Credit Insurance: Valuable Tool for Domestic

1
Credit Insurance Valuable Tool for Domestic
International Credit Management

• Presented to
• NACM Gateway Region
• by
• Mark Regenhardt
• September 18, 2007

2
Agenda

• Recent Industry Trends
• Types of Credit Insurance
• Distribution Channels
• Sample Policy Structures
• Claims Process Recoveries
• Cost Benefit Analysis
• Open Account Customer Financing
• Medium-term Insurance Political Risk
• Q A

3
Recent Industry Trends

• Very soft market
• Concern over tightening in credit
• High demand in certain industries
• Low claims
• Several new players
• Consolidation Over
• Insurers selling information
• Select risk is possible
• Growth in global policies

4
What Does Credit Insurance Cover?

• Non-payment of trade obligations for political or
  
• commercial reasons
• Political Risks (foreign transactions)
• Government acts/political events that restrict
  payment
• Currency inconvertibility (aka, transfer risk)
• War, riot, insurrection or civil disorder
• Embargo
• Terrorism
• Commercial Risks (foreign and domestic)
• Commercial bankruptcy or legally protected
  reorganization
• Protracted default (aka, slow pay)
• Exclusions include disputes

5
Why Use Credit Insurance?

• Risk mitigation
• Increase sales via open account
• Facilitate financing or sale of A/R
• Access insurers information/database
• Reduce collection expenses
• Standardize credit decision process

6
Credit Alternatives Vs. Risk
CUSTOMER DESIRE
REPAYMENT RISK
High
High
Insured O/A
Low
Low
CIA Letter of Credit Documentary
Collection Open Account
7
Types of Credit Insurance

• Short-Term Credit Insurance
• Export domestic coverage covering non-payment
  of A/R
• Single and multi-buyer programs
• Supports up to one year repayment terms
• Medium-Term Credit Insurance
• Facilitates LIBOR-based equipment and project
  financing for foreign obligors
• Supports up to 1 to 5 year repayment terms

8
North AmericaShort-term Credit Insurers
9
North AmericaMedium-term Credit Insurers

10
Credit Insurance Distribution Channels

• Captive Sales Agents (Euler, Atradius Coface)
• Generalist Brokers
• Specialist Brokers

11
Credit Insurance Policy Types

• Single Buyer (Export and Domestic)
• Short Term Supports up to 1 year repayment
  terms
• Medium Term 1 to 5 year terms
• Long Term 5 to 7 years
• Banks or corporations can be the insured (policy
  holder)
• Multi-Buyer (Export and Domestic)
• Whole-Turnover
• Key Account (ex. Top 20 Buyers)
• Select Risk (ex. Latin America Only)
• Banks or corporations can be the insured (policy
  holder)
• Usually short-term cover but medium-term
  multi-buyer cover is possible

12
Multi-Buyer Credit InsuranceStyles of
Underwriting

• Excess-of-Loss
• Policies with deductibles and discretionary
  authority
• Insured continues to make own credit decisions
  for most buyers
• American Style Underwriting
• Insurers include AIG, FCIA, Ex-Im Bank, HCC, QBE,
  ACE
• Ground-Up
• Policies with low or zero deductibles and low or
  zero discretionary authority
• Insurance company makes most or all credit
  decisions
• European Style Underwriting
• Insurers include Atradius, Coface, and Euler

13
Common Credit Insurance Parameters

• Policy Limit of Liability
• Deductible
• Indemnity (inverse of co-insurance)
• Premium Rates (Sales or Limits Based)
• Minimum Premium
• Credit Limits
• Non-Qualifying Loss

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Short-term Multi-buyer Key Account Policy

• Limit of Liability (LOL) 30,000,000
• Indemnity 90
• Deductible None
• Largest Buyer Limit 30,000,000
• Transaction Tenors 30 120 days O/A
• Insurers Two Syndicated 50/50
• Waiting Period 90 days
• Countries Peru, Mexico, Italy, U.S. Canada
• No. of Buyers 10
• Premium rate 0.065 per 100

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Short-term Single-buyer Policy

• Limit of Liability (LOL) 30,000,000
• Indemnity 80
• Deductible None
• Transaction Tenors 120 240 days O/A
• Insurers One
• Waiting Period 90 days
• Country Various
• Premium rate None, Flat 300,000
• Collection Fees None

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Typical Credit Insurance Policy
Insurer

