Morningstar DBRS Confirms UnipolSai's Financial Strength Rating at A (high) with Stable Trend; Unipol Gruppo S.p.A.'s Issuer Rating of BBB Remains Under Review With Positive Implications

DBRS Ratings GmbH (Morningstar DBRS) confirmed UnipolSai Assicurazioni S.p.A.'s (UnipolSai or the Company) Financial Strength Rating (FSR) and Issuer Rating at A (high) with Stable trends. Unipol Gruppo S.p.A.'s (Unipol Gruppo) Issuer Rating of BBB remains Under Review with Positive Implications.

KEY CREDIT RATING CONSIDERATIONS
UnipolSai's FSR reflects the Company's strong market position in Italy, supported by sound product diversification and an extensive distribution network. While underwriting profitability deteriorated in 2023 because of the Company's exposure to catastrophe risk, UnipolSai maintained sound bottom-line profitability metrics. On the other hand, the Company's activities remain focused in Italy and its risk profile is affected by the still-large, albeit decreasing, exposure to Italian government bonds. UnipolSai's strong franchise and excellent operational execution have contributed to consistent premiums generation in both the non-life and life segments in recent years. The Company maintained high levels of regulatory capital and adequate levels of financial leverage.

UnipolSai's FSR is three notches above Morningstar DBRS' sovereign credit rating of BBB (high) with a Stable trend on the Republic of Italy (Italy) and falls within the four-notch credit rating differential allowed by Morningstar DBRS' "Global Methodology for Rating Insurance Companies and Insurance Organizations". This differential reflects Morningstar DBRS' view that, given healthy profitability, UnipolSai is likely to pay insurance claims even if the sovereign is under stress. In the event of a weakening sovereign, premium revenues will likely continue to be generated, providing steady cash flow and enabling the Company to meet its claims obligations.

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

CREDIT RATING DRIVERS
The credit ratings would be upgraded over the longer term if UnipolSai materially improves its profitability, capital generation and risk profile, together with an upgrade of the sovereign credit rating of the Republic of Italy.

Conversely, the credit ratings would be downgraded if there is a downgrade of the sovereign credit rating of the Republic of Italy due to the Company's substantial asset exposure and business concentration in the country. The credit ratings would also be downgraded if the Company's underwriting profitability or capitalisation materially deteriorate.

CREDIT RATING RATIONALE
Franchise Strength Building Block Assessment: Strong
UnipolSai is the main operating entity of Unipol Gruppo and one of the leading insurance companies in Italy in both the non-life and life segments. The Company's operating activity is concentrated in the domestic market where UnipolSai offers a wide range of insurance products, including mobility, home, personal, and professional protection, as well as savings and investment products. UnipolSai's leading market position is supported by its diversified multichannel distribution network, which counts on an extensive system of agents across the nation and a consolidated bancassurance partnership with two participating Italian banks, BPER Banca S.p.A. (BPER) and Banca Popolare di Sondrio S.C.p.a. (BP Sondrio). In February 2024, Unipol Gruppo announced the merger by incorporation of UnipolSai into Unipol Gruppo. The transaction aims to rationalise and simplify the Group's corporate structure and will allow Unipol to optimise its cash, funding, and solvency position going forward. With the successful acquisition of 100% of UnipolSai's outstanding shares and the recent delisting of UnipolSai shares from the Euronext Milan stock exchange, Unipol remains on track to complete the merger as announced before the end of 2024.

Risk Profile Building Block Assessment: Good/Moderate
Notwithstanding the challenging operating environment, in Morningstar DBRS' view, UnipolSai maintained an adequate risk profile in its insurance operations. In 2023, underwriting profitability in the non-life segment deteriorated mostly because of adverse weather events and their related negative impacts in Italy during the year. On the other hand, the Company has fully and successfully implemented its repricing strategy in the motor business, which did not materially affect UnipolSai's client retention rates. In the life segment, UnipolSai has been significantly outperforming the market both in terms of premium growth and lapse risk. UnipolSai's exposure to Italian sovereign debt remained significant but decreased to approximately 30% of the total investment portfolio at the end of Q1 2024 from 50% at the end of 2019. However, while improving materially, the share of securities rated BBB or below within the Company's fixed-income portfolio was still high at 58% at the end of 2023 compared with 60% at the end of 2022.

