Credit Opinion: Compagnie Française d'assurance pour le Commerce

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1 Credit Opinion: Compagnie Française d'assurance pour le Commerce Global Credit Research - 13 Oct 2015 Paris, France Ratings Category Moody's Rating Rating Outlook STA Insurance Financial Strength A2 ST Insurance Financial Strength P-1 Coface SA Rating Outlook STA Commercial Paper P-2 LT Issuer Rating Baa2 Contacts Analyst Phone Laura Perez Martinez/London Antonello Aquino/London Key Indicators Compagnie Française d'assurance pour le Commerce[1] As Reported (Euro Millions) Gross premiums written (EUR Millions) 1,243 1,207 1,258 1,245 1,153 Net premiums written (EUR Millions) Net income as reported (EUR Millions) Shareholders' Equity (EUR Millions) 1,724 1,793 1,776 1,647 1,396 Moody's Adjusted Ratios High Risk Assets % Shareholders' Equity 41.3% 22.6% 8.9% 7.4% 16.6% Reinsurance Recoverables % Shareholders' Equity 19.2% 19.5% 20.0% 23.3% 23.0% Goodwill & Intangibles % Shareholders' Equity 16.0% 15.7% 16.5% 17.7% 23.8% Total Exposure % Shareholders' Equity [2] 243.9x 192.2x 187.2x 199.7x 210.9x Net Underwriting Leverage [2] 1.2x 1.0x 1.0x 1.1x 1.2x Combined ratio, gross [2] 80.9% 83.9% 82.7% 82.9% 84.4% Sharpe Ratio on Return on Capital (5 yr. avg) 393.7% NA NA NA NA Financial Leverage 22.1% 5.3% 5.3% 4.7% 17.6% Earnings cover - 1yr 11.1x 30.8x 32.1x 16.5x 14.4x [1] Information based on IFRS financial statements [2] Moody's calculations Opinion SUMMARY RATING 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)

2 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 IFSR does not incorporate any potential support from Natixis. Last June, Coface partially IPO 59% of its capital on Euronext stock exchange. The IPO consolidates a further important step in Coface's trajectory to become more autonomous from Natixis. Although Natixis remains Coface's largest shareholder at 41%, Natixis had announced its intention to dispose gradually its stake in Coface until 2017 as part of its strategic plan. Credit Strengths - Third largest in global credit insurance market and leading positions in key European credit insurance markets - Dynamic management of exposure and effective underwriting risk monitoring tools Credit Challenges - Significant investment risk with a high exposure to lower quality fixed income, which can lead to higher levels of volatility in economic capitalisation through the cycle - Limited diversification from credit insurance, albeit in line with peers - Highly competitive environment in the credit insurance market as a whole - Underwriting discipline in an environment of growing competition in a subdued economic environment Rating Outlook The outlook on Coface's ratings is stable. What to Watch For: - Significant deterioration in investment portfolio either through increase in higher-risk assets (such as shares, property) or through a significant deterioration in fixed income quality with a substantial increase in the exposure to Baa and non-investment grade bonds - Evolution of underwriting profitability What Could Change the Rating - Up 1. 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; 2. A material improvement in market share without deteriorating its profitability and quality of exposure; 3. A significant improvement in the company's economic capitalisation with reduced level of investment risk What Could Change the Rating - Down 1. Significant deterioration in the investment portfolio with (a) 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 (c) further substantial increase in the exposure to Baa and non-investment grade bonds; 2. A deterioration in underwriting profitability with a combined ratio through the cycle consistently exceeding 95%; 2. A significant deterioration in the economic capital with a Solvency II ratio consistently below 130% and/or considerable volatility in stressed scenarios; 3. Financial leverage exceeding 30% or a significant increase in the company's operational debt. Notching Considerations The Baa1(hyb) rating assigned to the subordinated notes reflects the fact that the notes are unconditionally and irrevocably guaranteed by Coface (operating company) on a subordinated basis and reflects standard notching (vs. the guarantor's insurance financial strength rating) for subordinated debt that lacks a mandatory trigger we consider to be "meaningful".

