Moody’s says virus will hit credit insurers harder than credit crisis

Credit ratings agency Moody’s has changed the outlook for the Atradius group of credit insurers (ACyC), Coface and Clal Credit Insurance to negative from stable, because it believes they could be hit harder by the coronavirus outbreak than the credit crisis of 2008/2009. Euler Hermes and the Israeli Credit Insurance Company (ICIC) are subject to the same risks but retain their stable outlook because of strong parental support. Euler Hermes is part of the Allianz group and ICIC is jointly owned by Euler Hermes and Harel Insurance Investments and Financial Services Ltd. “Moody’s has changed the outlooks for the ACyC and the other Atradius operating entities, Coface and Clal, to negative because it believes these insurers’ credit profiles would be more negatively impacted in a severe stress scenario related to the coronavirus, including prolonged disruption to business and financial markets and higher claims rates than were observed during the 2008/09 financial crisis. While Moody’s expects Euler Hermes and ICIC to be similarly impacted by these pressures, they benefit from parental support, which will limit the impact on their credit profiles,” said Moody’s. “The rapid global spread of the coronavirus has led to a deteriorating economic outlook, sharply lower oil prices and broad financial market upheaval, generating an unprecedented credit shock across many sectors worldwide. Small and medium-sized enterprises (SMEs), to which the credit insurers have significant exposure, are especially vulnerable in the current environment, with many at risk of insolvency in a prolonged disruption of their business, absent effective government support. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety,” continued the credit ratings agency. The agency explained that because of their insurance of trade-receivable balances for many sectors in most countries globally, trade credit insurers have significant exposure to the ongoing disruption of business and financial markets. “Because of their very high operating leverage (insured exposure relative to capital), trade credit insurers’ profitability and capitalisation are sensitive to significant spikes in claims, and the rapid global impact of the coronavirus limits the ability for the insurers’ extensive sectoral and geographic diversification to minimise losses. Uncertainty will remain for at least several months as to how long it will take to contain the spread of the virus and how businesses and households will cope with the resulting financial losses,” said the agency. “The rating affirmation reflects Moody’s’ expectation that the insurers’ credit profiles will be broadly resilient to the widespread economic and financial markets disruption related to the coronavirus, given that these insurers’ credit profiles are supported by strong capitalisation levels heading into this crisis along with the short-tail nature of trade credit exposures, which allows the insurers to quickly reduce limits and exposure in response to deteriorating market conditions. In addition, credit insurers had adopted a more conservative underwriting stance during 2019 in response to growing challenges evident in the global economy, including for example trade tensions and rising stresses in the automotive supply chain, which caused them to be more prepared going into this crisis,” added Moody’s. The credit ratings agency said the insurers’ well-developed risk underwriting practices limit their exposure to weaker entities that have smaller liquidity buffers and are therefore less likely to withstand the disruption to their businesses envisaged in its base stress scenario. The agency added, however, that in a more severe prolonged stress scenario, it expects rising strain on stronger entities, with the effectiveness of government support for businesses, including SMEs, along with the length of the period of disruption, to be key factors that would influence the level of losses that credit insurers will incur. “A number of countries in which the insurers have exposures are implementing measures to support SMEs, which if effective will moderate the number of insolvencies and therefore losses incurred by these insurers. Because of their conservatively positioned investment portfolios, Moody’s expects the direct impact of financial markets’ volatility to credit insurers’ balance sheets to be moderate,” concluded Moody’s.

Moody’s says virus will hit credit insurers harder than credit crisis

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