DBRS Morningstar Confirms Ratings on Compagnie Européenne de Garanties et Cautions at A (high); Trends Remain Stable

DBRS Ratings GmbH (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) with Stable trends.

KEY CREDIT RATING CONSIDERATIONS
CEGC’s ratings reflect the Company’s well developed franchise in the home loan guarantees industry in France, where it is the second largest provider by market share. CEGC has improved its product diversification with recent growth in other business lines including sureties and guarantees for professionals, small and medium-size enterprises, and large corporates loans. CEGC benefits from the distribution network of its parent banking group BPCE, one of the leading retail banks in France.

CEGC risk profile is sound, as a reflection of the historically low and stable risk metrics of the France home loan sector as well as its ability to use reinsurance to mitigate large losses. The Company’s investment management strategy is conservative with an increasing asset allocation to highly-rated fixed income securities. CEGC has a track record of sustained robust profitability, however, a potential long-lasting slowdown in the French home lending market due to higher interest rates could affect future earnings in the medium and long term.

Liquidity is ample, supported by the low share of illiquid assets in the investment portfolio. CEGC is subject to rigorous regulatory capital requirements imposed on French home loan guarantors. Regulatory capital requirements are met through a combination of common equity, subordinated debt issued to the parent, and reinsurance. The issuance of new subordinated debt is expected to deteriorate leverage ratio and fixed charge coverage ratio going forward.

CREDIT RATING DRIVERS
An upgrade would be driven by a sustained improvement in the Company’s solvency and financial leverage, while maintaining strong profitability levels and a conservative risk profile.

Conversely, ratings would be downgraded if CEGC’s home loan guarantees portfolio risk profile deteriorates significantly, leading to lower regulatory solvency levels as well as materially lower profitability.

CREDIT RATING RATIONALE
CEGC has a strong and well-developed franchise in the personal loan guarantee sector in France where it is the second-largest home loan guarantees provider with a market share of around 25% in 2022. Home loan guarantees remain the Company’s main product and premium generator (78% of total written premiums in 2022), however, the expansion towards corporate loans guarantees as well as presence in other business lines including sureties and guarantees for professionals and small and medium-enterprises provide some product diversification. As part of the BPCE group, one of the leading French retail banks, CEGC benefits from the extensive distribution network of the Banque Populaires (BP) and the Caisses d'Epargne (CE), which are the owners of Groupe BPCE. In 2022, 84% of total gross written premiums were generated through the BP and CE’s network.

CEGC's risk profile mostly reflects the credit risk embedded in its home loan guarantees portfolio, which totalled EUR 237 billion at end-2022 (EUR 217 billion at end-2021). DBRS Morningstar takes into consideration the overall low risk of the home lending sector in France, which is supported by strict underwriting standards and strong and stable asset quality metrics over a long period of time. CEGC’s ratio of doubtful loans at 0.27% at end-2022 is even lower than the sector average of 0.95% at end-2022. CEGC’s investment allocation is also conservative, with the majority of the portfolio invested in high-rated fixed income assets. Notably, the Company increased the share of AAA and AA rated bonds and has reduced the duration of its bond portfolio in 2023.

CEGC reported a record year in terms of gross premiums written in 2022 on the back of a still very active home loan market in France. In 2023, we would expect a slowdown of market activity, which could likely translate into lower revenue generation. CEGC’s return on equity (ROE) in 2022 remained in line with the mid-teen level shown in the last three years but decreased materially in H1 2023. The premium increase reported in 2022 was mostly driven by the significant growth in the corporate business while the home loan guarantees segment decreased by 2% YoY. Underwriting profitability remained strong with a combined ratio of 62% in 2022 (vs. 69% in 2021), supported by low default ratios and sustained high level of recoveries. The Company's conservative investment portfolio management has led to generally stable recurring investment results in the last five years.

CEGC's liquidity is supported by the overall conservative investment management strategy and sizeable portion of high liquid assets in the Company's investment portfolio. Non-liquid investments, including real estate and bonds below investment grade, have generally remained stable in recent years, totalling less than 6% of the total investment portfolio at end-H1 2023. The Company's claims have been characterized by a low level of volatility in recent years. While DBRS Morningstar takes into account some uncertainty related to the deterioration of the operating environment, claims should continue to benefit from the overall prudent risk management of the home loan guarantees portfolio. The risk of unexpected large losses is mitigated by the Company's multiple reinsurance program with the possibility to increase capacity if needed.

CEGC is subject to the rigorous regulatory capital requirements that are in place for French home loan guarantors, set by the Autorité de contrôle prudentiel et de résolution, France’s regulatory body for financial institutions. 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. In order to cover the increased regulatory requirement, CEGC increased its reinsurance capacity to EUR 2.5 billion at end-2022 (versus EUR 2.2 billion subscribed at end-2021) at a stable price. As a result of additional capital injection from the parent company, the solvency capital requirement (SCR) eligible own funds increased to EUR 1,671 million at end-2022. However, due to an increase of the underwriting risk solvency requirement, the SCR ratio decreased to 145% at end-2022, from 156% at end-2021. CEGC issued additional EUR 150 million subordinated debt which is expected to have a negative impact on leverage ratio and fixed charge coverage going forward As per the group’s policy, CEGC net profit is 100% distributed to the parent as dividends, with the expectation from BPCE to redistribute capital to support the Company’s capital position in the form of either common equity or subordinated bonds.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

There were no Environmental, Social and Governance factors that had a significant or relevant effect on the credit analysis.

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 (4 July 2023) at https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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

Notes:
All figures are in euros unless otherwise noted.

The principal methodology is the Global Methodology for Rating Insurance Companies and Insurance Organizations https://www.dbrsmorningstar.com/research/417109/global-methodology-for-rating-insurance-companies-and-insurance-organizations (14 July 2023). In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors.

The sources of information used for this credit rating include Morningstar Inc. and Company Documents and Rapport Régulier au Contrôleur 2022, Rapport sur la solvabilité et la situation financière 2022, Rapport de Gestion Exercice 2022, Rapport ORSA 2022, H1 2023 financial statements and Company Presentation. DBRS Morningstar considers the information available to it for the purposes of providing this credit rating to be of satisfactory quality.

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

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar's outlooks and credit 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: https://registers.esma.europa.eu/cerep-publication. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at:
https://www.dbrsmorningstar.com/research/421551

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Mario De Cicco, Vice President, Global FIG
Rating Committee Chair: Marcos Alvarez, Senior Vice President, Global Head of Insurance, Global FIG
Initial Rating Date: February 21, 2019
Last Rating Date: October 17, 2022

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