Leading trade credit insurers face higher claims but remain resilient, says Moody’s

Moody’s Investors Service has said the three leading trade credit insurers will remain resilient in 2020, despite a coronavirus-related drop in revenue and rise in claims.

The ratings agency said that Atradius, Coface and Euler Hermes have been helped by wide economic stimulus from governments as well as direct support, but will face higher claims in the months ahead as deteriorating economic conditions push up corporate insolvencies, leading to an increase in non-payment.

Moody’s said credit insurers’ strong capitalisation, moderate investment risk appetite and ability to rapidly cut their exposure will also help them absorb the coronavirus-related shock. However, it warned that a prolonged global downturn would put greater strain on the sector’s credit quality in 2021.

A decline in trade volumes will reduce demand for trade credit insurance, pushing down the industry’s premium income in H2 2020 and possibly in 2021. The industry’s customers will likely also pay lower premiums, as these are based on policyholders’ own revenues, said Moody’s. “There may be some counterbalancing uplift as increased risk aversion encourages some new buying of trade credit cover, while credit insurers are increasing their tariffs, but we expect that premiums will still decline overall,” it added.

According to Moody’s, the credit insurance sector has two particular characteristics that make it vulnerable to stressed economic conditions. Firstly, it is highly exposed to small and medium-sized enterprises, which operate on thinner margins than larger corporates and are therefore more likely to face financial difficulties. Secondly, the three leading credit insurers have high operating leverage, which makes them vulnerable in the event of larger-than-expected losses.

The EMEA region accounts for about three quarters of the trade credit insurers’ total exposure, explained Moody’s. It said Atradius has greater reliance on lower-rated countries in southern and eastern Europe than its two peers. These collectively account for about 30% of the company’s total exposure, approximately double the figure for Coface and Euler Hermes, and Atradius has significant exposure to Spain, whose economy has been significantly hit by the crisis.

Coface has the highest exposure to Latin America (4.3%), although this has been reduced in recent years, while Atradius has the biggest footprint in the Asia-Pacific region (14.5% of total exposure) and Euler Hermes is slightly more dependent on North America (more than 13%, against 12% for Coface and 11% for Atradius), said Moody’s.

Credit insurers have benefited considerably from the broad economic stimulus measures brought in by many governments. Moody’s pointed out that many European governments have also put in place sector-specific support aimed directly at the credit insurance industry. “This generally takes the form of guarantee or reinsurance schemes that backstop credit insurers’ coverage limits. These schemes significantly reduce claims volumes and hence protect credit insurers’ loss ratio (claims as percentage of premiums) and combined ratio (claims and costs as a percentage of premiums) in a stress scenario,” said Moody’s.

The main objective of these programmes is to support the economy by ensuring that trade credit insurance remains widely available, rather than to protect the credit insurance industry, said Moody’s. “They allow insurers to extend coverage to troubled debtors without taking on all the associated risk. As a result, some debtors will be able to trade out of difficulty, or at least continue trading while the credit insurers’ exposure winds down. So far, we estimate that government guarantees cover around 50% of the three large trade credit insurers’ exposure,” it said.

Moody’s added: “We believe the sector will remain broadly resilient, based on our central scenario that global growth will return in 2021 after contracting over 2020 as a whole, after a particularly sharp downturn in the first half. However, there is considerable uncertainty surrounding the duration and severity of the coronavirus-induced downturn, as there is currently no clear indication of how long it will take to contain the virus… A more prolonged period of enforced business inactivity, accompanied by increased layoffs and deteriorating consumer sentiment, would put additional strain on the trade credit insurance sector’s credit profile.”