trade credit insurance webinar - plastics leaders with a unique combination of experience...

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Trade Credit Insurance Webinar

Sponsored by:

Canadian Plastics Industry Association

February 6, 2014

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Indemnis Trade Risk Management

• Leaders with a unique combination of experience encompassing over 45

years in credit insurance, financing and factoring and crossing North

America:

– Board, Chief Executive, Senior VP, Chief Underwriter

– Strategic to operational roles crossing most discipline

– Relationships and expertise touching every receivable risk management

solution

• Business venture relationship with property and casualty brokers

– Provide specialist credit insurance expertise to Partner’s clients and

relationships

http://www.bensonkearleyifg.com/

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Some P&C Broker Partner Comments

2005 Year Integro Insurance Brokers was established

>2,000 Integro clients as of January 2012

>$1 billion Annual volume of insurance premiums placed

$100 Million Annual revenue

>21% Consistent double-digit annual growth

>400 Employees

14 Offices worldwide, including Canada, US, UK and Bermuda

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Even the Largest Companies Fail

• Trade credit risk transfer is just one of the benefits of credit insurance.

Company Name Industry Date Liabilities

Furniture Brands International Retail - Furniture Sep-13 $550 million

Loehmann's Holdings Inc. Retail – Designer Discount Dec-13 > $100 million

Orchard Supply Hardware Stores Corporation

Retailer - Hardware Jun-13 $480 million

GateHouse Media, Inc. Publishing Services Sep-13 $1,300 million

Constar International Holdings LLC (2013)

Manufacturer - Plastic Containers

Dec-13 > $500 million

Allens, Inc. Manufacturer - Food Oct-13 > $100 million

Fisker Automotive, Inc. Manufacturer - Electric Auto Nov-13 $468 million

Global Aviation Holdings Air Transport Nov-13 > $500 million

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Plastics Industry Related Exposure

• Constar International

– Leading supplier of PET (Polyethylene terephthalate) containers and focused

on the food and beverage industries

– Bankrupt three times in last five years

– Hoovers/D&B rates their credit rating as: Low

• low projected risk of delinquency and a moderate to low risk of failure.

– December 2008 - $175M Debt for Equity swap

– January 2011 - $151M Debt for Equity swap

• Unsecured claimants were targeting a maximum of 14 cents on dollar

– December 2013 – Chapter 11 filing – Over $500M Liabilities

• Cited severe liquidity crisis with slowdown in business (lost PepsiCo contract)

• Multipak Ltd. – 12/2012 - Proposal under Bankruptcy and Insolvency Act

– One of Canada’s leading printers and converters of flexible packaging

materials.

– Part of family owned company founded in 1918.

– Unsecured Creditor Exposure $9.2M.

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Credit Insurance Drivers

Credit protection is becoming more accepted as a valuable business tool in North America with the market growing 15% to 20% per year

Why?

– Avoid credit losses -Cap bad debt

– Eliminate concentration risk

– Improve financing arrangements

– Reduce/Cap bad debt allowance

– Enhance credit management

– Vet largest customers

– Avoid export credit & political risk

– Support export growth

– Grow sales where customer credit

may be restricted.

Over half of the credit insurance policies written are assigned to banks

$17 Trillion – GDP – North America

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Specialist Broker Service Expectations

• Marketing your program – Ensure you are well informed as to the alternatives.

– Position you to negotiate your renewal.

– Consider traditional markets as well as non-cancellable and excess alternatives

– Consider USA and International markets where reasonably priced coverage is unavailable in Canada

• Improving coverage – Limited information - assist in securing the information to reconsider larger limit shortfalls.

• Few if any brokers have this capability.

• Credit insurer’s ability and willingness to develop new information is questionable.

– High risk customers - pursue alternative forms of one-off coverage or an excess solution.

• Claims management – Leverage underwriting expertise to best advise clients in qualifying claims.

– Pre-vet claims to ensure they are presented to the underwriter for best results responding to all of the

underwriter’s inspection criteria.

