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2012 Economic Challenges & 2012 Economic Challenges & Credit Risk Mitigation Credit Risk Mitigation
Damion Walker, EVP, Willis Financial SolutionsDamion Walker, EVP, Willis Financial Solutions
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The AgendaThe Agenda
• Key Economic Client Concerns for 2012
• Introduction to Credit Insurance
• Underwriting - How Its Done
• Current Market Conditions
• Q & A
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Key Client Concerns for 2012Key Client Concerns for 2012Global•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
Source: S&P, Chartis
Corporate Credit Defaults Inversely Correlated to the Economy
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Key Client Concerns for 2012Key Client Concerns for 2012
Western & Eastern Europe•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)
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
Source: EIU, Chartis
Real GDP will Remain Below Trend
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Key Client Concerns for 2012Key Client Concerns for 2012
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
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
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What is Trade Credit Insurance?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• For the United States: Chapter
7, 11 Filing
• Foreign bankruptcy per country of buyer’s domicile
Protracted Default• Simple non-payment, usually
verified by third party
• Continued delinquency / non-payment
Political Risk• Confiscation, Expropriation,
Nationalization
• Currency Inconvertibility / Transfer Risk
• Political Violence
• Contract Frustration
• Wrongful calling of on-demand bonds
• Trade Disruption
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Why Purchase Trade Credit Insurance?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 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 CharacteristicsU.S. Insurer Characteristics
Insurer S & P Rating
Non-Cancelable
Credit Limits
Cancelable Credit Limits
Domestic Sales Export Sales
Large Discretionary Credit Limits
Large Global Buyer Database
Prefer The Insured Have An
Established Credit Department
ATRADIUS A- COFACE 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 2011Willis US Claims 2009 to 2011
Willis Financial Solutions Summary 2009
Number of Claims: 135 Total Claim Value: $18,100,000 Largest Claim: $4,000,000 Average Claim Value: $137,100
Willis Financial Solutions Summary 2010Number of Claims: 324 Total Claim Value: $196,000,000Largest Claim: $8,000,000Average Claim Value: $605,000
Willis Financial Solutions Summary 2011Number of Claims: 176 Total Claim Value: $94,000,000Largest Claim: $4,000,000Average Claim Value: $534,000
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Who is Purchasing: Clients by SectorWho is Purchasing: Clients by Sector
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Macro-Economists
Country RiskAnalysts
Credit Analysts (local)
Trade SectorAnalysts
Buyer Grade
1 2 3 4 5 6 7 8 9 10
Country G
rade
AA A
BB B C D
Increasing Risk
Carrier Risk Approach – Euler Hermes ExampleCarrier Risk Approach – Euler Hermes Example
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Euler Hermes - World Risk Map 2012Euler Hermes - World Risk Map 2012
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Cost of Credit InsuranceCost 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
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Current Market ConditionsCurrent 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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Damion WalkerExecutive Vice President
Willis Financial Solutions18101 Von Karman Ave. 6th floor
Irvine, CA 92612Tel: +01 949 930 1771
Thank You!Thank You!
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