Groupama : As one page is turned, another opens

We think that 2017 marked the end of Groupama’s financial recovery that began in 2012 after a difficult 2011. In the space of five years, the group has changed the product mix in personal insurance, reoriented its geographical positioning (80% France, Italy and Eastern Europe), trimmed the risks of its investments portfolios with the sale of the last equity stakes and a small reduction in peripheral debt holdings, boosted solvency through the issuance of mutual certificates among other measures, completed the management of its subordinate debt with the redemption of the infamous 6.298% notes and restored its operating profitability. Fitch rewarded this recovery by upgrading the financial strength rating to A-. - As such, 2018 marks the start of a new era, with a new CFO and a new strategic plan under preparation based on customer satisfaction, new technologies and growth. The re-mutualisation of the central operating body should allow Groupama to participate in the vast consolidation drive underway among French mutual insurers. This will be an opportunity to consolidate or strengthen its market shares in the highly competitive French market. Lastly, one financial objective that still has to be met is that of profitability. The improvement in operating profitability in 2017 is to be welcomed, but it needs to be consolidated and strengthened in P&C, where the combined ratio remains above the hardly challenging target of 98%. Lastly, the ROE remains weak at 3.3%. Without a lasting improvement in profitability, we do not foresee an additional upgrade of the rating, explaining our stable credit opinion. - The CCAMA bonds were one of the best performers in the sector in 2017. After a tough March for the entire sector, yields have already tightened but remain attractive, especially on the PNC 24. The 2027 paper has the advantage of its bullet structure, which is rare in the sector.> - Support factors - - Its positions in the French market where it is the third largest non-life mutual insurer and boasting top-three positions in agricultural, personal protection, health and home insurance and insurance products for local authorities. Italy today, Turkey and China tomorrow, are growth drivers. - The insurer posted solid operating profit in 2017, both in L&H which benefited from a favourable product mix (protection, health, unit-linked) and P&C, fewer NatCat claims. And this despite the hurricanes in the Caribbean for which the gross cost of € 330m amounted to € 38m net, after the reinsurance programmes.- The Solvency II margin with transitional measures was highly comfortable at 315% (vs. 289% in 2016). Without transitional measures, the margin also stood at a comfortable 174%. Naturally, market effects accounted for some but not all of this increase (+11 pts): +18 pts reflect impacts of strategic measures, including continued sales of profit-participation certificates. Some € 436m have been sold to date out a € 550m programme out to 2019. - Points to watch - - Ninth largest retail insurer in France, in a fiercely competitive French market, even as bancassurance companies are seeking to develop P&C and mutual insurance companies are joining forces in the life and health segments. The group has never hidden its ambitions to attract other mutuals. - a net profitability level that is partially protected by reinsurance, but which remains sensitive to exceptionally significant storm claims and severe losses and the interest-rate environment.