DBRS Morningstar Confirms Ratings of Compagnie Européenne de Garanties et Cautions at A (high)

DBRS Ratings Limited (DBRS Morningstar) confirmed the Financial Strength Rating and the Issuer Rating of Compagnie Européenne de Garanties et Cautions (CEGC or the Company) at A (high). All trends are Stable.

KEY RATING CONSIDERATIONS
CEGC’s ratings reflect the Company’s strong market position in France as the second-largest player in home loan guarantees and the extensive distribution reach it has through its parent, Groupe BPCE’s banking networks. Other business lines, including the sureties and guarantees for businesses, contribute to some revenue diversification. CEGC’s risk profile is low, underpinned by the strong quality of its home loans guarantees portfolio. The Company has excellent underwriting practices, evidenced by a history of consistent underwriting profitability. The Company’s investment portfolio is low risk, reflecting its conservative allocation strategy. CEGC has a track record of sustained robust profitability, supported by profitable underwriting and solid home loans origination volumes in recent years. During 2020, revenues and net profit increased, confirming the resilience of CEGC’s business model. Liquidity is ample, with 71% of the investment portfolio placed in high-rated bonds. The risk of large losses is mitigated by the Company's programme covering catastrophe risks. CEGC is subject to rigorous regulatory capital requirements imposed on the French home loan guarantors. Regulatory capital requirements are met through a combination of common equity, subordinated debt, and reinsurance. The Company has substantially strengthened its solvency capital levels in recent years by issuing subordinated debt to its parent.

RATING DRIVERS
A further increase in the Company’s regulatory capital levels without increasing leverage, combined with larger market shares while maintaining the current low risk profile would lead to an upgrade.

Deterioration in the quality of CEGC’s home loan guarantees portfolio leading to a decline in underwriting profitability, a substantial deterioration in either the Company's asset quality or regulatory solvency would negatively pressure ratings. A further material increase in financial leverage would likely lead to a rating downgrade.

RATING RATIONALE
With a market share of 26% in the new home loan guarantees production, CEGC is the second-largest home loan guarantees provider and the largest insurance company in this market segment in France. Aside from its home loan guarantee portfolio, which contributes around 80% of premiums, CEGC also provides guarantees to small businesses, social economy, real estate, property development, and corporate markets. CEGC benefits from being part of Groupe BPCE and the home loan guarantees are almost exclusively distributed through its banking network and subsidiaries. In the non-retail business lines around one-third of premiums are sourced through the BPCE networks.

The Company’s risk profile primarily reflects the credit risk of its home loan guarantees portfolio, which at end-2020 totalled EUR 195 billion. DBRS Morningstar views CEGC’s risk profile as low, reflecting the conservative underwriting, and advanced risk monitoring. The quality of the guaranteed portfolio is also supported by the defensive characteristics of French home lending, including the high level of fixed interest rate loans and a well-developed system of social support. The share of doubtful exposures in the home loans guarantee portfolio remained on a downward trend in 2020 and at year-end was a very low 0.31%. Through its reinsurance programme, CEGC transfers part of the catastrophe risk inherent in the retail and corporate lines. The Company‘s investment portfolio is low risk, reflecting conservative allocation strategy. Operational risk is also considered low.

CEGC has a track record of sustained robust profitability, supported by profitable underwriting and generally robust home loan origination volumes in recent years. Return on equity has been strong remaining in the mid-teen range in recent years, and despite the impact of COVID-19, this financial performance was maintained in 2020 and 1H21. During 2020, revenues and net profit increased YoY, confirming the resilience of CEGC’s business model. The combined ratio has oscillated around 70% for the past five years benefiting from low default rates and efficient recoveries of doubtful exposures. Revenue generation is strong, benefiting from the improving penetration rate of origination through the BPCE networks, which is the second largest banking group in the domestic market with an extensive branch network across France.

Liquidity is strong with 71% of the investment portfolio placed in high-rated bonds. The risk of large losses is mitigated by the Company's programme covering catastrophe risks. CEGC is subject to rigorous regulatory capital requirements imposed on the French home loan guarantors. CEGC’s regulatory capital requirements are met through a combination of common equity, subordinated debt, and reinsurance. The Company has substantially strengthened its solvency capital levels in recent years. There was some additional improvement during 2020 and the solvency capital requirement ratio was 142% compared to 137% a year earlier. However, the improvement resulted in large part from the issuance of EUR 150 million of subordinated debt subscribed by the parent and to a lesser extent from retained earnings.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

The Grid Summary Grades for Compagnie Européenne de Garanties et Cautions are as follows: Franchise Strength – Strong/Good; Risk Profile – Strong/Good; Earnings Ability – Very Strong/Strong; Liquidity – Strong/Good; Capitalisation – Good.

Notes:
All figures are in Euros unless otherwise noted.

The principal methodology is the Global Methodology for Rating Insurance Companies and Insurance Organizations (16 July 2021; https://www.dbrsmorningstar.com/research/381667). Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (03 February 2021; https://www.dbrsmorningstar.com/research/373262).

The sources of information used for this rating include Company Documents, Environnement Social et Gouvernance Intégration des enjeux extra-financiers dans les investissements 2019, Comptes individuels annuels - Exercice 2020, CEGC Rapport d’activité 2020, Rapport de Gestion Exercice 2020, Rapport Régulier Au Contrôleur 2020, Rapport sur la solvabilité et la situation financière 2020, and 2021 H1 financial statements. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

DBRS Morningstar does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar 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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/386347

This rating is endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Tomasz Walkowicz, Vice President
Rating Committee Chair: Ross Abercromby, Managing Director, Global FIG
Initial Rating Date: February 21, 2019
Last Rating Date: October 21, 2020

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