3 The subordinated notes are intended to 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. If Coface is not permitted under the final Solvency II rules to treat the subordinated notes as Tier 2 capital, the issuer has the option to redeem the notes in whole but not in part. The P-2 rating reflects the holding's strong liquidity sources, namely backing the full size CP programme by committed multi-bank 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 is used to refinance part of the factoring receivables (EURm) thereby reducing Coface's current reliance on Natixis in funding such business. the commercial paper has a maturity of 3 months and is backed by factoring receivables, which have a credit insurance policy attached ensuring limited maturity matches and mitigating credit risk. 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. Market Position and Distribution: A - STRONG MARKET POSITION AS ONE OF THE LARGEST CREDIT INSURERS GLOBALLY Coface is one of the largest credit insurer in the world with a global market share of around 17% at YE2014 (Moody's calculations based on ICISA's industry data). 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 Coface has been provided a key role as manager of the French Government Export Guarantee Scheme, but this will likely cease during in 2016 following the decision of the French Government to transfer the management of the guarantee scheme to Banque publique d'investissement.this scheme represented 4% of the group's revenues. 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 a strong and flexible access, as evidenced by the various partnerships concluded with smaller credit insurers in many parts of the globe, banks and multiline insurers. Therefore, Coface's Market Position and Distribution is in line with an A-rating. Product Risk and Diversification: A - LIMITED BUSINESS DIVERSIFICATION FROM CREDIT INSURANCE, PARTIALLY MITIGATED BY DYNAMIC MANAGEMENT OF EXPOSURE AND GOOD RISK MONITORING TOOLS Moody's views product risk and diversification as good driven by Coface's diversification and granularity of the portfolio together with its dynamic management of exposure and effective underwriting risk monitoring tools. Coface's business diversification is similar to its peers with most of the business sourced from credit insurance revenues, which limits the group's diversification by business line (YE 2014: 79% credit insurance revenues excluding checking fees). Credit insurance is inherently a cyclical industry, vulnerable to sharp changes in economic environment. After the discontinuation of French State government scheme, the concentration in credit insurance will increase to about a pro-forma 84% of revenues, albeit it is broadly similar to that of peers. In July, 2015 the French Government announced it will transfer the state public guarantee business from Coface to Banque publique d'investissement. Moody's views the transfer of French public state business as a credit negative for Coface as it provided the insurer with a low-risk fee revenue, nevertheless we note this business represented only around 5% of revenues and 6% of profits at year-end At the same time, the transfer will generate a meaningful level of increased fixed costs (see profitability discussion). 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 (down by 37% at year-end 2012), 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. Factoring revenues increased by 2% and 5% at year-end 2014 and first-half 2015 respectively.

4 Within the credit insurance business, Coface's portfolio is well diversified and granular with Germany (15% of exposure) and France (10% of exposure) being the largest and second largest country by exposure at year-end 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 85% between 2010 and 2014) and the sharp turnaround in profitability in the aftermath of the financial crisis in Asset quality: A - MEANINGFUL INVESTMENT RISK WITH SIGNIFICANT EXPOSURE TO LOWER QUALITY FIXED INCOME 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 H respectively. High risk asset ratio as % of shareholders' equity increased to 41% at YE2014 from 23% at YE2013 (and 9% at YE2012), due to increase in non-investment grade bonds (EUR347 million or 20% of Shareholders' Equity) and equities (EUR 310 million or 18% of Shareholders' Equity). 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 16% in 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 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. Total net exposure to Shareholders' Equity (Moody's calculations) increased to a still good 244x at YE 2014 from 192x in YE2013 mainly driven by a 20% increase in exposure. Net Underwriting Leverage remains low at 115% (YE 2013: 102%). Profitability: A - UNDERWRITING PROFITABILITY CAN BE UNDER SOME PRESSURES FOLLOWING INCREASED EXPENSES Moody's views Coface s profitability through the cycle as good supported by the group's dynamic management of liability. Our view of profitability is supported by the company's dynamic management of the exposure and the prudent reserving policy ( consistently above 20% of premiums since 2009). Nevertheless, we believe Coface's underlying profitability can be under some pressure as a result of the transfer of the French State guarantee business, the economic slowdown in emerging markets and the pressure on rates in Europe. Net income declined 4% to EUR66 million compared to H due to a deterioration in underwriting profitability. The net combined ratio declined to a still good 82% in H from 79% in H The increase was driven by a deterioration in the expense ratio with increased acquisition costs and a deterioration in the loss ratio as a result of the slowdown in emerging markets. Coface' underwriting profitability can be more affected by the slowdown in emerging markets than peers due to its relatively larger exposure ( Asia Pacific and Latin America represented around 22% of the group's exposure at year-end 2014).

