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Rating Action:

Moody's affirms the A2 IFSR of Coface with a stable outlook

08 Oct 2015

London, 08 October 2015 -- Moody's Investors Service has affirmed the A2 insurance financial strength rating (IFSR) of Compagnie Francaise d'Assurance pour le Commerce Exterieur SA ("Coface") and the associated Baa1(hyb) guaranteed subordinated debt rating. All ratings carry a stable outlook.

A list of all ratings affected by this rating action is available at the end of the press release.

RATINGS RATIONALE

Moody's A2 IFSR of Coface reflects (i) the group's good 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 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 IFSR does not incorporate any potential support from Natixis (senior debt A2 stable, adjusted baseline credit assessment baa2). Coface launched a partial IPO (59%) of its capital on the Euronext stock exchange in 2014. Although Natixis remains Coface's largest shareholder at 41%, Natixis had announced its intention to dispose gradually its stake in Coface by 2017.

Coface has a good market share in the global credit insurance industry being the third largest credit insurer with an estimated market share of 17% at YE2014 (Moody's calculations based on ICISA's industry data), after Euler Hermes SA (IFSR Aa3, stable) with an estimated 33% market share, and Atradius Credit Insurance NV (IFSR: A3, stable) with an estimated 22% market share. The group has a good geographic footprint globally, albeit it is predominantly oriented to Europe which still represents over 70% of revenues in the first half of 2015.

Moody's believes that Coface has a good track record in taking actions to mitigate risk arising in a deteriorating environment in order to protect its underwriting profitability and capitalisation. 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 85% between 2010 and 2014) and the sharp turnaround in profitability in the aftermath of the financial crisis in 2008. Our view of Coface's underwriting profitability is also supported by its conservative reserving policy. Coface significantly increased its prudence in reserving after 2009, with reserve releases consistently exceeding 20% of premiums.

Moody's views Coface's economic capitalisation as good. Moody's believes that Coface's economic capitalisation is 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's reported economic capital ratio was stable at 144% as at YE14 with a good quality of capital (financial leverage low at 22% as at YE14). Under Solvency II 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.

Coface's investment quality is the main credit weakness in the rating agency's view. Coface has significantly increased its investment risk since 2013 by shifting part of its high-quality sovereign bonds to a more diversified but lower-quality fixed income portfolio with an aim to increase its yield . Coface manages its investment portfolio to have an average rating of A3. Moody's believes that the company's exposure to non-investment grade bonds and Baa bonds has remained elevated in recent years with 18% and 33% of the total fixed income securities as at H1 2015 respectively.

Coface has a limited diversification from credit insurance, a cyclical and competitive industry that can be vulnerable to sharp deteriorations in economic environment. Coface's reliance on credit insurance revenues will increase by 5 percentage points to a pro-forma 84% of revenues at year-end 2014 following the decision of the French Government to transfer the state public guarantee business from Coface to Banque publique d'investissement (unrated) . This business provided the insurer with a low-risk fee revenue, albeit represented only around 5% of revenues and 6% of profits at year-end 2014. Nevertheless, the impact on profitability will be more meaningful due to di-synergies from the transfer of this business absent any subsequent management actions on costs (reported return on tangible equity will decline by 1.4 percentage points to a pro-forma 7% at year-end 2014). At the same time, Coface will receive a cash payment of EUR77.2 million (net of EUR12.5million of transferred liabilities) from the government, which is equivalent to over two years of future reduction in profits following the transfer and can enable the company to implement cost savings actions.

WHAT CAN CHANGE THE RATING UP/DOWN

Moody's says that there is limited upside potential on the A2 ratings of Coface given the stable outlook. Nevertheless upward pressure on the rating could result from: (i) a significant improvement in the company's business diversification with credit insurance revenues falling below 60% of premiums without increasing the company's liability risk; and/or (ii) a material improvement in market share without deteriorating its profitability and quality of exposure; and/or (iii) a significant improvement in the company's economic capitalisation with reduced level of investment risk.

Downward pressure could develop if (i) the investment quality further weakens with (a) high-risk asset ratio exceeding 75% of shareholder's equity or (b) the quality of the fixed income portfolio deteriorates with average rating of the portfolio falling below A3 or (c) further substantial increase in the exposure to Baa and non-investment grade bonds; (ii) a deterioration in underwriting with a combined ratio through the cycle consistently exceeding 95%; (iii) a significant deterioration in the economic capital with a Solvency II ratio consistently below 130% and/or considerable volatility in stressed scenarios; and (iv) financial leverage exceeding 30% or a significant increase in the company's operational debt.

LIST OF AFFECTED RATINGS

The following ratings were affirmed with stable outlook:

Issuer: Compagnie Francaise d'Assurance pour le Commerce Exterieur SA

-A2 long-term IFSR

-P-1 short-term IFSR

Issuer: Coface SA

-Baa2 long-term issuer rating

-Baa1(hyb) backed subordinated debt rating

-P-2 commercial paper

The principal methodology used in these ratings was Global Trade Credit Insurers published in October 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Laura Perez Martinez
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Antonello Aquino
Associate Managing Director
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's affirms the A2 IFSR of Coface with a stable outlook
No Related Data.
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