Groupama : BUY recommendation maintained on the CCAMA bonds.

2016 results released on Friday contained no surprises. They were impacted by exceptionally high claims, preventing the insurer from meeting its profitability targets. Reinsurance was strengthened to avoid future volatility and the group continues to focus on its attaining its objectives of a combined ratio of at least 98% and an operating profit of at least € 200m in 2017. - In 2016, the asset portfolio was slightly de-risked through sales of Italian, Spanish, high-yield and non-rated debt. This was sufficient to meet Fitch's requirement for a risky assets to equity ratio of less than 100%. - The LME operation in January went well and strictly adhered to a leverage ratio of 25%, another limit set by Fitch. - A rating upgrade is a one of the key target's set by the insurer. - An upgrade to the IG category is a significant potential driver of the spreads of the four subordinated CCAMA bonds, which have been suffered from their high-yield rating since 2011. - We are therefore maintaining our BUY recommendations on the three principal bonds – the PNC24, 2039/2019 and 2027 – and our Neutral recommendation on the Perp call 17. - >Support factors - - Groupama’s position in the French market, where it is the eighth-largest generalist insurer and number three in non-life insurance. The development of partnerships in France with DIAC, Orange, la Banque Postale and the fine performance in the ANI segment are growth opportunities. Italy today and Turkey or China in the future are international growth channels. - The group has had a clear commitment in recent months to obtain a rating upgrade, prompting efforts to boost solvency and de-risk the asset portfolio. Now that Fitch's criteria are respected, we expect a positive action on the outlook. - The Solvency 2 margin is comfortable at 289%. The group has obtained a green light for its partial internal model and the ACPR's approval to use transitional measure on technical provisions.- The creation of mutual insurance certificates by the Law of 2014 is an opportunity to boost the solvency margin. The issuance of these instruments in 2016 was a success. A total of € 190m was recorded as capital last year and € 274m had been collected at 10 March. The € 550m issuance programme by the end of 2019 may be surpassed. Points to watch - - Before transitional measures, the Solvency 2 margin was 147% in January 2017 at the group level and lower for Groupama SA on a standalone basis (111% in June 2016 vs. 113% for the group). Even though the ACPR officially monitors the margin calculated with transitional measures, a failure to cover this requirement without the use of this option would require the insurer to submit measures to the regulator to strengthen its solvency.- Overall profitability is partly protected by reinsurance but remains sensitive to exceptional weather-related and severe claims and the interest-rate environment. As such, the targets of the 2014-2018 plan – a combined ratio of 98% and an adjusted operating profit of at least €200m – were still not respected this year.