Fitch downgrades Fondiaria-SAI

The agency is maintaining the ratings on rating watch negative).

The downgrade reflects Fon SAI group's E929m loss reported for teh full year 2010, which was worse than expected, as well as uncertainty, in Fitch's opinion, over the execution of the group's turnaround plan.

Although the planned, underwritten, capital increase of E800m represents a clear benefit for the group, Fitch considered there are considerable challenges facing management in implementing its new business plans, including sluggish economic growth.

Fitch also understands that Credit Suisseand Unicredito Italiano have fully underwritten both Fon SAI and Milano's capital increases and that after the capital increase, Unicredit will hold 6.6% of Fon SAI's shares.

The planned increase is subject to Consob's (the Italian stock market regulator) approval. In a linked transaction, Fon SAI's existing 41.6% shareholder, Premafin, will reduce its stake in Fon SAI to no less than 35%.

The agency considers that the capital raising operation may restrict Fon SAI Group's future financial flexibility because it will be harder for it to seek fresh capital, if it was needed, in the short term.

The resolution of the RWN will depend on the completion of Fon SAI and Milano's capital increases. Failure to achieve the planned capital increases would result in a downgrade of the ratings, which is likely to be more than one notch. Successful completion of the capital increases is likely to result in Fon SAI's ratings being affirmed at the current level.

Should the turnaround plan be executed successfully, resulting in enhanced profitability and capitalisation, it is likely that the ratings would be upgraded. However, in Fitch's opinion, there is still significant uncertainty about the extent to which this will be achieved.

Fon SAI is the parent company and main operating entity of the second-largest domestic insurance group in Italy, with consolidated gross written premiums of E12.9bn in 2010.

The group, created by the merger between Fondiaria and SAI in late 2002, holds leading positions in the Italian non-life market through Fon SAI and its 60% ownership of the other main operating entity, Milano.