Earnings Ability Building Block Assessment: Strong/Good
UnipolSai's earnings ability remains sound, supported by its leading market share in the Italian non-life insurance market. The Company's direct insurance premiums increased by around 10% year over year in 2023, supported by both non-life and life segments. Nevertheless, underwriting profitability deteriorated in 2023, largely because of the negative impact from large losses associated with adverse atmospheric events that accounted for 14.1% of the combined ratio (CR), resulting in a significant increase in the CR to 98.2% from 93.8% in 2022. Positively, in Q1 2024, the CR improved to 91.1% from 94.8% in Q1 2023. The Company's average return on equity (ROE) has remained in the low teens over the last three years.

Liquidity Building Block Assessment: Strong/Good
UnipolSai has a predictable claims profile and adequate holdings of highly liquid assets. While the Company's investment portfolio comprises mainly fixed-income securities that provide a source of readily marketable assets, UnipolSai's substantial holding of domestic bonds (rated in the BBB range and lower) exposes the Company to any potential stressed market conditions. Exposure to natural catastrophic events adds certain claims' volatility.

Capitalisation Building Block Assessment: Good/Moderate
Morningstar DBRS' view of UnipolSai's capitalisation continues to reflect the Company's strong capital cushions, solid earnings generation capacity, and adequate leverage. UnipolSai's solvency capital requirement ratio on a consolidated basis (as measured by an economic capital model based on Solvency II) remained robust at 320% at the end of 2023 compared with 274% at the end of 2022. At the group level, Unipol Gruppo reported a Solvency II ratio of 215% at the end of 2023 compared with 200% at the end of 2022. The consolidation of the two insurance subsidiaries, BPER and BP Sondrio, continues to affect Unipol Gruppo's Solvency II ratio. Excluding the banking subsidiaries, the overall Solvency II ratio for the insurance sector at the group level would be 267% at the end of 2023. Notably, the leverage ratio will decrease gradually after the merger as Unipol Gruppo will let the senior bond expire without replacement.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Environmental (E) Factors
The Environmental factor is considered relevant but does not affect the credit ratings or trends assigned to the Company. As part of its operations within the property and 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. Morningstar DBRS considers that the Company 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, losses related to adverse weather events in Italy increased significantly in 2023, leading to a deterioration of UnipolSai's underwriting profitability.

Credit rating actions on Italy are likely to have an impact on this credit rating. ESG factors that have a significant or relevant effect on the credit analysis of Italy are discussed separately at https://dbrs.morningstar.com/issuers/17689. 

The Social and Governance factors affect UnipolSai as the ESG factors for Italy are passed through to the Company, given that its credit ratings or trends would move with the credit ratings or trends on the sovereign (see credit rating drivers section).

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) at https://dbrs.morningstar.com/research/427030.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology is the Global Methodology for Rating Insurance Companies and Insurance Organizations (15 April 2024), https://dbrs.morningstar.com/research/431180. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings, https://dbrs.morningstar.com/research/427030, in its consideration of ESG factors.

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

The sources of information used for this credit rating include Morningstar, Inc. and company documents, UnipolSai's consolidated annual reports 2023-18, UnipolSai's Solvency and Financial Condition Report 2023-18, Unipol Gruppo's Q1 2024 consolidated interim financial report, Unipol Gruppo 2023 Solvency and Financial Condition Report, Unipol Gruppo integrated consolidated financial statements 2023-18, Unipol Gruppo's annual reports 2023-18, and Unipol Gruppo's investor presentation. Morningstar DBRS considers the information available to it for the purposes of providing this credit rating to be of satisfactory quality.

Morningstar DBRS 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. Morningstar DBRS' outlooks and credit ratings are under regular surveillance.

The credit rating on Unipol Gruppo is under review. Generally, the conditions that lead to the assignment of reviews are resolved within a 90-day period. Morningstar DBRS reviews and credit ratings are under regular surveillance.

For further information on Morningstar DBRS 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 Morningstar DBRS 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://dbrs.morningstar.com/research/436290.

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

Lead Analyst: Mario De Cicco, Vice President, Global Insurance Ratings
Rating Committee Chair: Michael Driscoll, Managing Director, North American Financial Institution Ratings
Initial Rating Date: 8 October 2020
Last Rating Date: 21 July 2023

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