FECMA Digital Forum 26082020 - Andreas Tesch, Atradius

I'm very fine, thanks. Thanks for having us and giving us the opportunity with this very illustrious circle to share the perspective of a credit insurance company.

Sure, yeah. I've prepared a short presentation by way of introducing the topic. I've been asked to share with you guys the view from a credit insurer's perspective — what the impact of the crisis has been and our view on the economy right now. I'm Andreas Tesch, Chief Market Officer of Atradius, responsible for our commercial activities worldwide. All of you, I guess, are familiar with credit insurance as a tool. Some of you are using it, some of you are even using it with Atradius. Atradius is the second-largest credit insurer worldwide with a global market share of 24%, and in that capacity we provide support to you as credit managers — analyzing risk, giving you insights, but also protecting you and your companies against unexpected losses. I think it's fair to say that the outbreak of COVID has been one of these totally unexpected events that have hit companies that, from a financial analysis perspective, were incredibly healthy but, given they were operating in sectors that are heavily impacted, got into trouble very rapidly — something that no credit manager and no creditor could have predicted. If we can move to the first slide, I'd like to put the next couple of slides into perspective. All these numbers are in some shape or form familiar to all of you, but what is most striking is not the fact that we are now looking at a global recession or an even more severe recession for the eurozone — but if you look at the speed of deterioration and the speed by which you as credit managers, corporates, and we as credit insurers had to adjust. The immediate impact of that reduction in GDP has been the increase in insolvencies. As you can see, we look at unprecedented expected increases in insolvencies in a number of markets — most prominently in the U.S., but also within Europe. Germany, in our assessment, being one of the few countries that will see an increase in insolvencies but not as severely hit as a number of other countries. What is important is that you have to distinguish not just by geographies but particularly by industries. I recently heard about a K-shape recovery — the K-shape basically indicates that one leg of the K is going steeply upwards and will provide most industries with a rapid improvement, but there are other industries on the leg that points downward and will probably continue to be severely hit for the foreseeable future — industries like entertainment, like tourism. The good news is that the upper leg of the K is showing a rapid improvement. I've recently spoken to a steel producer that is already looking at an order book as big as it has been in 2019, while they still expect for the full year a revenue decrease of around 20%. It appears that the second half of the year is indeed pointing at a strong recovery. Let's turn to the next slide to go into more detail on geographical differences in global insolvencies. First of all, we need to bear in mind that countries are looking at a different starting position as far as insolvency numbers are concerned. On average, we at Atradius are expecting an increase of 26%, but there's a huge variety looking at individual countries — Germany being at the bottom with Turkey, but only ahead of a potential economy like the U.S. with increases of around 40%. It's fair to say that in the first half, after the outbreak of the global crisis, we've not yet seen a deterioration in that order of magnitude. We've seen increases in insolvencies compared to last year, but nothing of the magnitude we are expecting and anticipating for the full year. That is due to a number of factors — a lot of governments have taken severe action to support economies and companies that have been impacted by the crisis, keeping some of these companies alive. There's the famous saying of zombie companies — companies that have been in financial distress even before the COVID outbreak and are still being kept alive by government measures. Next to that, in some European countries we've had amendments in insolvency legislation where bankruptcy declarations have been delayed and will probably be further delayed until the end of the year, even though the criteria for declaring bankruptcy have been fulfilled. All that has led to a situation where we are not yet confronted with that tsunami of insolvencies, but we're expecting this to happen in the second half and probably continue into the first half of 2021, also due to the fact that some if not most of these government actions will expire. Moving to the next slide, I want to bring your attention to three pillars — how we at Atradius are looking at risk and how we help corporates in the current environment. The starting position, of course, is a healthy credit portfolio. What has been of utmost importance at the beginning of this crisis was to identify the most vulnerable factors and those sectors that suffer from a knockout effect. We've changed the parameters of our underwriting, and I'm going to talk about why and how we did that. It's been crucial that we execute necessary measures in reducing our credit exposure in a coordinated manner. That leads to the second pillar — to act in a very customer-centric way. It's been our ambition as Atradius to minimize the disruption to our customers, to still understand our customers' needs in terms of which buyers they anticipate to be continuously strong partners within and after the crisis, and still support those buyers. We always remain in close contact with our customers and brokers and communicate in a very intensive way. But also — and this will be music to your ears — to rely on the customer's credit management capability. As an underwriter, we do underwrite our credit risks, but