La Mondiale : We confirm our Buy recommendation on this solid credit

>Strengths / Opportunities - - The SGAM AG2R La Mondiale, which will be the future prudential scope, combines two affiliates: La Mondiale and AG2R Reunica Prévoyance (and the mutual groups, set to form an SGAPS shortly), which have different activities and cycles. La Mondiale has the advantage of generating a higher return (average ROE of around 8%) than AG2R (ROE of around 3%), but its solvency is more sensitive and volatile in a low interest-rate environment, whereas the solvency of AG2R’s health and personal protection insurance activities is more stable. - La Mondiale has solid market shares in France, with a leading position in Madelin pension plans, company pension plans and high-end wealth protection. The integration of Reunica has also allowed the SGAM to strengthen its positions in protection and health insurance. - La Mondiale is keeping a tight rein on its savings business in an ultra-low interest-rate environment, particularly in euros, leading to a reduction in its premiums but also an improvement in the unit-linked/euro product mix. Unit-linked represents 30% of reserves, above the market average of 23%. Weaknesses / Threats - - The group has to manage the continued low interest-rate environment, as do all life insurers. However, the improvement in unit-linked inflows, the decline in savings volumes and the boost to the policyholder surplus reserve, which represents 3.36% of liabilities today, all help to mitigate this. - Solvency II margins with transitional measures are comfortable at 256% for La Mondiale and 213% for the SGAM. Before transitional measures, they would be weaker at respectively 143% for La Mondiale and 131% for the SGAM. The improvement, already seen in 2016, should continue in the years ahead, with a target of 150% for the SGAM by 2020. To achieve this, the insurer is counting on a reduction in crediting rates, the issuance of mutual certificates, a higher proportion of unit-linked in the EUR/UL mix and a strengthening of solvency, among other measures. Credit opinion: Stable / Market recommendation: BUY - In 2016, a year that was complicated by low interest rates and regulatory changes, AG2R La Mondiale reported improved results and managed to strengthen its policyholder surplus reserve. Thanks to this stable profitability and the successful launch of the first mutual certificates, the standalone solvency margins of La Mondiale and the SGAM were strengthened. The bond issue in January boosted the SGAM's margin to 141%, close to the minimum target of 150% in 2020. In view of this solvency margin, liability management measures taken in recent months and other actions that can still be taken, we are confident that the rating can be maintained. We are reiterating our Buy recommendation on the PNC 25 and 2044/24 subordinated notes, which offer higher yields than BBB-rated peers in the subordinated segment.