Credit and Other Insurance Applications

Presentation For: CRF Credit & A/R Forum and EXPO Seattle, WA

August 13, 2019

PRESENTERS:

Mark Regenhardt, Esq. Allison Patrice Bruce S. Nathan, Esq. Senior Vice President VP Administration Partner MARSH JLT SPECIALTY CARROLL INDEPENDENT FUEL LOWENSTEIN SANDLER LLP

Ronald Borcky Todd Lynady Director Global Credit Head of Broker Management Operations (Americas) INTERNATIONAL PAPER EULER HERMES

53069272.ppt 53069292.pdf Table of Contents

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INSURING YOUR LARGEST ASSET, YOUR ACCOUNTS RECEIVABLE DEMYSTIFYING CREDIT INSURANCE AND NEGOTIATING THE BEST POSSIBLE POLICY Bruce S. Nathan, Esq., Christopher Loeber, Esq. and Eric Jesse, Esq., Business Credit, June 2014……………...... …. 1

RISK MANAGEMENT 101 Basics of Trade Credit Insurance Marsh, Risk Management Series, April 2019 …………...... 5

TRADE CREDIT INSURANCE AS PROTECTION FROM BANKRUPTCY PREFERENCE RISK: NEGOTIATING FOR THE BROADEST COVERAGE POLICY Bruce S. Nathan, Esq., James Stewart, Esq. and Mark Regenhardt, Sr. VP, CRF News, 1Q 2018………...... 29

COMPILATION OF EULER HERMES’ ARTICLES CFO Risk Survey Report…………………………………………. 33 EH-ClaimsTrends-Flyer_r1……………..…...... 37 A Guide to Credit Insurance ……………..…...... 38 Accounts Receivable Brochure…………………………….……. 48 Credit Insurance vs. Self-Insurance Whitepaper……...... 56 How Data Can Keep You One Move Ahead Article…………..... 64

SEVEN REASONS TO USE A CREDIT INSURANCE BROKER……..……. 69

i Page | 1 Selected topic Bruce Nathan, Esq., Christopher Loeber, Esq. and Eric Jesse, Esq.

Insuring Your Largest Asset, Your Accounts Receivable Demystifying Credit Insurance and Negotiating the Best Possible Policy

Chances are your company has insurance that protects it from the risks of major losses for its significant assets (like its buildings and equipment) and various other N a t i o n a l A s s o c i a t i o n o f C r e d i t M a n a g e m e n t risks (such as employment or professional liability claims). But, in many instances, a company’s largest Casset and a major source of risk goes uninsured: the

company’s accounts receivable. Credit insurance is an J U N E 2 0 1 4 option for companies wishing to insure against that risk. Credit insurance has the potential to be a useful tool to manage, and better understand, your company’s credit risk and to protect against nonpayment by customers. However, realizing that potential requires policyholders The Publication For Credit & Finance Professionals $7.00 to be proactive by understanding the key provisions of their credit insurance policies. It also involves negotiat- the company’s continued viability. In that situation, the ing with carriers to resolve uncertainties and obtain an company might be able to insure its key or high concen- insurance contract that maximizes the amount of cover- tration accounts. A company might also be able to age and minimizes the risk of claim denials. insure a single account or a single contract or sale.

What is Credit Insurance? Two Basic Types of Credit Insurance Policies At the most fundamental level, credit insurance protects There are two basic types of credit insurance policies: a seller against the risk of nonpayment that arises from cancelable and non-cancelable. When a policyholder the seller’s extension of credit terms to its customers. purchases cancelable insurance, the insurance compa- The specific circumstances that will trigger credit insur- ny becomes a credit management resource that can ance will be spelled out in the policy itself. However, work with the other protocols the policyholder already credit insurance is usually tailored to insure against has in place. Credit insurers maintain databases on mil- commercial risks or political or country risks. Com- lions of companies, including the policyholder’s cus- mercial risks include customers’ insolvency (including tomers, and the insurers monitor their customers’ cred- bankruptcy), nonpayment and other defaults and, if itworthiness and alert policyholders of changes in their identified in the policy, preference claims asserted by a customers’ outlook. bankruptcy trustee. Political or country risks include the risk that a policyholder’s foreign customer, even if When a company purchases cancelable insurance, the solvent and willing to pay, is unable to make payment insurance company sets the credit limits for each of the because of some foreign government action preventing policyholder’s accounts based on the insurer’s rating of payment (i.e., an embargo), decisions regarding cur- the account’s credit risk. Typically, a policyholder requests rency valuation, or war or insurrection. a credit limit for a particular account through the insurer’s online system. If the credit limit requested is at or Companies purchasing credit insurance can also tailor below the insurer’s predetermined limit, approval is pro- the policy to certain accounts. While insurers usually do vided instantaneously. If the amount requested exceeds not insure just the risky accounts that a company has the predetermined limit, the insurer’s underwriters “cherry-picked” for coverage, insurers will frequently review the request and decide whether to approve it. insure categories of accounts. Typical policies will insure all of the company’s accounts (including the creditwor- If, in the course of monitoring a given account, the cus- thy and credit-risky accounts) which is known as tomer’s creditworthiness diminishes, the insurer may “whole-turnover.” For many companies, the majority of reduce or cancel the credit limits it had previously their business comes from a small segment of customers approved, hence the term “cancelable.” So long as the making a default by one of those customers a threat to insurer is acting in good faith, and the policy is

