Fitch Ratings has affirmed Unipol Gruppo S.p.A.'s and its main operating entity UnipolSai Assicurazioni S.p.A.'s (together Unipol) Long-Term Issuer Default Ratings (IDR) at 'BBB+' (Good).

Fitch has also affirmed UnipolSai's Insurer Financial Strength (IFS) Rating at 'A-'. The Outlooks are Stable. A full list of rating actions is below.

The affirmation reflects Unipol's leading position in the Italian non-life insurance sector, strong and resilient capitalisation and strong insurance financial performance. The ratings also reflect Unipol's high, albeit reduced, investment in Italian sovereign debt concentration and moderate financial leverage.

Key Rating Drivers

High Exposure to Italy: Fitch views Unipol's investment policy as prudent, with nearly 86% of the group's investment portfolio invested in good-quality fixed-income instruments at end-2021. However, Unipol's exposure to Italian sovereign debt was high at 2.5x consolidated shareholders' equity at end-2021, albeit down from 2.8x at end-2020 as a result of a de-risking initiative to protect the group's solvency capital from the potential volatility of Italian government spreads. We expect asset concentration risk to be maintained at current levels in 2022.

Unipol also reduced its risky assets ratio to 130% as at end-2021 (end-2020: 156%), reflecting a reduction in risky assets and Fitch's upgrade of Italy (IDR: BBB/Stable) in December 2021.

Capitalisation Is Strong: Unipol's capital, as measured by Fitch's Prism Factor Based Model (Prism FBM), slightly deteriorated to the high range of 'Strong' based on end-2021 data from 'Very Strong' in 2020, primarily due to the reduction in subordinated debt, which is given 100% equity credit in Fitch's capital model. Fitch expects Unipol's Prism FBM score to remain stable in 2022. Unipol's solvency coverage was also strong at 214% at end-2021, little changed from 216% at end-2020.

Moderate Financial Leverage: Fitch views Unipol's financial leverage ratio (FLR) as moderate for its rating. In 2021, the FLR improved to 31.6% (2020: 36.6%), following the reimbursement of two subordinated notes totalling EUR562 million, in line with Fitch's expectations. Fitch expects Unipol's FLR to remain stable in 2022.

Strong Underlying Insurance Profitability: Fitch assesses Unipol's profitability as strong. The Fitch-calculated combined ratio deteriorated to 95% in 2021 (87% in 2020), as claims frequency increased in 2021 due to mobility returning to pre-pandemic levels. Fitch expects Unipol's underlying and net profitability to remain strong in 2022.

Most Favourable Business Profile: Unipol is the largest motor underwriter in Italy and the leader in the use of telematics in motor insurance. Unipol also has also a strong market position in the Italian life insurance sector. The group has a strong franchise and can exploit its pricing power and strong distribution capabilities through its network of agencies and bancassurance agreements.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

A reduction in Unipol's exposure to Italian sovereign debt to below 2.0x consolidated shareholders' equity and a Prism FBM score in the high range of 'Very Strong' (end-2020: 'Very Strong'), both on a sustained basis.

A one-notch upgrade of Italy's Long-Term Local-Currency IDR.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A one-notch downgrade of Italy's Long-Term Local-Currency IDR.

A sustained increase in Unipol's exposure to Italian sovereign debt to above 3.0x consolidated shareholders' equity.

A decrease in Unipol's Prism FBM score to the lower range of 'Strong', or the FLR weakening to above 35%, on a sustained basis.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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