Euler Hermes reports credit rates down but promises to stand firm

The credit insurer did note, however, that results may come under pressure soon as underlying volumes stagnate and increased competition among insurers begins to deliver rate cuts for customers, most notably in the big German trade credit insurance market. Insurance managers in southern Europe are not enjoying the same level of decreases, stated the insurer. Euler Hermes has a gloomier outlook for the near future, expecting insolvencies to rise again and despite reporting the rate decreases vows to stand firm in pricing and said that it has already introduced ‘restrictive measures’ in some riskier territories and sectors. The news from Euler Hermes followed the publication of a survey of just under 5,400 customers worldwide carried out by rival Atradius that found that payment delays and payment defaults continue to be a ‘major issue’ for businesses around the world. According to the Atradius Payment Practices Barometer, on average 3% of the total value of business to business accounts receivables was defaulted on and 30% of invoices were paid late, of which 12% were extended beyond two months overdue.hideDespite this backdrop, however, Euler Hermes reported a decent set of results for the first nine months of this year. It reported a healthy increase in turnover for the nine months, up 8% compared with the same period last year to just over €1.7bn. The group said that gross earned premiums were up 9.1% against last year, ‘thanks to a good insured turnover volume in the first semester and a dynamic net new production as economic uncertainty is making credit insurance even more attractive’. And Euler Hermes still managed a net combined ratio of 66.5% at the end of September against 68.9% for the same period last year. This helped deliver a net profit of €276m, compared to €255.8m for the first nine months of last year. Credit insurers are not the most popular of insurers with customers as they tend to pull coverage and raise rates just when the coverage is needed, faster than most other insurers, a tendency that was again confirmed following the credit crisis in 2008. But according to Wilfried Verstraete, Chairman of the Euler Hermes Board of Management, the insurers’ decent results come as a result of a customer-first strategy. Also, the insurer pointed out that rates in Europe have generally fallen this year from their post-credit crunch high. “Our strategy to put our customers at the centre of our business development shows results. We have focused our commercial efforts on providing our policyholders with the best possible risk coverage. The difficulties Europe faces to solve the intertwined debt and banking crisis in the Eurozone force close monitoring of the economic and financial situation. We have reshaped our group, ensuring that it is in the strongest position to face a further economic downturn,” he said. Europe, which remains Euler Hermes’ core market, still experienced what is described as ‘solid’ growth despite the rate decreases the credit insurer granted early this year, expected to be at 5.5% of total portfolio by year end. “The relatively lower performance in Germany is due to a slow commercial start early in 2011 and to a pressure from competitors on rates, which were not completely compensated by the positive evolution in the insured turnover volume,” stated the group. “The good performance in the Mediterranean region is due to dynamic insured turnover combined with relatively low rate decreases. The increase towards last year is also due to negative premium run-offs posted in 2010 linked to 2009 turnover adjustments. Growth in the region is done at high rates to preserve profitability,” it added. The group’s net technical result reached €391m compared with €358.6m for the same period last year. The main driver of the increase was the lower combined ratio, down by 2.4%. The claims ratio for the 2011 attachment year is slightly lower than last year (62.2% against 62.6%), stated Euler Hermes. But it added that the contribution of positive run-offs in the total claims ratio is lower so that the ratio for all attachment years stands at 42.1% compared to 40.8% last year. “The claims ratio is still very low, although the number and amount of claims increased after having reached a bottom in the third quarter 2010. However, both the number and amount of claims are still significantly lower than pre-crisis levels,” explained Euler Hermes. Despite what it reported earlier about competitive pressures on rates, especially in Germany, Euler Hermes says that it will stand firm on pricing and has already taken the first ‘restrictive’ measures to prepare for a further sudden downturn. “To keep the claims ratio low, the group stands firm on pricing and has made its risk governance more effective: all warning signals are in place in case of sudden economic deterioration, first restrictive measures have been taken in risky countries and sectors,” said the insurer. At end September 2011, the market value of the group's investment was up €99m from the end of year 2010 level, at over €3.8bn, mainly because of net cash inflows, it stated. The group said that it maintains a ‘very conservative’ financial strategy with ‘limited’ investments on the stock market and with 93% of its bond investments in AAA/AA rated issuers. It said that this focus on ‘quality’ issuers had enabled its bond portfolio to increase in value since the beginning of the year. “The exposure to the riskiest European economies is very limited (at the end of September, €39m to Italy and €2m to Greece),” stated Euler Hermes. Looking forward, Euler Hermes said that it expects delayed consumption of key durable goods for households and postponed ‘critical productive investments’ for companies. At the same time, the global level of country risk is deteriorating. “In this context, corporate insolvencies will stop decelerating and may even increase in some countries,” it said. But Euler Hermes maintained its 2011 target of a 5–6% gross earned premium growth and a net combined ratio in the ‘low seventies’, provided no exceptional high loss occurs. “The group is indeed well prepared for future challenges thanks to its strong capitalisation and the quality of its portfolio. In addition, the customer centricity initiative launched in the framework of project Excellence will be key to identify promptly warning signals and to preserve the group’s strong franchise with its clients in this uncertain period,” it added. The Atradius survey interviewed 5,399 businesses across 27 countries and sovereign states in Europe, North America and Asia-Pacific. Southern European countries which it stated, on average, extend longer payment terms, reported the worst problems with late payments from domestic business to business customers. Perhaps not surprisingly the insurer reported that 54% of Greek, 43% of Italian and 39% of Spanish domestic invoices were more than a month overdue while the overall survey average was 30%. Some 18%, 10%, and 7% respectively were more than 3 months overdue against an overall survey average of 6%. In the Asia-Pacific region, 14% of Indonesian domestic business to business invoices were reported to be more than 3 months overdue. Insufficient availability of funds was cited as the prime reason for payment delays from business customers with some 66% of respondents reporting it as the prime reason for domestic payment delays and 46% for foreign payment delays. To cut payment delays and payment defaults, about 30% of the survey respondents increased their active credit management by more frequently checking buyer creditworthiness, issuing dunning (payment reminders), or monitoring their buyers’ credit risk. But usage of outsourced collections and credit insurance increased at a slower pace with about 15% of respondents reporting that they had increased their usage, stated the insurer. Isidoro Unda, Chairman and CEO of Atradius, stated, “2010 has shown some improvement, but economic conditions in some markets continue to be precarious and insolvencies are again increasing. The survey results highlight the need for continued diligence in monitoring and managing trade credit risks. While many companies are taking prudent actions to improve the payment performance of their customers, more can be done to improve reimbursement rates when payments are defaulted on.”

Euler Hermes reports credit rates down but promises to stand firm

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