Fitch Ratings says it expects credit insurers to return to profitability in 2010 due to measures taken since 2008 to reduce their risk profiles.

"Given the extensive actions taken by credit insurers, the recovery in net income could be comparable to that seen after the previous crisis in 2002/2003. Moreover, their underwriting performance is less dependent on the economic cycle in the short term as policy terms and conditions have now been tightened to reduce exposure and enhance earnings," says Vanessa Andre, director in Fitch's Insurance team.

The three main credit insurers, Coface (Insurer Financial Strength rating 'A+'; Long-term Issuer Default Rating 'A+'/ Stable Outlook), Atradius and Euler-Hermes, are expected to have posted their worst net income in 2009 for the past decade, surpassing the poor results recorded in 2002. This compares to record net income achieved in 2007: Atradius (EUR164.2m), Coface (EUR163.5m) and Euler-Hermes (EUR407m). The fortunes of these companies reversed and at end-H109 Atradius reported a loss of EUR105m, Coface a loss of EUR117m and Euler Hermes a profit of EUR0.7m.

The worldwide number of corporate insolvencies dramatically increased in 2008 and 2009 with the Euler-Hermes Global Insolvency Index increasing 35% in 2009, following a 27% gain in 2008. Countries such as Spain, Ireland, the Netherlands, and the US, and sectors such as construction, retail, and metals have been particularly affected. The suddenness and magnitude of the economic crisis have drastically altered credit insurers' underwriting results. The increase in reported loss ratios for H109 reveal the extent of this deterioration: Atradius at 95% (versus H108: 69%), Coface 116% (55%) and Euler-Hermes 88% (64%).

Fitch expects technical profitability to have stabilised in Q409, paving the way for the expected recovery in 2010. The agency believes that the various remedial measures undertaken by credit insurers in response to the economic crisis are now beginning to bear fruit. Such measures, which include reducing the most sensitive exposures, tariff increases, tightening of terms and conditions, and in extreme situations, the cancellation of policies, typically produce tangible improvements in underwriting results within 12 to 24 months due to credit insurers' ability to quickly re-underwrite this short-tail business. At the same time, demand for coverage typically increases with the number of corporate bankruptcies. Unlike other segments of the industry such as reinsurance, the credit insurance market has high barriers to entry due to the need to maintain very comprehensive databases, efficient underwriting systems and specialist underwriters which have limited the appetite for new entrants.

Finally, there are signs that are pointing to more positive prospects for the credit insurance market. Coface has recorded a declining number of corporate failures since October 2009 while the Euler-Hermes Global Insolvency Index is expected to stabilise in 2010, albeit at a relatively high level. The expected economic recovery, while weak, should benefit credit insurers' profitability and bring modest relief to corporate balance sheets and performance.

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