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appropriately drafted, such a reduction in or cancelation of accounts and sales of goods and/or services that are covered; credit limits will only apply to future transactions, but should (iii) the accounts and risks that are not covered; (iv) any affir- not affect transactions that precede the insurer’s notification mative obligations required to maintain coverage; and (v) of the cancelation or reduction. In addition, while the cancel- opportunities to change those policy provisions that increase ation or reduction in credit limits increases exposure to the the likelihood of a coverage denial. policyholder for future transactions with the customer, the policyholder is at least aware of potential credit issues, Anatomy of a Credit Insurance Policy enabling it to make an educated decision as to whether to A credit insurance policy, like most insurance policies, will be extend credit going forward. typically comprised of a declarations page, a main coverage (standardized) form, and endorsements. The “dec page” is a The second type of insurance is non-cancelable. As the name summary of the policy’s key terms. It identifies the policyhold- suggests, an insurer cannot unilaterally cancel or reduce the er, the term of the policy, the premium (or how it will be calcu- credit limit assigned to a particular customer. When an insur- lated), the limits of liability (i.e., the maximum financial obliga- er sells non-cancelable insurance, the insurer is essentially tion of the insurer), and the deductible and/or co-insurance trusting the policyholder’s credit management practices. As a (which are amounts the insured must pay in the event of a loss). result, unlike cancelable insurance, where the insurer is actively involved in credit decisions, an insurer’s underwriting The main coverage form is the heart of the insurance policy. of a non-cancelable program tends to be more “hands-off.” In most cases, it is a standardized form that contains the tech- Policyholders may also have greater “discretionary credit lim- nical policy language, which defines the scope of coverage and its” allowing them to have more control to assign credit limits imposes obligations on the policyholder. The form includes to their accounts (though larger customers may require insur- an insuring agreement that is supposed to delineate the types er approval). of losses that are covered and the events that trigger an insurance claim. Potential Benefits of Credit Insurance A properly implemented credit insurance program can pro- What the policy provides through the insuring agreement, it vide a company with several financial benefits. However, these takes away with policy exclusions. Exclusions, in theory, are benefits are not automatic. Instead, they require a policyhold- supposed to clearly articulate those losses that are not cover to be proactive in ensuring that the policy purchased is the ered. Common exclusions include claims that are not filed best that could negotiated. with the insurer in a timely manner or sales that occur after the policyholder learns about the customer’s default/insol- When properly understood and implemented, credit insur- vency. Typically, sales or transactions that are disputed by the ance can be a safety net against losses arising from nonpay- customer are also excluded. Usually, disputed transactions ment of accounts receivable. More pragmatically, it can be a only become covered after the policyholder has vindicated its reliable credit management tool, backed by the monitoring right to payment through a lawsuit against its customer and resources of multinational insurance carriers. Companies the entry of judgment that remains unpaid. with credit insurance may also be able to increase sales through their ability to extend more favorable credit terms to Due to the technical nature of insurance contracts, policies existing customers or extend credit to new, unfamiliar cus- rely on terms that are defined in the definition section of the tomers with a carefully crafted insurance policy backstopping main coverage form. An insurance policy cannot be under- those sales. Policyholders might also have increased access to stood without understanding the definitions; indeed, the borrowing or lower interest rates as lenders see credit insur- ordinary meaning of words can be changed by a specific poli- ance as additional security for their loans. cy definition. Not surprisingly, terms are often defined in a way that limits coverage. Understanding a Credit Insurance Policy A policyholder should be proactive to obtain and maximize By way of one example, a policy may insure losses because of the benefits of credit insurance. It is not enough to merely “non-payment of amounts due from a covered Buyer for purchase a policy and then place it on the shelf until a loss Shipments of Covered Products made by you during the occurs. Instead, policyholders should review and understand Policy Period.” To fully grasp the meaning of that coverage their policies at the purchase and renewal stages. Failure to do grant, it is necessary to understand the policy’s definition of so might result in an unwelcome surprise (no coverage) when each of the bolded terms. In this example, “Buyer” does not a customer defaults by becoming insolvent or otherwise fail- mean just any buyer of the policyholder’s goods and/or ser- ing to make payment to the policyholder. vices. Instead, it is limited to a “legal entity” domiciled in the United States or Canada that “is approved for coverage under Because credit insurance policies are drafted in a convoluted this Policy” and it does not include any “subsidiaries or affili- manner and contain many “hidden” requirements and limita- ated companies” separate from that “legal entity.” A policy- tions, insurers routinely avail themselves of technicalities to holder may believe that, because ABC Corporation is an avoid paying claims. Proactive policyholders can arm them- approved buyer, sales to its subsidiary are also covered. That is selves by fully understanding: (i) the policy terms; (ii) the not the case. In sum, a policyholder must be cognizant of the

B u s I N e s s C r e D I t J U N E 2 0 1 4 2 Page | 3

entities with which it does business (including any affiliated co-insurance is the percentage of the loss that the policy- entities) and take steps to include all such entities within the holder must bear. scope of its insurance coverage. The order of applying the deductible and co-insurance affects Because the main coverage form generally contains standard- the policyholder’s recovery. For example, if there is a claim for ized language, policy endorsements, which are amendments $1 million where the policy has a $100,000 deductible and to the main coverage form, are used to customize a policy to 10% co-insurance, the insured recovers $810,000 if the the needs of the particular policyholder. It is through endorse- deductible is applied first, in contrast to a recovery of $800,000 ments that negotiated terms can be added to the policy. For if the 10% co-insurance is first applied. example, an endorsement could be used to amend the definition of “Buyer” above, to encompass subsidiaries and affili- Moreover, because they pay these amounts, proactive policy- ates, thus avoiding a technical gap in coverage and giving the holders, in an effort to be made as “whole” as possible, should insurer one less ground for denying a claim. be sure to maximize—through policy terms—their share of any recovery that the insurer obtains from the customer. Key Issues and Potential Pitfalls When reviewing and negotiating a credit insurance policy, Preference Risk. When a customer makes a payment within there are a few key provisions and issues to which proactive 90 days of its bankruptcy filing, a bankruptcy trustee can seek policyholders should be attuned. By way of example: to recover that payment as a preference. Some credit insurance policies do not address preference risk while other poli- Avoid Uncertainty. Best practices dictate that the policyhold- cies exclude such coverage. There are policies that do insure er seek clarity of vague or ambiguous policy provisions at the for preference risk, and proactive policyholders should purchase and renewal stages. Insurance policies are technical, endeavor to secure that coverage. Regardless of a particular containing “hidden” or unclear provisions that limit the policy’s scope, the policyholder must always comply with the insurer’s obligations. Insurers often use such loose language to exacting, yet amorphous, policy requirements, such as their advantage to deny claims. Thus, by seeking clarification “immediately” providing notice of the preference claim, pur- from the insurer at the outset, a proactive policyholder can suing “all defenses” and legal “remedies available,” and secur- minimize both the risk of the denial of the claim, and the need ing approval for “each action” taken to defend the claim. In for subsequent litigation to enforce its rights. addition, proactive policyholders should be aware of provisions requiring them to renew the policy with the same insur- Ensure that the Trigger of Coverage Conforms to Your er to retain the insurance for preference risk. Company’s Practices. Whether a goods seller or service provider has coverage for its unpaid, insured accounts receivable Notice. Policies have strict notice requirements and a failure under a policy will depend on the policy language and defined to comply can be a complete bar to coverage for an otherwise terms. For example, many policies are triggered upon covered claim. As soon as a default occurs, a proactive policy- “shipment” of goods. However, policyholders should ensure holder must be aware of the notice requirements to make sure that the policy’s “shipment” definition aligns with its practice that it timely files its claim. of selling goods or providing services to their customers. In some policies, “shipment” only occurs when the product In some cases, a policyholder may want to resolve a custom- leaves the insured’s control and passes into the buyer’s exclu- er’s default by extending terms or agreeing upon a payment sive physical possession. However, for a company that deliv- plan. While insurers often encourage such efforts (after all, if ers goods via a third party or to a location not owned or con- successful there will be no claim), it is necessary to obtain the trolled by the buyer, a “shipment” may not have been insurer’s written consent to pursue such arrangements. completed, meaning coverage is not triggered. Likewise, Failure to do so can run afoul of policy terms and result in companies that accept orders for specialized or customized denial of the claim. goods should explore procuring coverage that is triggered earlier than shipment (such as on receipt of purchase orders). In addition to requiring notice of a given loss or the assertion Taking such an approach could minimize the impact of cus- of a preference claim, the policy may hold policyholders tomer insolvency that occurs after the policyholder invested responsible for more general ongoing notice obligations. For significant resources prior to the delivery of goods or provi- example, a policyholder may be required to notify its insurer sion of services. of certain (usually vaguely defined) circumstances that may precede or lead to a customer’s default or insolvency. Deductible and Co-Insurance. While credit insurance can provide a significant recovery when there is a covered loss, Subrogation. Credit insurance policies usually give the insur- it is extremely rare for a policy to make a policyholder er subrogation rights after it pays a particular claim. Subroga- whole. Credit policies almost always contain deductibles tion rights allow the insurer to “step into the shoes” of the and co-insurance. The deductible is a fixed-dollar amount policyholder to try to recover the unpaid amounts from the that the policyholder must fund before the insurance com- buyer. Significantly, such subrogation rights could actually pany is required to pay and, once insurance is triggered, violate provisions in the policyholder’s standard customer

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contracts if those contracts contain “anti-assignment” clauses. There are ways to work around the anti-assignment scenario. For example, a policyholder can negotiate for a subrogation provision that allows only an assignment of the policyholder’s right to proceeds instead of an assignment of all of the policyholder’s rights under the contract. Another option is to carve out credit insurance policies from the anti-assignment provision in the seller-buyer contract.

