Compagnie Francaise d`Assurance pour le Comm.

FINANCIAL INSTITUTIONS
CREDIT OPINION
23 May 2016
Update
Compagnie Francaise d'Assurance pour le
Comm.
Semi-Annual Update
Summary Rating Rationale
RATINGS
Compagnie Francaise d'Assurance pour le Comm.
Domicile
Paris, France
Long Term Rating
A2
Type
Insurance Financial
Strength
Outlook
Stable
Please see the ratings section at the end of this report
for more information.The ratings and outlook shown
reflect information as of the publication date.
The A2 insurance financial strength (IFS) rating of Compagnie Francaise d'Assurance pour
le Comm. (Coface) reflects (i) the group's strong position in the global credit insurance
industry, (ii) good economic capitalisation and underwriting profitability through the cycle,
underpinned by Coface's dynamic management of the exposure and effective underwriting
risk monitoring tools. These strengths are offset by (i) Coface's increasing substantial
investment risk with significant exposure to lower-quality fixed income and (ii) its limited
diversification from credit insurance, a cyclical and competitive industry.
Coface's A2 IFS rating does not incorporate any potential support from Natixis, its largest
shareholder at 41% ownership, primarily due to the fact that Coface is run as a fully
autonomous entity, and Natixis’ stated intent is to dispose of its remaining stake in Coface
by the end of 2017. Coface has been listed on the Euronext exchange since its 2014 IPO.
Exhibit 1
Contacts
Brandan Holmes
212-553-6897
VP-Senior Analyst
[email protected]
Net Income and Combined ratio, gross (1 yr.)
Good profitability, although some recent pressure on combined ratio
Martina Seydoux
44-20-7772-1531
Associate Analyst
[email protected]
Source: Company reports and Moody's Investors Service
Credit Strengths
»
Leading market position as one of the largest global credit insurers
»
Dynamic management of exposure and effective underwriting risk monitoring tools
»
Good profitability on a through-the-cycle basis
FINANCIAL INSTITUTIONS
MOODY'S INVESTORS SERVICE
Credit Challenges
»
Meaningful investment risk due to significant exposure to lower quality fixed income, which can lead to more volatility in economic
capitalisation through the cycle
»
Limited diversification beyond credit insurance exposes the company to deterioration in the economic environment
»
Highly competitive industry environment and relatively high dependence on brokers
Rating Outlook
The outlook is stable, and reflects the group's strong position in the credit insurance market, along with good capitalisation and
profitability, and conservative reserving practices.
What to Watch For:
»
Ability to maintain an appropriate balance between revenue growth and underwriting discipline
»
Potential deterioration in the global macroeconomic environment, which could lead to increasing claims
»
Implementation of Solvency II regulatory framework and approval of internal model
»
Volatility in investment performance due to elevated level of higher-risk assets
Factors that Could Lead to an Upgrade
»
Material improvement in the group’s business diversification towards a higher proportion of fee-based services;
»
A material improvement in market share without deteriorating its profitability and quality of exposure;
»
A significant improvement in the company's economic capitalisation, together with a reduced level of investment risk
Factors that Could Lead to a Downgrade
»
Deterioration in asset quality, including increased exposure to low investment grade and non-investment grade fixed income
securities, or failure to adjust investment risk profile relative to fluctuations in the credit insurance operating environment
»
Material deterioration in underwriting profitability, with a 5-year combined ratio consistently above 95% through-the–cycle;
»
A significant deterioration in the economic capital with a Solvency II ratio consistently below 130% and/or considerable volatility in
stressed scenarios;
»
Financial leverage exceeding 30% or a significant increase in the company's operational debt.
»
Meaningful erosion of the company’s market position and franchise
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on
www.moodys.com for the most updated credit rating action information and rating history.
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FINANCIAL INSTITUTIONS
Key Indicators
Exhibit 2
Source: Company reports and Moody's Investors Service
Notching Considerations
The Baa1(hyb) rating assigned to the subordinated notes is two-notches below Coface’s IFS rating, and reflects Moody’s standard
notching for subordinated debt that lacks a mandatory trigger that we consider meaningful, and is issued or guaranteed by an
insurance operating company. The subordinated notes benefit from an unconditional and irrevocable guarantee provided by Coface.
