Receivables insurance Protection against the biggest unidentified exposure facing Canadian business

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1 Receivables insurance Protection against the biggest unidentified exposure facing Canadian business Presentation to: Alberta Trade Contractors Coalition By: Ian Miller Receivables Insurance Association of Canada July 24, 2014

2 Agenda Key Outcome Members of the Alberta Trade Contractors Coalition are aware of the existence of a thriving receivables insurance market in Canada and the rewards this product can bring to their businesses. Ø What is Accounts Receivable Insurance. Ø Why have Accounts Receivable Insurance? Ø What are the benefits to you? Ø Credit Insurance underwriters in Canada? Ø The Nitty-Gritty Ø Case Studies

3 What Is Accounts Receivable Insurance? Accounts receivable insurance protects a company s commercial accounts receivable from unexpected losses resulting from insolvency, non-payment or slow payment by its commercial customers and from political events that obstruct payment.

4 Coverage Offered Commercial Risks Ø Insolvency (Chapter 7, 11 in the US; CCAA in Canada) Ø Protracted default (non-payment within 6 months of due-date) Ø DISPUTES are not covered! Political Risks Ø Transfer Risk - political/economic events preventing or delaying transfer of payments Ø Government Moratorium/Exchange Controls/Discharge of Debt - government legislation preventing release of funds or absolving buyer s payment obligations Ø Contract Frustration - government action preventing performance of the contract Ø Civil Turmoil - insurrection, war, natural disaster Typically 90% of invoice value is covered by Accounts Receivable Insurance

5 Some Accounts Receivable Insurance Options Lots of Choice in Coverage: 1) Losses occurring and risks attaching. 2) Whole turnover cancelable credit limits. 3) Whole turnover non-cancelable credit limits. 4) Select buyers one to several - cancelable and non-cancelable credit limits. 5) Indemnity. 6) Deductibles. 7) Political risk coverage and special coverages (preshipment, holdbacks, etc).

6 Take a look. the biggest uninsured Risk facing Canadian business today! Land and Buildings Accounts Receivable (Uninsured) Machinery and Equipment Inventories Senior Executives Cash Receivables in Canada are vastly under-insured, creating undue risk Less than 6% of Canadian business uses Receivables Insurance

7 So what if my Accounts Receivable are uninsured? Protects your balance sheet and income statement from the impact of customer bankruptcy: Ø Every time I ship I bet my company! Ø Second set of credit eyes backed by a cheque Ø Mr(s). Banker becomes a happy man/woman! Sales Gross Profit Sales to a Large Customer Gross Profit on Those Sales Increase in A/R (4 turns) Default AR Insurance Claim Payment (90%) New Sales to Replace lost Gross Profit without CI New Sales to Replace lost Gross Profit with CI $10,000,000 20% $1,000,000 $200,000 $250,000 $225,000 $1,250,000 $125,000

8 So what if my Accounts Receivable are uninsured? You have a bank line Likely secured by accounts receivable amongst other assets and often personal guarantees. So what does happens when one of your major customers goes down? Sales Sales to a Large Customer $10,000,000 $2,000,000 Receivable owing from Customer $1,000,000 Line of Credit (close to 80% utilized) Amount advanced against Account Receivable (no accounts receivable insurance) Large Customer Bankruptcy - amount to repay immediately Your options? Options with Accounts Recievable Insurance $1,500,000 $750,000 $750,000 New Equity? Loans from another source? Shut down the business? Put up more personal assets as security? Claim paid to bank. Use other Accounts receivable to cover the 10%

9 Benefits of Accounts Receivable Insurance Reduce Financial Risk Improve Cash Flow Support Credit Management Improve Sales Protection against bad debt loss and export credit risk Insure excess concentrations Coverage for single buyers and key accounts Losses converted to claims payments Maximize borrowing power Free up additional working capital Enhance earnings by reducing bad debt reserves Complements existing credit control procedures Access to highly specialized industry/sector expertise Objective back-up opinion for credit decisions Safely increase open credit sales Offer clients and prospects better options and terms Eliminate the need for letters of credit Safely expand into new and emerging markets Domestic accounts receivable are no different than Foreign accounts receivable

10 Just Insurance? RIAC members can offer other benefits! Ø Credit advice Accounts receivable insurers business is analyzing the creditworthiness of companies and opining on the reliability of your customer base. Ø Collections Many Insurers often have collection companies as part of their organizations or as business partners. Ø Market/Sector Intelligence from the Accounts Receivable suppliers/servicers As part of the ongoing analysis buyers, accounts receivable insurers must regularly update their assessment of industries and general economic conditions. Through their broad selection of products, clients and close connections with insurers, brokers also are able to keep their customers up-to-date on information vital to policyholders. Similarly banks and lawyers provide regular reports on business intelligence.