The foregoing are only a few of the key issues facing credit insurance policyholders. Yet there is a common theme that runs through them—knowledge is power. A proactive policyholder should understand and negotiate unclear policy terms, reject a one-size-fits-all approach to policy language, appreci- ate the interplay between deductibles and co-insurance, and advocate for language that narrows policyholder obligations.

Conclusion Credit insurance can be a powerful tool for protecting a company’s accounts receivable. But it is a tool that must be negotiated, purchased and handled with care. Coverage is not always what it appears. And the company that fails to fully understand a credit policy’s scope and substance could end up jeopardizing its largest asset.

Bruce S. Nathan, Esq. is a partner in the New York office of the law firm of Lowenstein Sandler LLP, practices in the firm’s Bankruptcy, Financial Reorganization and Creditors’ Rights Group and is a recognized expert on trade creditors’ rights and the representation of creditors in bankruptcy and other legal matters. He is a member of NACM and is a former member of the Board of Directors of the American Bankruptcy Institute and is a former co-chair of ABI’s Unsecured Trade Creditors Committee. Bruce is also the co-chair of the Avoiding Powers Advisory Committee working with ABI’s commission to study the reform of Chapter 11. He can be reached via email at [email protected].

Christopher C. Loeber, Esq. is a partner in the law firm of Lowenstein Sandler LLP and practices in the firm’s Insurance Coverage Group. Although he spends a good deal of his time litigating, arbitrating or mediating complex coverage disputes, Chris remains acutely aware that an ounce of counseling prevention is worth a pound of litigation cure. Chris works with companies and their insurance brokers during the policy purchase and renewal stage to understand and anticipate relevant risks and to help them negotiate the best available insurance coverage. Chris can be reached at [email protected].

Eric Jesse, Esq. is an associate in Lowenstein Sandler LLP’s Insurance Coverage Practice Group. Eric focuses on counseling policyholders to negotiate the best possible insurance coverage. When coverage disputes arise, however, Eric works to negotiate an amicable resolution, if possible, and through litigation, if necessary. Eric can be reached at [email protected].

*This is reprinted from Business Credit magazine, a publication of the National Association of Credit Management. This article may not be forwarded electronically or reproduced in any way without written permission from the Editor of Business Credit magazine.

B u s I N e s s C r e D I t J U N E 2 0 1 4 4 Page | 5

RISK MANAGEMENT 101 BASICS OF TRADE CREDIT INSURANCE

April 2019 Page | 6

BASICS OF TRADE CREDIT INSURANCE AGENDA

• History/The Market. • Product Description. • Real World Solutions. • The Application Process. • Q&A.

Page | 7 HISTORY/THE MARKET

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HISTORY OF TRADE CREDIT INSURANCE

• First trade credit insurer established in 1893 (American Credit Indemnity – Baltimore, MD). • Product expanded throughout Europe in first half of 20th century. • Dominated by ECAs for much of its history – private markets become much more active in last decade of 20th century. • Continued evolution as market grows, more banks become engaged and product survives the 2008/9 credit crisis. • Seen as favorable credit product by market – served role in credit crisis and insurers survived.

• Product has proven itself through 120 + years of economic cycles. • Increased usage.

• Additional insured status only provides coverage for liability arising from another party’s negligence (vicarious liability). • When receiving evidence of additional insured status, always obtain copy of policy wording or endorsement. • Primary/non-contributory wording.

Page | 9

THE GLOBAL MARKET

• The Trade Credit Insurance market is approximately $9 billion in premiums. • More than half of this premium is written in Europe. • The primary growth areas for the product are in the Americas and Asia. • Product is now global • The US market is more fractured with about 15 carriers (see next slide) • Trends in the market include:

• Global programs Leveraging relationships/systems

• Using multiple insurers Focus on full limit coverages

• Greater Transparency Toolboxes, data sharing

Page | 10

THE UNITED STATES MARKET

• The US Market is growing and has a robust number of carriers • Post credit crisis, there have been fifteen new carriers enter in the US market (Ascot, AWAC, Equinox, Everest Markel, XL, Talbot, Chaucer, Hartford, AWAC, Beazley, Ironshore, Swiss Re, Validus). • US market is unique as there is a very robust Excess of Loss (XOL) market and Big 3 have a smaller market share. • US corporates have more developed credit operations. • Loss conditions improved since the financial/credit crisis and losses have been benign but on an upward trend.

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US TRADE CREDIT MARKET INSURERS Page | 12 PRODUCT DESCRIPTION

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WHAT IS TRADE CREDIT INSURANCE?

Trade credit insurance protects a company’s commercial account receivables from unexpected and catastrophic losses, resulting from insolvency or "non/slow-payment" by its buyers, and from political events that obstruct payment.

Account Receivable (A/R) is money owed to a company by a customer for products and services provided on credit. This is treated as a current asset on a balance sheet. A specific sale is generally only treated as an account receivable after the customer is sent an invoice. Page | 14

INSURABLE PERILS

• Commercial Risks – Insolvency (Chapter 7, 11). – Protracted default (non-payment within specified time after due-date). – DISPUTES are not covered. • Political Risks – Transfer risk - political/economic events preventing or delaying transfer of payments. – Government moratorium - decision from the government preventing release of funds. – Contract frustration - decision preventing performance of the contract. – Civil turmoil - insurrection, war, natural disaster.

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KEY BENEFITS OF TRADE CREDIT INSURANCE

• Risk Mitigation: Balance Sheet Protection – Non payment of Accounts Receivable (A/R). By protecting the A/R with trade credit insurance, you will have the assurance that you will get paid if one of your customers suddenly declares insolvency or is otherwise unable to pay. This transfers risk and mitigates loss. May also alleviate concentration risk issues.

• Increase Sales – Expand sales and competitiveness. Trade Credit Insurance may enable you to extend more credit to more creditworthy customers while reducing the risk of non-payment; thereby promoting safe sales expansion, for example, expand in to new geographic areas and reduce dependence on L/Cs.

• Facilitate Financing: Increase Borrowing Power – Increase borrowing power and reduce financing costs by using the insured A/R as collateral. Trade Credit Insurance can enhance the quality of the collateral provided by the A/R, resulting in greater availability of credit lines, and interest savings from the reduced borrowing rate.

• Reduce Bad-Debt Allowance – Trade Credit Insurance may help you reduce the amount of unsecured A/R that you presently reserve against.

• Improve Cash-flow – A primary source of operating cash-flow is the timely collection of A/R from customers and the timing pf payments to vendors and service providers. The finance charges associated with lengthy Day Sales Outstanding (DSO) can often exceed the actual cost of bad-debt write-offs.

• Independent Assessment of the Customer Base – may assist with SOX compliance.

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PROGRAM TYPES

• Whole-Turnover Policy

– Most common policy type. A trade credit insurance policy that covers your total credit sales (as opposed to key-buyer cover and single-risk cover). – All domestic and/or export buyers. – No selectivity. – Pricing on insurable sales.