The subordinated notes qualify as Tier 2 Capital under Solvency II and do not contain “variation or substitution” provisions that may
lead to mandatory interest deferral or principal write-down which are materially less favourable to an investor.
The P-2 rating reflects the holding company's strong liquidity sources, namely backing the full size CP programme by committed multibank credit facilities, an intercompany liquidity account, which facilitates loans between holding and affiliates, as well as cash and
short-term investments at the holding company.
The CP programme (EUR 600 million capacity) is used to refinance part of the factoring receivables (EUR 2.3 billion) thereby reducing
Coface's previous reliance on Natixis in funding such business. The commercial paper has a maturity between one and six months and
is backed by factoring receivables, which have a credit insurance policy attached ensuring limited maturity matches and mitigating
credit risk.
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Detailed Rating Considerations
Moody's rates Coface A2 for insurance financial strength, which is in line with the rating indicated by Moody's insurance financial
strength rating scorecard.
Insurance Financial Strength Ratings
Market Position and Distribution: A - STRONG FRANCHISE AS TOP TIER INSURER IN THE GLOBAL CREDIT INSURANCE MARKET
As the third largest global trade credit insurer by premiums (17% of 2014 global credit insurance premiums according to data compiled
by the International Credit Insurance & Surety Association, “ICISA”), Coface has a strong position in the global credit insurance market,
with a good global footprint, albeit orientated toward Europe.
Coface's distribution network is significantly reliant on brokers, in line with the commercial nature of credit insurance industry, which
to an extent limits the company's ability to control pricing. Nevertheless, direct sales are somewhat above peers (representing around
a third of premiums). In addition, Coface does manage to maintain strong and flexible market access, as evidenced by the various
partnerships concluded with smaller credit insurers in many parts of the globe, banks and multiline insurers.
In July, 2015 the French Government announced its intend to transfer administration of the government’s export guarantee scheme
from Coface to Banque publique d'investissement (Bpi France), with the transfer expected to be complete by the end of 2016, subject
to government decree. This business accounted for approximately 4% of Coface’s 2015 consolidated revenue, and approximately
17.5% of the group’s operating result. While the French Government has agreed to compensate Coface for the lost income – in an
amount the company estimates will compensate for approximately 2.2 years of lost income – it will likely be challenging to replace
the lost income over the next 2 years, particularly in the current, challenging economic environment. In addition, because this business
constitutes a meaningful source of fee income, upon transfer to Bpi, we expect a decrease in Coface’s diversification away from credit
insurance.
Notwithstanding Coface's strong position in the credit insurance market, we believe the group's overall franchise strength is somewhat
constrained by its limited diversification beyond credit insurance, an industry that we view as highly competitive and exposed to
economic cycles.
Product Risk and Diversification: A – STRONG SECTOR AND COUNTRY DIVERSIFICATION TOGETHER WITH SOME DIVERSIFICATION
BEYOND CREDIT INSURANCE
Consistent with its peers, Coface is primarily focused on credit insurance, with 80% of its 2015 premiums being sourced from credit
insurance, and the remaining 20% from non-credit insurance lines, including credit checking, debt collection and factoring services.
While still heavily dependent on credit insurance, Coface’s level of non-credit insurance business compares well against peers, although
this could deteriorate moderately following discontinuation of the French Government’s export guarantee business. As a specialist
credit insurer, Coface’s product risk focus is typically dependent on market-specific credit and economic dynamics.
The group's exposure is generally granular and well diversified by country and by sector, although its predominant focus is on Europe. In
2015, the group's largest country exposures were Germany (15.4%), France (10.1%) and the USA (9.1%). Additionally, Moody's believes
that the low average duration of Coface's policies as well as its dynamic management of exposure and good risk monitoring tools
enable the company to act quickly and to actively manage its exposure protecting its profitability through the cycle. The company's
dynamic management of the liability can be evidenced by the sustained good underwriting profitability despite the weak economic
environment (five-year average gross combined ratio 83% between 2011 and 2015) and the sharp turnaround in profitability in the
aftermath of the financial crisis in 2008.
