Euler Hermes Group Core Subsidiaries Ratings Affirmed At 'AA-' After Insurance Criteria Change; Outlook Stable
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Research Update:
Euler Hermes Group Core Subsidiaries
Ratings Affirmed At 'AA-' After
Insurance Criteria Change; Outlook
Stable
Primary Credit Analyst:
Taos D Fudji, Milan (39) 02-72111-276; taos.fudji@standardandpoors.com
Secondary Contact:
Virginie Crepy, Paris 33-1-4420-7330; virginie.crepy@standardandpoors.com
Table Of Contents
Overview
Rating Action
Rationale
Outlook
Ratings Score Snapshot
Related Criteria And Research
Ratings List
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 6, 2013 1
1141695 | 300013856Research Update:
Euler Hermes Group Core Subsidiaries Ratings
Affirmed At 'AA-' After Insurance Criteria Change;
Outlook Stable
Overview
• Following a review of France-based Euler Hermes Group (EH) under our
revised insurance criteria, we are affirming our 'AA-' ratings on its
core subsidiaries.
• The ratings reflect our view of EH's very strong business risk profile,
based on its leading global franchise in trade credit insurance, and
strong financial risk profile, with a strong financial flexibility that
offsets an only moderately strong capital and earnings.
• Our opinion on the strategic importance of EH to its parent Allianz SE
enhances our view of the ratings on EH.
• The stable outlook on EH mirrors that on Allianz SE and reflects our
expectation that EH will remain strategically important to its parent.
Rating Action
On June 6, 2013, Standard & Poor's Ratings Services affirmed its 'AA-'
counterparty credit and insurer financial strength ratings on Euler Hermes
France, Euler Hermes Deutschland, Euler Hermes Europe, and Euler Hermes North
American Insurance Company, the core subsidiaries of France-based global trade
credit insurer Euler Hermes SA (EH). At the same time, we affirmed the 'A-1+'
short-term counterparty credit ratings on Euler Hermes Deutschland. The
outlook is stable.
Rationale
The ratings reflect our view of the group's very strong business risk profile
and strong financial risk profile. Under our criteria, these factors lead to a
possible anchor of either 'aa-' or 'a+'. We derived our 'a+' anchor on the
group from our belief that EH's relatively narrow business focus on global
trade credit insurance and high sensitivity to the economic cycle position its
business risk profile toward the lower boundary of the very strong range. EH's
business risk profile is built on a very strong competitive position and our
view of intermediate industry and country risk. Its financial profile balances
our moderately strong capital and earnings assessment with strong financial
flexibility and its intermediate risk position. We consider enterprise risk
management (ERM) and management and governance to be neutral for the ratings,
while we view liquidity as strong. We combine these factors to derive a
stand-alone credit profile (SACP) for EH of 'a+'. We uplift the 'AA-' ratings
on EH's core subsidiaries by one notch to reflect its strategic importance to
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1141695 | 300013856Research Update: Euler Hermes Group Core Subsidiaries Ratings Affirmed At 'AA-' After Insurance Criteria
Change; Outlook Stable
Allianz SE.
Overall, we consider that global trade credit insurance faces intermediate
risk, based on our view of low country risk and intermediate industry risk. We
view country risk as low as exposures are globally diversified and strongly
weighted in wealthy and stable mature markets. The industry's high volatility
of loss ratios primarily drives our view of intermediate industry risk. In our
view, the evolution of claims is correlated to the trend in the economic
cycle. In addition, premiums are generally tied to clients' trade volumes,
which decline during a recession. The combination of these elements results in
volatile loss ratios, such as those experienced during the 2008 global
financial crisis, at which point we estimate that the combined (loss and
expense) ratio for the trade credit industry deteriorated by about 40
percentage points (pps) compared with before the crisis. On the other hand,
the necessity to hold extensive data on corporate credit quality and provide
international coverage creates very high operational barriers to entry, in our
view.