Servicing, compliance and

new capacity needs

Propose alternaterisk transfer

solutions and execute

Reviewtrade credit risk

management processes

Evaluate trade risk

management strategy

Understandcorporate strategy

Strategy and Risk Assessment Solution Development Program Transition/Service Plan

Key

Del

iver

able

s Analyze Trade Risks

Consult regarding

risk retention and

potential risk scenarios

Query: Approach consistent with

Corporate Strategy?

Corporate Strategy Review

Existing Credit

Protection Program Review

Operational Review of Credit Policies and

Procedures

Examine Alternatives

Customized Solution

Marketing to Many

Credit Protection Providers

Compliance

Buyer Capacity

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Credit Insurance World Market

World Market 2004 ICISA members (credit insurance)

Total Market appr. EUR 4,56 bn

Credito y Caucion 8.6%

CESCE 2.4%

Coface 17.8%

Mapfre 2.5%

QBE 1.7%

Chartis 2.4%

Others 9.1%

Atradius 21.1%

Euler Hermes 34.4%

Total Market Premium $6.9 Billion

Source: ICISA

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Credit Insurance Industry Barometer - Euler Hermes Net Loss Ratio

• Loss ratio have improved from 88.4% high in 2009

• Euler is very profitable at current 52.6% loss ratio

– Profit before tax of Euro330M for 9 months on Revenue of Euro1,861M.

– 18% profit margin before tax

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Eurozone Credit to Corporations Continues to Contract

• The Eurozone is expected to

grow at a modest pace of

0.9% in 2014 after a 0.5%

contraction in 2013.

• With many structural changes

to improve competitiveness,

southern European countries

now need the support of

lenders to expand.

• Weak European bank balance

sheets are hampering the

recovery.

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Market Conditions Have Improved

2005 North American Credit Insurance Market Premium Income $526 Million

Insured Client Revenues $262,967 Million

EULER

29%

EDC

15%Atradius

15%

Coface

14%

FCIA

10%

AIG

17%

North American Credit Insurance

Market Premium $1,300 billion

• Underwriter loss ratios have improved

• North American loss ratios have improved better than Europe

• Markets have quickly shifted focus to top-line growth

• Rates continue to come down and coverage has become less restrictive

• Other markets - Cancellable:

– GCNA (Canada)

• Other - Non-cancellable:

– QBE

– Ace

– HCC

– Zurich

– RedRock/ Lloyd’s (Canada)

– Equinox/ Lloyd’s (USA)

• Indemnis has licenses in

Canada and the USA

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Cancellable vs Non-cancellable and Structuring Techniques

Cancellable – Limits Underwriter

• Usually a lower Discretionary Credit

Limit (say $250K)

• Client looks to leverage the

underwriter’s proprietary data and

large credit risk underwriting capability

• Underwriter can reduce or cancel

buyer coverage based on financial

strength of the buyer

Non-cancellable Underwriter

• Coverage in place for the policy period

• Higher DCL (say $1,000K)

• Higher first loss retention

• Typical auto-cancellation clause –

future sales are not covered when

account goes over (NQL) $50K over

60 days past due

Some Structuring Techniques

1. First Loss Deductible - Catastrophic

2. Non-Qualifying Loss (NQL)

– If ultimate loss is less than the NQL

amount, the receivable is not covered

– If loss is above the NQL amount then the

receivable is covered at 90%

3. Each and Every (E&E)

– Policyholder would retain the first say

$500K to $1,000K of every customer loss

4. Largest 20 to 50 Customers

5. Datum Line

– Cover all customers over – say $1,000K

– To qualify for cover the customer

receivable must exceed datum line in

previous 12 months

6. Excess of Loss

– 2nd market writes in excess of primary

7. Syndication

– 2 or more markets share risk

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Client

Credit Insurance With Specialist Broker

• Minimal effort required by client to consider Credit Insurance

– 2 page application

• Get underwriters’ risk perspective on largest customers

• Quantify receivable portfolio credit risk

• Act on behalf of client to structure, market, negotiate, etc.