• Multi-Buyer/Key-Buyer Policy

– A trade credit insurance policy that covers your credit sales to an agreed upon selection of your largest customers. – Only select customers insured (requires reasonable spread of risk). – Pricing on insurable sales or credit limits provided by carrier.

• Single-Buyer Policy

– Least common policy type. – A trade credit insurance policy that covers your credit sales to a single customer only. – Investment grade quality buyers. – Adverse risk selection. – Pricing on credit limit provided by carrier.

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COVERAGE TYPES

Traditional Coverage: (Cancelable) • The insurance company assigns credit limits to the majority of clients and continuously monitors the specific credits. • This structure allows the insured to add new customers to the policy. Existing customers can be granted open account terms and there’s no need for letters of credit . • These policies usually have limited discretionary authority; however, deductibles are usually low. • Insurers provide convenient online systems for rapid turn-around times of buyer limit requests.

Excess-of-Loss Coverage: (Non-cancelable) • The insurance company will focus its underwriting on the Insured’s credit management procedures and assign specific credit limits to only the 10 - 20 largest customers. The policy offers a relatively large discretionary credit Limit which enables the Insured to set the majority of its credit limits without obtaining the insurance company’s specific approval. • The policy structure includes an annual aggregate deductible, above which losses are paid. The deductible is a function of the insured’s bad debt loss history and client portfolio. • None of the policy limits can be canceled by the insurance company during the policy period. • Limited interaction with the Insurer in most cases. Page | 18 REAL WORLD SOLUTIONS

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SCENARIO 1

Company Profile • US subsidiary of an overseas manufacturer. • Corporate policy requires firm risk management of known, identifiable risks-very limited ability to take on balance sheet risk. • Company purchases globally on an decentralized basis. • Company is in a highly competitive industry with limited customer loyalty. • Sells into US retail sector and through selected distributors.

Risk Drivers • With limited manufacturing in the US, US operation is a sales arm with limited margins. • US retail sector is fairly volatile and continues to evolve. • A fairly large amount of customers are facing their own risk issues and company cannot provide full limits needed. • Likewise, a fairly significant number of customers have limited financial disclosure. Page | 20

SCENARIO 1

Solution

• Through our global network, we were able to coordinate placements with a primary layer common insurer across multiple regions – significant cost saving. • Two additional policies were placed on the US entity as Top-Programs - acceptance rate on covered buyers improved from 82% to over 95%. • Primary policy terms were as follows:

Carrier: one of the Big 3 Policy Limit of Liability: in excess of $1bn Insurable Sales: in excess of $10bn Entities Covered: US and Canada Deductible: none Indemnity: 95%

Special Features: - Delayed effect for extended time period - Ability to purchase puts on distressed names and use a deductible - Frequent dialogue with insurer to share credit assessments/opinions and strategies

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SCENARIO 2

Company Profile • US-based life science company (global company). • Most of the sales growth is now emanating from developing countries (eastern Europe, India, China, etc.). • Among the KPIs upon which management is measured, cash flow, dso, and leverage are critical. • In US, sell to three primary distributors that represent more than 10% of their sales. • Throughout the rest of the world, they sell primarily to distributors.

Risk Drivers • The sales to US distributors represent a concentration risk, which is disclosed in the company’s financial statements as an identified risk • Many of the overseas distributors provide limited financial information • For some of the sales to overseas distributors, payments are sometimes subject to funds being provided by government ministries and subject to significant payment delays Page | 22

SCENARIO 2

Solution • Global insurer selected to insure US, Latin American, and certain developing markets – significant price break based upon global relationship. • Local policies were structured on different bands of customers; the US program featured large retentions but alleviated concentration risk issues, developing country policies features low retentions and much information flowing from insurer to company – the existence of insurance was able to be disclosed on the company’s financial statements as addressing a known and identified risk, the database provided by the insurer’s provided needed intelligence on newer buyers abilities to pay and support credit limit decisions. • Insurance used to support the sale of some of the accounts receivable to a financial institution, taking off these assets from the company’s balance sheet – sales of receivable to bank allowed for off balance sheet treatment, reducing leverage, dso and accelerating cash flow. Page | 23 THE APPLICATION PROCESS

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CONSIDERATIONS

Motivation for Coverage • Risk Transfer − Adverse risk selection? Exclusion issues? − Which portion of the portfolio is at issue? − What is corporate risk retention philosophy? − Are there issues with you receiving sufficient lines from your suppliers? • Financing − Is motivation to sell A/R to bank? What is the goal of the financing? − Is bank simply to be a loss payee? − Importance of insurer rating? • Growing Sales − Can a deductible support higher limits? − Do you or does your insurer know your customers better? • Additional Source of Information on Customers − Do you need risk transfer or only information? • Reduction of Bad Debt Reserves − What dollar amount are we aiming for? − Importance of insurer rating?

Page | 25

CONSIDERATIONS

The Process • Information Gathering • Application - Past Loss History. - Terms Of Sale - Largest Customers - Projected Sales - Sales By Country - Special Requirements - Summary Of Credit Procedures - Products Sold • Supplemental Information - Agings - Financial Package On Largest Customers - Background On Company

• Broker preparation of market submission. • Application with needs assessment, proposed solutions , etc. • Review of Market Quotations (approximately two weeks). • Analysis of Findings and Feasibility study (less than one week). Page | 26

CONSIDERATIONS

• Meetings with top insurers (two weeks for domestic/longer for multicounty). − Are insurer and you aligned? − Do you understand each other? • Requested improvements to terms. • Policy Wording Review (1 to 2 weeks). • Final Buyer Underwriting (1 to 2 weeks). Page | 27 BASICS OF TRADE CREDIT INSURANCE QUESTIONS?

Mark Regenhardt Senior Vice President Ph. 847-257-4304 [email protected]

Mike Treleaven Vice President Ph. 847-257-4303

[email protected] Page | 28

Marsh is one of the Marsh & McLennan Companies, together with Guy Carpenter, Mercer, and Oliver Wyman. This document and any recommendations, analysis, or advice provided by Marsh (collectively, the “Marsh Analysis” are not intended to be taken as advice regarding any individual situation and should not be relied upon as such. The information contained herein is based on sources we believe reliable, but we make no representation or warranty as to its accuracy. Marsh shall have no obligation to update the Marsh Analysis and shall have no liability to you or any other party arising out of this publication or any matter contained herein. Any statements concerning actuarial, tax, accounting, or legal matters are based solely on our experience as insurance brokers and risk consultants and are not to be relied upon as actuarial, tax, accounting, or legal advice, for which you should consult your own professional advisors. Any modeling, analytics, or projections are subject to inherent uncertainty, and the Marsh Analysis could be materially affected if any underlying assumptions, conditions, information, or factors are inaccurate or incomplete or should change. Marsh makes no representation or warranty concerning the application of policy wording or the financial condition or solvency of insurers or reinsurers. Marsh makes no assurances regarding the availability, cost, or terms of insurance coverage. Although Marsh may provide advice and recommendations, all decisions regarding the amount, type or terms of coverage are the ultimate responsibility of the insurance purchaser, who must decide on the specific coverage that is appropriate to its particular circumstances and financial position.

