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Moody’s turns negative on trade credit insurers

31st March 2020 - Author: Matt Sheehan

Moody’s Investors Service has revised its outlook for several trade credit insurers from stable to negative, due to the ongoing coronavirus (COVID-19) pandemic.

Moody'sThe rating agency said that COVID-19 could negatively impact the performance of Atradius Credito y Caucion S.A. (ACyC), Compagnie Francaise d’Assurance pour le Comm. (Coface) and Clal Credit Insurance (Call).

The stress test scenario used by Moody’s included prolonged disruption to business and financial markets and higher claims rates than were observed during the 2008/09 financial crisis.

However, the outlooks for Euler Hermes and BSSCH the Israeli Credit Insurance Company (ICIC) remain stable due to parental support, which will limit the impact on their credit profiles.

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, if they do not receive effective government support.

Moody’s believes that trade credit insurers in particular will have significant exposure to the ongoing disruption of business and financial markets, given their insurance of trade receivable balances for many sectors in most countries globally.

That said, Moody’s decided to affirm the insurance financial strength (IFS) and debt ratings of all the insurers in question, based on the expectation that they will be resilient to the widespread economic and financial market disruptions.

Analysts noted that the businesses benefit from 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, which caused them to be more prepared going into this crisis.

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