5 Although the French state public guarantee business only represented 6% of profits on its own, 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 proforma 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. Furthermore, Coface and credit insurers are facing increasing pressure on rates in Europe given the low loss ratios reported in recent years. The pressure on rates and the subdue economic outlook that will likely weigh on turnover will like put some pressure on underlying profitability. At YE2014, net income was stable at EUR125 million at YE 2014 (YE 2013: EUR127 million). The underwriting profitability continued to be strong with a gross combined ratio of 81% (Moody's calculation, YE 2013: 84%), with an improvement in the gross loss ratio to 52% (YE 2013: 54%). Sharpe ratio on return on capital for the last five years improved significantly to 428% across the cycle. However, the sharpe ratio from remains low at 51% reflecting the intrinsic volatility in the credit insurance industry. Reserve Adequacy: Aa - CONSERVATIVE RESERVE POLICY-STRONG 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 has increased to a still low 22% at YE2014 from 5% at YE This mainly reflects the issuance of EUR380 million of subordinated guaranteed notes in March 2014, intended to qualify as Tier 2 capital and the EUR220million share premium distribution to Natixis. The increase in leverage is fully consistent with the A rating. Earnings coverage remains strong at 11x 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 2014: EUR2,218million). Coface raised EUR1.2 billion through a securitisation programme, initially launched in February 2012, which represented 53% of the factoring needs at YE 2014 (49% at YE 2013). In addition, Coface's holding company extended the CP programme to EUR500 million programme in October 2013, which more recently increased to EUR600 million. Coface has fully backed committed banking facilities for the total size of the CP programme with several banks. The CP programme has a maturity of 3 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. Coface's total leverage (including operational debt) stood at 36% at year-end 2014 and will likely increase to 39% following the increased CP issuance. Rating Factors Compagnie Française d'assurance pour le Commerce[1] Financial Strength Rating Scorecard [1] Aaa Aa A Baa Ba B Caa Score [2]Adjusted Score Business Profile A A Market Position, Brand and Distribution (10%) A A

6 Market Position, Brand and Distribution (10%) A A Market Share X Distribution and Access to New Markets X Product Risk and Diversification (20%) A A Business Diversification X Flexibility of Underwriting X Risk Diversification X Financial Profile A A Asset Quality (15%) Aa A High Risk Assets % Shareholders' Equity 41.3% Reinsurance Recoverables % Shareholders' 19.2% Equity Goodwill & Intangibles % Shareholders' 16.0% Equity Capital Adequacy (20%) Aa A Net Total Exposure % Shareholders' Equity 243.9x Net Underwriting Leverage 1.2x Profitability (20%) Aa A Combined Ratio (5 yr. avg) 83.0% Sharpe Ratio of Return On Capital (5 yr. avg) 393% Reserve Adequacy (5%) Caa Aa Worst Reserve Development (last 10 years, X % of Initial Reserves) Financial Flexibility (10%) Aa A Financial Leverage 22.1% Earnings Coverage (5 yr. avg) 21.0x Operating Environment (0%) Aaa-A Aaa-A Aggregate Profile A1 A2 [1] Information based on IFRS financial statements [2] The Scorecard rating is an important component of the company's published rating, reflecting the stand-alone financial strength before other considerations (discussed above) are incorporated into the analysis 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 for the most updated credit rating action information and rating history Moody s Corporation, Moody s Investors Service, Inc., Moody s Analytics, Inc. and/or their licensors and affiliates (collectively, MOODY S ). All rights reserved. CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND ITS RATINGS AFFILIATES ( MIS ) ARE MOODY S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY S ( MOODY S PUBLICATIONS ) MAY INCLUDE MOODY S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE

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