we in the first place also underwrite our customers. We distinguish between those customers that are using credit insurance as an outsourced tool and customers that are actively managing their credit risk but would like to have a second pair of eyes and an insurer that protects them against the unexpected — something like COVID. Given the severity of this unexpected event, this brings me to the third pillar — the fact that governments have identified credit insurance as instrumental in keeping economies not just alive but growing in a prosperous way. Credit insurers have engaged with the European Commission, individual European governments, and some governments outside of Europe. We've negotiated and agreed on a couple of arrangements that help us as credit insurers to stabilize the business of our customers and thereby stabilize local economies. It's important to stress that the rationale of these schemes is not to bail out insurers or help employers — it's basically to help companies to keep on trading even in a very uncertain environment where, as a private credit insurer, we would be forced to adjust our levels of cover in order to keep our business sustainable. That would have impacted our customers in a severe way, which is why these government schemes have helped us to continue supporting our customers. Moving to the next slide — on the restrictions we've taken, first and foremost we had to adjust our exposure on the most vulnerable sectors. The way Atradius has carried out this action has been well received by our customers and brokers. No one's happy to even discuss, let alone accept reductions, but the way we conducted this was in close coordination and cooperation with our customers — first by asking them about the utilization of existing credit limits and bringing cover levels down to utilized levels, and secondly taking actions on those corporates and sectors that have been heavily impacted. What's been crucial was the coordination with customers, the timing, and the approach. To give you an impression of the magnitude — Atradius is monitoring two million buyers worldwide. We process 66% of our credit limit decisions automatically, and it's 260,000 decisions we take on a monthly basis. This huge process had to be adjusted in a very rapid way, and we had to be very targeted. In March and April, actions have been very severe for our organization, also in light of the fact that people had to work from home. Fortunately, our IT was geared up to allow people to work from home and take all these actions from their home office in a coordinated way. As I said, communication and cooperation with our customers has been crucial and still is today because ongoing risk actions have to be taken. We're agreeing payment plans and debt restructuring almost on a daily basis with our customers wherever that is appropriate, helping corporates to steer through this crisis. But as I said before, more than 50%, once all agreed government schemes are rolled out, are under government protection — meaning almost the whole portfolio would be fully reinsured by the respective government. But still, governments are asking us as insurers to manage taxpayers' money wisely — not to provide cover on companies that are not sustainable even before the COVID crisis. Moving to the next slide — the quality of the portfolio at the start of the crisis has been crucial. We've always been enormously prudent in assessing our risk. Our rating models had to be recalibrated, taking into account different factors. As we've heard earlier, a balance sheet or financial statement in today's environment is of lesser importance — what matters most is liquidity and the expected level of liquidity for customers, which is why it's been crucial to keep information on our buyer portfolio as up-to-date as possible. We've also made use of the credit managers within our customer base. We acted very close to the risk by having underwriters present in 39 countries. What has come into play even more strongly is the importance of country sovereign risk — we're looking at a very different pattern in terms of various geographies, the strength of the COVID impact, and on top of that, oil prices in the midst of the COVID crisis impacting places like the Middle East, Russia, and the U.S.-China crisis. We've also made sure there's coherence between our commercial and risk strategy. We've been very cautious in our new business approach while still being open for new business, because there's been a lot of demand for credit insurance even from companies that have not been insured before. As Atradius, we made sure we service our existing customers first before taking new customers on board, while also adjusting our risk appetite to make room for healthy new business. Looking at how our appetite has changed — while we were in the lower part of 70% risk appetite, this has reduced to below 65% in the current environment. This number has stabilized throughout August and is increasing again. The current level of appetite is appropriate for the current environment. Also on this slide, the expected increase of claims has not yet been visible, but claims ratios have increased — from around 45% by the end of last year to around 50% now, a 5 percentage-point increase, a large part of which is driven by provisions we've built to prepare for the expected inflow of claims in the second half. The feedback we've received is that we've managed this crisis much better than in 2008-2009. We've learned our lessons — the quality of the portfolio has been far better when we entered the COVID crisis compared to 2008-2009, and also the intensiveness of communication. Moving to the next slide — what is important for you guys particularly is that we don't look at credit risk or buyer risk in isolation. We always look at this in conjunction with the capability and quality of our customers to manage risk. In