Morningstar DBRS Confirms the Credit Ratings of Compagnie Européenne de Garanties et Cautions at A (high), Stable Trends

DBRS Ratings GmbH (Morningstar DBRS) 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 its well-developed franchise in the home loan guarantees industry in France as well as the Company's strong connection with its parent company banking group, Groupe BPCE (BPCE), which represents the Company's main distribution channel. Home loan guarantees are the main contributor to the Company's revenues, but other business lines including sureties and guarantees for professionals, small and medium-size enterprises (SMEs), and large corporate loans provide some diversification.

In 2023 and 2024, the home loan market in France slowed down significantly, mainly because of higher interest rates. As a result, CEGC's revenues and profitability deteriorated in 2023 from high levels in 2021 and 2022. While slightly deteriorating in 2023, the Company's underwriting profitability remained strong, reflecting the overall predictability of the home loans guarantees' claims and CEGC's strong recovery capacity.

The credit ratings also take into account CEGC's conservative risk profile in the home loan guarantees portfolio as well as the improved credit profile in the investment portfolio and lower exposure to market risk. The Company is subject to rigorous regulatory capital requirements imposed on French home loan guarantors. Regulatory capital requirements, met through a combination of common equity, subordinated debt issued to the parent, and reinsurance, are expected to decrease in the short term as the number of outstanding home loan guarantees in CEGC's portfolio decreases.

CREDIT RATING DRIVERS
An upgrade would be driven by a sustained improvement in the Company's solvency and financial leverage, while avoiding further deterioration of the profitability metrics and maintaining the current conservative risk profile.

The credit ratings would be downgraded in case of further sustained decline of the Company's profitability and revenue generation as well as material deterioration of risk profile.

CREDIT RATING RATIONALE
Franchise Strength Building Block Assessment: Strong/Good
CEGC maintained a strong and well-developed franchise in the personal loan guarantee sector in France. Notwithstanding the significant slowdown of the production of home loans covered by guarantees in France, the Company maintained a stable market share of 25.8% in 2023 compared with 25.3% in 2022. Home loan guarantees remained CEGC's main product and largest contributor to gross written premiums (GWP). The contribution to GWP from other business lines, including sureties and guarantees for professionals and SMEs increased in 2023 and provides some product diversification. CEGC benefits from the extensive distribution network of the Banque Populaires and the Caisses d'Epargne, the owners of BPCE, one of the leading French retail banks.

Earnings Ability Building Block Assessment: Strong/Good
CEGC's profitability deteriorated in 2023, mostly as a result of the severe slowdown in home loans market activity in France. This led to a 25% year-over-year reduction in GWP, which should remain at the current level in the medium/long term, although much lower than the record high levels reported in the last two years. On the other hand, the Company's underwriting profitability remained robust with a combined ratio of 68% in 2023 compared with 62% in 2022, notwithstanding an increased loss ratio in some specific businesses, such as individual house builders. CEGC's statutory return on equity (ROE) was 9.4% in 2023 compared with 15.7% in 2022. The Company reported an ROE of 6.4% in H1 2024 compared with 8.2% in H1 2023.

Risk Profile Building Block Assessment: Strong/Good
CEGC's risk profile mostly reflects the overall low risk in France's home lending sector, which is supported by strict underwriting standards as well as strong and stable asset quality metrics over a long period of time. CEGC's ratio of doubtful loans in its outstanding home loan guarantees portfolio was 0.29% at the end of 2023, which was significantly lower than the sector average of 0.97% at the end of 2023. The Company's investment allocation is conservative, with the bond portfolio's credit profile improving in 2023 thanks to the increased share of AAA and AA-rated bonds in the portfolio. Morningstar DBRS notes that the Company's exposure to market risk is low with the solvency capital requirement related to market risk decreasing to 7.9% in June 2024 from 11.7% in December 2019.

Liquidity Building Block Assessment: Strong/Good
CEGC's liquidity is supported by its overall conservative investment management strategy and sizeable portion of high liquid assets in its investment portfolio. Nonliquid investments, including real estate and non-investment-grade bonds, have generally remained stable in recent years, totalling less than 6% of the total investment portfolio at the end of 2023. The Company's claims have been characterised by a low level of volatility in recent years. While Morningstar DBRS takes into account some uncertainty related to the deteriorating operating environment, claims should continue to benefit from the overall prudent risk management in 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.

Capitalisation Building Block Assessment: Strong/Good
CEGC is subject to 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. To cover the increased regulatory requirement, CEGC increased its reinsurance capacity to EUR 2.6 billion at the end of 2023. The Company is well positioned to comfortably meet its capital requirement going forward given that, because of the lower production of home loans, Morningstar DBRS expects the total capital requirement to decrease in the short term. The Solvency II ratio increased to 157% in 2023 from 145% in 2022. As per the group's policy, CEGC's net profit is 100% distributed to its parent as dividends, with the expectation that BPCE will redistribute capital to support the Company's capital position in the form of either common equity or subordinated bonds.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental, Social or Governance factors that had a significant or relevant effect on the credit analysis.
 
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024) at https://dbrs.morningstar.com/research/437781.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology is the Global Methodology for Rating Insurance Companies and Insurance Organizations (10 September 2024), https://dbrs.morningstar.com/research/439195. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings, https://dbrs.morningstar.com/research/437781 in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The sources of information used for this credit rating include Morningstar, Inc. and company documents, Rapport Régulier au Contrôleur 2023, Rapport sur la solvabilité et la situation financière 2023, Rapport de Gestion Exercice 2023, Rapport ORSA 2023, H1 2024 financial statements and Company Presentation. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

Morningstar DBRS 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. Morningstar DBRS' outlooks and credit ratings are under regular surveillance.

For further information on Morningstar DBRS 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 Morningstar DBRS 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/440042.

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

Lead Analyst: Mario De Cicco, Vice President, Global Insurance & Pensions Ratings
Rating Committee Chair: Elisabeth Rudman, Managing Director, Global Financial Institution Ratings
Initial Rating Date: 21 February 2019
Last Rating Date: 6 October 2023

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