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Fitch Ratings : Coface ratings affirmed

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Fitch Ratings has affirmed the Coface group’s major insurance entity, Coface S.A.’s Insurer Financial Strength (IFS) rating at ‘AA-‘. The agency has also affirmed Coface S.A.’s Long-term Issuer Default Rating (IDR) at ‘A+’. The Outlooks on all ratings are Stable. Coface S.A.’s Short-term IFS rating has also been affirmed at ‘F1+’. Coface Holding S.A.S’s Long-term IDR of ‘A’ and Short-term IDR of ‘F1’ have also been affirmed.

The affirmations reflect Coface’s strong worldwide franchise, its high capital levels with shareholder funds totalling EUR1.5bn at end-2011 and its solid underwriting performance as reflected in Fitch’s calculated net combined ratio at 89% in 2011, improving to 83% in H112. Coface reported a EUR68m net profit in H112 increasing by 7% yoy (2011: EUR74m).

The Stable Outlooks indicate the agency’s expectations that Coface will uphold its current capital position and withstand the expected increasing corporate insolvencies as a result of conservative underwriting measures, implemented to limit its risk exposure since mid-2011, in anticipation of increasing insolvencies in light of a weakened macroeconomic environment.

Coface’s decision to convert three of its European subsidiaries into branches to improve capital fungibility within the group led to the ratings’ withdrawal of: Coface Kreditversicherung AG including its holding company Coface Deutschland, in Germany; Coface Assicurazioni Spa in Italy; and Coface Austria Kreditversicherung AG in Austria. Fitch continues to factor the performance of these three newly converted branches into Coface S.A.’s ratings.

Coface’s total financing and commitments ratio – a comprehensive measure of debt-related leverage – fell to 1.9x in H112 from 2.4x in 2011 (2010: 3.3x). Although this indicator remains high according to Fitch’s insurance rating guidelines, most of the debt is operating debt used to support the group’s factoring operations, and is therefore excluded from Fitch’s calculation of Coface’s financial leverage, which is commensurate with the rating level, at just 1% at end-H112. Moreover, the agency considers Coface’s financial flexibility to be strong, with access to external financing demonstrated by the company’s recent EUR250m commercial paper issuance.

Fitch views Coface’s strategic importance to its parent company, Natixis (IDR: ‘A+’/Negative), as limited. Given Natixis’ weaker financial profile, Fitch believes that the ability of Natixis to provide support to Coface would be constrained. Overall, Fitch views Natixis’ ownership of Coface as a neutral to Coface’s ratings.

Although unlikely in the medium term, factors that could trigger a rating upgrade include a new and financially stronger shareholding structure in which Coface’s strategic importance to Natixis increases at the same time as the group’s standalone financial profile remains strong.

The ratings could be downgraded if Natixis’ credit quality deteriorates to the extent that capital is extracted from Coface to support Natixis. The ratings could also be downgraded if Coface’s standalone profile deteriorates as a result of increased insolvencies leading to a combined ratio above 100% for a prolonged period and a material fall from current capital levels.

Coface is the third-largest international credit insurer, with an estimated 25% global market share and gross written premiums of EUR1.4bn at end-2011. The group’s competitive advantages are its strong franchise, consistent strategy and IT systems that facilitate streamlined underwriting under strict guidelines. Coface has a solid standing in the complementary businesses of credit information, factoring and debt collection.