Credit insurer Coface faces rating downgrade due to COVID-19 impact

Fitch has placed credit insurer Coface's financial strength (IFS) ratings on 'rating watch negative' due to the adverse effects of the COVID-19 pandemic on the global trade credit insurance industry.

The trade credit industry is said to be one of the most affected insurance sectors due to the decline in economic activity triggered by the pandemic, particularly due to its sensitivity to corporate defaults.

According to Fitch, the negative impact from the outbreak increases the likelihood that Coface will breach its downgrade sensitivities.

Fitch expects deterioration in Coface's technical result for 2020 due to higher claim rates from rising corporate insolvencies amid a global economic recession and supply chain disruption. It also projects the insurer's gross premiums to fall in 2020, and possibly also in 2021, as a result of slowing volumes of activity, active risk selection and lower client retention rates, which are partly offset by price increases.

Furthermore, the agency expect the trade credit insurer's capitalisation to decrease marginally in 2020, but says that it will still remain robust. The company's solvency is also likely to remain "very strong".

Fitch noted that the insurer has the ability to respond promptly to the current crisis by swiftly repricing or scaling down risk exposure, which will help mitigate the effect of a sharply deteriorating economy on its financial results.

The group has been reducing the most sensitive exposures in the hardest-hit sectors and countries through limit reductions, and in extreme cases by policy cancellations.

Overall, Fitch says the trade credit industry is resilient, and profitability tends to bounce back rapidly, despite being one of the insurance sub-sectors most affected by the pandemic.

The rating action applies to all major insurance operating entities of the Coface Group, including Compagnie francaise d'assurance pour le commerce exterieur's (Coface France), Coface North America Insurance Company and Coface Re SA.