Virginia Manufacturers Association Trade Credit and Political Risk Overview James E. Dezell Senior Vice President New York, NY
What is Trade Credit Insurance? It is protection for a company’s domestic and/or foreign Accounts Receivable from non-payment caused by the following : • Insolvency – Chapter VII, XI or its equivalent in the country the loss occurs • Protracted Default – Continued delinquency / non-payment / inability to pay (without a insolvency) • Political Risk – Currency Inconvertibility / Transfer Risk – Embargos, Moratoriums or War – License Cancellation, Public buyer defaults (Please Note: Policy “Triggers” vary from policy to policy. The three bullet points above do not necessarily trigger coverage for all Trade Credit Programs) 1 MARSH October 23, 2012
Benefits of Credit Insurance • Protects against catastrophic bad- debt losses (it is a “sleep” insurance) • A Policy provides third-party analysis of credit risks (credit insurance underwriters can assist a company’s existing Credit Department) • Credit insurance may improve lending arrangements, either in asset- based borrowing situations, or on funding for international receivables • Trade credit may enhance any A/R securitization program in force. • A Policy can enable a company to expand sales more aggressively by passing risks off to a carrier; terms of sales can be extended by passing risks to the insurer. Letter of Credit usage can be reduced. 2 MARSH October 23, 2012
Why Companies Use Credit Insurance • Trade credit can help a company expand into new territories more safely and securely. • Credit insurance can assist companies in growing sales by treating certain internal credit limits as self-retention levels, then selling beyond that level, and passing overage off to the insurer. • Trade credit addresses the significant concentration risks most larger companies have to a select group of accounts. • Credit insurance can be a tool for companies to comply with Sarbanes- Oxley requirements by addressing and protecting against material changes. 3 MARSH October 23, 2012
Potential Policy Structures that are Available • Single Debtor Policy: As the name implies, insures only one key debtor. Premiums dependent on the credit quality of the insured account. • Key Account Policy: Policy can be structured to insure on a named basis as few as 3 accounts, all the way up to 200 accounts. Typically written with no deductible, and are structured with a 10% coinsurance. • Whole Turnover: Insures all of a company’s sales; typically structured to cover smaller accounts through a blanket level of cover (Discretionary Credit Limit), then larger accounts are named to the Policy. • Specific Account: Specific accounts selected to be insured; insurers require that selection basis not be totally adverse. 4 MARSH October 23, 2012
U.S. Trade Credit Insurance Market by “Type” Export Agencies & Traditional Catastrophic DIstressed Syndicates * * Please note that QBE, HCC, Zurich, ACE and Ironshore are not yet admitted in all US states. Surplus lines or Free Trade Zone provisions may apply. 5 MARSH October 23, 2012
The True Cost of Bad Debt Losses Additional Sales Needed to Recoup that Loss Amount of Loss/Write Off Assuming 2% pre-tax profit Assuming 5% pre-tax profit margin margin $250,000,000 $100,000,000 $5,000,000 $25,000,000 $1,250,000,000 $500,000,000 6 MARSH October 23, 2012
Volatility in the mist… • The total assets of public companies filling bankruptcy in 2008 exceeded $1.2 billion • There was a major bankruptcy filed every seven minutes in 2009 • Revolutions are occurring throughout the Middle East • Greece’s economy has deteriorated • Spain was downgraded last week • Growth in China is slowing • Italy and Portugal could be the next troubled corridors of Europe • As so many things change, the domino effect prevails: what will be the impact on the rest of the world if there are a great deal of corporate failures in the U.S., and in Europe? 7 MARSH October 23, 2012
“I don’t need credit insurance. I sell to some really strong companies…” Remember these? Levitz Furniture Adelphia Communications Border’s Bookstores Circuit City Enron Lehman Brothers Best Products Washington Mutual bank Nortel Phar-Mor Drugstores WorldCom Fleming Foodservice Silicon Graphics Syms MF Global Blockbuster Linens-N-Things Parmalat The Sharper Image Caldor 8 MARSH October 23, 2012