Trade Credit Insurance as Protection from Bankruptcy Preference Risk: Negotiating for the Broadest Coverage

By: Bruce S. Nathan, Esq. and James Stewart, Esq. Lowenstein Sandler Mark Regenhardt, Sr. VP, Credit, Political and Security Risks JLT Specialty USA As originally published in the Credit Research Foundation 1Q 2018 CRF News

Editor's Note: This article was originally released as an of nonpayment of its accounts receivable and Educational Brief to CRF Members only. bankruptcy preference liability. Consulting with the right broker and attorney could be the When purchasing TCI, a creditor should negotiate difference between obtaining extensive, minimal, for the inclusion of policy provisions that grant or no preference coverage. the broadest possible protection from the risk of nonpayment of its accounts receivable and Brief Overview of Trade Credit Insurance bankruptcy preference liability. Consulting with the right broker and attorney could be the TCI is one of the oldest forms of insurance dating difference between obtaining extensive, minimal, back to the 19th century. TCI was developed in or no preference coverage. Europe to promote trade and protect companies that sold to customers in other countries. Beginning in the 20th century, governments A creditor purchases Trade Credit Insurance frequently offered TCI through their export (TCI) to protect against the risk of a customer’s credit agencies as a way to promote exports. nonpayment of accounts payable owing to the TCI’s popularity has grown in the 20th and 21st creditor. This risk materializes upon a customer’s centuries to the point that many private sector protracted nonpayment of invoices or bankruptcy insurance companies provide credit insurance filing. A creditor whose customer has filed for coverage. Most trade credit insurers are large bankruptcy is stayed from collecting its pre- global carriers that write policies to cover credit petition claim and faces the prospect of a transactions worldwide. diminished or no recovery on its claim. TCI protects a trade creditor from the risk of Unfortunately, a creditor with unpaid accounts nonpayment when the creditor extends open receivable confronts other risks following its account credit terms to its customers. TCI customer’s bankruptcy filing. These additional usually insures against commercial risk and risks include having to defend a preference claim political/country risk. Commercial risk includes that a bankruptcy trustee asserts based on the a customer’s insolvency (including bankruptcy customer’s payments to the creditor within 90 or its equivalent in a foreign country) and days of the customer’s bankruptcy filing date. a customer’s protracted nonpayment of its While the creditor can assert an array of defenses payables to a creditor. Commercial risk also to reduce its preference liability, the creditor includes preference liability for payments might pay some amount, hopefully small, but the creditor had received from its financially unfortunately sometimes large, to resolve the distressed customer within 90 days of the claim and avoid litigation risk and the attorneys’ customer’s bankruptcy filing. fees that would have to be incurred to defend the litigation. As a result, a creditor’s bad debt A creditor seeking to obtain the broadest TCI exposure increases when the creditor settles a coverage for any commercial risk, whether based preference claim and makes a payment to the on protracted nonpayment, the customer’s trustee. insolvency, bankruptcy, or exposure to preference liability, should make sure the policy covers When purchasing TCI, a creditor should negotiate the risks for which the creditor is seeking for the inclusion of policy provisions that grant protection. There are policy provisions that insure the broadest possible protection from the risk for preference risk, and a proactive creditor

©2018 Credit Research Foundation Page | 30 should make sure this coverage is included in its The ordinary course of business defense requires TCI policy. A creditor should also object to the proof, by a preponderance of the evidence, that inclusion of unfavorable policy provisions. Some of (1) the alleged preferential transfer paid a debt these provisions expressly exclude any coverage that was incurred in the ordinary course of the for preference risk or limit coverage by requiring debtor’s and creditor’s business or financial renewal of the policy with the same insurer to affairs—which merely requires proof of a trade retain preference coverage. A creditor must also creditor’s extension of credit terms to the debtor— be prepared to comply with policy requirements, and (2) that the transfer was either (a) made in such as “immediately” providing notice of the the ordinary course of the debtor’s and creditor’s preference claim to the credit insurer; pursuing business or financial affairs, or (b) made according “all defenses” and legal “remedies available;” and to ordinary business terms. obtaining the insurer’s approval of “each action” taken to defend the claim and of any settlement of The ordinary course of business defense is the claim. intended to encourage unsecured creditors to continue doing business with (and extending Brief Overview of Bankruptcy Preference Risk credit to) an entity that is sliding into, but seeking Section 547(b) of the Bankruptcy Code allows to avoid, a bankruptcy filing. The defense is a trustee to avoid and recover a transfer as a supposed to protect a debtor’s payments to preference by proving the following elements of creditors that were consistent with either the a preference claim: (i) the debtor transferred its parties’ prior course of dealing or industry property (usually by tendering payment) to or for practice. Nevertheless, the courts have been the benefit of a creditor. [section 547(b)(1)]; (ii) inconsistent and unpredictable in the manner in the transfer was made on account of antecedent which they have applied the ordinary course of or existing indebtedness that the debtor owed the business defense, resulting in expensive litigation creditor. [section 547(b)(2)]; (iii) the transfer was and a difficulty in predicting the likelihood of made when the debtor was insolvent based on a proving the defense. This has led creditors to balance sheet definition of insolvency - liabilities settle many preference claims in order to avoid exceeding assets [section 547(b)(3)], which is the risk of incurring the significant attorneys’ fees presumed during the 90-day period prior to its necessary to defend the litigation and then losing bankruptcy filing, making it easier for a trustee to the litigation. prove; (iv) the transfer was made within 90 days of the debtor’s bankruptcy filing, in the case of A creditor can also assert the new value defense a transfer to a non-insider creditor, and within to reduce its preference liability to the extent the one year of the bankruptcy filing for a transfer creditor provides new value to or for the debtor’s to an insider of the debtor, such as the debtor’s benefit after an alleged preference payment. A officers, directors, controlling shareholders and creditor determines its new value based on the affiliated companies. [section 547(b)(4)]; and (v) goods the creditor had sold and delivered, and/or the transfer enabled the creditor to receive more services the creditor had provided, to the debtor than the creditor would have received in a Chapter on an unsecured basis after an alleged preference 7 liquidation of the debtor. [section 547(b)(5)]. payment. This defense, like other preference The latter requirement is easy to satisfy unless defenses, encourages creditors to continue selling the recipient of the alleged preference can prove and extending credit to troubled companies. It that it was fully secured by the debtor’s assets, is also supposed to alleviate the unfairness of was paid from the proceeds of its collateral, or all allowing a trustee to recover all payments by a creditors’ claims were (or will be) paid in full. debtor to a creditor during the preference period without reducing the amount of any preference Once a trustee proves all of the elements of claim by the new value the creditor had provided a preference claim under section 547(b), a to the debtor after the payment. After applying this creditor has the burden of proving one or more defense, the debtor’s unsecured creditors should of the affirmative defenses to a preference claim be no worse off by an alleged preference payment contained in section 547(c) of the Bankruptcy where the creditor had subsequently provided new Code to reduce or eliminate its preference value (e.g., delivered goods or provided services exposure. The two most frequently invoked on credit terms) to the debtor. defenses as they relate to TCI coverage are the ordinary course of business and new value Insuring Against Preference Risk defenses contained in section 547(c)(2) and (c)(4) TCI coverage for preference risk has evolved of the Bankruptcy Code. over time. Twenty years ago, a TCI policy rarely contained any policy wording that protected the

