S&P revises Generali rating to A- from A, as a consequence of the downgrade of Italy

Trieste - The rating agency Standard & Poor’s has revised Generali rating to A- from A as consequence of the Italy’s downgrade on July 9.  The outlook is negative. S&P continues to view Generali as having “a very strong business risk profile based on international diversification”.

“While our view of Generali’s ‘a’ anchor is unchanged, its rating is limited under our criteria to two notches above that on Italy” notes S&P. The rating agency continues “to rate Generali two notches above our rating on Italy as its operations span the European Economic and Monetary Union (EMU), and it has leading market shares in the highly rated countries of Austria, the Czech Republic, France and Germany. This diversification reduces Generali’s direct link to domestic sovereign risk”.

Please find below the original press release by S&P.

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Assicurazioni Generali And Core SubsidiariesLowered To 'A-' After Sovereign Downgrade,Outlook Negative

Overview

• On July 9, 2013, Standard & Poor's lowered its unsolicited sovereigncredit ratings on Italy to 'BBB/A-2' from 'BBB+/A-2', with a negativeoutlook.
• Although Italy-based Assicurazioni Generali has a very strong businessrisk profile based on international diversification, we consider thatthis only partially insulates Generali from Italian sovereign risk.
• Consequently, we are lowering our long-term ratings on Generali and itscore subsidiaries to 'A-' from 'A'; while our view of the 'a' anchor isunchanged, the rating is limited to two notches above that on Italy.
• The outlook is negative, both because of the negative outlook on thesovereign rating on Italy and the negative trend regarding operating andfinancial conditions in Generali's key Italian market.

Rating Action
On July 12, 2013, Standard & Poor's Ratings Services lowered to 'A-' from 'A'its long-term counterparty credit and insurer financial strength ratings onItaly-based global multiline insurer Assicurazioni Generali SpA and its coresubsidiaries (Generali). We also lowered the senior, ubordinated, and juniorsubordinated debt ratings by one notch. The outlook on Generali and its coresubsidiaries is negative.

In addition, we revised the outlook to negative from stable on thecounterparty credit and insurer financial strength ratings on Ceska PojitovnaAS ('A-') and Generali Pan Europe (GPE; 'BBB+') and on the counterparty creditrating on Deutsche Bausparkasse Badenia AG (Badenia; 'BBB+') and affirmedtheir respective ratings.

Rationale
The rating actions follow the lowering to 'BBB' from 'BBB+' of the unsolicitedlong-term sovereign credit rating on Italy, with a negative outlook (see "Long-Term Ratings On Italy Lowered To 'BBB'; Outlook Negative," published onJuly 9, 2013, on RatingsDirect).

While our view of Generali's 'a' anchor is unchanged, the ratingis limitedunder our criteria to two notches above that on Italy (the maximum availablewould be three notches as Italian policyholder liabilities represent about 30%of total group liabilities). We limit the rating because, in our view,although Generali has a very strong business risk profile with wideinternational diversification, we consider Generali's capitalization to be arelative weakness. Potential volatility in capitalization exposes Generali todeterioration in operating and financial conditions in Italy.

We continue to rate Generali two notches above our rating on Italy as itsoperations span the European Economic and Monetary Union (EMU), and it hasleading market shares in the highly rated countries of Austria, the CzechRepublic, France, and Germany. This diversification reduces Generali's directlink to domestic sovereign risk (see "Nonsovereign Ratings That Exceed EMUSovereign Ratings: Methodology And Assumptions," published on June 14, 2011).

We consider Generali's financial risk profile a relative weakness for therating. Our assessment of its moderately strong capital and earnings rests onour expectation that profitability will see a strong recovery and thatGenerali will complete a number of asset sales. These xpectations aresensitive to change in Italian operating and financial onditions. Inaddition, Generali is reliant on forms of capital such as value in force (VIF)and unrealized gains. In our opinion, these form a weaker buffer againstdeterioration in sovereign risk than common equity because they are lessliquid and more-sensitive to market conditions.

We revised the outlooks on GPE and Badenia because our group ratingmethodology caps the potential uplift for extraordinary support from Generaliat one notch below the group ratings for these entities. The outlook on GPEand Badenia is now aligned with that on Generali. We have revised the outlookon Ceska Pojitovna to negative as the ratings on this subsidiary cannot exceedthose on its parent.

The ratings on Generali are now constrained by the sovereign ratings on Italy.Our view of Generali's very strong business risk profile and upper adequatefinancial risk profile still leads us to derive an anchor of 'a'. Ourassessment of Generali's business risk profile is based on our view of itsvery strong competitive position and intermediate insurance industry andcountry risk. The financial risk profile is based on our opinion of Generali'smoderately strong capital and earnings, combined with a moderate risk positionand adequate financial flexibility. We consider enterprise risk management(ERM) and management and governance to be neutral rating factors.

The base-case assumptions that underpin our moderately strong assessment ofcapital and earnings are that Generali will likely:

• Generate average net income of about €1.7 billion per year over 2013-2015;
• Improve its non-life combined (loss and expense) ratio to about 95% by end-2014. (Lower combined ratios indicate better profitability. A combined ratio of greater than 100% signifies an underwriting loss.);
• Record much lower impairments compared with 2011 (€800 million) or 2012 (€1.3 billion); and
• Complete the asset sales it has announced--those of Generali USA LifeReassurance and BSI Bank.

Our assessment of capital and earnings also takes into account the commitmentto buy out the remaining minority stakes in its Central and Eastern Europeansubsidiary--Generali PPF Holding (GPH)--by the end of 2014 and to increase thedividend payout to 40%.