Coface also offers factoring and low-risk fee-based services, such as company information and receivables management. Coface shrank
the size of the factoring refinancing programme, in order to reduce its reliance on funding from Natixis, its current shareholder, and to
focus on the most profitable contracts. Since then, the size of factoring refinancing and the revenues have been increasing modestly
and the company has secured alternate sources of funding to ensure that it is not reliant on Natixis, which plans to sell its remaining
stake in Coface by the end of 2017.
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FINANCIAL INSTITUTIONS
Asset quality: A - MEANINGFUL INVESTMENT RISK WITH SIGNIFICANT EXPOSURE TO LOWER QUALITY FIXED INCOME SECURITIES
We consider Coface's investment quality to be a key weakness in its credit profile, as Coface has increased its investment risk
significantly since 2013 by shifting part of its allocation of high-quality sovereign bonds to a more diversified but lower-quality fixed
income portfolio. The objective of this strategy is largely focused on increasing yield in the current low interest rate environment. While
Coface is diligent in its efforts to limit exposure to the same names on both the asset and liability sides of its business, we believe there
is meaningful correlation between its credit insurance liabilities and financial markets, which increases the risk associated with holding a
lower quality investment portfolio.
Coface manages its investment portfolio to maintain an average rating of A3, however, the portfolio contains an elevated level of Baa
and below-investment grade bonds presenting a higher risk than reflected by the average rating (the average measure does not capture
the non-linear increase in credit risk as positions migrate down a rating scale), although the company has stated some reduction in
1Q 2016. The ratio of high risk assets to shareholders' equity remained steady at 41.5% (2014: 41.3%), although it remains higher
than in years prior to 2014 (2013: 23%, 2012: 9%) and compared to credit insurance peers. The increase in high risk assets is mainly
due to increased allocation to non-investment grade bonds. The company's equity exposure consists of stocks broadly in line with the
Eurostoxx index and amounts to 8.7% of the total investment allocation at YE2015. In addition, the company has put options in place
on approximately 40% of its equity exposures as a hedge against volatility.
More positively, credit exposure to reinsurance companies is relatively low due to the high retention levels and the high quality of the
reinsurance panel. The level of intangibles significantly has remained low at 15% of shareholders' equity at YE2015. Liquidity is strong,
supporting Coface's P-1 short term IFS rating. Coface has good levels of quality liquid assets with relatively short liability profiles. Cash
and deposits make up a fair amount of the asset portfolio and equities and bonds held are sufficiently liquid.
Capital adequacy: A - GOOD CAPITALISATION BENEFITING FROM DYNAMIC LIABILITY MANAGEMENT BUT WITH INCREASING
INVESTMENT RISK LEVELS
We consider to group’s capitalisation to be good, with its economic/ regulatory capital levels supported by the company's dynamic
management of the exposure and good underwriting risk monitoring tools, which can mitigate the volatility of the liability profile
in an economic downturn scenario. Coface reported a Solvency II SCR of 147% on the standard formula at year end 2015, and the
company is going through the approval process with the regulator for its partial internal model. Moody's will monitor the volatility
of the economic capitalisation following the meaningful investment risk which, in Moody's opinion, would probably be correlated to
Coface's liability profile in an economic downturn scenario.
Total net exposure to Shareholders' Equity (Moody's calculations) improved to a 222x at YE 2015 from 244x in YE2014 mainly driven
by the company’s efforts to cut exposure in certain under-performing regions, including Latin America and Asia. Net Underwriting
Leverage remains low at 116% (YE 2014: 115%).
During 2015, Coface implemented a contingent equity line in the amount of EUR 100 million, with BNP Paribas Arbitrage B.V. as the
counterparty. While this facility is not reflected in our scorecard metrics, we view the company's ability to issue equity on breach of a
loss ratio or SCR trigger, as credit positive because it allows the company to secure Tier 1 equity capital in the event of a severe stress
when such capital is likely to be in short supply.
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MOODY'S INVESTORS SERVICE
Exhibit 3
Net Total Exposure and Net Total Exposure % Shareholders' Equity
* Estimated based on the reported gross total exposure and the premium retention rate
Source: Company reports and Moody's Investors Service
Profitability: A - GOOD PROFITABILITY ALTHOUGH SOME PRESSURE DUE TO SOFTER MARKET AND ELEVATED CLAIMS
We consider Coface’s profitability to be good on a through-the-cycle basis, although the deteriorating market environment is expected
to continue placing pressure on profitability. In addition, the business lost through the transfer of the French Government export
guarantee scheme accounts for a meaningful portion of the company’s operating result (approximately 17.5%), and will be difficult to
replace in the current environment. However, the company will receive a cash payment from the government as part of the transfer
agreement – Coface estimates that this payment (EUR 73.6 million before tax) will cover approximately 2.2 years-worth of lost
operating income.