Claim Payment
Reports Premium
Broker
Credit Insurance Policy HQ, St. Louis, MO

Additional Insured, TX

Additional Insured, KS

Additional Insured, IL
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Global Credit Insurance Policy
Insurer U.S.A.
Reports Premium
Claim Payment
Broker U.S.A.
Master Policy HQ St. Louis, MO
Locally Sub-Policy Mexico
Locally Sub-Policy Brazil
Broker Mexico
Broker Brazil
Insurer Mexico
Insurer Brazil
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Benefits of Global Policy(Global Negotiation-
with Local Service)

• Global Centralized Policy Negotiation
• Local Language Service Support
• Compliance with Local Insurance laws (which
  differ by country)
• Premiums Are Fully Tax Deductible
• Claim Payments Match Country of Loss

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Policy Administration

• Sales reporting premium payment
• Qualifying customers for insured lines of credit
• Past due reporting
• Cease-shipment or automatic withdrawal of cover
  provisions
• Rescheduling of debt must be pre-approved
• Claim deadlines and satisfactory filing of
  claim form and supporting documents

20
Syndicated Policy

• Multiple Insurers - one policy
• Increasing in popularity
• Can be for one or multiple buyers
• Insurers agree to pricing and other policy terms
• Leverages global insurance capacity

Insurer No. 1 10 Mil. Buyer Limit
Insurer No. 2 10 Mil. Buyer Limit
Insurer No. 3 10 Mil. Buyer Limit
30 Mil. Total Buyer Limit
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Top-up Policy

• Two or more policies
• Can be for one or multiple buyers
• Common with existing policies
• Price varies by layer
• Layer 2 lower priced than Layer 1

Excess Insurer Policy 2 15 Mil.
30 Mil. Total Buyer Limit
Primary Insurer Policy 1 15 Mil.
22
Claim Payment Flow Chart
0 - 90 Days Past Due
30 Days
30 60 Days
Invoice Period
Waiting Period
Claim Processing Period
Claim Payment
Collection Expense Paid by Insurer
Collection Effort Responsibility of Insured
Collection Expenses Avoided by Insured
Some Insurers Indemnify this expense
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Sample Claim Payout
1,000,000 Bad Debt
1,000,000 Total Claim
Claim Payout 750,000 x 90
675,000
750,000 Insured Limit
Recovery
Sharing 675,000/1,000,000 67.5
Insurer, 32.5 Insured
1,000,000 Total Claim
675,000 Claim Payment
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Recovery Scenario (After Claim Payment)
100K Recovered From Debtor
85K Net Recovery
15 Insurer Collection Expense
1,000K Total Claim
Recovery
Sharing Insurer 85K X
.675 57.3K Insured 85K X .325 27.7K
27K Recovery
675K Claim Payment
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Top Reasons for Claim Denial

• Unresolved disputes
• Failure to meet credit limit requirements
• Non-payment of premium
• Past-due reports not filed
• Shipments made when customer had excessive past
  dues
• Late claim filing
• Unauthorized debt restructuring
• Key required documents missing
• Documents not properly executed

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Cost Benefit Analysis

• Assumptions
• Insured sales 30,000,000
• Gross margin 20
• 50/50 domestic/export
• Premium rate 0.20 per 100
• Estimated premium 60,000
• Largest credit limit 3,000,000
• Average credit limit 250,000

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Cost Benefit Analysis

• Incremental Sales Needed to Pay for Policy
• 60,000/.20 300,000 or 1
• Incremental Credit Limit Needed to Pay for
  Policy
• 300,000/6 50,000 (60 days O/A)
• Incremental Sales Needed to Pay for Largest Loss
• 3,000,000/.20 15,000,000 or 50 !

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Profit Loss Impact

• (000) No Ins.
  Insured
• Revenue 30,000 30,000
• Profit (20) 6,000
  6,000
• Less Bad Debt 3,000 300
• Less Insurance 60
• Net Profit 3,000 5,640
• Savings 2,640 / 60 44 Year Payback Return

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Open Account Trade Finance Program

• Insurance Bank A/R purchase program open
  account trade finance program
• Reduces cash flow burdens of the customer
• Credit insurance protects the balance sheet as
  sales and A/R exposure grows
• DSO rises, so exporter sells the insured foreign
  A/R to bank monthly or bi-monthly
• Pass bank finance and insurance costs to
  customer, perhaps even adds a small margin for
  especially long terms

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Sample Bank Term Sheet forA/R Purchase Facility

• Recent term sheet from a large commercial bank
  for a 15 million
• foreign receivable purchase facility. Terms
  included
• Credit insurance required with assignment of
  proceeds to bank
• Supported invoiced terms of up to 180 days
• A/R sale/purchase could be made weekly or
  bi-weekly with a 500,000 minimum purchase per
  transaction
• Bank purchases title to invoices and pays 90
  (the amount of insurance indemnity) of the face
  value of invoices less the bank's "Discount
  Margin
• The bank's "Discount Margin" was LIBOR 0.75
  per annum, calculated on the basis of 90 of the
  face value of each invoice purchased
• Seller retains "First Loss Deficiency Guarantee"
  of 150,000 to match the credit insurance policy
  deductible
• One-time structuring fee 25,000

