Moody’s takes action on top trade credit insurers as COVID-19 wreaks havoc on financial markets

Moody's has downgraded five trade credit insurers who it believes would be negatively impacted in a severe stress scenario related to the coronavirus (COVID-19), including prolonged disruption to business and financial markets and higher claims rates than were observed during the 2008-09 financial crisis.

The insurers impacted by this action include Atradius (ACyC), Coface, Euler Hermes, Clal Credit Insurance, and BSSCH the Israeli Credit Insurance Company (ICIC) .

The outlooks for the ACyC and the other Atradius operating entities, Coface and Clal have been changed to negative from stable. Moody's thinks that these companies may experience higher than expected losses and a material weakening of its capital adequacy and profitability due to a prolonged or severe disruption to business and financial markets.

The outlooks for Euler Hermes and ICIC remain stable. While Moody's expects Euler Hermes and ICIC to be similarly impacted by these pressures, their outlook remains stable as they benefit from parental support which will limit the impact on their credit profiles.

It noted that trade credit insurers have significant exposure to the ongoing disruption of business and financial markets. Owing to their very high operating leverage, trade credit insurers' profitability and capitalisation are sensitive to significant spikes in claims, as well as the rapid global impact of the coronavirus limits their ability for extensive sectoral and geographic diversification to minimise losses.

"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," Moody's said. "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."

Overall, the agency expects the insurers' credit profiles to 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 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.

Additionally, 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.

"The insurer's well developed risk underwriting practices limit their exposure to weaker entities that have smaller liquidity buffers and therefore are less likely to withstand the disruption to their businesses envisaged in our base stress scenario. However, in a more severe prolonged stress scenario, Moody's 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 influencing the extent of losses credit insurers will incur."

It added that 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."

Moody's views that the trade credit insurers tend to be similarly impacted by global economic shocks, although differentiated outcomes could emerge as the impact of the coronavirus unfolds. It stated that the ratings could face further downward pressure in the event of claims trending significantly higher than was observed during the 2008/09 financial crisis, which is one key benchmark against which the credit insurers capital adequacy has been measured.