Transcript Willis Financial Solutions Introduction to Credit Insurance – ATK

2012 Economic Challenges &
Credit Risk Mitigation
Damion Walker, EVP, Willis Financial Solutions
1
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
4
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
5
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
7
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)
8
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-







9
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
10
Who is Purchasing: Clients by Sector
11
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
12
Euler Hermes - World Risk Map 2012
13
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
15
Thank You!
Damion Walker
Executive Vice President
Willis Financial Solutions
18101 Von Karman Ave. 6th floor
Irvine, CA 92612
Tel: +01 949 930 1771
[email protected]
16
DISCLAIMER
The statements provided herein are based solely on the opinions of Willis and are being provided for general information purposes only. Neither the information nor any
opinion expressed constitutes an offer or a solicitation to buy or sell any securities or other financial instruments. Any opinions provided herein should not be relied upon
for investment decisions and may differ from those of other departments or divisions of Willis Group Holding PLC (“Willis”) or its affiliates.
Certain information may be based on information received from sources Willis considers reliable; however, the accuracy and completeness of such information cannot be
guaranteed. Certain statements contained herein may constitute “projections,” “forecasts” and other “forward-looking statements” which do not reflect actual results and
are based primarily upon applying retroactively a hypothetical set of assumptions to certain historical financial information. Any opinions, projections, forecasts and
forward-looking statements presented herein reflect the judgment of Willis only as of the date of this document and are subject to change without notice. Willis has no
obligation to provide updates or changes to these opinions, projections, forecasts and forward-looking statements. Willis is not soliciting or recommending any action based
on any information in this document.
17