Fitch Ratings has downgraded Groupama S.A.’s and four of its core insurance subsidiaries’ Insurer Financial Strength (IFS) rating to ‘A-‘ from ‘A’. The subsidiaries are Groupama GAN Vie, GAN Assurances, GAN Eurocourtage and Groupama Transport. Fitch has also downgraded Groupama S.A.’s Long-term Issuer Default Rating (IDR) to ‘BBB+’ from ‘A-‘ and subordinated debt ratings to ‘BBB-‘ from ‘BBB’. All rating Outlooks are Negative. A full list of rating actions is at the end of this comment.
The downgrade reflects the deterioration of Fitch’s view of Groupama’s capital adequacy as a result of the group’s continued exposure to southern European government debt. It is materially exposed to these assets through holdings at local subsidiaries as well as through holdings at French entities. Fitch notes that the group’s exposure to investments in volatile asset classes, including equities, is higher than peers and has resulted in the weakening of capital adequacy following volatility in the financial markets.
The key rating drivers that could result in a further downgrade include deterioration of the group’s financial profile, especially in terms of solvency, as well as its inability to translate measures aimed at improving underwriting results into sustainable strong performance in non-life (combined ratio near 100%) and in life (new business margin near 1%).
The ratings are supported by Groupama’s adequate solvency and a risk profile that benefits from a large degree of business and risk diversification. The ratings also take into account its solid business position and improving profitability.
Fitch will carefully monitor Groupama’s ability to improve its capital adequacy from the low level reached at end-June 2011 and expects retained earnings to gradually compensate for increased unrealised capital losses. The agency considers Groupama’s largest challenge will be to smoothly manage the reduction of its exposure to southern European government bonds, especially Greece. Fitch also expects Groupama to gradually reduce the share of its equity investments.
Excluding the impact of financial market volatility, Groupama’s profitability could still be improved. However, competitive underwriting conditions in a number of business lines will continue to challenge the group’s ability to achieve significant earnings improvement in the future. In this context, Fitch notes the improving profitability of Groupama’s non-French operations.
Source : Fitch Ratings
