ETHIAS : Reassured by the solvency levels achieved, we are upgrading our recommendation to Buy

>Strengths / Opportunities - - Ethias is Belgium's third-largest insurer, all segments combined, with a 9% market share, and the leading insurer of the public sector and its agents. It is the third-largest non-life insurer, with a market share of 11.2%, and the fourth-largest life insurer with a market share of 7.4% (source: Assuralia 2015). - Ethias is the only major direct insurer in Belgium, where brokers and bancassurers have a predominant position.- It is the special partner of local authorities. Ethias is the natural insurer of public authorities. Its policyholders include the federal state, the regions and communes, state authorities, the ten provinces and more than 580 towns and districts, hundreds of public aid centres and public housing companies and thousands of inter-municipal companies, semi-public companies, schools, hospitals and public interest establishments. All risks incurred by public service personnel are covered by Ethias.- Technical results in non-life insurance are solid, reflected in a combined ratio of below 100%.Weaknesses / Threats - - The portfolio of retail life insurance contracts at guaranteed rates still amounts to € 2.4bn (under IFRS) after First A contracts were reduced by € 2.3bn in 2015 and € 957m in 2016. There is still € 969m left on these contracts, which offer policyholders an average guaranteed rate of 3.46% for life. - The yield served on the group life insurance portfolio is also high. At the same time, the investments portfolio had to be managed in accordance with European Commission guidelines until the end of 2016, limiting the return obtained - The solvency ratio using the standard formula and without transitional measures is 144.9% (based on the quarterly QRT). This level is respectable, but it still needs strengthening in view of its sensitivity. The group intends to raise this ratio to over 150% this year thanks to two measures due to be implemented in 2017: the retroactive consolidation of Whestia from 1 January, 2017 and the implementation of a financial reinsurance solution on corporate bond credit spreads. - In 2012, Vitrufin made a private placement of a € 278m senior bond maturing in 2019 with a coupon of 7.5%. The payment of interest and the repayment of capital at maturity will be covered by the cash generated by dividends from Ethias s.a. Annual interest payments amount to € 20.85m. Ethias paid Vitrufin € 40m in 2012, € 25m in 2013, no dividend in 2014, € 45m in 2015 and the same amount in 2016 (conditional on approval at Ethias' AGM on 17 May). Questions can be asked about Vitrufin's capacity to redeem this bond in 2019. On a standalone basis, Vitrufin does not have the liquidity to do so today. It is dependent on a bigger liquidity injection by Ethias.Credit opinion: positive / Market Recommendations : BUY - The newsflow has been positive on the credit since December 2016, with the success of the Switch VI operation and the strengthening of the solvency margin to 144%, the closing of the financial restructuring plan demanded by the BNB, the closing of the EC plan and the shareholder agreement that provides stability until 2019. We are confident that this positive trend will continue, while Fitch may reward the group for its efforts by upgrading the rating.After an excellent performance in recent months, mirroring that of other insurers but buoyed in Ethias' case by the strengthening of solvency and speculation about offers by Ageas or Belfius, the Tier 2 2026 bond yields around 4.4% to maturity. Consequently, in absolute and relative terms, Ethias 2026 still appears attractive to us.