SAI Exercises La Fondiaria Option; S&P Lowers Ratings

Italian insurer Societa Assicuratrice Industriale SpA. (SAI) announced that it would exercise the call/put option it has with a group headed by J.P. Morgan Chase to acquire an additional 19.8 percent stake in rival insurer La Fondiaria Assicurazioni Spa (Fondiaria).

The ongoing drama, worthy of Italian opera at its best, has pitted some of the country’s most powerful financial groups against one another in the rush to acquire a controlling interest in Fondiaria. Last May, as Yogi Berra might have put it,”the fat lady sang,” when the company finally agreed to a merger with SAI.

Part of the convoluted transaction involved the “temporary” acquisition of the 19.8 percent interest in Fondiaria by the Morgan group in order to avoid regulatory and court rulings that SAI was a majority shareholder in the company, and was thus required to make a tender offer to all of its shareholders. The put/call option -SAI agreed to buy, and Morgan agreed to sell – assured that SAI could reacquire the shares, but at a price.

Following the announcement Standard & Poor’s lowered its financial strength and counterparty credit ratings on SAI and its subsidiary SIAT – Societa Italiana Assicurazioni e Riassicurazioni Spa to triple- ‘B’-minus from single-‘A’ minus, removed them from its, but said that the outlook is negative.

The rating agency also lowered its financial strength and counterparty credit ratings on Fondiaria and its subsidiary Milano Assicurazioni Spa to triple-‘B’-minus from triple-‘B’, removing them from CreditWatch, and also assigning a negative outlook.

S&P explained its actions in light of the acquisition of the shares, which will cost SAI around $1.05 billion. Credit analyst Laura Santori indicated that S&P “believes the pro-forma capitalization of the future Fondiaria-SAI group to be vulnerable in the absence of appropriate measures to restore it back to what is expected at a triple-‘B’ rating level. In addition, the lack of appropriate funding in the form of capital for an acquisition of this size and price has raised concerns over the financial strategy of SAI’s management and principal owners.”

The report nonetheless noted that the newly formed group would rank as Italy’s third largest insurance group with”a proforma gross premiums written of EUR7.9 billion[$9.5 billion] at year-end 2001.” It will have “a customer base of eight million and a 19.3% share of the non-life market, and will be the largest underwriter of motor business.” This, along with rising premiums puts the Group in a strong position to improve its ratings the report concluded.