[June 18, 2015]

Fitch Rates Azzurro Re I Ltd. Catastrophe Bond Class A Notes 'BB+sf'; Outlook Stable

Fitch Ratings has assigned a rating to the principal at-risk variable-rate notes issued by Azzurro (News - Alert) Re I Ltd., an Irish private limited company authorized as a special purpose reinsurance vehicle, as follows:

--Eur200,000,000 class A notes with expected maturity Jan. 16, 2019; 'BB+sf'; Outlook Stable.

The notes provide reinsurance protection for UnipolSai Assicurazioni S.p.A. and other group subsidiaries (UnipolSai; unrated by Fitch). The notes are exposed to Earthquake peril and ensuing perils such as, but not limited to, sprinkler leakage, fire, groundshaking, volcanic disturbance or eruption (including ashfall), and tsunami and flooding due to dam or levy ruptures. The covered area is predominantly located in Italy (99.8%); however, it is possible if the epicentre is located outside Italy to be considered a covered event if risks in the covered area are damaged. The trigger is a per occurrence event based on ultimate net losses. The risk interest spread is 2.15% per annum.

UnipolSai provides earthquake coverage as add-on coverage to existing property insurance policies (not on a stand-alone basis). The total indemnity limit (TIL) in Italy is Eur69.6 billion with industrial-type coverage representing 41.8%, and residential/civil 22%). Contingent business interruption coverage is less than 1% of the TIL. Approximately two-thirds of the TIL is located in the northern regions of Italy: Lombardia (capital is Milan, TIL is 31.6%), Emilia-Romagna (Bologna, 13.7%), Veneto (Venice, 11.2%) and Piemonte (Turin, 10.1%).

The 2015-1 notes are exposed to principal loss if ultimate net losses from a covered event exceed Eur500 million and is totally exhausted if they exceed Eur700 million. In the calculation of the ultimate net loss, there is a growth limitation factor which is the lesser of 1.0 and the ratio of the growth allowance factor (1.10) and the actual growth factor. The initial loss adjustment expense factor is 1.08 but may be changed at each rate reset date to range between 1.06 and 1.10.

On a historical basis, it does not appear that a recurrence of a past earthquake event based on the modelled subject business would have caused any partial (or full) principal loss. It is estimated that the Irpinia event in 1980 with an epicentre in Campania (magnitude 6.9) would have caused modeled insured industry losses in Italy of Eur5.3 billion but only Eur291 million of ultimate net losses to the notes. Three other events, all in central Italy (Avezzano, magnitude 7.0; Friuli, 6.4; and Messina-Reggio, 7.1), may have caused over Eur1 billion in industry losses, but the modelled ultimate net loss was estimated at Eur194 million, Eur163 million and Eur45 million, respectively.

For frequency and severity, Fitch reviewed the 2011 version of the Parametric Catalogue of Italian Earthquakes (A. Rovida, R. Camassi, P. and M. Gasperini Stucchi (eds), 2011; CPTI11). This catalogue contains 3,182 recorded earthquakes from the year 1000 to 2006. Since 1900, 1,838 events have occurred (or about 17 per year), of which, 75% had a Moment Magnitude Scale less than 5.0, which usually causes minimal losses. Approximately, 1.5% had a measurement above 7.0. This measurement replaced the more commonly known Richter Scale in the 1970s.

The risk period is around 3.5 years and ends on Dec. 31, 2018. The notes may be extended in quarterly increments for another 36 months if certain qualifying events occur, or at the discretion of UnipolSai; thus the final extended redemption date is Jan. 18, 2022. However, the notes are not exposed to any further catastrophe events during this extension period. The notes may be redeemed at any time under seven defined early redemption events which include regulatory or tax law changes or may be redeemed by UnipolSai during the extension period. The repayment of the notes to the noteholders occurs subsequent to any qualified payments to UnipolSai for covered events. Noteholders have no recourse to UnipolSai.

UnipolSai has established and owns a premium deposit account, which will be used to pre-fund two quarters of premium payments. One of the purposes of the premium deposit account is to support timely interest payments to noteholders should UnipolSai fail to continue to make premium payments. As such, UnipolSai has assigned its rights, title, benefit and interests to Azzurro Re. If UnipolSai fails to maintain two quarters of premium payments, the indenture calls for an early redemption of the notes whereby noteholders will be paid full principal and accrued interest on a timely basis.

Given its ownership status, the premium deposit account may be subject to a stay period in the event of UnipolSai's insolvency. This could prevent noteholders from receiving timely payment of interest, as intended. Fitch does not rate UnipolSai, but has reviewed certain publicly available information, including the ratings of other rating agencies, and believes UnipolSai's credit quality is supportive of the rating of the transaction.

KEY RATING DRIVERS

The rating is based on the evaluation of the natural catastrophe risk, the counterparty risk of UnipolSai, the credit risk of the collateral assets and the structural soundness of the transaction. The natural catastrophe risk represents the weakest link and currently drives the rating of the class A notes.

The rating analysis in support of the evaluation of the natural catastrophe risk is highly model-driven. As with any model of complex physical systems, particularly those with low frequencies of occurrence and potentially high severity outcomes, the actual losses from catastrophic events may differ from the results of simulation analyses, which may or may not be detrimental to noteholders. Fitch is neutral to any of the major catastrophe modeling firms that is selected by the issuer to provide this analysis, and did not include any explicit margins or qualitative haircuts to the probability of loss metric.

