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 RATING CONSIDERATIONS
CEGC’s ratings reflect the Company’s well-established franchise in the home loan guarantees market in France. CEGC is the second-largest player by market share and also benefits from the extensive distribution network of Groupe BPCE, its parent group. Additional revenue diversification is provided by CEGC's activity in other business lines including sureties and guarantees for professionals, small and medium-size enterprises, and large corporates.

The Company's risk profile is sound, reflecting the historically low credit risk of home lending in France, reinforced by CEGC's stringent underwriting practices, the strong track record of asset quality in its underlying guaranteed home loans portfolio, and its ability to use reinsurance to mitigate large losses. The Company’s investment management strategy is conservative with an increasing asset allocation of very high-rated fixed income securities. CEGC has a track record of sustained robust profitability, supported by growing business volumes and profitable underwriting. DBRS Morningstar notes that the potential slowdown of home lending growth in the French market due to rising interest rates and the deteriorating economic outlook could affect profitability.

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 Company has substantially strengthened its solvency capital levels in recent years following a combination of lower dividend payouts and the issuance of subordinated debt to the parent.

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

A deterioration in the quality of CEGC’s home loan guarantees portfolio leading to a decline in underwriting profitability and/or regulatory solvency levels would negatively pressure ratings. A further material increase in financial leverage would also likely lead to a rating downgrade.

RATING RATIONALE
CEGC has developed a well-entrenched 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 2021. Home loan guarantees are the Company's primary product, accounting for 81% of total gross written premiums in 2021. In addition to home loan guarantees, CEGC also provides professional loan guarantees and guarantees to social housing, home builders, real estate development, property administration, and corporates, which contribute to some revenue diversification. CEGC benefits from the extensive distribution network of the Banques Populaires (BP) and Caisses d'Epargne (CE), which are the owners of Groupe BPCE, one of France’s largest banking groups. In 2021, 87% of total gross written premiums were generated through the group network.

CEGC's risk profile mostly reflects the credit risk embedded in its home loan guarantees portfolio, which totalled EUR 216.5 billion at end-2021 (EUR 195 billion at end-2020). The Company’s risk profile continues to benefit from the French home lending sector's generally conservative underwriting standards, in DBRS Morningstar’s view. In France, the vast majority of home loans are granted on a fixed interest basis for the whole duration of the loan. CEGC's guaranteed underlying home loans are 100% fixed rate, which eliminates the risk from increasing interest rates. The share of doubtful loans in the home loans guaranteed portfolio totalled 0.3% at end-2021, stable compared with the previous year and well below the domestic home lending sector average of 1.1% at end-2021. The Company continued to demonstrate high efficiency in its recovery framework as illustrated by an average cumulative recovery rate of 78%. 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 to 38% at end-H1 2022, compared with 29% at end-2021 and 25% at end-2020.

CEGC’s profitability has been historically robust supported by sustained origination volumes and low claims in the home loan guarantees portfolio. The Company continued to report a strong return on equity in 2021 (13.7%), albeit down from 15.3% in 2020. Revenue generation has been strong in recent years, benefitting from increasing home lending volumes in the French market and a high level of penetration within the BPCE network. However, in DBRS Morningstar’s view, rising interest rates and the slowdown of economic activity might have a negative impact on lending growth in France going forward and ultimately affect CEGC's revenue generation. CEGC's combined ratio remained strong at 67% in 2021 (versus 74% in 2020), supported by low default ratios and sustained improvement in 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. Nonliquid investments, including real estate and bonds below investment grade, have generally remained stable in recent years, totalling a low 6.2% of the total investment portfolio at end-H1 2022. 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 1.9 billion at end-2021 (versus EUR 1.6 billion at end-2020) at a stable price. As a result of a combination of lower dividend payouts and capital injections from the parent, solvency capital requirement (SCR) eligible own funds increased to EUR 1,523 million at end-2021 (versus EUR 1,292 million at end-2020), resulting in a significant strengthening of the SCR ratio to 156% at end-2021 (versus 142% at end-2020). The leverage ratio has decreased slightly to approximately 43% at end-H1 2022, down from the 45.2% level at end-2020. Ownership by BPCE should provide CEGC with some dividend flexibility in times of stress.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/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 at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

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; Liquidity – Strong/Good; Capitalisation – Strong/Good.

DBRS Morningstar notes that this press release was amended on October 20, 2022, to incorporate the link to the sensitivity analysis.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology is the Global Methodology for Rating Insurance Companies and Insurance Organizations (August 31, 2022; https://www.dbrsmorningstar.com/research/402220). 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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022) in its consideration of ESG factors.

The sources of information used for this rating include Rapport Régulier au Contrôleur 2021, Rapport sur la solvabilité et la situation financière 2021, Rapport de Gestion Exercice 2021, CEGC Examen et arrêté des comptes de l’exercice clos le 31 décembre 2021, CEGC Rapport Actuariel 2022 Provisions Techniques, and H1 2022 financial statements and Company Presentation. 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.

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 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://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/404139

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

Lead Analyst: Marcos Alvarez, Senior Vice President, Head of Insurance, Global FIG
Rating Committee Chair: Ross Abercromby, Managing Director, Global FIG
Initial Rating Date: February 21, 2019
Last Rating Date: October 21, 2021

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