Credit risk on financial investments

Credit risk refers to possible losses arising from a counterparty failing to meet its obligations (default) or from a deterioration in its creditworthiness (downgrade or migration), respectively, in relation to debt instruments the Group invests in or to a counterparty of a derivative contract. Furthermore, the risk resulting from a generalized increase in the level of spreads in the market is considered, due to events such as a credit crunch or a liquidity crisis, having an impact on the economic solvency of the Group.

Within the Group Risk Guidelines, investment in high credit quality securities (investment grade) is preferred and the diversification (or dispersion) of risk is encouraged.

The Group uses a data warehouse to collect and consolidate the financial investments, which guarantees a homogeneous, time effective and high quality analysis of the financial risks.

For the internal rating assessment of an issue or issuer, rating of the main agency ratings are used. In the case of different rating judgements, the second best value available is used. Securities without a rating are given an internal one based on exhaustive economic and financial analysis.

The manager of the central financial risk control department reports periodically to the Group Risk Committee on the Groups’ exposure to the components of the credit risk.

The portfolio of fixed income investments of the Group is prudently built.

The distribution by rating class shows that the absolute majority of the fixed income investments is of high rating standing.

In order to mitigate the counterparty risk, related to market risk hedging strategies, the following measures have been put in place: the counterparty selection, the use of exchange traded instruments and the integration of ISDA Master Agreements with the Credit Support Annex (CSA). CSA requires the counterparty to post collateral when the derivative position is beyond an agreed threshold.

Note that the same considerations on market risk regard also the financial instruments backing  life insurance policies, so default, downgrades or changes in spread could affect the financial liabilities values with a consequent mitigation effect.

Amongst the financial assets not impaired, there are no significant positions of debt past due, whereas the main part of the receivables arising from insurance operations are included in the Group assets since three months.

Group’s exposures to investments in government bonds - detailed by country of risk and rating - are reported at fair value in the following tables:

The government bonds portfolio amounted to € 138,760 million at the end of the period, with the 62% of the portfolio represented by Italian and French debt instruments. The exposure to individual sovereign bonds is mainly allocated to their respective countries of operation.

With reference to ratings, the AA class included the French debt instruments following their downgrade by both S&P’s (AA+, 13 January 2012) and Moody’s (Aa1, 19 November 2012). The BBB rating class included mainly the Italian debt instruments following their downgrade by both S&P’s (13 January 2012) and Moody’s (Baa2, 13 July 2012).

Group’s exposures to investments in corporate bonds - detailed by sector and rating- are reported at fair value in the following tables:

The investments in corporate bonds totalled € 110,108 million at the end of the period. The portfolio was composed for 33% by non-financial corporate bonds, for 34% by financial corporate bonds and for 31% by covered bonds.