In our opinion, EH's competitive position is very strong. With about 34%
market share, we consider that EH has a leading position in the trade credit
insurance market. The group also has good geographic diversity, with large
operations in Germany, France, the U.K., Italy, and the U.S. EH's solid
underwriting skills and geographical reach result in a better average
through-the-cycle combined ratio compared with peers Atradius and Coface. In
addition, EH has maintained positive net results since the crisis started five
years ago, as loss ratios have been less volatile than peers'. EH's relatively
high reliance on reinsurance, representing about 33% of gross written premium,
as well as its concentration in a single line of business, weigh on our view
of the strength of its business profile.
We anticipate that EH will pursue diversification in countries where demand
for trade credit insurance is growing, such as the U.S., and in the major
Latin American and Asian economies. We anticipate a 4%-5% increase in EH's
premiums in the next three years. We also expect that Solunion, the new joint
venture with Mapfre S.A. in Spain and Latin America, will sustain growth.
We consider that EH's capital and earnings are moderately strong--a relative
weakness in the rating profile. We view EH's capitalization as strong
according to our risk-based capital model, albeit at the lower end of our
benchmark for an 'A' rating. We also consider that EH's stop-loss reinsurance
treaty, which covers claims in excess of a 70% loss ratio up to a limit of
€130 million, supports capital. Nevertheless, we consider that our estimates
of capital requirements, based on historical loss levels, may underestimate
the sensitivity of EH's gross exposure to future economic shocks. Gross
exposure is high--€770 billion at the end of 2012--and has risen by a
relatively rapid 37% between the end of 2009 and the end of 2012.
We expect that capital adequacy will remain strong in the next three years as
we consider that exposure, which drives trade credit capital requirements, is
likely to grow at a similar pace to premium. We also expect EH's combined
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1141695 | 300013856Research Update: Euler Hermes Group Core Subsidiaries Ratings Affirmed At 'AA-' After Insurance Criteria
Change; Outlook Stable
ratio to be between 80%-85%, which is slightly worse than in the past three
years, as the positive run-off of prior reserves reduces. Volume growth,
particularly in America and Asia, should nevertheless sustain net income near
the €300 million level reached in 2012. Our capital projection also factors in
EH's dividend payout objective of 60%.
In our opinion, EH exhibits an intermediate risk profile, primarily due to the
high credit quality of its investment portfolio and short-term nature of its
liabilities, which are generally close to one year. This has enabled EH to
quickly cut its credit insurance commitments to riskier counterparties during
the 2008-2009 global financial crisis, thus partially offsetting the negative
impact of the crisis. We also expect EH's reinsurance program to reduce
earnings volatility. In 2012, for example, we estimate that excess-of-loss
reinsurance decreased EH's combined ratio by about 4pps. In our view, the
group's pension benefits remain moderate and we have factored into our
assessment of EH's capital adequacy the negative impact of a change in pension
accounting rules in first-quarter 2013 that resulted in a €121 million charge.
We view EH's financial flexibility as strong, supported by the company's
access to both equity and debt markets. In addition, we consider that EH could
quickly strengthen its capital by reducing its dividend payout. Lastly, EH's
financial leverage is relatively low as it does not have hybrid debt on its
balance sheet, and could potentially tap this market in case of need.
We regard EH's ERM and management and governance as neutral for the ratings.
The importance of ERM for EH is high, in our opinion, given EH's large
exposures to multiple economies. Our assessment of ERM as adequate reflects
our positive view of the group's risk-management culture, and neutral
assessment of EH's risk controls and strategic risk management. We could
revise our assessment of the group's ERM to strong if it continues to develop
a holistic ERM program and its internal model, as well as embedding economic
capital and risk-return considerations into its strategic decision making.
EH's management and governance is satisfactory, in our opinion. This is based
on our view that EH's management has a strong track record of successfully
delivering on its strategic goals. At the same time, we consider the company's
risk tolerance as neutral, balancing a prudent approach to underwriting with a
strong appetite for growth.
We regard EH's liquidity as strong, owing to the strength of liquidity sources
available to it--mainly premium income--and its highly liquid asset portfolio
that contains more than €4 billion in marketable securities.
