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Rating Action:

Moody’s assigns a Aa3 insurance financial strength rating to Covea Cooperations, stable outlook

 The document has been translated in other languages

27 May 2019

Paris , May 27, 2019 – Moody's Investors Service has today assigned a Aa3 insurance financial strength rating (IFSR) to Covea Cooperations, with a stable outlook.

Covea Cooperations is a reinsurance company, fully owned by several French mutual companies, MAAF Assurance and MAAF Santé, MMA IARD Assurances Mutuelles and MMA Vie Assurances Mutuelles, La Garantie Mutuelle des Fonctionnaires ("GMF") and Assurances Mutuelles de France, which, all together, founded the Covea group ("Covea"). Covea Cooperations also acts as the holding company for all Covea group's stock companies which generate more than 95% of the group's earned premiums. Covea Cooperations has therefore a pivotal role in the Covea group's structure and, as a consequence, Moody's rating on Covea Cooperations reflects the combined financial strength of the Covea group.

Covea is the leading French property and casualty (P&C) insurance group and ranks number four in the overall French insurance market. It reported gross earned premiums of €16.9 billion in 2018 and shareholders' equity of €15.2 billion as at year-end 2018.

RATINGS RATIONALE

The Aa3 IFSR on Covea Cooperations reflects primarily Covea's outstanding level of capitalisation, the group's leading position in the French P&C market and the strong recognition of its three main brands (MAAF, MMA and GMF). Other credit strengths of Covea include a relatively low product risk, good business diversification and good operating performance through the cycle. Conversely, a high exposure to equities, at around 10% of the group's investments, and a very high concentration to the French market, which represented almost 85% of premiums in 2018, are the main credit challenges for the group.

Covea's outstanding capitalisation is evidenced by the very high level of the group's Solvency II ratio, which reached 384% as at year-end 2018, which is much higher than the level reported by other Aa-rated insurance groups in Europe. In addition, Covea does not distribute dividends as a mutual group and as a consequence has continuously strengthened its capitalisation in recent years through retained earnings. Hence, between 2016 and 2018, the group's Solvency II ratio increased by 33 percentage points and the group's reported shareholders' equity increased from €13.5 billion to €15.2 billion.

Covea is the lead P&C insurance group in France and plans to diversify its business organically but also through acquisitions outside of France, which will likely alter the group's business and financial profile.

Moody's expects the organic diversification in the French market to be gradual and balanced, with a likely increased exposure to higher risky businesses, such as commercial insurance, partly counterbalanced by growth in less risky segments such as accident, health and protection insurance. Covea's strategy also focuses on maintaining its leadership position in the retail P&C market, notably through investments in digitalization. Therefore, the retail business (around 75% of the group's premiums generated in France in 2018) will remain a dominant part of Covea's business in France.

Outside France, Covea has expressed its interest in purchasing a reinsurance company. An acquisition could have a pronounced impact on Covea's credit profile. Depending on the size of the transaction, an acquisition of a global reinsurer would likely weaken the group's capitalisation, potentially increase the group's leverage if Covea decided to raise debts, and increase the group's risk profile. However, Moody's expects Covea to remain disciplined in its acquisition strategy and to maintain a very strong level of capital, both in absolute terms and relative to Aa-rated peers.

According to Moody's, Covea's main credit risk is its high exposure to equities. At year-end 2018, Covea held a direct equity portfolio and equities through mutual funds for a total of €9 billion. Covea's high risk asset ratio (high risk assets % shareholders' equity), which was below 100% as at year-end 2018, still compares favorably to that of many peers thanks to its elevated level of capital, but the high exposure to equity risk exposes Covea's Solvency II ratio and profits to some volatility.

Regarding Covea's profitability, the consolidated net income has remained within a range of €800 million to €1 billion over the last five years and volatility of return on capital has been low, in spite of elevated natural catastrophic claims during that period. Moody's expects Covea to continue to generate a good level of recurring earnings, mostly stemming from the group's life insurance business (21% of the group's profits before tax on average in the last five years) and from the financial result generated by the assets backing the group's non-life business (estimated at more than 50% of the group's profit before tax between 2014 and 2018). Covea's life business mostly comprises unit-linked and traditional products with very low guarantees and, therefore, the group's exposure to low interest rates risk is limited. Nonetheless, pressures from low interest rates will continue to lower the recurring return of the group's fixed income portfolio, which in turn may gradually reduce the contribution of the non-life financial result to the overall group results. Moody's adds that the group's non-life technical margin may be volatile by nature, although the good level of diversification of Covea's non-life business tends to limit the variation of the overall combined ratio. Covea's combined ratio for its French activities has fluctuated between 97% and 100% since 2013.

WHAT COULD CHANGE THE RATING UP / DOWN

Covea Cooperations' rating could be downgraded in case of (1) a material reduction in the group's capital, as evidenced by a Solvency II ratio below 260%, or (2) an increase in financial leverage above 30% and a decrease in earnings coverage below 7x, or (3) a reduction in profitability, as evidenced for example by a combined ratio sustainably above 100%, or a sustained increase in the volatility, or (4) a significant deterioration in its asset quality.

Conversely, positive pressure, although unlikely at this stage, could be exerted on the rating in case of a material and profitable diversification of the business outside of France, while maintaining outstanding capital levels (with a Solvency II ratio above 350%) and a very low financial leverage.

The methodologies used in this rating were Property and Casualty Insurers published in May 2018, and Life Insurers published in May 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

Benjamin Serra
Senior Vice President
Financial Institutions Group

Moody's France SAS
96 Boulevard Haussmann
Paris, 75008
France
JOURNALISTS : 44 20 7772 5456
Client Service : 44 20 7772 5454

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

Releasing Office :
Moody's France SAS
96 Boulevard Haussmann
Paris, 75008
France
JOURNALISTS : 44 20 7772 5456
Client Service : 44 20 7772 5454

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