©2018 Credit Research Foundation 2 Page | 31 insured from the assertion of preference claims. the full cost of defending a preference claim, Trade credit insurers were forced to address this including the significant defense costs that risk as preference claims in the United States are incurred in any preference litigation. Most have multiplied over the past 40 years since the policies also require the insurer’s consent to any adoption of the United States Bankruptcy Code. settlement of a preference claim as a condition Credit insurers initially began providing coverage for preference coverage. This might lead to by adding a preference endorsement to the a conflict between the insurance carrier and policy. Creditors/insureds that were not aware the insured over their approach to defending of the endorsement, or did not request it, had a preference claim. The carrier might push no coverage for preference risk. Knowledgeable for the insured, at the insured’s expense, to brokers and counsel pushed their clients to obtain continue to pursue preference defenses that the the endorsement when available from a carrier. insured has concluded have little merit. In these However, for quite some time, many insurance circumstances, the insured should be working companies resisted adding preference coverage with knowledgeable bankruptcy and insurance to their policy language. They viewed such counsel (hopefully from the same law firm). coverage as adding an unwanted tail to their risk Good bankruptcy counsel will assert all available period. preference defenses to minimize and hopefully eliminate preference liability. The insured’s The market has changed in favor of expanded TCI bankruptcy counsel should also provide the coverage for preference risk. Many credit insurers carrier and its counsel with a fair assessment of are now incorporating preference coverage in the risk and expense of litigating the creditor’s their standard policy wording. However, there are defenses. This is particularly true for a creditor’s still some insurers that continue to provide the ordinary course of business defense where it coverage by adding it as an endorsement to the is often very difficult to predict the likelihood policy and other insurers that omit preference of successfully asserting the defense. Good coverage altogether. insurance counsel should also be familiar with the TCI policy to make sure that the creditor A trade credit insurer might offer a policy that complies with all of the policy requirements for contains numerous limitations on its coverage preference coverage. Experienced insurance for preference risk. Creditors should understand counsel should also make sure that the insured and identify the limitations and negotiate for their and insurer continue to communicate in a way removal or for at least some improvements to that protects the policyholder and its rights under preference coverage. As an example, a creditor the insurance policy and coordinate the defense has no preference coverage when its unpaid of the preference action so that the parties can accounts receivable owing by an insolvent eventually agree on a cost-effective settlement. customer equals the approved buyer limit then in effect for that customer. A creditor can maximize Creditors should consider the following best the likelihood of at least some preference practice points to maximize the likelihood of coverage by having their approved buyer limit preference coverage: 1) make sure its TCI policy exceed the account receivable balance owed by includes preference coverage; 2) monitor the any given customer. This is not always easy to do approved buyer limit and provide for a cushion given the changing nature of accounts receivable for preference risk; 3) make sure the creditor balances. It also requires retaining knowledgeable continues to have preference coverage, even bankruptcy counsel to identify and vigorously where the policy is not renewed; 4) be aware of assert preference defenses to minimize or the preference notification periods and request a eliminate any potential preference liability. reasonable period of time to notify the carrier; 5) eliminate clauses that put a short time restriction A few insurers are open to providing a separate on filing a claim for preference exposure since and additional limit for a creditor’s/insured’s preference claims are frequently asserted from exposure to preference liability. This additional one to two years after expiration of the TCI policy; coverage is less frequently granted, and insurers 6) if the policy contains a “no claims bonus” that that provide it usually require the insured to pay releases the insurer from all liability under the an additional premium for the added risks the policy, there should be a carve out for continued insurers are assuming. preference coverage; 7) include accounts receivable that were paid within 90 days of an Creditors should also understand that TCI insolvent buyer’s bankruptcy filing date as part policies usually require that the insured assume of any insurance claim; 8) retain well-qualified

©2018 Credit Research Foundation 3 Page | 32 bankruptcy counsel to assist in the defense of bankruptcy. A creditor, with the assistance of any preference claim and make sure the law firm its insurance broker and counsel, should be has sufficient insurance expertise to deal with TCI proactive in negotiating for as broad coverage issues concerning preference coverage; and as possible, including broad coverage for 9) communicate early and often with the preference risk. Understanding the key provisions creditor’s broker, counsel and insurer. of the policy and, with the assistance of a good broker and counsel, negotiating with the carrier Conclusion to eliminate unfavorable provisions, resolve Trade credit insurance is an excellent vehicle ambiguities and reach agreement on a credit for protecting against the risk of uncollectible insurance policy that maximizes the amount of accounts receivable, including accounts owed coverage (including coverage for preference risk), by an insolvent customer that has filed for will minimize the risk of claim denials.

About the Authors:

Bruce S. Nathan Esq Mark Regenhardt, is a of Lowenstein Sandler Senior Vice President for is a Partner in the firm’s the Credit, Political, and Bankruptcy, Financial Security Risk Group of JLT Reorganization & Creditors’ Specialty USA, which is Rights Department. part of the Jardine Lloyd Thompson Group plc (JLT), He has more than 30 a provider of insurance, years experience in the reinsurance, and employee bankruptcy and insolvency benefits related advice, brokerage, and field, and is a recognized national expert on associated services. Headquartered in London, trade creditor rights and the representation of JLT is one of the world’s largest Credit and trade creditors in bankruptcy and other legal Political Risk brokerage firms. matters. In addition to his extensive experience, Mark Bruce has represented trade and other speaks Spanish and Portuguese. unsecured creditors, unsecured creditors' committees, secured creditors, and other interested parties in Chapter 11 cases.

James Stewart Esq is a Partner specializing in Environmental Law & Litigation at Lowenstein Sandler. He handles large and complex Superfund cases, a skill honed by his work on the nation's first Superfund trial followed by many federal matters involving remediation cost recovery and natural resource damage assessment. Mr. Stewart provides both trial and appellate representation in toxic tort actions, in addition to actions related to government enforcement penalties. He also provides companies advice on hazardous waste regulations, toxic substance regulations, Title V air pollution and permitting issues, toxic mold, and employee exposure to hazardous substances under the federal Occupational Safety and Health Act.

Euler Hermes Americas

EULER HERMES “RISKY BUSINESS” SURVEY CFOS CONCERNED ABOUT ESCALATING RISKS IN 2019 www.eulerhermes.us Page | 34

EULER HERMES “RISKY BUSINESS” SURVEY: CFOS CONCERNED ABOUT ESCALATING RISKS IN 2019 | 1

Nearly 75% of CFOs are at least moderately concerned about the risks they might face in the next 12 months, according to “Risky Business” a national survey conducted by Euler Hermes Americas, the world’s largest trade credit insurer. The Euler Hermes “Risky Business” Survey analyzed responses from U.S CFOs and those in related jobs in companies with at least $5 million of annual revenues to understand their top concerns related to global political, economic and digital uncertainties heading into 2019.

Achieving growth, dealing with competition, responding to regulatory changes, and a lack of cash flow predictability were the top concerns among those surveyed, with 58% saying that they don’t feel fully prepared to handle the current risk landscape.

“Today’s market conditions can change in the blink of an eye. The only way to prepare for today’s volatility is to plan for all possible scenarios. Having the right partners and tools in place to create proactive risk mitigation strategies makes that possible.”

