External Credit Insurance

1
External Credit Insurance

• IFG 27 April 2009

2
Receivables Management
Credit Insurance
Challenges of Credit Insurance
Factoring and Credit Insurance
3
The Receivables Management Business
General Sales Agreements
Set Credit Limits and payment conditions
Invoicing
Debt Collection
Dunning
Write off debt
Process
Details of the process
Recoveries/Collections
Com/Legal advice
Printing/Mailing
Business Information
Dunning Services
Accountants
Credit Counselling
Rating services
Interim Credit Management, software facilitation
Outsourcing/Invoice processing/administrating
securitization deals
Credit Audit
Receivables Management Solutions
Due Diligence (auditing) A/R portfolios
Debt Purchase
Factoring, Financing
CREDIT INSURANCE,
Non-risk
Risk
CI is used throughout the cycle but does not
take part in the invoicing or dunning activities
4
Traditional Credit Management Tools (1)

• Open Account/Documentary Collection
• Maximum risk to the company
• Uses the companys balance sheet
• Affects ratios cash flow
• No risk mitigation
• Letters of Credit/Bank Guarantees
• Expensive
• Uses customers working capital lines
• Customers becoming unwilling to provide them
• Insured Open Account (Credit Insurance)
• Mitigates political Commercial Risks
• Uses the companys balance sheet
• Affects ratios cash flow

5
Traditional Credit Management Tools (2)

• Third Party Financing or Sale of Receivables
• Mitigates political Commercial Risks
• Can be managed on an individual or portfolio
  basis.
• Growing in worldwide popularity
• Improves cash flow and ratios

6
Receivables Management
Credit Insurance
Challenges of Credit Insurance
Factoring and Credit Insurance
7
Credit Insurance - History

• Credit Insurance dates back to the 19th century
  when the first credit insurance policy was
  issued
• Between the first and the second world war, it
  became clear in the industrially leading European
  countries that Export Credit Agencies were
  required to help exporters reestablish their
  trade after the first world war
• In 1918 the Trade Indemnity Co was established
  and Cuthbert Heath, the Father of Lloyds non
  marine business became chairman
• Cuthbert Heath announced his Eight Principles for
  Trade Credit Insurance

8
Credit Insurance - Eight principles of Cuthbert
Heath (1918)

• Credit Risks for goods sold and delivered on
  credit terms
• Losses due to insolvency
• Does not guarantee payment of a debt at due date,
  nor disputed items
• Insured debts are self liquidating
• Terms of payment should be short
• Coverage of no more than 75 of the risk
• No cover for existing commitments
• No insurance for loans or advances by banks

9
Credit Insurance - Eight principles of Cuthbert
Heath (2009)

• Credit Risks for goods sold and delivered on
  credit terms
• Losses due to insolvency
• Does not guarantee payment of a debt at due date,
  nor disputed items
• Insured debts are self liquidating
• Terms of payment should be short
• Coverage of no more than 75 of the risk
• No cover for existing commitments
• No insurance for loans or advances by banks

• Unchanged
• Protracted default
• Unchanged
• unchanged
• Max 180 days, but MEP
• 90
• Unchanged
• Unchanged

10
What is Credit Insurance ?

• COVERAGE
• Non-payment of Debt Obligations for Political
  or Commercial Reasons
• COMMERCIAL RISKS
• Default for Risks Not Otherwise Stipulated as
  Political Risks
• Commercial Bankruptcy or Legally Protected
  Reorganization
• Slow Pay/Protracted Default (In Most Types of
  Coverage)
• POLITICAL RISKS
• Government Acts/Political Events that Restrict
  Payment
• Currency Inconvertibility and Transfer Risk
• War or Civil Disorder
• Imposition of Law, Order, Decree
  Embargo/License Revocation

11
What is Credit Insurance ?
Premium
Customer
Credit Insurance
Covered receivables
Whole portfolio
Providing goods or services
Buyer postfolio
Buyer portfolio
Bad risk
12
Why Credit Insurance?

