Coface : Stable in all circumstances

As Coface’s management has acknowledged, 2016 was a difficult year. The group had to deal with a steep rise in risks in emerging countries, especially in Asia, and the transfer of its state export guarantees business to BPI France. The year was marked by two profit warnings in February and July, leading Coface to ditch the targets set at its IPO in 2014. To respond to these challenges and to implement a new strategic plan, a new CEO, Xavier Durand, was appointed in January 2016. - Despite this difficult year, the agencies confirmed the group’s ratings and, more surprisingly, the outlooks, displaying confidence in Coface’s recovery potential. Likewise, prices of the Tier 2 2024 notes were fairly stable, in line with those of AXA and Hannover re. Shrugging off one-off events, investors appreciate the 2024 bullet structure with an A- rating. At our credit breakfast with Coface, we are renewing coverage with a Neutral market recommendation on the 2024 paper. - >Support factors - - Coface’s positioning as one of the world’s leading credit insurers with a market share of 15%. Operators in this sector are protected by high entry barriers. What’s more, the penetration rate of credit insurance in the total volume of global trade receivables is just 5%, creating significant growth potential. This market grew by 5% annually between 2005 and 2009 and by 3% since then.- Its geographical positioning, with strong market shares in Germany and France, and positions in Europe, the US and emerging countries. - Solvency is solid, reflected in a Solvency II margin of 150% using the standard method. Above all, the SCR has a small market component and is thus less sensitive than that of other insurers. Lastly, to improve its coverage, Coface is counting on an increase in cessions in reinsurance, reducing capital needs. It has also arranged a € 100m, three-year contingent capital facility in case of certain extreme events and is working on a shift to a partial internal model.- The management change necessary for the recovery was made in 2016 and a new strategic plan for 2016-2018 was launched with the objective of boosting profitability by lowering costs and strengthening analysis in emerging countries. Points to watch - - Credit insurance is closely correlated to business activity and hence to macroeconomic trends. In mature countries, premiums are falling. Coface expects the economic environment to remain volatile and uncertain in 2017; with soft growth in advanced countries and a recovery in emerging countries.- High losses in recent years in Latin America and Asia, where GDP growth has fallen short of expectations. The first measures were taken in Latin America in 2014 and in late 2015 in Asia. Their full effect is expected to be felt two years later, i.e. from this year in Latin America (where loss ratios began to improve in Q1) and from 2018 in Asia.- A change of ownership structure in the short-to-medium term. Natixis has held a 41% stake since Coface was relisted in 2014 and has never hidden its intention to sell its minority stake. This was initially scheduled by the end of 2017 but may take more time given that the current share price (around € 7) is well below the IPO price of € 10.4 in 2014.