– JAMES DALY, PRESIDENT AND CEO OF EULER HERMES AMERICAS

Achieving growth 48% Competition 42% Change in regulatory environment 42% Cash flow predictability 34% Privacy/data management 32% Fed policy, interest rate increases and/or inflation 18% Disruptive technologies 18% Bank financing 17% Not getting paid by partners 16% Political uncertainty/policy shifts by US... 13%

PAYMENT PROBLEMS ABOUND

From cybercrime to political gridlock, potential threats to businesses are often in the news, but a quiet risk factor is causing its fair share of sleepless nights for CFOs – 70% consider a nonpayment event a threat to their businesses. While some flashier risk events impact some industries more than others, non-payment events are industry agnostic. In fact, 72% of CFOs have experienced a non-payment in the last three years, with CFOs reporting an average of 17.2 nonpayment events during the last three years.

In addition, 70% of CFOs say the Trump administration’s tariffs could at least moderately affect their company. These effects could include cash flow disruption, increased input or output costs or 72% potential supply disruptions. have experienced a A focus on potential cash flow issues and nonpayment only amplifies other risk factors for CFOs. non-payment in the The Euler Hermes survey found that the more a CFO is concerned about nonpayment events, last three years the more likely they are to be concerned about the overall risk landscape in the next 12 months. What’s more, the survey found that having a better handle on risk factors like cash flow and nonpayment events puts CFOs in a better position to deal with more unpredictable market events. For example, the survey results show that companies that consider themselves highly prepared for risk are least likely to think tariffs will affect them. Page | 35

EULER HERMES “RISKY BUSINESS” SURVEY: CFOS CONCERNED ABOUT ESCALATING RISKS IN 2019 | 2

PREVENTABLE RISK In an attempt to limit non-payment events, some CFOs report turning to strategies like requiring prepayments or deposits from new or risky buyers. Additionally, factoring of invoices is among the top practices for mitigating non-payments. But, this may not be the best strategy.

Prepayment or deposits from new/risky... 44% Factoring of Invoices 39% Letters of Credit 32% I am not putting in any processes. 22% Stricter terms/smaller credit limits on risky... 17%

Limiting the scope of business activity has consequences of its own. Just over half (57%) of CFOs have experienced a loss of business after enacting stricter payment terms, smaller credit limits or deposit requirements. There’s revenue to be lost too: an inefficient risk posture has resulted in an average of $1.4 million per company in unrealized revenue.

UNREALIZED REVENUES 1.9 1.7 FROM RISK POSTURE 1.4 1.5 (in millions) 0.6

Total $5m – $10m – $25m – Over $9.9m $24.9m $50m $50m

Instead of turning to risk prevention measures that bleed profits, businesses should consider partners and tools that that can provide granular detail on potential customers: The strength of a balance sheet, and the credit terms granted to a client, depends on the individual company as well as the country and industry drivers.

METHODOLOGY

The Euler Hermes “Risky Business” Survey analyzed responses from 250 U.S. CFOs and their direct reports. Quotas were established to ensure that half of the respondents were from small companies (revenues between $5M and $25M) and that the remainder were “medium sized” (with revenues of $25M or more). Survey responses were collected during the period of September 10 – October 4, 2018. Page | 36

EULER HERMES “RISKY BUSINESS” SURVEY: CFOS CONCERNED ABOUT ESCALATING RISKS IN 2019 | 3

ABOUT EULER HERMES

WE PREDICT TRADE AND CREDIT RISK TODAY, SO YOU CAN HAVE CONFIDENCE IN TOMORROW.

Euler Hermes is the global leader in trade credit insurance and a recognized specialist in the areas of surety, collections, structured trade credit and political risk. Our proprietary intelligence network analyzes daily changes in corporate solvency representing 92% of global GDP.

We give companies the confidence to trade, and be paid. We compensate your company in the event of a bad debt, but more importantly, we help you avoid bad debt in the first place. Whenever we provide trade credit insurance or other finance solutions, our priority is predictive protection. So when the unexpected arrives, our AA credit rating means we have the resources, backed by Allianz to provide compensation to maintain your business. Headquartered in Paris, Euler Hermes is pres- ent in 52 countries with 6,050 employees. Every year we protect more than $1Trillion in trade transactions for our customers.

For more information on risk tools that help business leaders focus on growth, visit www.eulerhermes.us Page | 37

Euler Hermes Americas

WHAT TO EXPECT AS THE ECONOMY SLOWS Your clients count on Euler Hermes to help maximize growth opportunities and minimize risk. When the economy worsens, trading partners that were low risk yesterday can become higher risk today, and this can translate into tightening credit limits. The core part of our value is alerting our clients about risks they may not see coming.

The declining payment environment is very clearly linked to Euler Hermes’ claims trends:

+22.5% +8.3% +11% -9.8%

+33.5% +29.9%

Remember, avoiding a loss is a better outcome than experiencing a loss and making a claim. Euler Hermes will continue to provide the most accurate possible credit decisions, leveraging our leading data and expertise. 2016 2017 2018 YTD May 2019 Questions or concerns? Contact your service team today. Number of Claims Claims in $

For clarity, figures exclude impact of Toys R Us claims Page | 38

A GUIDE TO CREDIT INSURANCE

www.eulerhermes.us Page | 39

2 A Guide to Credit Insurance | WHITE PAPER

INTRODUCTION

“In an economy where eighty percent of trade is conducted on open terms, far too little analysis is done with respect to the effect of bad debt write-offs on the bottom line and BUSINESS ASSETS what can be done to avoid that impact.”

Uninsured Assets Insured Assets

Financial executives must continuously balance the cost of doing business with the risk of doing business. Each time a dollar of revenue is produced, all costs of generating that dollar have been thoroughly analyzed in an effort to maximize the profit margin. However, in an economy where eighty percent of trade is conducted on open terms, far 40% too little analysis is done with respect to the effect of bad debt write-offs Uninsured Accounts on the bottom line and what can be done to avoid that impact. Receivable According to the IRS, certain industries keep average bad debt reserves of up to 2 percent of yearly sales. While this amount is atypical, the U.S. average bad debt loss is about 30bps of annual sales, with unexpected or recessionary losses occasionally doubling that amount to 60-70bps – UNPAID INVOICES still a major hit to a company’s profitability and cash flow.

Accounts receivable, which typically represent more than 40 percent of a company’s assets, are a vital component of a healthy business. 1 IN 10 On average, one in every ten invoices becomes delinquent, with many Invoices is ultimately becoming an unpaid bad debt. When a major customer — or delinquent even multiple customers — defaults on a debt, there are devastating consequences to a company’s cash flow, earnings, and capital. In a worst- case scenario, this could literally put a company out of business. These risks require thorough analysis and ongoing monitoring at the buyer, BUSINESS FAILURES sector, country, and macroeconomic levels.

