Dagong Europe has affirmed its Long-Term Credit Rating of ‘AA-’ and equivalent Short-Term Credit Rating of ‘A-1’ on Euler Hermes SA (EH), Belgium based core operating subsidiary of the Euler Hermes Group SA. The outlook is ‘Stable’.
The rating rationale is as follows:
Satisfactory operating environment: Being a very international company, EH is exposed to increased geopolitical risks, currency fluctuations, volatile economic growth and increasingly frequent changes in international and domestic trade regulations. Dagong Europe sees the industry development potential for Credit Insurance as ‘Satisfactory’ since it is negatively affected by increasing competition in the sector, weakening profitability and high cost of operations in smaller and developing markets. The current low interest rate environment also adds pressure on industry’s profitability. These negative aspects are partially offset by Strong and well-established insurance regulatory and legal frameworks in the core European countries and improving economic outlook.
Successful strategy and Very Strong competitive position: In Dagong Europe’s view, EH can count on a very experienced management team and a long-standing track record of successful execution of strategies and achieved goals. It is the leading player in the global credit insurance sector with a market share of above 30% and Strong geographical diversification. For 2017-18 the analysts expect a low level of growth in premiums at about 1%-2% due to volatile economic environment, increasing risks and the company’s strategic focus on protecting profitability.
Very Strong risk management: Dagong Europe’s view is based on very well developed risk management framework, supported by prudent underwriting policies. The implemented sophisticated risk management tools help EH to mitigate high tail risks and reduce volatility of earnings and capital. EH has a proven ability to identify and react to early signs of deterioration in the country, sector or buyers’ risk profile and reduce its exposures to prevent large losses.
Very Strong financial performance, supported by Very Strong profitability but exposed to earnings volatility: EH continues to show a solid track record of high, although slowly reducing profitability, due to lower investment returns, with a three-year average return on assets at 5.1% and return on equity of 11.2%. EH’s technical performance is stable and robust, considering its exposure to high severity risks and sensitivity to the macroeconomic environment. The net combined ratio was stable and stood at 80.3% by YE16 with a three-year average at 79.1%.
Excellent level of capital: EH maintains a large, stable and high-quality capital base, consisting primarily of shareholder equity. It stands at 45.7% relative to its total assets adjusted. The capital is managed at group level for economic and risk management purposes. By YE16, the Solvency II ratio at the EH group level stood at 166%, slightly above the target of 160%. Due to the volatile nature of the credit insurance business, the analysts believe the main risks to EH’s capital could come from a significant deterioration in the credit risk of buyers, and severe losses outside of the current reinsurance protection structure.
High potential external support: Dagong Europe regards the potential external support from Allianz, Euler Hermes’ major stakeholder, as ‘High’. In the analysts’ view, EH is a strategically important and a highly integrated member of the Allianz Group. It provides high returns, diversification and growth opportunities for the parent. In addition, with its specialised niche products, EH supplements Allianz’s value proposition and enables full product range proposition for its corporate client segment, from retail to risk management solutions.