Euler Hermes 2012

Euler Hermes AmericasCredit Insurance Overview

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© Copyright Euler Hermes 2EH Americas: Credit Insurance Overview

Euler Hermes Americas

119 years of experience, with a AA- S&P Rating and an A+ rating from AM Best

Headquartered in Baltimore, MD, backed by blue-chip ownership through the Allianz Group

Staff of 6,000 associates world wide provides localized sales and servicing, with over 50 local offices nationwide and in 52 countries

Guarantee over $120 Billion in sales annually

Provides coverage in over 200 foreign markets

Over 52,000 Policyholders worldwide

Industry based experts in risk underwriting provide customized analysis and support to our clients

International Risk Database monitors & grades over 45 million companies worldwide


Protection against unexpected bad debt losses due to

Insolvency, slow pay or political risk.

Insolvency can be a Ch. 7, 11, 13, bulk sale, receivership, general meeting of creditors, etc.

Everything else falls into the slow pay “bucket”. Slow pay claims must be filed within 90 days from due date or 180 days from

ship date, whichever is longer.

We act as collection company with the guarantee…if we don’t collect we pay.

If we collect debt then the business is assessed a collection fee however, deductible or coinsurance do not apply.

Loss Protection and Prevention


Indemnifies policyholder against unforeseen bad debt losses due to

commercial and/or political risks.

Part of Sound Risk Management Strategy

Companies use credit insurance for four primary reasonsCatastrophic Risk Protection

Sales Expansion

Bank Financing

General Loss Prevention

Business Credit Insurance

Manage Expected Risk

GOOD DECISIONS

Information

Your Credit Expertise

Manage Unexpected Risk

PROTECTION

Insurance

Self-insurance


Business Credit InsuranceCatastrophic Risk Protection Prevents Disruption of Losses to one of company’s largest, unprotected assets Reduction of Risk of Key Account concentration levels Caps Exposure to Bad Debt Loss

Sales Expansion Expand Sales into Riskier or New Markets Grow with Existing Accounts Enhance a Customer Relationship

General Loss Prevention Support for Credit Risk Evaluation through third party evaluations of customers, prospects, industries

and countries Provides a structure and discipline for credit decision making Gain leverage over problem accounts by using underwriter’s clout and resources

Bank Financing Enhance Lending Relationship...

High Concentration with Key Accounts ‘Cross-Aging Language’ on A/R Borrowing against Export Receivables More capital at reduced rates, taking full advantage of A/R

Reduction in Bad Debt Reserves Frees up Working Capital Converts non-taxable deductible provisions into a fully tax deductible insurance premium


Export Coverage

Can provide an organization with increased sales, cost savings and protection from unexpected losses

Eliminates… Need for Letters of Credit Covers shipments for the year Open terms allows the buyer to keep their working capital line of credit available for

other uses

Borrow… Export Receivables are no longer non-performing assets, but may become recognized collateral that can open up opportunities for better financing

Competitive Edge … Offering open terms may be the difference in winning the business from competitors

Political Risk… Export protection against Inability to obtain hard currency Changes in Import/Export regulations Contract frustration due to Act of War Foreign government non-payment


Accounts Receivable – The Only Major Asset Left UninsuredWhat assets are insurable and insured?There is a greater chance that a business will experience a loss within their accounts receivable than any other asset.

Where does the A/R fall on a client’sBalance Sheet?Typically represents 40% of a company’s assets Most vulnerable to unexpected lossesHighly likely to be affected by business cycles Provides cash flow for the business Only under-leveraged assetFew companies can effectively compete without extending credit to their buyers

What amount of loss would seriously impact a company’s financial stability or annual profit? How many accounts have credit extended over that limit?


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“My Accounts Are As Good as Gold…?”

??????


Where’s the Risk?Domestic, Export, Catastrophic coverage Portfolio Coverage (Full A/R) Tier Coverage (Logical & consistent segmentation) -

Key Account, Export Only, 2nd tier, etc.; (Can’t be defined as “ only the accounts a business is worried about”)

Appetite for Risk

Establish Premium Rate Based on policy type, buyer and industry risk, term Rate is quoted on percentage of sales basis

Risk Sharing Aggregate first loss (deductible), Non-Qualifying Loss (NQL), Coinsurance

Set Credit Limits Underwrite large, named credit limits (Risks are Rated) Arrange Discretionary Credit Limit (DCL)

Policy is DynamicPolicy Payout - Insolvency vs. Slow Pay

Understanding How to Structure YOUR Policy


Policy Examples

Portfolio CoverageFoundry Materials Supplier

Est. Sales Volume - $40 MM

Policy StructureKey Accounts

56 accounts for $27 MM (68%)

Discretionary Credit Limit (DCL) $25,000 per account

Aggregate of $100,000

CoinsuranceKey Accounts - 10% (90% Indemnity)

Unnamed DCL- 10% (90% Indemnity)

Policy Deductible - $25,000

Non-Qualifying Loss (NQL) - $5,000

‘Sample’ Policy Premium Range$0.17/$100 Sales - $0.22/$100 Sales

(40,000,000/100 * 0.17 = 68,000)

(40,000,000/100 * 0.22 = 88,000)

$68,000 - $88,000 Premium

Key Account CoverageGraphics Printing Company

Est. Sales Volume - $13 MM

Policy StructureKey Accounts (Largest Exposure) 18 accounts for $9 MM (69%)

CoinsuranceKey Accounts - 10% (90% Indemnity)

Unnamed DCL- n/a

Policy Deductible - $0

Non-Qualifying Loss (NQL) - $5,000

‘Sample’ Policy Premium Range$0.25/$100 Sales - $0.33/$100 Sales

(9,000,000/100 * 0.25 = 22,500)

(9,000,000/100 * 0.33 = 29,700)

$22,500 - $29,700 Premium


Sales Expansion

Operating FactsTypical Company with $120 Million in Sales Average A/R: $15 Million, Gross Margin: 10% Account Turns Per Year: 8

ObjectiveCompany has a few large/new accounts that offer additional selling opportunities but had reached their “comfort” exposure level. Interested in a credit risk protection program that would allow to safely increase sales.

