DBRS Morningstar Confirms the Ratings of UnipolSai and Unipol Gruppo; 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 RATING CONSIDERATIONS
UnipolSai’s A (high) Financial Strength Rating reflects the Company’s strong position in Italy, where it has leading market shares in the nonlife segment and is among the top six life insurers. The Company offers a diverse range of products to retail and corporate customers and benefits from an extensive agency network in the country. The Company’s product risk is relatively low given its focus on motor insurance; however, credit risk is adversely affected by the large exposure to Italian sovereign bonds. The Company’s strong franchise and excellent operational execution have contributed to consistent premiums generation and strong underwriting profitability. UnipolSai has high levels of regulatory capital, which, together with strong underwriting profitability, mitigates the sensitivity to Italian bond spreads.

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 ratings 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 are likely to continue being generated, providing steady cash flow and enabling the Company to meet its claims obligations. The Financial Strength Rating of A (high) also takes into account that the Company holds capital levels comfortably in excess of 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.

RATING DRIVERS
An upgrade of the sovereign rating of the Republic of Italy or a change of its Trend to Positive, along with UnipolSai maintaining high regulatory capital ratios and conservative financial leverage, would lead to a corresponding upgrade or Trend change on UnipolSai’s and Unipol Gruppo’s ratings, respectively.

Conversely, a downgrade of the sovereign rating of Italy, or a change in the Trend to Negative, would result in a downgrade or trend change of both entities' ratings due to UnipolSai's material business and asset exposure to Italy. Material and sustained deterioration in UnipolSai's solvency, asset risk, financial leverage, and/or underwriting profitability would also negatively pressure the ratings.

RATING RATIONALE
UnipolSai is one of the leading insurers in Italy with robust market shares across several key lines, including motor insurance. The Company benefits from an extensive distribution network and bancassurance agreements, as well as a solid brand recognition that underpins the strength of its franchise and supports revenue generation. UnipolSai offers a diverse range of insurance and saving products to retail and corporate customers. The Company’s strategy is focused on consolidating its position in the mobility, welfare, and property ecosystems.

In DBRS Morningstar’s view, UnipolSai’s underwriting risk is low given its focus on the short-term retail segment in the nonlife insurance business. In the life insurance business, the Company has reduced its exposure to traditional saving products with guaranteed rates. The Company has substantial product diversification, but operations are concentrated on the Italian market, including a decreasing but still material exposure to Italian government bonds. UnipolSai’s significant exposure to real estate holdings exposes the Company to the risk of a decline in property values in Italy. However, this risk is mitigated by the high quality of its real estate portfolio, which remains concentrated in primary cities in Italy. UnipolSai’s risk management infrastructure is strong and well aligned with the size and complexity of the organization.

DBRS Morningstar notes that UnipolSai’s earnings generation ability is solid, supported by its leading franchise, extensive distribution channels, and profitable underwriting. The Company’s combined ratio has consistently been in the mid-90s range in years. Following improvements in profitability during 2020 and 2021 because of material reduction in motor insurance claims, UnipolSai’s profitability has returned to its long-term average with a return on equity in the low teens. Unipol Gruppo’s new strategic plan for 2022–24 anticipates a reduction in combined ratios across different business lines, including motor insurance. In DBRS Morningstar’s view, such reduction, together with the consolidation in UnipolSai’s ecosystems will allow the Company to improve profitability. However, a potential slowdown of the Italian economy poses headwinds, which are partly mitigated by the stickiness of the motor insurance business in the short term.

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 an excellent cushion and good capital generation, with UnipolSai’s consolidated solvency ratio remaining strong at 284% at the end of H1 2022. DBRS Morningstar notes that the Company’s solvency levels remained well above internal targets during the peak of the Coronavirus Disease (COVID-19) pandemic despite extreme market volatility. However, Unipol Gruppo’s consolidated financial leverage (as calculated by DBRS Morningstar) weakened to 38.1% at June 2022, which is somewhat above the average for its rating category. The increase in financial leverage was mostly because of unrealized losses on available-for-sale financial assets in the first half of 2022, which reduced the Company’s total capitalization.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Environmental (E) Factors
Environmental concerns regarding climate and weather risks are relevant to the rating of UnipolSai but do not affect the assigned rating or trend. The issuer mainly operates in Italy and through its P&C business is exposed to natural catastrophic events such as earthquakes, wildfires, flooding, and other extreme weather events. These events can lead to earnings volatility and increased reinsurance cost. The issuer has procedures in place to assess and measure the impact of this risk on its operations, and is supportive of broader global actions that aim to minimize this risk. DBRS Morningstar considered this ESG factor as part of product risk when assessing the Company’s risk profile.

There were no Social/Governance factors 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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings. (17 May 2022).

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

Notes:
All figures are in Euros unless otherwise noted.

The principal methodology is the Global Methodology for Rating Insurance Companies and Insurance Organizations https://www.dbrsmorningstar.com/research/402220 (31 August 2022). Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/396929 (17 May 2022).

The sources of information used for this rating include Company Documents, UnipolSai Consolidated Interim Financial Report at 30 June 2022, UnipolSai 2021 Solvency and Financial Condition Report, UnipolSai 2021 Consolidated Financial Statements, UnipolSai 2021 Annual Report, UnipolSai Sustainability Report 2020, Unipol Gruppo 1H22 Consolidated Interim Financial Report, Unipol Gruppo 2021 Solvency and Financial Condition Report, Unipol Gruppo 2021 Integrated Consolidated Financial Statements, and Unipol Gruppo 2021 Annual Report. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS Morningstar does not audit the information it receives in connection with the 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 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://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/403585.

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

Lead Analyst: Marcos Alvarez, Senior Vice President, Head of Insurance—Global FIG
Rating Committee Chair: Elisabeth Rudman, Managing Director, Head of European FIG—Global FIG
Initial Rating Date: October 8, 2020
Last Rating Date: November 5, 2021

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