11 Who are the Receivables Insurance Markets?

12 Market Share - Canada THE GUARANTEE 1% RED ROCK 3% AIG 4% COFACE 15% ATRADIUS 6% EDC 53% EULER 19% Data Source: OSFI Direct Written Premium reporting (2012) on Premiums and Claims report for each private sector insurer

13 Market Share - Global Worldwide Market Share by Gross Premium Other 16% Atradius CYC 31% Atradius CYC Euler Hermes Coface Other Coface 19% Euler Hermes 34%

14 Where to Buy? RIAC s members include Underwriters (those companies that take the risk) Brokers, Bankers and Lawyers. Ø Underwriters many of the underwriters sell direct to businesses but, even those that do, also work closely with brokers to provide the best solutions to their policyholders. Ø Brokers Sell accounts receivable insurance as one of the many different lines of insurance available to you some are specialists (selling only accounts receivable insurance) and others are have specialist divisions which focus only on accounts receivable insurance and work with the other insurance lines departments within their companies. Ø Bankers Banks are not allowed to sell accounts receivable insurance (Bank Act) but are able to give general insurance advice and refer you to the RIAC website. Ø Lawyers The legal sector recognize the benefits of accounts receivable insurance and can recommend you to a broker or underwriter (or the RIAC website).

15 Now for the Nitty-Gritty! This is an Insurance Product not a Guarantee you have responsibilities: First and foremost - Underwriters base their pricing, policy structure and coverage available on your credit and collection procedures, expertise and application of these criteria. Also: Ø Correctly identify your buyers and make sure you know what credit limit you need. Ø Payment terms and what you are selling are important Ø Reporting past dues is essential both for you, other insureds and the insurer Ø Make sure your receivables are in order you need to speak with insurers when debt rescheduling is required and don t forget that branches are part of the same legal entity Ø Be sure to file your claims promptly Ø Per policy wording (which reflects commercial reality), prompt payment is a business discipline not a legislated debacle.

16 Case Studies

17 Enhanced Borrowing Case Company: Consumer products manufacturer Situation: Medium sized company experiencing good growth opportunities, especially from international markets. Foreign receivables were being internally funded, which was beginning to limit their opportunities. Operating Facts: Annual Sales: $200 million (50% from export sales) Average Accounts Receivable: $30 million Gross Margin: 20% Account Turns Per Year: 7 Credit Management handled by Corporate Controller Objective: Credit risk was not the most important issue - the company was interested in leveraging assets within a borrowing arrangement, freeing up capital so they could maximize on all selling opportunities, both domestic and international. Solution: Implement a domestic and export accounts receivable insurance program that eliminated all buyer credit risk for the lender. Results: Accounts receivable insurance transformed pledged accounts receivable into "risk-free" assets for the lender, allowing an increase in advance rates, inclusion of foreign receivables in the borrowing base, and elimination of concentration limits. In total, the program was projected to make available approximately $12 million in additional working capital for the company.

18 .Enhanced Borrowing Case Additional Working Capital/Profit Average Receivables $30 million Eligible Receivables (Borrowing Base) $15 million Prior Advance Rate 80% (domestic sales only) Prior Available Working Capital $12 million Internal Funding Requirement $18 million (capped out) New Eligible Receivables $30 million New Domestic Advance Rate 90% New Export Advance Rate 70% New Available Working Capital $24 million New Internal Funding Requirement $6 million

19 Enhanced Sales Growth Customer Profile: International Food Traders Incorporated (IFT Inc.) has offices in Toronto and provides a market place for both buyers and sellers. In addition to market maker services; IFT Inc. also provides logistics and intelligence to its clients. Business Situation: IFT Inc. is looking to expand their business into foreign markets where the business and legal environments are relatively unfamiliar to them. IFT Inc. is very aware of the need to mitigate the risk of non-payment from buyers in these foreign countries and protect against adverse political conditions in these foreign countries. Options Explored / Considered: Have the prospective buyers pay up front - The Company's foreign buyers do not have the working capital to pay for their purchases up front and if the Company is unable to provide terms, the buyer would simply look for another trading partner that will offer terms. Don t sell to these countries As much of the demand and growth for services provided by Ifs Inc. are from overseas markets, the Company cannot afford to lose business opportunities as a result of being unable to offer credit terms to prospective international customers in these regions. The Solution: The Company worked with their insurance broker to find a cost effective trade accounts receivable policy. Accounts Receivable Insurance is crucial if you are an exporter as it enabled trade by allowing IFT Inc. the ability to offer 60 to 90 day credit terms to their overseas buyers, in turn making the company more competitive and increasing the annual sales volume. Accounts Receivable Insurance also helped to manage the non-payment risks associated with the buyer and the buyer's country by providing coverage to IFT Inc. for up to 95% of the value of unpaid invoices. Ancillary Benefit: Debt Collections Services Attempting to collect on a debt in a foreign country can be very costly, as the Accounts Receivable insurer also had a Collections Company with local offices located all across the globe, and likely in a country that IFT is selling to, they would likely have someone on the ground to ensure an effective debt repayment strategy.

