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.

The table below summarized the fair value of bonds split by rating class.

(€ million)
Loans   Held
to maturity
Financial assets
 at fair v alue
through profit or loss
for sale
fin. Assets
Bonds  Impact (% )
AAA 25,778.9 1,052.1 1,042.9 42,631.0 70,504.8 33.1
AA 4,745.9 177.5 2,207.0 25,021.8 32,152.2 15.1
A 12,711.4 1,209.8 2,750.0 64,904.1 81,575.3 38.3
BBB 3,172.7 2,268.0 665.4 15,048.9 21,154.9 9.9
Non investment grade 446.7 542.2 415.5 3,763.8 5,168.1 2.4
Not Rated 652.3 23.2 199.4 1,287.6 2,162.4 1.0
Total 47,507.9 5,272.6 7,280.1 152,657.2 212,717.8 100.0
(€ million)
Loans  Held
to maturity
Financial assets
at fair value
through profit
for sale
Bonds  Impact (% )
AAA 27,657.6 355.4 1,269.1 49,496.0 78,778.2 35.2
AA 9,155.0 191.8 2,575.6 63,744.6 75,667.0 33.4
A 12,125.4 304.9 2,557.9 28,387.8 43,375.9 19.3
BBB 2,417.0 2,513.2 664.1 13,461.5 19,055.8 8.4
Non investment grade 592.1 58.1 463.4 3,049.1 4,162.7 1.8
Not Rated 1,162.2 1,105.2 415.7 1,330.9 4,014.0 1.8
Total 53,109.4 4,528.6 7,945.8 159,469.8 225,053.6 100.0

During 2011, the composition of debt securities by rating recorded the increase in classes A, BBB and Not Investment Grade, as a consequence of the downgrade of some important countries of the Euro Area, including Italy, Portugal, Greece and Slovenia.

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.