• Risk Mitigation
• Political Commercial Risk- for export business
• Commercial Risk for domestic business.
• Policy assignable to the financial institution or
  factor
• Allows companies to offer customers longer terms
  while maintaining a captive relationship
• Combined with Bank Discounting programs and
  factoring programs allows off-balance sheet
  financing
• Ease of administration

13
Credit Insurance - Buyer underwriting

• The credit insurer holds the underwriting pen and
  assesses the predominant part of the buyer
  portfolio
• Tools
• Buyer Review Submission Form Risk Scores
• Management Accounts
• Visiting / telephone contact with buyers direct
• Agency reports Credit Reform, Graydon, DB,
  Company Watch, etc
• Payment experience from other suppliers
• Information from banks
• Rating Agencies SP, Moodys, KMV

14
Credit Insurance - Special Risk Management

• Credit Insurers need to be pro-active and careful
  in minimizing their losses. In addition, they are
  aware of their role in society and have therefore
  established an intensive care unit.
• These units monitor buyers closely, either
  nursing the business back to health or commencing
  managed exit strategies.
• Atradius example - Woolworths
• Total exposure of GBP 190m when it came to the
  intensive care unit
• Against the advice of the banks and KPMG, we
  managed out of the risk as per 31 July 2008
• Administration was announced on 26 November 2008
• Atradius example - Ukraine
• Large amounts of outstandings from various
  policyholders
• Ukraine is practically insolvent
• Large scale operation whereby we are working very
  closely with the policyholders to gradually
  reduce the risk and/or reclaim the goods that
  were already shipped

15
Trade transaction process
Probable loss
Due date
Shipment date
Overdue reporting date
Contract date
Invoice date
Protracted default
Waiting period
120 180 days after due date
Pre-credit risk period
Credit period
Maximum extension period
90 days after due date
max 6 months
Max 180 days

60 days
Invoicing period (max 30 days)
Submit claim
Transfer for collection
Apply for credit limit
Apply internal credit management procedures
Cover stops
Send invoices
16
Credit Insurance - Drivers for terms and
conditions

• Contact with insurer via insurance broker or
  direct
• Offer based on the discussions containing amongst
  others
• Risk sharing (first loss)
• Market segment
• Countries covered
• Debtor spread
• Buyers covered
• Tenor
• Historic performance
• Credit management

17
Receivables Management
Credit Insurance
Challenges of Credit Insurance
Factoring and Credit Insurance
18
Challenges for the credit insurance market
claims ratio management

• The changed world environment has urged the
  credit insurance industry to act more rapidly
  than usual

Atradius stand alone without CyC
19
Challenges - Claims development
Claims development Atradius
20
Challenges - Premium rate development
21
Challenges - Exposure management
In EUR m
22
Challenges - Perception from the market
Challenges - Perception from the market
23
Steep downward growth forecast revisions.
Sources Consensus Forecasts Atradius Economic
Research. Note Consensus GDP growth forecasts
for 2009 from 12 consecutive surveys (between
January and December 2008).
24
Insolvency growth across the business cycle.
Sources Global Insight Atradius Economic
Research. Note Values up to Q3 2008. Insolvency
growth rates based on 4-quarter trailing
insolvency counts.
25
Insolvency growth examples - Spain
26
Receivables Management
Credit Insurance
Challenges of Credit Insurance
Factoring and Credit Insurance
27
Combination of Credit Insurance and Factoring

• The traditional world where credit insurance and
  factoring were clearly separated are long gone.
  Instability, insecurity, and more demanding
  customers require strong information, cover and
  finance which can only be achieved by a
  combination of credit insurance and factoring.
• We have a long term experience in cooperating
  with Factoring companies
• The feedback why factoring companies use credit
  insurance is as follows
• Knowledge detailed information on many buyers
  worldwide
• Loss minimization advice on how to resolve
  overdues and delays
• Debt collection capability
• Risk mitigation
• Growth credit protection enables the offering
  financing without recourse
• Cost credit insurance tends to be cheaper than
  the two factor protect collect system
• Management Reports on a weekly or monthly basis

28
Key themes of Credit Insurance and Factoring

• Customer vetting It becomes obvious that
  certain factoring customers have a substantially
  higher share in producing losses than others.
  Insurers should get involved already at the
  customer selection stage
• Exposure management Factors traditionally have
  a worse ratio of insured shipments to TPE (Total
  potential exposure) as there is hardly any
  incentive for factors to give up capacity
• Collection efforts The vast majority of
  factoring claims result from protracted default.
  In order to minimize these losses factor and
  credit insurer need to move even closer together.
• Terms and conditions Rates will go up.
  Conditions will be tightened (covered percentage,
  discretionary limits, etc)
• Trade sector/buyer country selection Certain
  sectors and country risks will be reviewed
  intensively going forward (metals, textile
  Eastern Europe, former CIS, Asia, Latin America)

29
(No Transcript)