DBRS Assigns Ratings of A (high) to Compagnie Européenne de Garanties et Cautions

DBRS Limited (DBRS) assigned a Financial Strength Rating of A (high) and an Issuer Rating of A (high) to Compagnie Européenne de Garanties et Cautions (CEGC or the Company). All trends are Stable.

KEY RATING CONSIDERATIONS
CEGC’s ratings take into consideration the Company’s strong market position in France as the second-largest player in the home loan guarantee line of business, the extensive distribution reach it has through the Groupe BPCE banking networks, and the added diversification of earnings through its surety and financial guarantee businesses. The Company exercises prudent and conservative underwriting, which has resulted in a high-quality insurance portfolio, as evidenced by a history of consistent underwriting profitability. CEGC is sufficiently capitalized, meeting its regulatory capital requirements through a mixture of reinsurance and equity.

RATING DRIVERS
Positive ratings pressure may arise from a material increase in market share (>20%) in the home loan guarantee business line in France, combined with a significant increase in scale in the smaller businesses, while maintaining a prudent risk profile. CEGC is adequately capitalized; however, a substantial increase in capital or provisions, providing a larger buffer on top of regulatory minimums (currently 2% of outstanding exposure), may also have positive rating implications.

Conversely, negative ratings pressure may arise from a material decline in underwriting profitability, as measured by an increase in the combined ratio above 95%, resulting in a sustained reduction in earnings. A shift in the risk profile, with increasing growth in business lines with poor or more volatile underwriting profitability may also have negative rating implications.

RATING RATIONALE
The quality of the Company’s home loan guarantee portfolio is one of the primary factors in the ratings, given that the large majority of the Company’s risk exposure arises from its home loan guarantee business. As a home loan guarantee provider, the performance of CEGC’s portfolio is relatively predictable, with experience more or less in line with assumptions, during stable economic times. Home loan performance risk rises during periods of adverse economic cycles where there is also a corresponding sharp increase in unemployment, as borrowers may no longer be able to service their home loans, resulting in an elevated frequency of defaults. A prudently underwritten portfolio helps mitigate this risk.

DBRS has assessed CEGC’s portfolio quality as strong, with a good borrower profile resulting from conservative underwriting practices. Home loan guarantees being underwritten go through a double-screening process, first through the lending financial institution and then independently by CEGC. Portfolio quality is reflected in the good underwriting results, as evidenced by low loss ratios. CEGC also has a strong recovery program in place, resulting in high recovery rates on loans of defaulted borrowers. Overall, DBRS has confidence in the Company’s ability to navigate a downturn in the French housing market.

DBRS also takes into consideration the specifics of the housing market in France when assessing the risk profile of CEGC’s home loan guarantee portfolio. The expansive social safety net in France, which provides unemployment benefits for an extended period of time, provides a cushion against a shock to its economy, making it a more favourable environment for mortgage insurers and home loan guarantee providers. As a result, France has experienced a relatively less volatile housing market than other jurisdictions.

CEGC’s ratings are highly dependent on the level of its total capitalization and the amount of capital cushion the Company holds in excess of minimum regulatory capital requirements. CEGC is subject to rigorous regulatory capital requirements. The Company is required to hold a minimum amount of qualifying available solvency resources equal to at least 2% of its outstanding home loan guarantee exposure, which was EUR 148 billion as at YE2017. The Company has calculated its Solvency Capital Requirement (SCR) ratio to be 117% as at YE2017, providing a good buffer above the regulatory minimum of 100%.

CEGC requires substantial amounts of capital to meet regulatory requirements for its current portfolio and to fund its growth. The Company has a relatively high dividend payout rate, resulting in a low pace of capital growth through retained earnings, which could constrain its growth or limit its ability to rebuild its capital cushion quickly, if necessary. Additionally, the Company depends significantly on high-quality reinsurance to meet its regulatory capital requirements. As such, continued management attention to the reinsurance programs and reinsurer quality is important.

Notes:
All figures are in euros unless otherwise noted.

The applicable methodology is Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations, which can be found on our website under Methodologies & Criteria.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found on the issuer page at www.dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This rating is endorsed by DBRS Ratings Limited for use in the European Union. The following additional regulatory disclosures apply to endorsed ratings:

Each of the principal methodologies/principal asset class methodologies employed in the analysis addressed one or more particular risks or aspects of the rating and were factored into the rating decision. Specifically, the Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations was used to develop the ratings of the Company.

This is the first DBRS rating on this entity.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS’s outlooks and ratings are monitored.

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Lead Analyst: Komal Rizvi, Vice President - Canadian FIG & Insurance
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer - Global FIG and Sovereign Ratings
Initial Rating Date: February 21, 2019

For more information on this credit or on this industry, visit www.dbrs.com.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada