S&P, Best Comment on Generali Plans

Standard & Poor’s Ratings Services and A.M. Best Co. both issued brief bulletins commenting on Generali’s earnings announcement and its plans for the future, which include issuing new hybrid securities (See related article above).

S&P said “its ratings and outlook on Italy-based insurer Generali’s core operating companies (insurer financial strength rating AA/Stable) remain unchanged following the group’s announcement of a €1.8 billion [$2.15 billion] share buyback and a €2.3 billion [$2.75 billion] purchase of minority and policyholder interests in various entities.”

S&Palso noted that the “transactions are to be majority financed with hybrid debt,” which it said satisfies S&P’s “requirements for hybrid treatment.” The comment added, however, that S&P views the transactions as “slightly negative for Generali’s financial risk profile as they reduce the group’s financial flexibility and quality of capital. On the other hand, we believe the transactions are unlikely to erode Generali’s current and future financial strength, thanks to the expected conservative funding structure of the transactions.”

Best announced that it has affirmed Generali’s financial strength rating of “A+” (Superior) and the issuer credit rating of “aa-.” Best also affirmed its ratings on all of the “debt instruments issued or guaranteed by Generali.” The outlook for all ratings remains stable.

“The ratings reflect Generali’s strong operating performance and capitalization despite increasing financial leverage,” said Best. It added that the 2005 results were in line with its expectations, “having increased by approximately 15 percent to €1.918 billion ($2.309 billion) in 2005, driven by strong growth in life premiums and a decline in expenses.”

Best added that it “believes that Generali’s operating expense ratio is likely to continue to decline as a result of the company’s plan to improve operational performance over the next three years. Execution risks arising from the implementation of Generali’s newly published business plan are likely to be mitigated by the company’s strong execution skills, as exhibited during the integration of its largest acquisitions.”

Commenting on the debt restructuring and buy-backs, Best indicated that it expects Generali’s capitalization to “remain strong despite the company’s decision.” The refinancing will “bring Generali’s proportion of debt leverage close to A.M. Best’s tolerance levels in the short term,” said the bulletin. “Although the exact nature of the debt issue is still to be finalized, A.M. Best believes that it is likely to justify almost full equity credit in its quantitative analysis of Generali.”