Trade credit insurer insulated from sovereign debt crisis engulfing Europe

Euler Hermes is largely safe from the sovereign debt defaults rattling investors, analysts say.

The trade credit insurer has seen its shares plunge 10% over the past three days, following fears that Greece is about to renege on its debt commitments.

But investors fears are unfounded, Societe Generale says, as the Allianz-owned company holds the vast majority of its bonds in the triple AAA/AA range.

Analysts from the French bank said: “The shares have massively underperformed over the past 3 days (-10%) on fears of debt defaults in general – and on sovereign debt in particular. 1/ Regarding sovereign risk Euler Hermes had (at end 2008) 96% of its bonds in the AAA/AA range. More generally speaking, Euler Hermes has the safest asset allocation of the insurance sector (the company does not want to take/add high risk on its assets side given that it has already taken corporate risk on board as its core operating business). Below AA represent only 4% of assets – i.e. €75m compared with its €1.85bn capital base.

"In addition the ‘safe cash' pocket represents a massive 25% of assets. 2/ Regarding corporate risk, recent statistical reports show a gradual improvement in the default trend. Coface saw a 10% decline in defaults in H2 2009 YoY vs a 19% increase in H1. In addition trade receivables have started to fall. We also note that rating agencies S&P and Moody's have revised end of 2009 their expectation of default at the peak of the crisis from 21% to 13% - flagging in addition Q3/Q4 2009 as the bottom of the default cycle.”