Managing Trade Risk and Business Credit Insurance Association of Independent Corrugated Converters Sept 11, 2009
"Capitalism without failure is like religion without sin it just doesn t work. Adam Smith, Economist 1723-1790 2
Violent Downturn in Financial Markets The extreme turmoil in the financial markets and the ensuing credit seizure in the second half 2008 created a drag on an economy already challenged by rising energy costs, collapse of the housing market and over-tightening actions by the Federal reserve. 30% S&P 500, y/y% change 20% 10% 0% -10% The market had been slowing for a while... -20% -30% but this was FEAR; -30% in 38 days -28% in 42 days -40% -50% 09-Jan-2007 02-Mar-2007 24-Apr-2007 14-Jun-2007 06-Aug-2007 26-Sep-2007 15-Nov-2007 09-Jan-2008 03-Mar-2008 23-Apr-2008 13-Jun-2008 05-Aug-2008 25-Sep-2008 14-Nov-2008 08-Jan-2009 03-Mar-2009 3
Violent Downturn in Financial Markets Domino Effect: Sudden End to Global Growth Period 2002-2007 4
Disruption in Global Markets Domino Effect: Real economic consequences across industry sectors. Deteriorating confidence and low demand - Reduced industry investments - Collapse of private consumption Restriction of resources and added margin pressures - Energy/Materials - Decline in value of inventories (especially in sectors dependent on volatile commodities or imported raw materials) - Rise in Unemployment Less liquidity Tightening credit environment 140 12 0 100 80 60 40 20 Global Insolvency Index +25% in 2008 and in 2009 EH Global Insolvency Index EH EMU Insolvency Index USA Rise in business insolvencies 0 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 Government intervention Sources : Global Insight, Euler Hermes forecasts (Nov. 2008 EH Insolvency outlook) GDP 2007 weighting at current exchange rates 5
The Eye of the Global Storm: USA Economy High correlation between tight lending environment and continued rise in bankruptcy rate. 100 80 Close Relationship: Fed Survey Implies More Bankruptcies 75% 60% 60 Growth in bankruptcies y/y Source: Admin. Off., US Courts 45% 40 30% 20 15% 0 0% -20-15% -40-60 Lending Practices : (Net % of Banks Increasing Spreads to Small Firms) -30% -45% -80 1991 Source: Federal Reserve Board, Senior Loan Officer Opinion Survey on Bank Lending Practices, Jan. 2009 1993 1995 1997 1999 2001 2003 2005 2007 2009-60% 6
US Insolvency Outlook The dramatic increase in bankruptcy filings is expected to continue through fourth quarter 2009, as companies experience declining revenues and subsequent operating losses. Companies that do not act quickly to aggressively shore up their balance sheet may be in peril. 20,000 U.S. Business Bankruptcy Filings, quarterly 50% (f) 15,000 52% 10,000 5,000 Q1-07 Q2-07 Q3-07 Q4-07 Q1-08 Q2-08 Q3-08 Q4-08 Q1-09 Q2-09 Q3-09 Q4-09 source: Administrative Office of the U.S. Courts 7
What is Business Credit Insurance? Protection against unexpected bad debt losses due to the insolvency or protracted default (slow pay) of business customers. Insolvency can be a Ch. 7, 11, 13, bulk sale, receivership, general meeting of creditors, etc. Everything else falls into the slow pay bucket. Slow pay claims must be filed within 90 days from due date or 180 days from ship date, whichever is longer. Insurance provider acts as collection company with the guarantee if we don t collect we pay policyholder and the named bank beneficiary. If insurance provider collects debt then the business is assessed a collection fee. Under these circumstances, the deductible or coinsurance do not apply. 8
The Only Unprotected Asset Which company assets are secured by an Insurance program? Where does the A/R fall on most companies balance sheet? Typically represents from 40% to 70% of a company s assets Most vulnerable to unexpected losses Likely to be affected by business cycles Provides cash flow for the business Only under-leveraged asset with financial lender Few companies can effectively compete without extending credit to their buyers What amount of loss may seriously impact a company s annual profit? How many accounts have credit extended over that amount? 9
Risk of Business Failures??? Bankruptcies are inevitable and can happen to big and small name companies alike. Failures come from increasingly unpredictable sources. Large bankruptcies can cause a domino effect with suppliers. Public Company Bankruptcy Statistics: - 1 st Qtr 2007 = 16 companies w/ assets of $1,079,774,604-1 st Qtr 2008 = 30 companies w/ assets of $11,638,611,188-1 st Qtr 2009 = 64 companies w/ assets of $100,967,544,123 10