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General Structure (Relative to Previous Sample
Bank Term Sheet)

• Credit insurance policy issued to exporter
• Insurance attaches when shipment is made or
  service rendered
• Bank that purchases insured A/R is assigned as
  Loss Payee
• Claim payments made to bank
• Exporter/insured must retain policy risk
  retention
• Bank has recourse back to exporter for uninsured
  amounts (deductible, co-insurance, or
  non-compliant A/R)
• Exporter responsible for administration of
  insurance policy
• A/R Collection
• Bank buys A/R and hires exporter back as the
  servicing agent on what is now the banks asset,
  or
• Bank services/collects the A/R on its own

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Supplier Credit Receivable Finance Program
(Insurance Backed)
Insurer
3. Assignment of Insurance Policy Proceeds
Bank
2. Receivable Purchase Agreement
Insured/ Seller
1. Credit Insurance Policy
5. Receivable Purchase
4. Invoice
6. Payment
Customer
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Alternative Structure Bank as the Insured

• Credit insurance policy issued to bank
• May be of greater interest to bank for purchases
  of Largest Accounts A/R (such as Top 10
  customers)
• Coverage attaches once bank purchases the A/R
  from exporter
• Claims filed by the bank
• Bank must retain policy risk retention
• Bank generally cannot have recourse back to
  exporter (A/R seller) for uninsured amounts
  (deductible, co-insurance, or A/R out of
  compliance)
• Bank responsible for administration of insurance
  policy
• Bank must collect all necessary documentation
  from A/R seller/exporter to ensure it can file a
  complete and satisfactory claim
• A/R Collection
• Bank buys A/R and hires exporter back to be
  servicing agent on what is now the banks asset,
  or
• Bank services/collects the A/R on its own

34
Buyer Credit Finance Program
Bank/ Insured
Insurer
1. Credit Insurance Policy
4. Receivable Purchase
Seller
2. Loan Agreement
5. Payment
3. Invoice
Customer
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Medium-Term Credit Insurance

• Medium-Term defined as transactions with
  repayment terms greater than one year
• Available for capital equipment or project
  financing transactions
• Supports LIBOR-based loans by a U.S.A. bank to
  overseas buyers
• Maximum terms to dealers is 2 years
• Maximum terms to end-users is up to 5 years
  (depending on transaction size)
• Semi-annual payments of principal interest
• Transaction backed by comprehensive (political
  commercial) credit insurance

36
Ex-Im Bank MT Basics

• Coverage carries full faith credit of U.S.
  government
• Limited coverage for foreign content
• 15 minimum down payment required
• 100 indemnity on amount financed
• Equal semi-annual payments of principal
  interest
• Flat rate premium based on country, payment
  terms, disbursement period, and financial
  strength of obligor
• Buyer or supplier credit structure
• Standard documentation used for obligors in any
  country

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Private Sector MT Basics

• Unlike Ex-Im Bank, private insurers typically
  structure coverage with 90 indemnity
• Typically an alternative when foreign content
  precludes Ex-Im Bank coverage
• No down-payment requirements
• Underwriting criteria less stringent and
  application process less cumbersome than Ex-Im
  Bank, and turn-around times are much faster in
  the private market
• Bank funds the MT notes but will need recourse
  back to exporter for the uninsured portions in
  the event of a default
• Private insurers require exporter to develop
  legally enforceable promissory note and other
  documentation

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Private InsurersMaximum Terms

• Insurer Maximum Terms
• AIG 3 years
• FCIA 5 years
• EIC 5 years
• Atradius 5 years
• Coface 5 years
• HCC 5 years
• Zurich 7 years

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Why Use Political-Risk Insurance?

• Protect overseas assets against Confiscation,
• Expropriation, Nationalization (CEN) and
  Political
• Violence (PV)
• Obtain Currency Inconvertibility (CI) cover to
• protect profit repatriation from foreign
• operations
• Protect against wrongful-calling of guarantees
• Cover trade transactions with sovereign obligors
• Protect against Contract Repudiation or Non-
• Delivery

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Thank You

• Mark Regenhardt
• International Risk Consultants, Inc.
• 212 Crystal Street
• Suite B
• Cary, IL 60013
• Tel [phone]
• Fax [phone]
• Cell 847-651-0851
• E-mail mregenhardt_at_irc-group.com
• Web www.irc-group.com