La Mondiale : A strategy balanced between diversified growth and boosting financial solidity

>Publication date 18/05/2018 15:44 - Writing date 18/05/2018 15:41 - - Secondary market spreads - Issuer - Rating - Maturity - Coupon - Price - Asw - Yield - Perp Tier 2 - LAMON - BBB - PNC13 - 5.875 - - - LAMON  - BBB - PNC25 - 5.050 - 111 - 267 - 3.3 - CARDIF - BBB - PNC25 - 4.032 - 107 - 218 - 2.9 - CAA - BBB- - PNC25 - 4.250 - 107 - 248 - 3.1 - SOGECA - BBB - PNC26 - 4.125 - 107 - 235 - 3.1 - ASSGEN - BBB- - PNC25 - 4.596 - 105 - 307 - 3.8 - AXA - BBB - PNC25 - 3.875 - 107 - 209 - 2.8 - CNP - BBB+ - PNC24 - 4.000 - 107 - 274 - 2.7 - Dated Tier 2 - LAMON - BBB - 44/24 - 6.750 - 123 - 226 - 2.6 - NNG - BBB - 44/24 - 4.625 - 112 - 203 - 2.5 - VIENNA - A- - 43/23 - 5.500 - 118 - 152 - 1.9 - CNP - BBB+ - 45/25 - 4.250 - 112 - 181 - 2.4 - - Change in Z spreads of LAMON PNC25 vs comparables - - / - Source: Oddo BHF - - / - H1 2018 results: October - - Strengths / Opportunities - - The SGAM AG2R La Mondiale, the new prudential scope and the umbrella structure for insurance activities, combines two affiliates: La Mondiale and an SGAPS, AG2R La Mondiale. They have different businesses and different cycles.- As of 2019, Matmut may be integrated with La Mondiale, a move that would boost business diversification. Alongside the € 10bn of insurance contributions recorded by the SGAM AG2R La Mondiale, mainly generated in savings, health, protection, dependency and supplementary pensions, Matmut would contribute € 2bn of premiums, primarily in non-life insurance (motor and home). With € 7.7bn of shareholders’ equity, the two groups could also maximise their solvency management. - La Mondiale has solid market shares in France, with a leading position in Madelin pension plans and strong positions in company pension plans and high-end wealth protection. - The solidarity mechanism that existed between La Mondiale and AG2R has been modified, extended and strengthened within the SGAM.- La Mondiale is keeping a tight rein on its savings business in a low interest-rate environment, particularly in euros, leading to lower premiums but an improvement in the unit-linked/euro product mix. Unit-linked represents 32% of reserves, above the market average of 21%. - Weaknesses / Threats - - Like other life insurers, the group has to manage the continued low interest-rate environment. However, the improvement in unit-linked inflows, the decline in savings volumes and the increase in the policyholder surplus reserve, which represents 4.3% of liabilities today, all help to mitigate this. - Solvency II margins with transitional measures on technical provisions are comfortable at 277% for La Mondiale and 224% for the SGAM. Before transitional measures, they would be just 169% and 146% respectively. The target of 150% for the SGAM in 2020 has therefore almost been reached. To continue strengthening solvency, the insurer will be able to count among things on a new € 150m mutual certificates issuance programme.- Although the group still has issuance capacity in the Tier 2 bucket, we do not expect it to use this to strengthen its margin in the medium term, since the last three bond issues raised financial leverage more than S&P expected. - Credit opinion: Stable / Market recommendation: BUY - In 2017 the group achieved a recognition of the prudential scope, boosted profitability while increasing the policyholder surplus reserve, and strengthened solvency. It continues on its growth drive and has proven its appeal as a consolidating mutual insurer in France by studying a merger with Matmut. The integration of this insurer would strengthen the SGAM’s business diversification and could ultimately be beneficial for solvency.Following the last three bond issues in USD in 2017/2018, and pending the expected call of the PNC19, the increase in financial leverage, albeit temporary, limits the likelihood of a rating upgrade by S&P this year. We are maintaining our Stable credit opinion.For investors in euros, the choice is limited to the Perp call 2025 and the 2044/2024. However, this last paper has the drawback of being a little less liquid (€ 191m). Our preference is for the Tier 2 Perpetual Callable 2025, which offers a yield of 3.3%, far more attractive than the yields of approximately 2.9-3% on the PNC25 BNP Cardif or CAA, also rated BBB.