“I’m selling into low risk countries - I don’t need political risk cover.” • The United States initiated trade sanctions against India and Pakistan, which voided American exporters’ licenses -- causing numerous political risk losses. • Mad Cow disease caused many European countries to ban the import of British beef, another political risk scenario insurers paid on. • Argentina’s economic crises • Japan’s banking system • South East Asia’s economic collapse • Greece’s bail -outs 9 MARSH October 23, 2012
An Overview of Straight Political Risk Solutions Confiscation, Expropriation, Nationalization Selective Discrimination Forced Divestiture Cancellation/ breach of License or Concession PROTECTING YOUR CROSS- Expropriation Business Interruption BORDER Full Political Violence Exchange – Transfer Risk INVESTMENTS & Forced Abandonment Contract Frustration OPERATIONS 10 MARSH October 23, 2012
Recent Country & Political Risk Issues Driving Discussions • Direct Expropriations: Argentina (Repsol), Venezuela (cross sector), Bolivia (mining) • Other Gov’t/Regulatory actions: Ivory Coast cocoa embargo, Guinea, DR Congo, Zambia, Argentina, Mongolia, “the ’stan’s” (Kyrgyz, Kazakh, Tajik, Turkmen…) • Political violence/civil unrest: Arab Spring revolutions of Tunisia, Egypt, Libya, terrorism losses in Indonesia, Pakistan, India, Thailand politically motivated violence in Ghana, continuing conflict or tensions in DR Congo, Philippines, Syria and the Ivory Coast • Credit & non-payment: Ukraine & Kazakhstan (virtually systemic banking system defaults), Bahrain, Brazil (soft-commodity trader), Russia Source: Marsh Confidential Egyptian Upheaval Puts Spotlight On Political-Risk Insurance NEW YORK (Dow Jones)--The upheaval in Egypt is causing firms doing business in far-flung corners of the world to look at insurance that protects against losses from the sort of turmoil that has unsettled the Middle East. As protesters have amassed in Cairo and other cities to demand the resignation of Egyptian President Hosni Mubarak, several foreign companies curtailed operations and evacuated workers--at least for a time. General Motors Co… 11 MARSH October 23, 2012
Contact Information, New York Trade Credit James Dezell Billy Trigg Senior Vice President Senior Vice President U.S. Practice Growth Leader Marsh USA, Inc. Rutherfoord 1166 Avenue of the Americas 1001 Haxall Point New York, NY 10036-2774 Richmond, VA 23219 P: (212) 948-2817 P: ( 804) 915-5617 M: (917) 439-5346 M: (804) 356-9966 James.Dezell@marsh.com William.Trigg@rutherfoord.com 12 MARSH October 23, 2012
Marsh Notice This document and any recommendations, analysis, or advice provided by Marsh (collectively, the “Marsh Analysis”) are intended solely for the entity identified as the recipient herein (“you”). This document contains proprietary, confidential information of Marsh and may not be shared with any third party, including other insurance producers, without Marsh’s prior written consent. Any statements concerning actuarial, tax, accounting, or legal matters are based solely on our experience as insurance brokers and risk consultants and are not to be relied upon as actuarial, accounting, tax, or legal advice, for which you should consult your own professional advisors. Any modeling, analytics, or projections are subject to inherent uncertainty, and the Marsh Analysis could be materially affected if any underlying assumptions, conditions, information, or factors are inaccurate or incomplete or should change. The information contained herein is based on sources we believe reliable, but we make no representation or warranty as to its accuracy. Except as may be set forth in an agreement between you and Marsh, Marsh shall have no obligation to update the Marsh Analysis and shall have no liability to you or any other party with regard to the Marsh Analysis or to any services provided by a third party to you or Marsh. Marsh makes no representation or warranty concerning the application of policy wordings or the financial condition or solvency of insurers or reinsurers. Marsh makes no assurances regarding the availability, cost, or terms of insurance coverage. 13 MARSH October 23, 2012
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