CNP assurance : We reiterate our Buy recommendation on a selection of bonds

Monday 27 March 2017 - - - - CNP Assurances outperformed expectations in 2016, prompting it to raise its 2018 EBIT target, with the group now aiming to deliver average annual organic EBIT growth of at least 5% over the 2017-18 period compared with the 2016 baseline (vs. its forecast in 2015 for average annual organic EBIT growth of at least 5% over three years). - Many of the indicators monitored by S&P to warrant a possible upgrade have been further improved, such as: 1/ a product mix comprising more unit-linked contracts, with sales of unit-linked contracts representing 26.7% of savings and pensions premiums; 2/ net profit of over € 1.2bn; and 3/ a Total Adjusted Capital (TAC) of € 40bn. The agency said that it would particularly monitor the situation in Brazil. In this area too, the economic situation is poised to recover as of 2018. Accordingly, we are revising our credit opinion to Positive vs. Stable. - All told, for this positive credit trend and the yields on offer, we reiterate our Buy recommendation on the Tier 2 2041/2021, 2045/2025 and 2047/2027 bonds and the TEC 10. We see less value ?in the other euro-denominated bonds, Perp NC24, CMS 10 and 2040/2020 notes. - > - Support factors - - French leading life insurer with a solid 16% market share. Partnership agreements with shareholders La Banque Postale and BPCE allow CNP Assurances to take advantage of the biggest distribution networks in France.- A strong public shareholder base. The shareholder agreement between the CDC (34.6%), Sopassure (30.7%) and the French government (0.9%) has been renewed for two years until 31/12/2017. The deadline to cancel the agreement is 30 June 2017, failing that, it will be automatically extended for two years. Given the deadline's close proximity to the appointment of a new government following the French presidential elections in May, we anticipate the status quo to be maintained. Including free float, the CDC controls 40.8% of the share capital, Sopassure 36.3% and the French government 1.1%. - Multiple solid partnerships. The two principal ones in France were renewed and a new partnership with Santander Consumer Finance was signed in 2015. These are promising for the geographical spread of revenues and the continuing shift towards higher-margin products. - Successful expansion in Brazil with Caixa Seguradora, the country's fifth-largest insurer.- CNP Assurances has scope to weather a lasting low interest-rate environment given an average guaranteed rate of 0.5% on its portfolios and a deferred profit-sharing reserve of € 9bn that receives regular contributions. - A high solvency margin of 177%, calculated using the standard formula, without transitional measures. - Points to watch - - The economic and political situation in Brazil worsened further in 2016. GDP fell further by 3.6% after -3.8% in 2015. 2017 is set to be a transition year before growth recovers in 2018 (+1.5% according to OECD). Still, CNP's results in Brazil are holding up well and the group remains more committed than ever and even continues to invest in the Brazilian market. - Two partnerships are due to be renewed shortly: with UniCredit in Italy this year and with Caixa Econômica Federal in Brazil before 2021, which are clearly the most important negotiations. - Fairly high (14.3%) exposure to equity investments compared with other insurers, rendering the SCR more sensitive to market risk.