• Leverage Specialists’ credit insurance knowledge and market relationships

• Daily contact with markets

• Advise of market conditions

• Error & Omission responsibility

– Policy conditionality, Claim filing, Reporting, etc

Specialist

Broker

Coface

Euler Atradius Lloyd’s

GCNA

AIG

EDC Other

Non-cancellable

1 Application Marketing,

Comparison

& Analysis of

Quotes

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new capacity needs





Evaluate trade risk

management strategy



Key

Del

iver

able


Consult regarding

risk retention and



Corporate Strategy?


Existing Credit



Procedures


Customized Solution

Marketing to Many


Compliance

Buyer Capacity

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Corporate Default Rates and Anticipated Bad Debt

• In 2008 and 2009 underwriters reduced coverage on the highest risk companies to reduce their loss ratio

• Most bad debts are expected to come from these higher risk rated buyers

Global Corporate Cumulative Average Default Rates

(1981-2008) (%)

-

5

10

15

20

25

30

35

40

45

50

AAA

(1)

AA

(2)

A

(3-4)

BBB

(4/5)

BB

(5/6)

B

(6/7)

CCC/C

(7-8)

S&P Rating (Credit Insurer Proxy)

De

fau

lt %

... 1 Year Average

5 Year Average

1 Year Maximum

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Indemnis Collection of Proprietary Information – Over a 2 week period

• Indemnis will obtain private and confidential information from customers where the underwriter has been unsuccessful.

• With the majority of losses expected to come from these buyers where risk is uncertain, coverage here is of greatest importance.

Policyholder Buyer Indemnis Info Collected Limits at Risk Buyer

Indemnis Collected

Proprietary Information

Limits at Risk

($'000)

Building Products CR Co Yes 100

Food Mfr/Distributor PP Paper Yes 250

Chemical DistributorPaint Manufacturer Yes 1,500

Food Mfr/Distributor US Food Distributor Coord with U/Wers 2,500

Chemical DistributorPackaging Company Yes 250

Food Mfr/Distributor Sweetner Co Yes 100

Food Mfr/Distributor Chicago Food Mfr Yes 300

Food Mfr/Distributor US Food Retailer Yes 1,300

Automotive SupplierMexico Customer Yes 1,500

Lobster Distributor Cruiseline Food Caterer Yes 250

Steel Distributor Metals Co Yes 100

Pet Food Mfr Russian Customer Yes 1,500

Steel Distributor Iron Company Yes 650

Steel Distributor Major Builder Yes 3,000

Steel Distributor Construction Co Yes 300

Steel Distributor Construction Co Yes 800

Window Cleaning Equip MfrMajor Builder Yes 450

Total Cover 14,850

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Buyer Coverage Resolution Examples

• Large Paint Manufacturer - Mexico

– Obtained confidential financial highlights from Canadian Buyer and bank

– Subsequently obtained financials from Mexican parent for underwriter

• Packaging Company - Canada

– Multiple calls with bank, buyer and underwriter

– Obtained financials, interims, projections, bank facility details

• Large Food Retailer - USA

– Obtained confidential balance sheet from controller.

– Subsequent calls with Treasurer and controller to obtain additional

information.

– Subsequent calls arranged with 2 different underwriters to secure cover

required for 2 clients.

• Pet Food Distributor - Russia

– Obtained financials under a confidentiality agreement from CFO.

– Arranged a call with Russian underwriter and buyer.

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Indemnis Approach to Shortfalls - Secure Proprietary Information & Analysis

• Proprietary information collected by Indemnis could include:

– Financials, bank, financial highlights, verbal, viewed, etc.

• Information and authorizations are collected from:

– CFOs, Controllers, Treasurers, CEO/Owners, lenders, etc.

• Collection of confidential proprietary information requires a unique

skill set that Indemnis knows very well:

– Need to convince buyer it is in their interest to provide information.

– Respect for Policyholder/Buyer relationship is paramount to all contact.

– Persistence is critical to success

• many buyer limits requiring 10 or more calls to multiple people.

– Few if any brokers have this capability.

– Credit insurer’s ability and willingness to develop new information is

questionable.

