OREANDA-NEWS. February 09, 2015. Fitch Ratings has affirmed Assicurazioni Generali SpA's (Generali) and its core subsidiaries' Insurer Financial Strength (IFS) ratings at 'A-' and Long-term Issuer Default Rating (IDR) at 'BBB+'. The Outlooks are Stable.

Fitch has also affirmed Generali's senior and subordinated notes at 'BBB+' and 'BBB-', respectively. A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS
The affirmation reflects Fitch's expectations that Generali's operating performance (in particular in the property and casualty segments) will continue to be strong and that the ongoing focus of the new management will be to preserve capital and reduce debt. Nonetheless, Fitch believes that Generali's capital is vulnerable to stress due to its substantial exposure to Italian sovereign debt and its high investment leverage. Furthermore, Generali's significant levels of goodwill and intangibles negatively affect the quality of its capital.

Generali's ratings are heavily influenced by the group's exposure to Italian sovereign debt (EUR56bn or 2.5x consolidated shareholders' funds at end-9M14). This exposure represents a large concentration risk and a potential source of volatility for capital adequacy. The group's exposure to Italian sovereign debt, which is to match domestic liabilities in Italy, is underlined by the alignment of Generali's IDR with Italy's 'BBB+' IDR.

Generali's insurance activities are internationally diversified, including significant operations in France and Germany. These operations are not exposed to either Italian investment risk or Italy's economic environment and therefore possess stronger credit characteristics. Fitch consequently believes that the group's ability to meet its policyholder obligations is superior to the risk expressed by its IDR, resulting in Generali's IFS rating being a notch higher at 'A-'.

Generali's Fitch-calculated financial leverage ratio (FLR) was high at 35% at end-2013. However, the group plans to further reduce financial debt. Therefore, Fitch expects the FLR to fall below 35% in the medium term.

Fixed-charge coverage (FCC) including unrealised and realised gains and losses was low at 4.1x in 2013. Fitch expects FCC to improve over time as the group deleverages and the new debt carries a lower coupon than the existing outstanding notes. Fitch also considers Generali to have high financial flexibility, as demonstrated for example, by the sale of treasury shares to fund the buy-out of Generali Deutschland's minorities and the pre-funding activities carried in 2013 and 2014.

Generali's Solvency I ratio was 160% at end-9M14, up from 141% at end-2013. The ratio already reflects the 7ppts negative effect from buying the remaining 24% of PPF Group's shareholding in Generali PPF Holding in December 2014, but not the positive effect from the disposal of BSI. The sale of BSI is part of Generali's broad strategic plan to refocus on selected core markets and strengthen the group's solvency margin. The transaction is expected to be solvency accretive by 9ppts, although Generali made a small loss of around EUR113m, booked in 3Q14.

RATING SENSITIVITES
An upgrade of Generali's ratings is unlikely in the medium term given the group's large exposure to Italian government debt.

Nonetheless, an upgrade could occur if Generali's consolidated Solvency I ratio is consistently above 150% (end-9M14: 160%) and Italy's rating is upgraded to the 'A' category.

Generali's ratings could be downgraded if its consolidated Solvency I ratio falls below 120% on a sustained basis or its consolidated financial leverage ratio remains at or above 35% over the next 12-18 months (end-2013: 35%). Generali's ratings are also likely to be downgraded if Italy is downgraded.

The rating actions are as follows:
Assicurazioni Generali SpA:
IDR affirmed at 'BBB+'; IFS affirmed at 'A-'; Outlook Stable

Generali Iard:
IFS affirmed at 'A-'; Outlook Stable

Generali Vie:
IFS affirmed at 'A-'; Outlook Stable

Generali Deutschland Holding AG:
IFS affirmed at 'A-'; Outlook Stable

Generali Deutschland Pensionskasse AG:
IFS affirmed at 'A-'; Outlook Stable

Cosmos Versicherung AG:
IFS affirmed at 'A-'; Outlook Stable

Cosmos Lebensversicherungs-AG:
IFS affirmed at 'A-'; Outlook Stable

AachenMuenchener Lebensversicherung AG:
IFS affirmed at 'A-'; Outlook Stable

Generali Lebensversicherung AG:
IFS affirmed at 'A-'; Outlook Stable

AachenMuenchener Versicherung AG:
IFS affirmed at 'A-'; Outlook Stable

Generali Versicherung AG:
IFS affirmed at 'A-'; Outlook Stable

Central Krankenversicherung AG:
IFS affirmed at 'A-'; Outlook Stable

Generali Espana, S.A. de Seguros Y Reaseguros
IFS affirmed at 'A-'; Outlook Stable

Generali Versicherung AG (Austria)
IFS affirmed at 'A-'; Outlook Stable

Envivas Krankenversicherung AG
IFS affirmed at 'A-'; Outlook Stable

Advocard Rechtsschutzversicherung AG
IFS affirmed at 'A-'; Outlook Stable

Dialog Lebensversicherungs-AG
IFS affirmed at 'A-'; Outlook Stable

Generali (Schweiz) Holding AG:
IDR affirmed at 'BBB-'; Outlook Stable

Generali's debt ratings are as follows:
Assicurazioni Generali SpA
Senior unsecured affirmed at 'BBB+'
Subordinated debt affirmed at 'BBB-'
EUR1bn 4.125% subordinated note affirmed at 'BBB'

Generali Finance BV
Senior unsecured affirmed at 'BBB+'
Subordinated debt affirmed at 'BBB-'