S&P: Some Ratings ‘Not Affected’ by Italy Downgrade

October 20, 2006

After Standard & Poor’s Ratings Services lowered its country ratings on Italy to “A+” from “AA-” it issued a supplementary bulletin that reaffirmed its ratings on three of the country’s largest insurers.

S&P said that its ratings and outlook on “Assicurazioni Generali SpA and its core Italian subsidiaries (Generali; AA/Stable/–), Riunione Adriatica di Sicurtà SpA (RAS; AA-/Positive/–), Lloyd Adriatico SpA (AA-/Positive/–), and Euler Hermes SIAC SpA (AA-/Stable/–)” are not affected by the downgrade.

“Although country risk is factored into the ratings on these insurers, a downgrade of the sovereign does not have an automatic impact on the ratings as it is Standard & Poor’s policy that ratings on non-government-supported entities within EMU are not constrained by the foreign currency rating on the sovereign,” the bulletin continued.

S&P also explained: “The primary risk for the insurance sector as a consequence of the downgrade is in terms of insurers’ investment exposure to Italian government bonds–national, regional, and local–for which credit quality is lower as a consequence of the sovereign downgrade.”

Commenting on Generali, S&P said it “is a well-diversified global player–in 2005 more than 60 percent of gross premiums written were earned outside Italy–with a diversified and low-credit-risk investment portfolio. Bonds rated ‘AAA’ constitute 40.3 percent of the portfolio, and bonds rated ‘AA’ 40.7 percent. Government bonds make up 65.1 percent of the total bond portfolio, only 45 percent of which was issued by the Italian government at the end of June 2006.

“Consequently, the lowering of the long-term sovereign credit rating on Italy does not significantly affect the overall credit quality of Generali’s bond portfolio or, by implication, the ratings on the group.”

Concerning RAS and Lloyd Adriatico, S&P said they “are considered core to Allianz SE (AA-/Positive/A-1+). Euler Hermes SIAC is considered a core member of the Euler Hermes group, which in turn is strategically important to the Allianz group. Although the exposure of Italian government bonds is significant for these companies, the intermediate and ultimate parents are financially very strong, and we expect them to provide support in order for the subsidiaries not to fail to meet their policy obligations in the event of a sovereign local currency default scenario.”

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