OREANDA-NEWS. Fitch Ratings has affirmed Italy's Poste Vita S.p.A.'s (Poste Vita) Issuer Default Rating (IDR) at 'BBB+' with a Stable Outlook. At the same time, Fitch has affirmed Poste Vita's subordinated notes at 'BBB'.

KEY RATING DRIVERS
Poste Vita's rating reflects its ownership by Poste Italiane (Poste; BBB+/Stable), as well as its strong franchise in Italy. Poste Vita's solid profitability also supports its ratings. Offsetting this, Poste Vita's capital position is only adequate and it is exposed to large concentration risk in sovereign bonds, as it operates primarily in Italy. Financial leverage is also relatively high and interest coverage adequate.

Fitch views Poste's 100% ownership as positive for Poste Vita's rating. Fitch regards the company as being strategically very important to Poste based on the agency's group rating methodology. Poste Vita benefits from cross-selling synergies, with 3.1 million shared customers from Poste's 31.8m client base. Fitch views Poste Vita as an important contributor to Poste profit and believes both financial and operational support would be forthcoming if needed. Poste Vita contributed pre-tax income of EUR330m in 1H14 to Poste's consolidated group pre-tax result of EUR698m.

Poste provides funding in the form of subordinated loans (EUR540m at 1H-14) and manages capital at a group level. However, Poste Vita issued EUR750m subordinated debt in 2014 to third-party investors to fund its expected growth and reduce dependence on Poste. The issuance increased Poste Vita's financial leverage to 34% from 17% and reduced fixed charge coverage to 12x from 19x, but these metrics remained in line with the rating. Fitch expects both leverage and coverage to remain commensurate with Poste Vita's rating when calculated using 2014 financials.

Profitability at Poste Vita's group level continues to remain strong, with consolidated pre-tax profit of EUR330m in 1H14 (1H-13: EUR253m). Fitch expects this positive trend to have continued in 2H14. Annualised return on assets was 0.3%, which is lower than the corresponding period in 2013, but reflects strong asset growth and the new business strain associated with this growth.

Poste Vita's invested portfolio is concentrated in holdings of Italian sovereign and corporate debt. Poste Vita's rating is constrained by Italy's rating (BBB+/Stable) given its large exposure to Italian debt (EUR67.5bn at end-June 2014 or around 22x consolidated shareholders' funds).

Fitch views Poste Vita's level of capitalisation and solvency as being moderate, albeit commensurate for the rating level. The regulatory solvency margin ratio was 135% at end-June 2014 (end-2013: 120%), after issuing EUR750m subordinated debt in April 2014 that receives capital recognition. However, Fitch expects the regulatory solvency margin to decline to 124% in 2014 and around 120% in 2015 as the company grows its business. Nonetheless, Fitch does not view this lower solvency margin as a significant weakness due to the low level of minimum guarantees embedded in Poste Vita's products which are expected to result in a significantly improved solvency ratio under the Solvency 2 regime, due to become effective in 2016.

Poste Vita's interest rate risk is low, as around two-thirds of Poste Vita's traditional liabilities must contractually return at least 1.5% but credited rates to policyholders have historically been higher. The remaining one-third of liabilities have guarantees lower than 1.5%. In addition, less than 10% of mathematical reserves carry annual guarantees, while the remaining offer guarantees at maturity which Fitch views positively. The assets backing the life business within the segregated funds also carry significant unrealised gains. These gains can be used to cover the cost of guarantees, supplementing ordinary investment income.

Poste Vita is the third-largest Italian life insurance group by gross written premiums, with a market share of 14.9% as of end-June 2014. In Italy, Poste Vita has a strong franchise and can exploit its strong distribution capabilities through the widespread network of post offices in the country. Poste Vita's premium income is resilient and has been on a steadily rising trend since 2007.

RATING SENSITIVITIES
Any change in Poste's rating is likely to lead to a corresponding change in Poste Vita's rating. However, an upgrade would be conditional upon improved profitability (as measured, for example, by a return on assets at or above 0.7%) and continued contribution to group profits. An upgrade for reasons other than an upgrade in Poste's rating is unlikely.

Poste Vita could be downgraded if the company's performance deteriorates or its contribution to Poste group's profits reduces to such an extent that Fitch no longer views it as being strategically very important to the group.