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Italy-Based Elba Assicurazioni Assigned ‘BBB’ Ratings; Outlook Stable

          MADRID (S&P Global Ratings) July 11, 2018--S&P Global Ratings today assigned its 'BBB' long-term issuer credit and financial strength ratings to Italy-based surety insurer Elba Assicurazioni Spa. The outlook is stable. 
          Elba was established in 2007 and mostly writes surety insurance policies. Its other business lines consist of property casualty and liability insurance for around 15% of premiums written. Elba has exhibited robust and regular growth in its core business (five years CAGR of 15%), far outperforming the market trend, which has been quite volatile over the past 10 years.
          Headquartered in Milan, the company has operations all around Italy and sells its products via multi-brand agents. Elba has built its position in the market by covering short-term risks of small size, supported by an agile IT structure and quick responsiveness to customers' requests. Our assessment of Elba's competitive positioning is limited by the company's small absolute size (EUR51 million in premiums at year-end 2017) and concentration in one single line of business, making it more vulnerable to adverse business conditions than larger and more diversified insurers. 
          Elba has delivered solid and stable technical performance since its incorporation, in our view. Over the past five years, Elba's historical combined (loss and expense) ratio has fluctuated around 70%, confirming the company's prudent approach to underwriting and reserving. 
          Elba's earnings generation and dividend policy have been supportive of capitalization, which we regard as solid in terms of both Solvency II (239% at year-end 2017) and S&P Global Rating's capital model (capital redundancy is expected to consolidate at close to our AA confidence level). Over the next three years, we forecast capital requirements to grow by 4% annually and an average annual net income of EUR5 million with a dividend payout ratio of about 20%. The small absolute size of capital limits our overall view of its financial risk profile, making it more exposed to unexpected negative market and economic shocks.
          Elba's asset portfolio is almost entirely invested in Italian government bonds with a pocket of cash. Accordingly, we cap our ratings on Elba at the level of the Italian sovereign ratings, currently 'BBB/Stable'.
          Our view of Elba's risk management and wider management benefit from the issuer's generally prudent approach to growth, underwriting, reserving, and reinsurance. We consider that Elba has adequate risk controls in place for its major risks, namely underwriting and reserving. Our assessment is partly constrained by Elba's lack of sophisticated quantitative risk modelling. We also believe the insurer is exposed to some key-man risk, given its small size and headcount. 
          The stable outlook reflects our view that, over the next two years, Elba will consolidate its capital adequacy at solid levels, continuing to grow profitably, and posting a stable combined ratio around 70%.
 
          We could lower the ratings on Elba if:
          - Technical profitability or capital adequacy significantly deteriorated for an extended period; or
          - Our long-term Italian sovereign ratings were lowered below the current 'BBB' level.

          Although currently unlikely, we could raise the ratings on Elba if: 
          - The company were to significantly increase in size while maintaining solid levels of profitability and capital; and
          - We were to upgrade the Italian sovereign, or Elba's investment exposure to Italian assets were to materially reduce.