Profit/Payout (on just ONE approved account)

"Comfort" Exposure $750,000

Approved Coverage $1,000,000

Sales Opportunity $250,000

By Account Turns 8

Incremental Annual Revenue $2,000,000

By Gross margin percent 10%

Increased Gross Profit $200,000


Return On Your Investment

Average AR $1,000,000.00

Annual Credit Sales $12,000,000.00

Gross Margin 20%

Total # of Credit Customers 10

Average Credit Limit $100,000

Length of Terms 30

Turns in Year 12

Cost of Program $24,000.00

ROI sales $120,000.00

Average Customers Needed for ROI 1.2

Premium Rate 0.002

New Sales $500,000.00

Gross Margin 20.00%

Premium Cost $24,000.00

Return on Investment $76,000.00

How can you protect your business and safely expand sales?


EOLIS Online Database

45 Million Companies Monitored and graded in our worldwide risk database

2,000 debtors Processed on-line each day

17,000 Credit Limit RequestsReceived each day

81% of Credit Limit Requests Processed in less than 48 hours

Credit Limit Request Turnaround TimeDomestic: 1 day (95%)

Exports: 4-7 days (95%)


Borrowing Enhancements Enabled by Credit InsuranceAdvance Rates

- Puts a “Hard Cap” on potential bad debt losses

- Reduces overall inherent risk in pledged receivables

- May allow the bank to meet client’s need for additional working capital

Eligibility- Reduce risks of “concentration” issues & any “slow pay” issues

- Offer competitively price funding due to reduced risk of A/R

Underwriting Support- Euler Hermes ACI underwriting assumes responsibility to review, approve and monitor your client’s

insured account base Explicit “Limits-Underwriter” No credit due-diligence except for severe delinquent notification

Include Export A/R in Borrowing Base

Policy Assignment- Policy could be assigned to the Bank, providing the same rights as the client under the terms of

the policy.


Effect of Bad Debt Loss

Profit Margin $25,000 $50,000 $100,000 $250,000 $500,000 $1,000,000

2% $1,250,000 $2,500,000 $5,000,000 $12,500,000 $25,000,000 $50,000,000

4% $625,000 $1,250,000 $2,500,000 $6,250,000 $12,500,000 $25,000,000

6% $416,667 $833,333 $1,666,667 $4,166,667 $8,333,333 $16,666,667

8% $312,500 $625,000 $1,250,000 $3,125,000 $6,250,000 $12,500,000

10% $250,000 $500,000 $1,000,000 $2,500,000 $5,000,000 $10,000,000

15% $166,667 $333,333 $666,667 $1,666,667 $3,333,333 $6,666,667

The table shows the amount of sales required to cover a bad debt loss, i.e., $50,000 debt @ 4%

Profit Margin means you have to gain $1,250,000 to BREAK EVEN.


Euler Hermes Americas: Benefits Summary

Service Company First, Insurance Company Second

Protects against large credit losses.

Provides increasing borrowing and purchasing power.

Reduce your bad debt reserve.

Credit Management Tool – Provides key account monitoring, and back-up support and assistance to your existing credit function.

Allows for safe sales expansion into new and existing markets.

Accommodates profitable cooperation between your sales and credit functions.

Provides effective collection and account resolution assistance.

Allows you to convert non-tax deductible provisions for bad debt losses into fully tax deductible credit insurance premiums.


UnderwritingResearch and Corroboration

Coverage Enforced

• Together review coverage request

• Account review summary• Sales and loss history

• In-depth evaluation by regional specialists• Premiums and limits set

• Q&A session• Evaluation and review

• Account monitoring and joint review

• Shared responsibility

• Company officer’s acceptance 3

•Performed by Euler Hermes ACI

•Performed by Company

•Performed Together

Partnersin Credit

Management

Insurance Policy

Application

Review Updated

Policy and Proposal

OrderFulfillment,

Sales Expansion

PolicyAcceptance

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2

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6

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•Protection against bad debt losses•Pre-Approval coverage on large accounts

•Sales expansion to existing accounts•Borrowing enhancement•Catastrophic loss protection

Timeline for Application & Acceptance Process

As you would expect from the largest credit insurer in the world, Euler Hermes has THE best credit department in the world because we are out of business if we don’t. And guess what, we use credit insurance too, via re-insurance.

Why…because like (our customers and) your customers, we want to grow our business by taking on new clients and risk. But no matter how good we are at credit decisions, we can’t stop bankruptcies and losses from occurring.

We hate writing those premium checks just like any other business but we continue to do so because we’ve realized over 117 years of business that no matter how good we are, surprises happen. Joe Ketzner

We thank you for the opportunity to present our company and our services.

We look forward to becoming a trusted and important resource.

Documents

Euler Hermes 2012