AIR Worldwide Corporation (AIR) provided the isk analysis using their proprietary software and risk models implemented in Touchstone (News - Alert) 2.0.2 and Catrader 16.0 which includes version 3.0 of their Earthquake Model for the Pan-European region. This earthquake model was last updated in 2011 and currently there are no expected updates for the next three years. These models will be escrowed and used by AIR in determining any future annual reset.

Based on 10,000 simulations, the annual one-year attachment probability for the class A notes was 0.40%. This indicates an implied rating of 'BB+' using Fitch's ILS Calibration Matrix with a one-year time-to-risk maturity assumption. The annualized that modeled expected loss was 0.31%. Results from other third-party modeling firms or UnipolSai that were provided did not indicate different levels of attachment probability.

AIR estimates 85% of the modeled expected loss was attributed to the four northern regions mentioned above. Since earthquake magnitudes in excess of 7.0 are rare, measurements reading between 6.00 and 6.49 and then between 6.50 and 6.99 contributed 36.0% and 56.5% (92.5% total) respectively, of the modeled expected loss.

The AIR risk analysis used a time-independent assumption that estimates long-term probabilities of occurrence, irrespective of when previous earthquakes occurred. The last earthquake with a magnitude in excess of 7.0 occurred in 1915 (Avezzano). The modelling included the effects of business interruption and the initial loss adjustment expense factor. Unmodeled risks included volcanic eruption, tsunami, sprinkler leakage, fire, flood following the event, demand surge, landslide and liquefaction. A small portion of the subject business was not modelled. Fitch did not make any estimation of these risks.

As an indemnity bond, the determination of the Ultimate Net Loss "follows the fortunes" of the UnipolSai Group in regards to underwriting of new business, claim loss management and reserve practices. UnipolSai is the largest non-life insurer in Italy with earned premiums in excess of 16 billion euro in 2014 and shareholder's equity of 6.3 billion euro at December 31, 2014. Over 95% of policy distribution is through a preferred distribution channel where the majority of the agencies are tied and work exclusively with UnipolSai. The Settlement Claims Direction Office is responsible for the settlement of losses related to earthquakes. Towers Watson (Bermuda) Ltd has been appointed as the Claims Reviewer and the Loss Reserve Specialist for the Issuer.

Proceeds from this issuance will be held in a collateral account for the benefit of UnipolSai and will be invested in European Bank for Reconstruction and Development notes (EBRD; Fitch Issuer Default rating of 'AAA'). These notes will yield Euribor less 38 basis points (but not less than 0%). They also contain a put feature designed to eliminate market risk to investors. Under certain circumstances, these notes may be replaced by high-quality money market funds which may be rated at least "AAmmf" by Fitch. If that were to occur, noteholders may have exposure to market value risk if the net asset value of a money market fund falls below $1.00, and the yield volatility of that particular fund. Finally, certain actions may be required if the collateral account is invested in money market funds and it is determined that gross proceeds from the disposition or redemption of the money market funds will become subject to withholding tax. A downgrade of a permitted investment will not necessarily lead to a replacement of that investment. Finally, certain actions may be required if the collateral account is invested in money market funds and FATCA is deemed to apply in late 2016.

RATING SENSITIVITIES

This rating is sensitive to the occurrence of a qualifying event(s), the counterparty risk of UnipolSai and the rating on, and performance of, the assets held in the collateral account.

If qualifying covered events occur that cause ultimate net losses to exceed the attachment amount, Fitch will downgrade the notes reflecting an effective loss of principal and impairment of the notes, and issue a Recovery Rating.

In the case of a reset election, UnipolSai may select an updated attachment level such that the updated modeled expected loss falls in the range of 0.31% and 0.36%. Fitch believes the corresponding attachment probability will likely stay at the implied rating of 'BB+' though there could be a one-notch upgrade or downgrade under possible outcomes.

The rating on the notes is contingent on UnipolSai maintaining the proper pre-funded amounts in the premium deposit account, and if this does not occur, the rating is contingent on the transaction being successfully unwound with principal and accrued interest paid in full. Failure of UnipolSai to maintain pre-funding amounts, concurrent with a failure in the timely unwinding of the transaction, which could potentially occur if UnipolSai entered into insolvency proceedings, could cause an impairment of the notes.

To a lesser extent, the notes may be downgraded if the EBRD notes should suffer a serious downgrade, the terms of the notes are altered, or the assets held in the collateral account perform significantly worse than expectations for high-quality, short-term investments.

The escrow model may not reflect future methodology enhancements by AIR which may have an adverse or beneficial effect on the implied rating of the notes were such future methodology considered.

The final rating is contingent upon receipt of signed legal documents pertinent to this transaction that do not materially change what has currently been reviewed. Any changes could lead Fitch to an alternative rating or inability to rate the note.

DUE DILIGENCE USAGE

No third party due diligence was provided or reviewed in relation to this rating action.

Additional information is available on www.fitchratings.com

Applicable Criteria

Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744158

Global Structured Finance Rating Criteria (pub. 31 Mar 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864268

Insurance Rating Methodology (pub. 04 Sep 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=756650

Insurance-Linked Securities Methodology (pub. 08 Aug 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752532

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=986641

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=986641

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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