’s Financial Strength Rating at A (high) and Unipol Gruppo’s Issuer Rating at BBB; Trend Remains Stable

DBRS Ratings GmbH (DBRS Morningstar) confirmed UnipolSai Assicurazioni S.p.A.’s (UnipolSai or the Company) Financial Strength Rating and Issuer Rating at A (high) and Unipol Gruppo S.p.A.’s (Unipol Gruppo) Issuer Rating at BBB. The trend on all ratings is Stable.

KEY CREDIT RATING CONSIDERATIONS
UnipolSai’s A (high) Financial Strength Rating reflects the Company’s strong market position in Italy, supported by a sound product diversification and an extensive distribution network. Despite the difficult operating environment, UnipolSai’s has maintained a low underwriting risk in its insurance operations. On the other hand, the Company’s activities remain focused on Italy and its risk profile is affected by still large albeit decreasing exposure to Italian government bonds. The Company’s strong franchise and excellent operational execution have contributed to consistent premiums generation and solid underwriting profitability. UnipolSai maintained high levels of regulatory capital, supported by its strong underwriting profitability.

UnipolSai's Financial Strength Rating of A (high) is three notches above DBRS Morningstar’s sovereign rating on the Republic of Italy (BBB (high) with a Stable Trend), and falls within the four-notch rating differential allowed by DBRS Morningstar’s “Global Methodology for Rating Insurance Companies and Insurance Organizations.” This differential reflects DBRS Morningstar’s view that, given healthy profitability, insurance claims are likely to be paid by UnipolSai even if the sovereign is under stress. In the event of a weakening sovereign, premium revenues will likely continue being generated, providing steady cash flow and enabling the Company to meet its claims obligations. The Financial Strength Rating of A (high) also considers that the Company holds capital levels comfortably above the regulatory minimums mandated by the Solvency II capital regime.

The Issuer Rating of BBB of Unipol Gruppo is constrained by the rating on the Republic of Italy. Generally, the notching difference between the Financial Strength Rating of the operating insurance company and the Issuer Rating of the holding company is two notches to account for structural subordination and the priority ranking of policyholder claims. However, the differential is widened in this case because of the lower sovereign rating of Italy relative to DBRS Morningstar's assessment of the standalone risk of UnipolSai.

CREDIT RATING DRIVERS
The Company’s ratings are well placed at their current level. However, the ratings would be upgraded over the long term if the Company materially improves its profitability, capital generation and risk profile, together with an upgrade of the sovereign rating of the Republic of Italy from its current level of BBB (high).

Conversely, the ratings would be downgraded if there is a downgrade of the sovereign rating of the Republic of Italy due to the Company’s substantial asset exposure and business concentration in the country. The ratings would also be downgraded if the Company’s earnings ability or capitalization materially deteriorates.

CREDIT RATING RATIONALE
UnipolSai is the main operating entity of Unipol Gruppo and one of the leading insurance companies in Italy. The Company operates primarily in Italy and is active in both the life and non-life segments offering a wide range of insurance products, including mobility, home, personal, and professional protection, as well as savings and investment products. UnipolSai maintained a leading market share in the non-life sector and a strong presence in the life business, supported by a diversified multichannel distribution network which counts on an extensive system of agents across the whole national territory.

Notwithstanding the challenging operating environment, in DBRS Morningstar’s view, UnipolSai’s maintains an adequate risk profile in its insurance operations. The Company’s underwriting risk remains generally low, benefitting from focusing on short-term retail business in the non-life segment. In the life business, UipolSai has been reducing exposure to traditional savings products, which were particularly impacted by increasing early surrenders in the Italian market. However, the group’s exposure to lapse risk remains manageable and below the market average. DBRS Morningstar notes that UnipolSai has partly repositioned its investment portfolio by reducing its exposure to the Italian sovereign debt to approximately 33% at the end of 2022 from 50% at the end of 2019. However, while improving materially, the share of securities rated BBB or below within the fixed income portfolio is still high at 60% at the end of 2022 (63% at the end of 2021).