• Analysis of Buyer

– Indemnis will analyze buyer to ensure underwriter is properly considering

– Indemnis will participate on buyer/underwriter calls to guide discussion

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New Client – Case Study

• Indemnis Approach to Shortfalls

1. Secure new information – 2. Analyze buyer – 3. Consider one-off alternatives

• Here is just one example of a new account and our activity over a 3

month period to get coverage reinstated with a leading underwriter.

• Experienced a large number of coverage reductions/declinations.

• With the BOR, Indemnis identified all of the shortfalls with the client.

• Indemnis then started collecting information or analyzing financials on

the largest shortfalls and client priorities.

Summary Results – Coverage Improvements Reinstated 35

DCL Reinstated 3

Financial Information Provided - Not Insurable 7

No Longer Required 2

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1. Secure Proprietary Information – Activity Details of Case Study

Buyer

Confid'lCity

Prov/

Stateunderwriter Action Indemnis Action outcome

11 Markham Ontunderwriter cancelled

cover - slow paySent bank authorization to controller reinstated

12 Vaughan Ont

underwriter indicated

that they did not

receive LOE

Limit reinstated reinstated

13 Toronto Ontunderwriter has no

information

Spoke to Daniel - he is filling out the bank

authorization, received authorzation. Obtained bankreinstated

14 Stouffville Ont

underwriter has no

information,

declined

Left message for Catherine Obtained bank

information and reapplied for cover.reinstated

15 Maple ontunderwriter has no

information

Spoke to Eleanor, obtained bank authorization,

received bank line inforeinstated

16 Toronto Ont

Declined, no

coverage, info

limited

spoke to owner Joe Montana and requested bank

release. Bank report obtained 11/4, reapplied for

cover

reinstated

17 Gormley Ontunderwriter could not

locate buyer

called President, sending bank authorization and

incorporation papers. Followed up several times,

keeps promising to send info. Last follow up 9/1/09.

Received bank info - reapplied for over 12/9

reinstated

18 King City Ont cancelled

waiting for bank /fax from banker, got bank

authorization, got bank - sent to underwriter - await

response

reinstated

19 North York Ont

underwriter

cancelled cover, slow

pay

Sent bank authorizaiton to controller. Fazal would

not release any informationreinstated

20 Maple Ontunderwriter has no

informationObtained Bank reference - 12/11 reinstated

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2. Buyer Analysis – Case Study

• Coverage declined. High leverage, nominal equity, losses.

• Request to re-consider.

• Rationale to reconsider - Indemnis obtained audited and interim f/s

– This company was formed in 2005 and is the combination of a number of acquisitions since then.

– The acquisitions are cash flow driven (supported by their lenders) and a large amount of goodwill has resulted.

– Tangible equity is negative but looking at tangible equity assumes there is no value to the cash flows acquired.

• Liquidity – Indemnis obtained bank report.

– The company has a $6.5 M line of credit with 12/31/09 $4.3 M utilized. In addition cash balances are $4.6M

• Cash flow – Re-focus underwriter

– Cash flows are strong and the interest multiple is good (even is Amortization of PPE is not included).

– Profitable for the first 5 months of this year - Profit before tax and non-controlling interest of $973K.

• Financial analysis attached

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2. Buyer Analysis Case Study (continued)

• Underwriter approved required limit based on strong cash flow

despite high debt and negative tangible equity

Audited Audited

Interim

5 mth

7/31/2008 7/31/2009 12/31/2009

Earnings (loss) before income taxes

and non-controlling interest-3,824 -564 973

Amortization of property and

equipment4,024 5,718 2074

Amortization of intangible assets 1,400 1,710 713

Interest 2,306 2,076 665

One time Reorg Costs 1,049

Gain on Disposal of Assets -141 -126

Operating Income (EBITDA) 3,906 9,848 4,299

EBDIT/Interest Multiple 1.7 4.7 6.5

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3. Receivable Puts – Last Resort for Uninsurable Public Company Customers