EH's main shareholder is France-based holding company Allianz France (not
rated) with 68.2% ownership, which is fully owned by Allianz SE. EH's
remaining shares are publicly traded. We consider EH strategically important
to the Allianz group because of its important earnings contribution to the
group. EH has also enlarged Allianz' product offering and strengthened its
franchise. Although EH operates as a stand-alone unit due to the nature and
specificities of its activities, there is some integration with its parent,
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1141695 | 300013856Research Update: Euler Hermes Group Core Subsidiaries Ratings Affirmed At 'AA-' After Insurance Criteria
Change; Outlook Stable
for example, the use of the internal capital model and the adoption of some of
Allianz' risk management practices. As a strategically important subsidiary of
Allianz, we cap the ratings on EH at one notch below those on its parent.
Outlook
The stable outlook on EH mirrors that on Allianz SE and reflects our
expectation that EH will remain strategically important to its parent. A
one-notch downgrade of Allianz would result in a similar downgrade of EH's
core companies. We could lower the rating on EH if we consider that its
strategic importance to Allianz weakens.
We could lower the ratings on EH if our view of its capital and earnings were
to weaken materially from our current assessment of moderately strong, leading
us to lower the SACP by more than two notches. A deterioration of the SACP by
up to two notches would not automatically result in a downgrade, however, as,
owing to its strategic importance to its parent, EH would benefit from up to
three notches of support above its SACP, according to our criteria.
We currently consider an upgrade as remote and consider that it would depend
on a similar rating action on the parent.
Ratings Score Snapshot
Financial Strength Rating AA-/Stable
Stand-Alone Credit Profile a+
Anchor a+
Business Risk Profile Very Strong
IICRA Intermediate Risk
Competitive Position Very Strong
Financial Risk Profile Strong
Capital and Earnings Moderately Strong
Risk Position Intermediate Risk
Financial Flexibility Strong
Modifiers 0
ERM and Management 0
Enterprise Risk Management Adequate
Management and Governance Satisfactory
Holistic Analysis 0
Liquidity Strong
Support +1
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1141695 | 300013856Research Update: Euler Hermes Group Core Subsidiaries Ratings Affirmed At 'AA-' After Insurance Criteria
Change; Outlook Stable
Group Support +1
Government Support 0
IICRA—Insurance Industry And Country Risk Assessment.
Related Criteria And Research
Related criteria
• Insurers: Rating Methodology, May 7, 2013
• Group Rating Methodology, May 7, 2013
• Enterprise Risk Management, May 7, 2013
• Methodology For Linking Short-Term And Long-Term Ratings For Corporate,
Insurance, And Sovereign Issuers, May 7, 2013
• Management And Governance Credit Factors For Corporate Entities And
Insurers, Nov. 13, 2012
• Principles Of Credit Ratings, Feb. 16, 2011
• Refined Methodology And Assumptions For Analyzing Insurer Capital
Adequacy Using The Risk-Based Insurance Capital Model, June 7, 2010
• Credit And Surety Insurance Criteria: Interactive Rating Methodology,
Oct. 18, 2004
Related research
• List Of Issuers With Ratings Under Criteria Observation Due To S&P's New
Insurers Rating Methodology, May 7, 2013
• Standard & Poor's Assigns Insurance Industry And Country Risk Assessments,
May 7, 2013
• Allianz SE And Core Subsidiaries Affirmed At 'AA/A-1+' After Insurance
Criteria Change; Outlook Stable, May 23, 2013
Ratings List
Ratings Affirmed
Euler Hermes France
Euler Hermes North America Insurance Company
Euler Hermes Europe
Counterparty Credit Rating
Local Currency AA-/Stable/--
Euler Hermes France
Euler Hermes North America Insurance Company
Euler Hermes Europe
Euler Hermes Deutschland AG
Financial Strength Rating
Local Currency AA-/Stable/--
Euler Hermes Deutschland AG
Counterparty Credit Rating
Local Currency AA-/Stable/A-1+
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1141695 | 300013856Research Update: Euler Hermes Group Core Subsidiaries Ratings Affirmed At 'AA-' After Insurance Criteria
Change; Outlook Stable
Additional Contact:
Insurance Ratings Europe; InsuranceInteractive_Europe@standardandpoors.com
Complete ratings information is available to subscribers of RatingsDirect at
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(46) 8-440-5914; or Moscow 7 (495) 783-4009.
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