INTERNATIONAL RISK CONSULTANTS Political Risk, Credit Insurance, and Trade Finance Solutions Credit Insurance: Valuable Tool for Domestic & International

Political Risk, Credit Insurance, and Trade Finance Solutions

INTERNATIONAL RISK CONSULTANTS

Credit Insurance: Valuable Tool for Domestic & International Credit

Management

Presented to

NACM Gateway Regionby

Mark RegenhardtSeptember 18, 2007



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



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



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



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



Credit Alternatives Vs. Risk

CUSTOMER DESIRE

REPAYMENTRISK

Insured

O/A

High High

Low Low

CIA Letter of Credit Documentary Collection Open Account



Types of Credit Insurance

• Short-Term Credit InsuranceExport & domestic coverage covering non-

payment of A/RSingle and multi-buyer programsSupports up to one year repayment terms

• Medium-Term Credit Insurance Facilitates LIBOR-based equipment and project

financing for foreign obligorsSupports up to 1 to 5 year repayment terms



North America:Short-term Credit Insurers



North America:Medium-term Credit Insurers



Credit Insurance Distribution Channels

• Captive Sales Agents (Euler, Atradius & Coface)

• Generalist Brokers

• Specialist Brokers



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



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



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



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



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



Typical Credit Insurance Policy

Credit Insurance Policy HQ, St. Louis, MO

Additional Insured, TX

Additional Insured, IL

Additional Insured, KS

ClaimPayment

Reports & Premium

Insurer

Broker


INTERNATIONAL RISK CONSULTANTSGlobal Credit Insurance

Policy

Locally Sub-Policy

Brazil

Locally Sub-Policy

Mexico

InsurerU.S.A.

BrokerU.S.A.

Master Policy HQ St. Louis, MO

Reports & Premium

ClaimPayment

InsurerMexico

InsurerBrazil

BrokerBrazil

BrokerMexico



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



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



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

$30 Mil. Total Buyer Limit

Insurer No. 3

$10 Mil. Buyer Limit



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

Primary Insurer Policy 1

$15 Mil.

$30 Mil. Total Buyer Limit

ExcessInsurer Policy 2

$15 Mil.



Claim Payment Flow Chart

Invoice Period

30 Days

Waiting Period

0 - 90 DaysPast Due

Claim Processing

Period

30 – 60 Days

Claim Payment

** Collection EffortResponsibility of Insured

Collection Expense Paid by Insurer

Collection Expenses Avoided by Insured

** Some Insurers Indemnify this expense



Sample Claim Payout

$1,000,000Bad Debt

$750,000Insured

Limit

$1,000,000Total Claim

Claim Payout $750,000 x 90% = $675,000

$675,000Claim

Payment

$1,000,000Total Claim

Recovery Sharing %$675,000/$1,000,000 =

67.5% Insurer, 32.5% Insured



Recovery Scenario (After Claim Payment)

$100KRecovered

From Debtor15% Insurer Collection Expense

$85KNet

Recovery

$675KClaim

Payment

$1,000KTotal Claim

Recovery Sharing %Insurer $85K X .675 = $57.3K

Insured $85K X .325 = $27.7K

$27K Recovery



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



Cost Benefit AnalysisAssumptions:• 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



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% !



Profit & Loss Impact

(‘000) No Ins. InsuredRevenue: $30,000 $30,000Profit (20%) $6,000 $6,000Less Bad Debt: $3,000 $300Less Insurance: $60Net Profit: $3,000 $5,640

Savings $2,640 / $60 = 44 Year Payback Return



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



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



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 bank’s asset, or Bank services/collects the A/R on its own



Insured/Seller

Customer

Insurer Bank

4. In

voic

e

6.

Paym

en

t

2. Receivable

Purchase

Agreement

1. Credit Insurance

Policy

3. Assignment of Insurance Policy Proceeds

5. Receivable

Purchase

Supplier Credit Receivable Finance Program (Insurance

Backed)



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 bank’s asset, or Bank services/collects the A/R on its own



Seller

Customer

Insurer

Bank/Insured

3. In

voic

e 5. Pay

men

t

1. Credit Insurance Policy

4. Rece

ivable

Purchase

Buyer Credit Finance Program

2. Loan

Agreem

ent



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



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



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



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



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



Thank YouMark RegenhardtInternational Risk Consultants, Inc.212 Crystal StreetSuite BCary, IL 60013

Tel 847-462-0547Fax 614-224-7901Cell 847-651-0851

E-mail: [email protected]: www.irc-group.com