Customer Service & Communications Conference. Credit Insurance Overview. Jay Rose Euler Hermes

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1 Customer Service & Communications Conference Credit Insurance Overview Jay Rose Euler Hermes

2 Euler Hermes North America 119 years of experience, with a AA- S&P Rating and an A+ rating from AM Best Headquartered in Baltimore, MD, backed by blue-chip ownership through the Allianz Group Staff of 6,000 associates worldwide provides localized sales and servicing with over 50 local offices nationwide and in 52 countries Guarantee over $1 Trillion globally. Provide coverage in over 200 foreign markets Industry based experts in risk underwriting provide customized analysis and support to our clients International Risk Database monitors & grades over 45 million companies worldwide Presentation title 2

3 Loss Protection and Prevention Protection against unexpected bad debt losses due to insolvency, slow pay or political risk. Insolvency can be a Ch. 7, 11, 13, general meeting of creditors, etc. Everything else falls into the slow pay bucket that we call Pro-tracted Default. - Business shuts their doors, still operating but cannot make payment, dissolved through acquisition, involuntary insolvency Slow pay claims must be filed within 180 days from date of invoice Presentation title 3

4 Business Credit Insurance Indemnifies policyholder against unforeseen bad debt losses due to commercial and/or political risks. Part of Sound Risk Management Strategy Manage Expected Risk GOOD DECISIONS Information Your Credit Expertise Manage Unexpected Risk PROTECTION Insurance Self-Insurance Primary reasons businesses implement credit insurance - Catastrophic Risk Protection - Sales Expansion - Bank Financing - General Loss Prevention Presentation title 4

5 Business Credit Insurance Benefits to TVPPA Members Catastrophic Risk Protection - Prevents Losses to one of company s largest, unprotected assets - Reduction of Risk of Key Account concentration levels - Caps Exposure to Bad Debt Loss More Flexible Terms of Sale - Offering your customers open credit terms in lieu of Letters of Credit, surety bonds, cash deposits, frees up their working capital that they can reinvest in their business. The cost of the C.I. is much cheaper than the above products currently being offered. - Being flexible with payment terms enables you to be more flexible to attract and maintain business to your service area. General Loss Prevention - Support for Credit Risk Evaluation through third party evaluations of customers, prospects, industries and countries - Provides a structure and discipline for credit decision making - Gain leverage over problem accounts by using underwriter s clout and resources Bank Financing- Enhance Lending Relationship High Concentration with Key Accounts More capital at reduced rates, taking full advantage of A/R Reduction in Bad Debt Reserves Frees up Working Capital Converts non-taxable deductible provisions into a fully tax deductible insurance premium Presentation title 5

6 Accounts Receivable: The Only Major Asset Left Uninsured What assets are insurable? What assets are insured? There is a greater chance that a business will experience a loss within their accounts receivable than any other asset. Where does the A/R fall on a client s Balance Sheet? Typically represents 40% of a company s assets Most vulnerable to unexpected losses Highly likely to be affected by business cycles Provides cash flow for the business Only under-leveraged asset Few companies can effectively compete without extending credit to their buyers What amount of loss would seriously impact a company s financial stability or annual profit? How many accounts have credit extended over that limit? Presentation title 6

7 Effects Of A Bad Debt Loss The table shows the amount of sales required to recover from a bad debt loss. A $50,000 2% profit margin requires you to generate an additional $2,500,000 to just to BREAK EVEN. Profit Margin $25,000 $50,000 $100,000 $250,000 $500,000 $1,000,000 2% $1,250,000 $2,500,000 $5,000,000 $12,500,000 $25,000,000 $50,000,000 4% $625,000 $1,250,000 $2,500,000 $6,250,000 $12,500,000 $25,000,000 6% $416,667 $833,333 $1,666,667 $4,166,667 $8,333,333 $16,666,667 8% $312,500 $625,000 $1,250,000 $3,125,000 $6,250,000 $12,500,000 10% $250,000 $500,000 $1,000,000 $2,500,000 $5,000,000 $10,000,000 15% $166,667 $333,333 $666,667 $1,666,667 $3,333,333 $6,666,667 Presentation title 7

8 My Accounts Are As Good as Gold. Really???? Bankruptcies are inevitable Have happened to big named companies Failures come from increasingly unpredictable sources Management Deficiencies Complex Financial Restructuring Legal Maneuvering (Ch. 11) Product Liability Regulatory Changes Political & Global Economic Change Will your business be part of the Cash Flow Domino? Euler Hermes monitors beyond the primary debtor Presentation title 8

9 Eligible Participants: TVPPA Members Risks Considered: Commercial & Industrial Customers Credit Limit: Utility determines receivables at risk (e.g. 2 months average sales) Premium Factor: $6.325 per $1,000 of coverage limit For Example: Customer ABC has $100,000 in credit risk Annual cost to customer to have open terms = $ Monthly Cost per $100,000 = $52.70 Minimum Premium: $ per customer per annum= $25,000 in coverage Qualifying Loss: $1,000 or greater Deductible: None Coinsurance: 10% of Qualifying Loss (paid by Utility) Indemnity: 90% of Qualifying Loss (paid by Insurer) Past Due Reporting: Any Customer Over 60 Days and Over $10,000 Due Presentation title 9

10 How Policy Works Step #1: A New Customer or Existing Customer To be Added Step #2: One Page form including Corporate Name, Headquarters Address, Amount of Insurance needed sent to Wells Fargo Insurance Services, Step #3: WFIS Inputs each customer into our online portal which gets re-routed to a Risk Analyst to underwrite each customer s credit worthiness Step#4: Euler Hermes risk underwriter looks at the credit worthiness of each buyer Step#5: Credit Decision remitted to WFIS within hours if not instant Presentation title 10

11 Risk Underwriting: Our Data At Your Fingertips 45 Million Companies monitored and graded in our proprietary worldwide risk database 2,000 debtors Processed on-line each day 17,000 Credit Limit Requests Received each day Credit Limit Request Turnaround Time Domestic: 1 day (95%) Presentation title 11