such a crisis with very rapid developments, it's important not just to rely on our own capabilities but also to have a trustful relationship with our customers. What we expect from credit managers in today's environment — next to analyzing balance sheets and P&L accounts, which they are doing in any event — is to monitor payment behavior as one of the indicators of trade worthiness, but also the change in level of trade. I mentioned the steel customer I met recently — their revenue fell off a cliff in the COVID crisis but is now improving again, order book is improving. There are positive signs and light at the end of the tunnel, but whether that's sustainable for 2021 is still to be seen. We would also expect you to monitor which actions your buyers are taking to counter the crisis, whether government support is available for those buyers, and their position in the supply chain. Moving to the next slide — the last of the three pillars are the government schemes. Those schemes have been developed in conjunction with respective governments, and the International Credit Insurance Association has had discussions with the European Commission to secure as much alignment as possible across Europe. The crucial point is that for now, those programs are limited until the end of 2020. Most programs are governed by European legislation which expires in 2020. We're now entering into discussions with governments as to whether and to what extent those programs should be extended into 2021, bearing in mind that we have not yet seen the worst part of insolvency increases. Moving to the next slide — to explain how challenging these schemes are from a credit insurance perspective and to manage customer expectations. The way we underwrite a buyer is close to the buyer — the underwriter looks at the buyer's perspective locally and independently from a customer once we've onboarded such questions, and therefore also to some extent independent of whether government schemes are in place or not. We had to change our processes and systems to reflect the different schemes, which has been an enormous challenge. The next slide shows the overview country by country, and it is rapidly changing. Poland, for example, by now has legislation in place which now needs to be translated into concrete actions. There are a number of countries where we're still in discussions, and some countries where we cannot expect a scheme to be in place. France was the first country to announce a government scheme, very much based on the top-up scheme from 2008-2009, and only later introduced a full-fledged reinsurance scheme, as have countries like Germany, the Netherlands, and Belgium. The last slide provides the summary. We're still in the middle of the crisis and the worst part is probably still to come, also bearing in mind the expiry of government actions. Claims and insolvencies are still on the rise. It's crucial for us as insurer to stay in continuous close contact with our intermediaries, brokers, agents, and clients. We try to follow our customers as much as possible and minimize disruption wherever possible. We will continue to rely on you and your capabilities, and we will continue to engage with governments in the interest of our industry. I hope this has given you a good insight into what's happening on the credit insurance side and behind the scenes. I'm happy to continue discussions on risk management strategies going forward. With that having said, I finish my presentation and I'm happy to join the discussion.

Well, it's very different. Yeah, it's very different in many ways. I think first and foremost, this crisis has started with a corporate crisis, while the last one started as a banking crisis. So a potential knock-on effect of this corporate crisis is going to be a banking crisis, because already today we're looking at very high potential defaults in terms of number and size that will impact the credit books of some large banks. In that sense, it is very different, which has also triggered a different behavior of governments — governments have responded much more rapidly to this crisis, trying to come to the aid of corporates than what happened in 2008-2009. I think the one similarity is the speed of the crisis. All of you will remember the day when Lehman collapsed and the speed of deterioration followed thereafter, and we've seen something similar with the outbreak of the COVID crisis. Only, as I said, the main difference is the response. After the Lehman collapse, no one was really sure how to respond — there was a conscious decision to let Lehman go and probably also let other banks go. Right now, the whole world is conscious that this is an external factor which has impacted corporates — some sectors more than others — without any misbehavior or mismanagement on their side. If you look at the airlines, for example, some have been in trouble before, but others have been managed in a very professional way, considered blue chips, and still they're on the brink of bankruptcy without government aid. That has been identified very rapidly and attacked very rapidly by governments, and I can only compliment them for their actions so far, though their abilities are also limited. I'm very glad to see that a lot of the payment plans we've seen with our clients are being adhered to. My personal fear has been that those insolvency numbers and those defaults on receivables would have happened much quicker and much more severe than what we've seen so far. I still have some hope that it's not going to be as bad for the second half and the first half of 2021 as what we might expect at the moment, because it has also created a lot of unity between customers, suppliers, various parts of the value chain of society — and that was different in 2008-2009, where the blame was on the banks and financial institutions. Right now it's very different in that regard as well.