UnipolSai’s earnings ability remains sound, supported by the Company’s leading market share in the Italian non-life insurance market, its diverse and extensive distribution network, and sound underwriting profitability. UnipolSai’s premium income increased to EUR 13.6 billion in 2022, from EUR 13.3 billion in 2021. The increase was attributable to the non-life sector, up by around 5% Year-on-Year (YoY). The non-motor business showed very positive underwriting profitability in 2022 leading to a reduction of the overall net combined ratio of the non-life segment (93.8% in 2022 vs. 95% in 2021). UnipolSai managed to maintain 2022 life premiums almost stable compared to 2021 in a context of significant reduction for the industry overall.

UnipolSai has a predictable claims profile and adequate holdings of highly liquid assets. While the Company’s investment portfolio comprises mainly fixed income securities, providing a source of readily marketable assets, the substantial holding of domestic bonds (rated in the BBB range and lower) exposes the Company to any potential episodes of stressed market conditions.

The Company has a robust capital cushion with UnipolSai reporting a consolidated solvency ratio of 274% at the end of 2022, albeit decreasing from 284% at the end of 2021. The reduction was mostly attributable to the increased capital requirement on government bonds’ spread. The leverage ratio (as calculated by DBRS Morningstar at the Unipol Group level on a consolidated basis) increased at end-2022, primarily due to the significant reduction of the shareholders’ equity of the group as per the effect of the high unrealised losses on available-for-sale financial assets during 2022.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Environmental (E) Factors
As part of its operations within the property & casualty insurance business, UnipolSai is exposed to climate and weather risks, as well as natural catastrophic events in Italy, including earthquakes, wildfires, flooding and others. DBRS Morningstar considers that the issuer has adequate procedures in place to assess and measure the impact of these risks on its operations and supports broader global actions that aim to minimise them. However, these considerations on the Environmental factor are taken into account as part of DBRS Morningstar’s assessment of product risk within the Company’s risk profile.

There were no Social or Governance factor that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (4 July 2023).

The Grid Summary Grades for UnipolSai Assicurazioni S.p.A. are as follows: Franchise Strength - Strong; Risk Profile - Good/Moderate; Earnings Ability – Strong/Good; Liquidity - Strong/Good; Capitalization - Good/Moderate.

Notes:
All figures are in EUR unless otherwise noted.

The principal methodology is the Global Methodology for Rating Insurance Companies and Insurance Organizations https://www.dbrsmorningstar.com/research/417109/global-methodology-for-rating-insurance-companies-and-insurance-organizations (14 July 2023). In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

The sources of information used for this credit rating include Morningstar Inc. and Company Documents UnipolSai Consolidated Annual Reports 2022-2018, UnipolSai 2022 Solvency and Financial Condition Report, UnipolSai Sustainability Report 2022, Unipol Gruppo Q123 Consolidated Interim Financial Report, Unipol Gruppo 2022 Solvency and Financial Condition Report, Unipol Gruppo Integrated Consolidated Financial Statements 2018-2022, and Unipol Gruppo Annual Reports 2018-2022, Unipol Gruppo Investor Presentation. DBRS Morningstar considers the information available to it for the purposes of providing this credit rating to be of satisfactory quality.

DBRS Morningstar does not audit the information it receives in connection with the credit rating process, and it does not and cannot independently verify that information in every instance.

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 credit ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: : https://registers.esma.europa.eu/cerep-publication/.
For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://www.dbrsmorningstar.com/research/417518

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Mario De Cicco, Vice President, Insurance – Global Financial Institutions
Rating Committee Chair: Marcos Alvarez, Senior Vice President, Global Head of Insurance – Global FIG
Initial Rating Date: October 8, 2020
Last Rating Date: October 4, 2022

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