Standard & Poor’s has revised its outlook on French insurance company CNP Assurance and its guaranteed entity CNP Caution from stable to negative. At the same time, the long term counterparty credit and financial strength has been affirmed.
The outlook revision follows S&P’s assessment of CNP’s weakened stand-alone credit profile, deriving mainly from further deterioration in its capital adequacy.
The recent adverse developments in capital markets are weighing on CNP’s capital adequacy. Under Standard & Poor-s risk-based insurance capital model, CNP’s weakening capital adequacy stems from its exposure to equities, which represented about 9.3% of total investments at the end of June 2011, as well as its reliance on soft forms of capital, mainly unrealized capital gains and value in force. We also believe that CNP’s credit risk has increased so far this year mainly from its exposure to lower rated European sovereign bonds, issued for instance in Greece, Portugal, and Ireland.
The capital market turmoil is weakening the group’s earnings generation capabilities and therefore its ability to organically restore capitalization in the medium term. Still, S&P continues to consider CNP’s underlying earnings as strong–new business margins were 12.3% at year-end 2010 and 14.3% for the first-half of 2011.
The negative outlook reflects the deterioration of CNP’s capital adequacy as it faces higher market and credit risk. Together with the tough financial landscape, S&P believes these factors could slow CNP’s ability to generate earnings and ultimately delay its efforts to restore its capital adequacy. For the next two years capital adequacy will remain a rating weakness for CNP.
CNP’s competitive position is expected to remain broadly stable. While the company is improving its business mix toward more profitable products, S&P believes the low interest rate environment will weigh on financial income. The group could also hit some hurdles in sales of unit-linked products given the current falling stock markets. Consequently, new business margins are expected to remain just above 11% in 2011 and 2012. CNP’s consolidated net result will likely stand at least at €800 million (before dividends) at year-end 2011.
At this stage, the company is not expected to make any acquisitions involving large capital expenditures, which could cause capital adequacy to fall far below the current rating level.
S&P could lower the ratings if CNP posts earnings short of S&P expectations or if its capital adequacy further deteriorates.
S&P could revise the outlook to stable chiefly if CNP’s capital adequacy rises toward good levels under S&P risk-based capital model at a faster pace than what is currently expect.
Source : Standard & Poor’s
