2012 Economic Challenges &
Credit Risk Mitigation
Damion Walker, EVP, Willis Financial Solutions
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The Agenda
• Key Economic Client Concerns for 2012
• Introduction to Credit Insurance
• Underwriting - How Its Done
• Current Market Conditions
• Q&A
2
Key Client Concerns for 2012
Global
• Consumer demand drops due to fiscal policy tightening in the US
• Currency fluctuation due to push for exports
• Upward pressure on the dollar already hurting export growth
• The “Break-Up” – Eurozone
• US & European banking sector faces tightening credit conditions
• Global rising risk of strikes and civil disturbances
• Tightening bank capital due to Basel III:
• The current 20% risk-based
capital requirement for Trade
Finance Lending under Basel II
will now be 100% under Basel III
• European banks twice as
leveraged as US banks
Corporate Credit Defaults Inversely Correlated to the Economy
Source: S&P, Chartis
3
Key Client Concerns for 2012
Western & Eastern Europe
•
•
•
•
Real GDP will Remain Below Trend
Austerity measures create a prolonged
period of economic uncertainty in the region
PIIGS + France are affected by recent
ratings downgrades
Consumer demand weakening further
especially in IT and Pharmaceuticals sectors
Russia (Putin’s election), Turkey (Risky
funding of deficit). Hungary (At odds with
IMF/EU), Ukraine – (IMF/Russia help)
Source: EIU, Chartis
Asia
• Asia’s (especially China’s) construction boom causing bubble concerns
• North Korea and Kim Jong-Un causing tension with South Korea
• Contracting economy limiting recovery in Japan, another natural disaster
• Indonesia still viewed as corrupt, expropriations by the government continue
• Political instability (Yellow vs. Red) in Thailand
• In Vietnam poor fiscal policy creating inflation and currency instability
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Key Client Concerns for 2012
LATAM
• Argentina – Inflation, currency controls
• Latin America is exposer to a commodities bubble (Chile, Peru, Brazil)
• Unsafe business environment due to increased drug trafficking in Mexico, now spilling
over into Central America
Middle East & Africa
• Political Instability and the price of oil
are key concerns
• Possible regional conflict and/or oil
crisis as US/EU and Arab Sanctions
against Iran
• Sub-Saharan African commodities spurs
economic growth but there are ongoing
risks of uprisings, coups, and terrorist
attacks (Nigeria at risk - Oil).
• Threat of civil war in Syria and Yemen
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What is Trade Credit Insurance?
Protection for a company’s commercial accounts receivable (Foreign
and/or Domestic) risk against NON-PAYMENT for goods shipped on
unsecured credit terms. Covered perils:
Insolvency
Protracted Default
Political Risk
•
For the United States:
Chapter 7, 11 Filing
•
Simple non-payment, usually
verified by third party
•
Confiscation, Expropriation,
Nationalization
•
Foreign bankruptcy per
country of buyer’s domicile
•
Continued delinquency / nonpayment
•
Currency Inconvertibility /
Transfer Risk
•
Political Violence
•
Contract Frustration
•
Wrongful calling of ondemand bonds
•
Trade Disruption
6
Why Purchase Trade Credit Insurance?
Top reasons for purchasing Trade Credit and/or Political Risk
Insurance:
•
•
•
•
•
•
•
•
Expand sales domestic/export to new and existing customers
Balance sheet protection / stabilize cash flow
Concerns about economic & political changes
Concerned about customer concentration
Obtain attractive bank financing or borrow against trade receivables
Interested in replacing letters of credit (L/C’s)
Reduce bad debt reserves
Supplement credit risk management
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Alternative Credit Protection
Accounts Receivable Purchase Contracts - “Put Options”
•
Bilateral contract which gives the holder the right to sell receivables to
the investment bank upon the insolvency of a debtor
•
No retention options
•
Typically used for distressed buyer concerns but can be used for all risk
•
Offered by investment banks and hedge funds
•
Offering Banks : JPMorgan Chase and Wells Fargo
•
Normally costs 0.50%-3.00% per month on notional value (Limit)
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U.S. Insurer Characteristics
Insurer
S&P
Rating
ATRADIUS
A-
COFACE
NonCancelable
Cancelable
Credit Limits
Credit Limits

Domestic
Sales
Large
Prefer The Insured
Large Global
Export Sales Discretionary
Have An Established
Buyer Database
Credit Limits
Credit Department




A-




EULER HERMES
AA-




ACE
AA-





CHARTIS
A





FCIA
(GREATAMERICAN)
A+





HCC
AA





QBE
A+





ZURICH
AA-







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Willis US Claims 2009 to 2011
Willis Financial Solutions Summary 2009
Number of Claims:
Total Claim Value:
Largest Claim:
Average Claim Value:
135
$18,100,000
$4,000,000
$137,100
Willis Financial Solutions Summary 2010
Number of Claims:
Total Claim Value:
Largest Claim:
Average Claim Value:
324
$196,000,000
$8,000,000
$605,000
Willis Financial Solutions Summary 2011
Number of Claims:
Total Claim Value:
Largest Claim:
Average Claim Value:
176
$94,000,000
$4,000,000
$534,000
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Who is Purchasing: Clients by Sector
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Carrier Risk Approach – Euler Hermes Example
MacroEconomists
Credit Analysts (local)
Trade Sector
Analysts
Buyer Grade
1
3
4
5
6
7
8
9
10
AA
Country Grade
Country Risk
Analysts
2
A
BB
B
C
D
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Euler Hermes - World Risk Map 2012
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Cost of Credit Insurance
Primary Price Drivers:
•
Total sales insured
•
Geographic location of buyer portfolio
•
Average four year loss history
•
Credit quality of the buyer portfolio or key buyers
•
Insured industry sector risk
•
Customer concentration
•
Country risk
•
Payment terms
•
Economic Conditions
14
Current Market Conditions
• Insurers’ ratings have stabilized, improving
• Trade Credit insurance rates and retention levels are extremely soft
• Overall market capacity has grown substantially due to new entrants
• Claims volume and collection actions starting to slow domestically; once again
picking up in Europe and Asia (Since Q4 - 2011)
• Payment plan requests more frequent – carriers are supportive
• Coverage on distressed credit via A/R Purchase Agreements increasingly
popular due to dropping cost levels (SEARS)
• Euler Hermes driving market conditions - pricing & growth
• Many new-to-market multinationals considering coverage
• Buyers market
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Thank You!
Damion Walker
Executive Vice President
Willis Financial Solutions
18101 Von Karman Ave. 6th floor
Irvine, CA 92612
Tel: +01 949 930 1771
Damion.Walker@Willis.com
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