20 Credit Management Case Company: Manufacturer Situation: The growing company was experiencing tremendous sales opportunities, domestically and abroad. However, they needed assistance in determining whom to sell to and whom to avoid. The company could not afford to risk valuable working capital selling to financially unstable accounts. Operating Facts: Annual Sales: $140 million Average Accounts Receivable: $20 million Gross Margin: 8% Account Turns Per Year: 7 Credit Management handled by the management team Objective: Outsource credit analysis function to provide expert advice, allowing the company the ability to safely grow their business. Solution: Implemented a accounts receivable insurance program that provided credit risk assessment on their medium and large accounts. The policy assumes the responsibility of continuous monitoring on all covered accounts - no credit "due diligence" required by our client. The policy was customized to provide immediate credit decisions for new medium sized accounts. Results: The program produced immediate results. Sales were made to new and existing accounts on open credit terms that our client would have never entertained prior to the adoption of the accounts receivable insurance program. Our client successfully grew their business by 200% during the initial policy period and is projecting to generate approximately $350 million in revenue over the next year.

21 Catastrophic Loss Case Company: Wholesaler Situation: Largest independent wholesaler in the industry, experiencing good growth prospects with a strong balance sheet. Low margins and high exposures resulted in peak seasonal demand being held down by the company to avoid potential catastrophic credit loss. Operating Facts: Annual Sales: $150 million Average Accounts Receivable: $8.3 million Gross Margin: 7% Net Margin: <1% Account Turns Per Year: 18 Credit Manager: an experienced, full-time credit expert Objective: The company had sophisticated methods, and personnel, in place to manage the expected credit risk within their customer portfolio. They were interested in a program that would eliminate the potential catastrophic risk of an "unexpected" situation. Solution: Implemented an accounts receivable insurance program that covered top 25 accounts for their projected peak exposure, with a significant first loss position (deductible) maintained by the client - truly a catastrophic program. The deductible level was established per the client's ability to withstand the loss, any loss above the deductible would be covered by the program. Results: Instead of limiting peak seasonal sales, the client confidently entered into sizable contracts that produced incremental profit that far exceed the cost of the program - providing catastrophic loss protection. They also reduced their bad debt allowance and enhanced their ability to negotiate increased collateral eligibility with their working capital lender - all for a true "zero net cost"!

22 Just supposing you are a Contractor Case Company: General Commercial Building Contractor Situation: Mid-sized Contractor is entering the busy months but is cash-flow constrained from entering into new contracts. The problem is slow payments and holdbacks from previous jobs but the company cannot afford to refuse to take on new jobs. Operating Facts: Annual Sales: $ 25 million Line of Credit: $9 million Accounts Receivable: $8 million Eligible Receivables (under 60 days): $6.5 million Borrowing formula: 70% of A/R under 60 days Amount advanced: $4.55 million (maxed out) Holdbacks (due within 180 days of completion): $1.5 million Objective: The Contractor needed to leverage perfectly good receivables to increase their working capital loan to comfortably enter into new contracts Results: A receivables insurance policy in put in place would have meant: Line of Credit: $9 million Accounts Receivable: $8 million Eligible Receivables (under 60 days or insured + holdbacks up to 180 days): $8 million Borrowing formula: 85% of A/R under 60 days plus holdbacks up to 180 days at 70% Amount eligible to be advanced: $6.575 million Additional funds for new contracts: $2.025 million Collections improved as Contractor submitted slow payers to collection company.

23 Receivables Insurance Association of Canada Ø Ø Ø Ø RIAC promotes and builds an awareness of all facets of Receivables Insurance throughout Canada to all current and prospective parties that would benefit, could influence the use of, or currently use Receivables Insurance RIAC is an association of people and business that are interested in the promotion of Receivables Insurance and all aspects of the products to the Canadian business community dedicated to promoting the value of the products and services offered as an industry. RIAC is invested in educating companies, banks and other third party influencers in the benefits of the products offered. The RIAC association does not in any way promote one carrier s products over another and is focused on growing the industry as a whole.

24 To learn more: Mark Attley, President Receivables Insurance Association of Canada

25 Thank you

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