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Announcement:

Moody's confirms Unipol Gruppo Finanziario's senior Ba2 rating; outlook negative

30 Oct 2012

London, 30 October 2012 -- Moody's Investors Service has today confirmed the Ba2 senior rating of Unipol Gruppo Finanziario S.p.A. (UGF), the holding company of Unipol Group, and the Baa2 insurance financial strength rating (IFSR) of Unipol Assicurazioni SpA (Unipol), the main insurance operating company. The confirmation of the Ba2 senior rating of UGF and the Baa2 IFSR reflects Moody's view of Unipol's very strong business profile following the acquisition of a controlling stake in Fondiaria Sai SpA (Fondiaria Sai; unrated), which is partly offset by the group's high investment risk and execution risk arising from the acquisition.

At the same time, Moody's has confirmed Unipol Banca's Ba2 long-term deposit rating and downgraded the standalone bank financial strength rating (BFSR) to E, equivalent to a standalone credit assessment of caa1, from D-/ba3. The lowering of Unipol Banca's standalone credit assessment reflects Moody's view of the bank's weak financial fundamentals, and an increased likelihood that the bank may require further capital support from UGF. The confirmation of the long-term deposit rating reflects the confirmation of UGF's ratings, as well as Moody's view of a very high probability of support from the parent, in case of need.

These actions and announcements conclude the review for downgrade Moody's initiated on 17 July 2012. All the ratings now carry a negative outlook, except the BFSR at Unipol Banca which carries a stable outlook. A complete list of actions is listed below.

RATINGS RATIONALE -- UNIPOL ASSICURAZIONI

In September 2012, UGF raised EUR1.1 billion of equity capital to fund its proposed purchase of a controlling stake in Fondiaria-Sai, the second largest Italian P&C insurance group. UGF is expected to obtain control of over 60% of the newly merged insurance group, which includes Unipol Assicurazioni, Fondiaria-Sai, Milano Assicurazioni and Premafin. Unipol's management board expects to approve the merger by year-end 2012 and to receive authorisation from the insurance regulator in 2013.

The new insurance group generated by the merger of Unipol and Fondiaria Sai will be a clear market leader in the Italian P&C segment, with a pro forma 30% market share, well ahead of the second (21%) and third (11%) market players. Moody's expects this strong P&C market position to translate into substantial pricing power with its customers. The group will continue to focus mainly on retail P&C insurance, and will also have a sizeable life insurance business (pro forma, premiums are split 2/3 in P&C, 1/3 in Life).

More negatively, the new group will have a high concentration to Italian sovereign risk in terms of both its investment portfolio and business profile. On a pro forma basis, Moody's estimates that Italian government bonds will represent around 50% of the new group's total investment portfolio (around 4x pro forma capital), and almost the entire new group's premiums will be sourced in Italy. In addition, other investment risks include the elevated exposure to property (estimated to be over 10% of total investments on a pro forma basis at year-end 2011), although Moody's understands that the insurer aims to reduce this exposure to below 8% by 2015. The level of intangibles is also high as a percentage of total pro-forma capital for the new group.

Furthermore Moody's views the execution and legal risk of the merger as high, given its complex nature: the transaction involves the integration of three listed companies and will demand considerable management time and effort in securing operational efficiency. An additional risk is the potential for further loss-reserve strengthening in the future -- Fondiaria Sai had already strengthened its reserves by EUR0.8 billion in 2011 -- although this is partially mitigated by Unipol's plan to strengthen reserves by an additional EUR0.5 billion between 2013-15.

Moody's views the new group's consolidated capitalisation as adequate and in line with Moody's expectations for a Baa-rated company. In September 2012, both Unipol and Fondiaria Sai concluded their capital increases for a total net amount of EUR1.7 billion (this amount includes EUR1.1 billion raised by Unipol and an additional EUR1.1 billion raised by Fondiaria Sai, minus the share of Fondiaria Sai' s capital underwritten by Unipol). This results in a Solvency I ratio for the new group of 139% on a pro forma basis at year-end 2011 (124%, after deducting unrealised losses on sovereign bonds). With respect to financial flexibility, Moody's views the group's financial leverage as within the rating agency's tolerance levels for the current rating at a pro forma 34% at year-end 2011. However, earnings coverage is expected to remain somewhat subdued in 2012.

RATINGS RATIONALE -- UNIPOL BANCA

Unipol Banca's profitability has been weak in recent years, with net losses in 2008 and 2009, and break-even results in 2010 and 2011 (adjusted to exclude a EUR300 million impairment on goodwill). In H1 2012, excluding extraordinary gains on debt buyback, the bank's recurring profitability deteriorated further, both on a pre-provision and on a net level.

In Moody's view, asset quality is also weak, with gross problem loans accounting for around 15% of gross loans in 2011, significantly higher than the Italian average of 8.9% (source: Bank of Italy's 2011 annual report).