Credit Insurance Receivable Puts

- Insurance policy - Contract to buy an account

receivable

- Usually covering all sales - Covers a single customer

- Insurer wants spread of risk - Only available on highest risks

- Insolvency &/or slow pay - Insolvency only

- 90% coverage - Strike price of 90% to 100%

- 10 bps to 50 bps on sales - 50 to 250 bps per month on cover

- Losses attaching to shipments/invoices - Losses occurring during contract

- Can include foreign sales & political risk - Not a licensed insurance product

- Not a regulated product

- Counterparty risk is put writer

Recently placed receivable put coverage on:

- Office Depot for a office supply manufacturer in the USA

- Sears Canada for a factoring company on a master program basis

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Accounts Receivable Put Pricing

Company Name Industry S&P Rating Put Pricing

Range (bps*) Pricing Trend

American Airlines Inc.

Airline B Outlook Stable Not Available Ch. 11

American Axle & Manufacturing Inc.

Automotive B+ Outlook Stable 10 to 15 Down

Navistar International Corp.

Automotive CCC- Outlook

Developing Not Available

Sprint Nextel Corp. Communication BB- Outlook Stable 10 to 15 Down

Eastman Kodak Co. Photo/Printing

Equip. Senior Secured CCC

Outlook Stable Not Available Ch. 11

Gannett Co. Inc. Publishing BB Outlook Positive 10 to 15 Down

Best Buy Co. Inc. Retail Electronics BB Outlook Stable 10 to 20 Down

RadioShack Corp. Retail Electronics CCC- Outlook Negative 300 Up

Sears Holdings Corp.

Retail CCC+ Credit Watch

Negative 175 to 200 Up

J.C. Penney Co. Inc. Retail CCC- Negative Outlook 200 to 225 Up

Toys R Us Inc. Retail CCC Outlook Stable 150 to 175 Up

Rite Aid Corp. Retail Drug Store CCC+ Outlook Stable 10 to 15 Down

Supervalu Inc. Retail Food B- Stable Outlook 10 to 20 Down

Office Depot Inc. Retail Office

Supply B- Stable Outlook 10 to 15 Down

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new capacity needs





Evaluate trade risk

management strategy



Key

Del

iver

able


Consult regarding

risk retention and



Corporate Strategy?


Existing Credit



Procedures


Customized Solution

Marketing to Many


Compliance

Buyer Capacity

26

Claims Support / Management – Key Success Factors

1. Structure policy to give client most flexibility

– DCL - Definition of Prompt/ Qualifiers/ etc.

– Past due reporting requirements/ Auto-cancellation/ NQL/ MEP

– Construed/ Pre-shipment / Services rendered

2. Know policy and the underwriter

– 45 years experience in credit insurance business – much of this on the underwriting side of the business

– Credit insurance is our only business

– Senior relationships with all underwriters

3. Regularly communicate policy requirements to client

– Policy delivery annually

– Reinforced throughout the policy year via

• Regular interaction to establish cover

• Active involvement in claims analysis

4. Actively work through claim situations with the client

– Request extension or file claim decision

– Pre-vet claims

– Submit claim based on methodology with greatest success for payment

– Interface with credit insurer

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The Claims Event and Indemnis Service

• Claims Event

– Indemnis gets involved when a claims event occurs or when there is the potential for a claim situation

• There are usually two options for consideration at this point:

1. Request Extension

2. File a claim

1. Request Extension

– Request Extension

– communicate to insurer how situation will work itself out without insurer involvement and over what period

– Reschedule Payments

– Obtain agreement from credit insurer to payment plan

– Indemnis will work with the client and often the buyer to coordinate a payment plan acceptable to the insurer

– This plan may involve ongoing trade with the buyer

– Insolvencies – will confirm scheduled debt with Trustee

2. File a Claim

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Discussion and Next Steps

Tom Leonard

Principal

Indemnis Trade Risk Management

t: 416-238-1017 (Toronto)

t: 212-295-8585 (New York)

f: 416-619-8131

[email protected]

www.indemnistrade.com

trade credit insurance webinar - plastics leaders with a unique combination of experience...

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