Standard & Poor’s Ratings Services has lowered its long-term counterparty credit and insurer financial strength ratings on France-based composite insurer Groupama S.A. and its related subsidiaries to ‘BBB’ from ‘BBB+’, and removed them from CreditWatch with negative implications.
Standard & Poor’s latest report :
The ratings had been placed on CreditWatch on Sept. 13, 2011, reflecting S&P’s view that adverse and volatile capital markets may be weakening Groupama’s financial profile, in particular capital adequacy. The outlook is negative. Groupama’s junior subordinated debt ratings have also been lowered to ‘BB+’ from ‘BBB-‘.
At the same time, we lowered our long- and short-term counterparty credit ratings on Groupama Banque to ‘BBB-/A-3’ from ‘BBB/A-2’ and removed them from CreditWatch, where they were placed on Sept. 13, 2011, with negative implications. The outlook is negative.
The rating action reflects our belief that, despite management’s planned actions to improve Groupama’s financial profile, it is unlikely that its capital adequacy will be restored and maintained at levels commensurate with ‘BBB+’ ratings over the next two years.
We believe that the recent negative capital market developments have undermined Groupama’s already weak capital adequacy, according to Standard & Poor’s risk-based insurance capital model. In our view, Groupama’s credit risk has also increased because of the group’s sizable exposure to sovereign bonds, in particular those of Greece (CC/Negative/C) and Portugal (BBB-/Negative/A-3), which represented 7.8% and 3.3% of the group’s shareholder’s funds on June 30, 2011, after taxes and profit sharing.
We have assessed actions that management plans to take in the short term to restore capital adequacy that include asset hedging and reinsurance solutions. We believe these actions will have a material positive impact on capital adequacy and represent a positive development in the group’s financial risk tolerance. We also note that Groupama’s reported underwriting earnings for the first half of 2011, with a net combined ratio of 99.6% and new business margins of 0.7%, are well on track to meet our full-year expectations. That said, management’s actions and improving earnings in our view will likely not be enough to restore capital adequacy to levels commensurate with ‘BBB+’ ratings, according to Standard & Poor’s risk-based insurance capital model. We also believe that adverse and highly volatile capital markets continue to weigh on Groupama’s financial profile and exacerbate challenges in restoring its capitalization.
The negative outlook reflects continuing pressure on Groupama’s financial profile and our view of execution risk associated with management’s strategic actions to improve capital adequacy. We will continue to assess management’s actions, including effective implementation of the above-mentioned measures and potential additional measures that Groupama could take to improve capital adequacy.
Our expectations for Groupama’s underwriting earnings in 2011 remain unchanged: new business margins of 0.7%, an operating return on embedded value of about 5% in life business, and a net combined ratio of about 102% according to our computation and excluding major natural catastrophes in the property/casualty business.
We could lower the ratings if Groupama’s capitalization further deteriorates, especially if Groupama is not successful in implementing its actions to restore capital adequacy or if management reverted to its pre-existing financial risk tolerance. We might also revise the ratings if the company is obliged to further significantly write down investments, especially because of its exposure to lower-rated sovereigns, which could result in weaker earnings and lower life crediting rates on investment-type policies.
We could revise the outlook to stable chiefly if management successfully executes the actions it has planned and takes additional measures to substantially enhance capital adequacy and limit future volatility.
Source : Standard & Poor’s Press Release