Considering Unipol Banca's low recurring profitability, and its weak and deteriorating asset quality, Moody's cautions that the bank's 8.2% core Tier 1 ratio as of June 2012 might not, in its opinion, provide a sufficient cushion to absorb losses in case of stress, resulting in a relatively high probability that further capital support from UGF might be required. In June 2012, Unipol Banca reported a pre-tax profit of EUR10 million, a decrease of 33% from June 2011, with an increase in provisions for loan losses and other financial assets of 55% to EUR44 million, and also benefited from a substantial non-recurring gain on debt buybacks.

The above rating drivers were the cause for the lowering of Unipol Banca's standalone credit assessment to caa1. The bank's long-term deposit rating was, however, confirmed at Ba2, based on Moody's assessment of a very high probability of parental support from UGF, resulting in five notches of rating uplift from the caa1 standalone credit assessment.

In recent years, UGF has demonstrated its willingness and effectiveness in providing support to Unipol Banca. UGF has provided support in the form of (1) capital, with around EUR300 million injected between 2009 and 2011, which represents around one-third of the bank's shareholders' equity in 2011; (2) liquidity, through the provision of funding to the bank when required; and (3) asset quality, through a EUR550 million guarantee for part of the bank's loan portfolio, provided in 2011.

OUTLOOK

Moody's negative outlook on UGF, Unipol and Unipol Banca's long-term deposit rating reflects the execution challenge arising from the acquisition of Fondiaria Sai, as well as the risk of further reserve strengthening for the new group. The negative outlook also mirrors the negative outlook on Italy's Baa2 government bond rating and reflects the uncertainties around the economic and financial environment in Italy.

WHAT COULD MOVE THE RATING OF UNIPOL ASSICURAZIONI and UGF UP/DOWN

At present, there is limited upwards pressure on the ratings given the negative outlook.

Downwards rating pressure could develop following any further significant reserves strengthening and costs associated to the integration, including legal and compensatory expenses. Any significant loss of market share would also exacerbate negative rating pressures, whilst any further downgrade of Italy's government bond rating would also likely lead to a downgrade of Unipol's ratings, due to various credit linkages between the two. These linkages include the reduced quality of the group's investment portfolio and the potential constraints on the profitability of the insurance business, if operating conditions in Italy decline further.

WHAT COULD MOVE THE RATING OF UNIPOL BANCA UP/DOWN

A degree of upwards pressure could develop on the bank's BFSR following (1) a substantial increase in the bank's core capital ratios; and (2) an improvement in the bank's recurring profitability and asset quality. An upgrade of the bank's BFSR would be unlikely to result in an upgrade of the deposit ratings, given the very high level of support Moody's already incorporates into the deposit ratings. Upwards pressure on the deposit ratings might develop following an upgrade of UGF's Ba2 long-term debt rating; however, this is unlikely at present because of the negative outlook on that rating.

Further deterioration of profitability and asset quality, and/or a reduction of the bank's core capital ratios, could exert downwards pressure on the caa1 standalone credit assessment. A downgrade of UGF, or a reduction in support and commitment from UGF towards Unipol Banca might lead to a downgrade of Unipol Banca's long-term deposit rating.

The following ratings were confirmed and their outlook revised to negative from on review for downgrade:

Unipol Assicurazioni S.p.A. -- insurance financial strength rating: Baa2

Unipol Assicurazioni S.p.A. -- subordinated debt rating: Ba1 (hyb)

Unipol Gruppo Finanziario SpA -- senior rating: Ba2

Unipol Gruppo Finanziario SpA -- senior MTN rating: (P) Ba2

Unipol Gruppo Finanziario SpA -- long term issuer rating: Ba2

Unipol Banca -- long-term bank deposits rating: Ba2

The following rating was downgraded and outlook revised to stable from negative:

Unipol Banca -- bank financial strength rating: E/caa1 from D-/ba3

METHODOLOGY USED

The methodologies used in rating Unipol Assicurazioni S.p.A. and Unipol Gruppo Finanziario S.p.A were Moody's Global Rating Methodology for Life Insurers published in May 2010, Moody's Global Rating Methodology for Property and Casualty Insurers published in May 2010, and Moody's Guidelines for Rating Insurance Hybrid Securities and Subordinated Debt published in January 2010. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

The principal methodology used in rating Unipol Banca was Moody's Consolidated Global Bank Rating Methodology published in June 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

The subordinate debt 293905 of rated entity Unipol Assicurazioni S.p.a was initiated by Moody's and was not requested by this rated entity.

This rated entity or its agent(s) participated in the rating process. The rated entity or its agent(s) provided Moody's access to the books, records and other relevant internal documents of the rated entity.

The ratings have been disclosed to the rated entities or their designated agent(s) and issued with no amendment resulting from that disclosure.

Information sources used to prepare each of the ratings are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entities, obligations or credits satisfactory for the purposes of issuing these ratings.

Moody's adopts all necessary measures so that the information it uses in assigning the ratings is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entities or their related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.

In addition to the information provided below please find on the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued each of the ratings.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Antonello Aquino
Senior Vice President
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Simon Harris
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's confirms Unipol Gruppo Finanziario's senior Ba2 rating; outlook negative
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