Our view of Generali's moderate risk position results from the volatility andmarket risk generated by its very large exposure to Italian sovereign debtsecurities of €57 billion at end-March 2013--equivalent to more than 2x theregulatory capital level of €25 billion at the same date. This exposureincreases volatility of capital as the Italian sovereign yields significantlyaffect the value of VIF and shareholders' equity as the value of the bondportfolio is marked to market.

In addition, weak Italian growth prospects elevate the risk of further impairments on the domestic investment portfolio, including unlisted stakessuch as Telco SpA. We also recognize the potential volatility that could arisefrom the group's exposure to interest rate risk in European markets,particularly Germany.

Outlook

The outlook is negative, primarily reflecting that on Italy. In addition, thenegative trend of the operating and financial conditions in Generali's keyItalian market could delay capital rebuilding and reduce Generali's ability tosuccessfully execute its strategy.

We could lower the ratings if we lowered the rating on Italy, given Generali's material domestic exposures. We could also lower the ratings if Generali'scapitalization and financial flexibility both materially deteriorate fromcurrent levels because of weakening operating and financial conditions inItaly.

We could revise the outlook to stable if we revised the outlook on Italy tostable or if we anticipated that Generali would sustainably meet or exceed ourbase-case assumptions.

Ratings Score Snapshot
Financial Strength Rating A-/Negative
Anchor a
Business Risk Profile Very Strong
IICRA Intermediate Risk
Competitive Position Very Strong
Financial Risk Profile Upper Adequate
Capital and Earnings Moderately Strong
Risk Position Moderate Risk
Financial Flexibility Adequate
Modifiers 0
ERM and Management 0
Enterprise Risk Management Adequate With Strong Risk Controls
Management and Governance Satisfactory
Holistic Analysis 0
Liquidity Exceptional
Sovereign Risk -1
Support 0
Group Support 0
Government Support 0
IICRA--Insurance Industry And Country Risk Assessment.

Related Criteria And Research
Related research

• Long-Term Ratings On Italy Lowered To 'BBB'; Outlook Negative, July 9,2013
• Assicurazioni Generali And Core Subsidiaries Ratings Affirmed At 'A'After Insurance Criteria Change; Outlook Negative, May 22, 2013
• Standard & Poor's Assigns Insurance Industry And Country Risk Assessments,May 7, 2013

Related criteria

• Insurers: Rating Methodology, May 7, 2013
• Group Rating Methodology, May 7, 2013
• Enterprise Risk Management, May 7, 2013
• Management And Governance Credit Factors For Corporate Entities AndInsurers, Nov. 13, 2012
• Principles Of Credit Ratings, Feb. 16, 2011
• Refined Methodology And Assumptions For Analyzing Insurer CapitalAdequacy Using The Risk-Based Insurance Capital Model, June 7, 2010
• Hybrid Capital Handbook: September 2008 Edition, Sept. 15, 2008
• General Criteria: Nonsovereign Ratings That Exceed EMU Sovereign Ratings:Methodology And Assumptions, June 14, 2011).

Ratings List
Downgraded
To From
Assicurazioni GeneraliGenerali Vie
Generali Versicherung AG
Generali Versicherung AG
Generali Lebensversicherung AG
Generali Italia SpA
Generali IARD
Generali Deutschland Pensionskasse AG
Envivas Krankenversicherung AG
Cosmos Versicherung AG
Cosmos Lebensversicherungs AG
Central Krankenversicherung AG
Alleanza Toro S.p.A
Advocard Rechtsschutzversicherung AG
AachenMuenchener Versicherung AG
AachenMuenchener Lebensversicherung AG
Counterparty Credit Rating
Local Currency A-/Negative/-- A/Negative/--
Assicurazioni Generali SpA
Generali Vie
Generali Versicherung AG
Generali Versicherung AG
Generali Lebensversicherung AG
Generali Italia SpA
Generali IARD
Generali Deutschland Pensionskasse AG
Generali (U.S. branch)
Envivas Krankenversicherung AG
Cosmos Versicherung AG
Cosmos Lebensversicherungs AG
Central Krankenversicherung AG
Alleanza Toro S.p.A
Advocard Rechtsschutzversicherung AG
AachenMuenchener Versicherung AG
AachenMuenchener Lebensversicherung AG
Financial Strength Rating
Local Currency A-/Negative/-- A/Negative/--
Generali Holding Vienna AG
Generali Rueckversicherung AG
Counterparty Credit Rating
Local Currency BBB/Negative/-- BBB+/Negative/--
Financial Strength Rating
Local Currency BBB/Negative/-- BBB+/Negative/--
Assicurazioni Generali SpA
Senior Unsecured BBB+ ASubordinated
BBB BBB+
Junior Subordinated BBB- BBB
Generali Finance B.V.
Senior Unsecured* BBB+ AJunior
Subordinated* BBB- BBB
Ratings Affirmed; CreditWatch/Outlook Action
To From
Ceska pojistovna a.s.
Counterparty Credit Rating
Local Currency A-/Negative/-- A-/Stable/--
Financial Strength Rating
Local Currency A-/Negative/-- A-/Stable/--
Senior Unsecured BBB+
Generali PanEurope Ltd.
Counterparty Credit Rating
Local Currency BBB+/Negative/-- BBB+/Stable/--
Financial Strength Rating
Local Currency BBB+/Negative/-- BBB+/Stable/--
Deutsche Bausparkasse Badenia AG
Counterparty Credit Rating BBB+/Negative/A-2 BBB+/Stable/A-2
*Guaranteed by Assicurazioni Generali SpA.
Complete ratings information is available to subscribers of RatingsDirect atwww.globalcreditportal.com and at spcapitaliq.com. All ratings affected bythis rating action can be found on Standard & Poor's public Web site atwww.standardandpoors.com. Use the Ratings search box located in the leftcolumn. Alternatively, call one of the following Standard & Poor's numbers:

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