Why Companies Purchase Credit Insurance Catastrophic Loss Prevention and Cash Flow Protection Prevent disruptive losses to one of company s largest, unprotected assets Reduce the risk of key account concentration levels Cap exposure to bad debt loss and smoothes financial results over the business cycle unlike an allowance for doubtful accounts accomplishes this with tax deductible premium. Support Sales Expansion Safely extending more credit to new or existing customers Mitigate the risk of expanding sales into more volatile or new markets Enhance customer relationships profitable cooperation between sales and credit functions. Increase ability to offer more competitive terms to export customers o No need for letters of credit and collateral requirements on foreign shipments. o Open terms permit buyers to reserve their own working capital line for other uses. 11
Why Companies Purchase Credit Insurance Strengthen Lender Relationship Improve borrowing power and increase available capital by converting receivables into a performing asset take full advantage of A/R, possible improve cost of funds. Eliminate concern over account concentration Enable eligibility of foreign receivables Reduce need for personal security requirements Improve Financial Monitoring and Operational Efficiency Strengthen structure and discipline for credit decision making Improve credit risk intelligence using unparalleled third party evaluations of prospective customers, industries and countries. Install on-going and consistent key account analysis, supply chain monitoring and back-up support for your credit management program Increase leverage over troubled accounts by utilizing insurer s expertise and global resources Political Risk Protection Protect against political events in foreign markets that could make accounts receivable uncollectible. 12
Myths About Credit Insurance It s only for large companies-- No. Companies of all sizes utilize credit insurance. As demand for this product has skyrocketed during this economic downturn, many insurers actively pursue smaller and less complex exposures, which presents significant opportunity for mid-size companies to expand their credit management controls. It s only for companies with large bad debt losses-- No. Companies with all levels of bad debt loss experience install this protection in order to guard against default by their business partners. Credit insurance is truly a risk mitigation tool to safeguard a company s revenue stream, as well as to improve their overall credit profile. It s only valuable for companies that export-- No. 70-75% of new policies issued exclusively cover only domestic receivables. Credit insurance replaces a company s internal credit functions-- No. Insurance is not a substitute for prudent credit management practices. You don t buy automobile insurance and start driving with your eyes closed! It is not affordable-- Credit insurance is one of the more versatile insurance products. A program can be structured to cover an entire portfolio or concentrate on key accounts and/or specific business segments. Based on a company s appetite for risk and flexibility in program structure, this insurance can be highly cost effective. Premium is typically a fraction of 1% of the covered sales. 13
Partnering with Euler Hermes ACI Euler Hermes is global leader for trade credit insurance and other risk mitigation solutions 115 years of experience with a 37% share of the world credit insurance market 56,000 customers globally with more than 20,000 credit limit requests processed daily Insure over $900 billion in commercial transactions annually in over 200 countries Rated A+ (Superior) by A.M. Best and AA- by Standard & Poor s Euler Hermes is ultimately owned by German financial services giant, Allianz. Established international risk management presence spanning six continents with local risk analysts strategically positioned in 53 countries in close proximity to each customer s clients. Proprietary risk management database with intelligence on more than 43 million companies worldwide. Provides coverage on shipments to more than 200 countries around the globe. Comprehensive and convenient on-line policy management system With over nine decades of collection expertise, Euler Hermes UMA (United Mercantile Associates) also offers a suite of account receivable management services including commercial third party collections, receivables management outsourcing, international collections, and other debt mitigation services. 14
Global Credit Insurance Market Market shares ICISA members QBE 1.97% Mapfre 2.45% Others 4.82% AIG* 2.59% Coface 19.64% Euler Hermes 35.65% CESCE 2.74% Atradius 21.36% Credito y Caucion 8.78% Atradius + CyC = 30.14% Total market volume 4,608 bn Source : ICISA, Euler Hermes 2008 15 * Not an ICISA member
Questions and Answers Thank you for your time today!
I thank you for the opportunity to present our company and our services. I look forward to becoming a trusted and important resource to your company. Mike Matulis - Sales Vice President Euler Hermes ACI 1660 South Highway 100 Suite 500 St Louis Park, MN 55416 (952) 697-3588 Mike.matulis@eulerhermes.com Thank you for your time today!