At YE2015, net income was stable at EUR126 million (YE 2014: EUR125 million) with a reported combined ratio of 83% (2014 CoR:
79.7%). The increase in combined ratio during 2015 was mainly the result of higher claim frequency in the USA, Latin America and
China, which had been areas of growth for the company. While the company had taken steps to address these losses, Q1 2016 saw
further losses in the USA and China, which were a meaningful drag on profits. As premium growth remains flat in the company’s
traditional markets, Coface and its peers are seeking growth in new regions, however this growth is often accompanied by added risk.
Q12016 Net income was EUR 22.3 million (Q12015: 40.3 million) with a reported combined ratio of 87% (Q12015: 77.5%), the result
of lower revenues and higher claim costs.
Reserve Adequacy: Aa - CONSERVATIVE RESERVE POLICY WITH RESERVE RELEASES LIKELY TO CONTINUE
Although Coface has generally reported favourable reserve development, negative reserves development were reported in 2009,
due to the exceptionally high claims frequency experienced at the end of 2008 and the subsequent challenging assessment of IBNR.
Nonetheless, Coface has significantly increased its prudence in reserving after 2009, with reserve releases consistently exceeding 20%
of premiums.
Financial Flexibility: A - GOOD FINANCIAL LEVERAGE BUT SUBSTANTIAL OPERATIONAL DEBT AS PART OF REFINANCING OF
FACTORING BUSINES
Coface's financial flexibility remains good and the group's financial leverage has remained low in recent years. The group's financial
leverage remains moderate, at 21%, down from 22% at YE2014 (financial leverage excludes debt supporting the factoring business,
which we consider to be akin to operating debt). Leverage increased meaningfully in 2014 (up from 5% at YE2013) due to the
company’s issuance of EUR380 million of subordinated guaranteed notes in March 2014, intended to qualify as Tier 2 capital and the
EUR227 million share premium distribution to Natixis. The increase in leverage is fully consistent with the A rating. Earnings coverage
remains strong at 9x in line with the low financial leverage. Coface carries a significant amount of senior debt to support its factoring
business, that Moody's currently classifies as operating debt (YE 2015: EUR2,370million). Coface raised EUR1.2 billion through a
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FINANCIAL INSTITUTIONS
securitisation programme, initially launched in February 2012, which represented 50% of the factoring needs at YE 2015 (53% at YE
2014).
Other Considerations
Coface operates a meaningful factoring business, focused on the German and Polish markets. At YE15, net factoring receivables
amounted to approximately EUR 2.4 billion, and produced EUR70.6 million in revenue for the year. The factoring business exposes
Coface to liquidity risk not faced in its traditional credit insurance business, and the management of funding sources and maturity
matching is a key consideration.
Coface manages funding and liquidity risk in its factoring business through a diverse set of funding mechanisms, which include a EUR1.2
billion securitisation program, a EUR0.6 billion commercial paper program, up to approximately EUR0.9 billion in bilateral credit lines
with various banks and up to EUR0.6 billion of fully backed committed banking facilities for the CP programme.
The CP programme has a maturity of between one and six months, which is backed by receivables with a credit insurance policy
attached that ensures a modest maturity mismatch. Notwithstanding this, Moody's believes that substantial increases in CP
programme would probably pressurize the financial burden on the holding company.
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MOODY'S INVESTORS SERVICE
Rating Methodology and Scorecard Factors
Exhibit 4
Source: Company reports and Moody's Investors Service
Ratings
Exhibit 5
Category
COMPAGNIE FRANCAISE D'ASSURANCE POUR LE
COMM.
Rating Outlook
Insurance Financial Strength
ST Insurance Financial Strength
Moody's Rating
STA
A2
P-1
COFACE SA
Rating Outlook
Commercial Paper
LT Issuer Rating
STA
P-2
Baa2
Source: Moody's Investors Service
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FINANCIAL INSTITUTIONS
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