In the face of today’s changing domestic and global economic climate, recognizing and managing future risks has become a priority for business 23,109 leaders. Losses attributed to non-payment of a trade debt or bankruptcy can and do occur regularly. Default rates vary by industry and country Businesses failed from year-to-year, and no industry or company is immune to trade credit in North America risk. This is evidenced by the data tracked in the Euler Hermes Global Index of Business Failures. The risk of buyers defaulting on trade debt in 2017 continues to loom. Page | 40

3 A Guide to Credit Insurance | WHITE PAPER OPTIONS FOR MITIGATING CREDIT

Financial executives should weigh the costs and benefits RISK of several options for mitigating trade credit risk. Each one should be investigated carefully to determine the best fit for a specific company. Some of the more common methods are:

SELF-INSURANCE LETTERS OF CREDIT Many companies choose to self-insure in the form of bad-debt A documentary letter of credit is a bank’s agreement to reserves. This fund is available to offset the deficit should any guarantee the payment of a buyer’s obligation will be received of their customers become unable to pay. However, it also on time and in the correct amount. The buyer has to approach impacts other areas of cost: the bank to request a letter of credit, which has the • Investments in credit management resources, systems, and disadvantage of reducing the buyer’s borrowing capacity as it information acquisitions, analysis and monitoring is counted against the company’s overall credit limit set by the • Impact on sales, given risk tolerance bank. In developing markets it may need to be cash secured. • Impact on capital allocation of the balance sheet Impacts on cost include: • Typically does not account for large and unexpected • Only covers a single transaction for a single buyer – regularly catastrophic loss relying on this form of protection can be tedious and time consuming for a buyer FACTORING • Expensive, both in terms of absolute cost and in terms of A factor is a company that typically purchases companies’ credit line usage with the additional need for security accounts receivable at a reduced amount of the face value of • Ties up working capital for buyers, thus potentially restricting the invoices. These costs may range from 1% to 10%, based upon opportunities a variety of components. This gives a company immediate access • The claims process can be lengthy and laborious and can be to cash in exchange for a percent of the receivables’ value, plus a derailed by minor discrepancies in paperwork. fee. Many factors will also offer invoicing, collections, and other bookkeeping activities for companies looking to outsource their CREDIT INSURANCE entire accounts receivable function. Some factors will assume the Credit insurance is a business insurance product that protects risk of non-payment of the invoices they purchase, while others a seller against losses from nonpayment of a commercial do not. Other impacts on cost include: trade debt. With trade credit insurance in place, the seller/ • Considerable margin erosion policyholder can be assured that non-disputed accounts • Loss of control of customer relationships receivable will be paid by either the debtor or the trade credit • Capacity constraints associated with line availability insurer within the terms and conditions of their policy.

MITIGATING TRADE RISK: A COMPARISON OF METHODS

FEATURE CREDIT INSURANCE LETTER OF CREDIT FACTORING SELF-INSURANCE Coverage Insolvency, protracted default Buyer default Insolvency and protracted default Any loss and political risks Services Credit information, risk assessment, None Debt collection and credit information Internal resources market intelligence, debt collection Financing None, but can facilitate financing None, but can facilitate financing Converts trade receivables into cash for a fee No effect Customer Buyer is unaware of credit Insurance Buyer initiates provision of letter Collection by factor of trade Maintain direct relationship Relationships contract. Better terms enhance of credit receivables may affect client relations with customer relationship with customer Page | 41

4 A Guide to Credit Insurance | WHITE PAPER WHAT IS CREDIT INSURANCE? Credit insurance protects businesses from non-payment of commercial debt. It makes sure invoices will be paid and allows companies to reliably manage the commercial and political risks of trade that are beyond their control. Capital is protected, cash flows are maintained, loan servicing and repayments are enhanced, and earnings are secure from these events of default. A credit insurance policy also allows companies to feel secure in extending more credit to current customers, or to pursue new, larger customers that would have otherwise seemed too risky. The protection it provides allows a company to increase sales to grow their business with existing customers. Insured companies can sell on open account terms where they may have previously been restrictive or only sold on a secured basis. For exporters, this especially can be a major competitive advantage.

COMPANIES INVEST IN TRADE CREDIT INSURANCE FOR A VARIETY OF REASONS, INCLUDING:

Credit insurance can Sales expansion – If receivables are insured, a company can enable a company to safely sell more to existing customers, or go after new customers increase sales by up to that may have been perceived as too risky. Expansion into new international markets – Protection 1 against unique export risks and market knowledge to make 20% accurate growth decisions. Better financing terms – Banks will typically lend more capital against insured receivables, and may also reduce the On average, cost of funds. banks lend up to Reduction in bad-debt reserves – Insuring receivables frees up capital for the company. Also, credit insurance premiums are tax 80% more deductible, but bad debt reserves are not. 2 on insured receivables Actionable economic knowledge – The trade credit insurer’s information database and technology platform help reduce operational and informational cost. 1 http://www.eulerhermes.us/case-studies/Pages/ default.aspx Protection against non-payment and catastrophic loss – Should 2 http://www.tradefinancemagazine.com/AboutUs/ an unforeseeable event catch a company and its insurance carrier Stub/WhatIsTradeFinance.html without warning, the bill gets paid via the claims process.

While protection is often perceived as the primary reason to purchase credit insurance, the most common benefit companies receive by investing in a policy is that it helps them increase their sales and profits without additional risk. It is in this way that a credit insurance policy can typically offset its own cost many times over, even if the policyholder never makes a claim. Page | 42

5 A Guide to Credit Insurance | WHITE PAPER WHAT IS CREDIT INSURANCE? (CONT.)

EXAMPLE 1: INCREASING SALES AND PROFITS $150K As an example, a wholesale company’s credit department had restricted a credit line to a CREDIT INSURANCE ADDED $60K customer to $100,000. They then purchased a trade Annual gross credit insurance policy and the insurer approved a $100K limit of $150,000 on that same customer. With a profit on one 15% margin and an average days sales outstanding account* of 45 days, the wholesaler was able to increase their sales to realize an incremental annual gross profit of *Eight shipments per year/ DOS 45 days $60,000 on just that one account. CREDIT LIMIT 15% profit margin

Trade credit insurance can also improve a company’s relationship with their lender. In many cases the bank actually requires trade credit insurance to qualify for an asset-based loan.

EXAMPLE 2: IMPROVING LENDER RELATIONSHIP $25 MILLION For example, a $25 million lumber wholesaler had extreme concentration in their accounts receivable WHOLESALER because they only had eight active accounts. The smallest of these customers had A/R balances in the low six-figure range, and the largest was into CONCERN: the low seven-figure range. 1 Extreme Concentration in Accounts Receivable The company’s bank was concerned about this BANK concentration and they required trade credit insurance in order to include their accounts ACTION: receivable as collateral. The lumber company 2 Bank required credit established a trade credit insurance policy that insurance policy for $25K specifically named all of its buyers, providing the WHOLESALER bank the comfort level it needed.

In fact, the bank increased the advance rate from RESULT: 80% to 85%. The net result was that the lumber 3 Advance rate from company was able to obtain an additional 80% to 85% BANK $400,000 in working capital because of their trade credit insurance coverage. The cost of the policy was $25,000 so the return on this investment was BENEFIT: excellent, and the lumber company was able to use 4 Extra working the additional cash to continue to fund its growth capital = $400K and expansion strategy. WHOLESALER Page | 43

6 A Guide to Credit Insurance | WHITE PAPER WHAT CREDIT INSURANCE IS NOT

As important as it is to know what trade credit insurance is, it is equally important to know what it is not.

Credit insurance is not a substitute for prudent, thoughtful credit management. Sound credit management practices should be the foundation of any credit insurance policy and partnership. Credit insurance goes beyond indemnification and does not replace a company’s credit practices, but rather supplements and enhances the job of a credit professional.

THE BASIS OF CREDIT INSURANCE

The ultimate goal of credit The key is having the right information to make informed credit decisions and therefore avoid or minimize losses. Using this insurance is not simply to information, companies also have the confidence to make more indemnify losses incurred strategic decisions to profitably grow their business. from a default, but provide The best credit insurers will invest heavily in the development of businesses with the support proprietary credit and financial information, and also will and knowledge they need to employ risk analysts, as well as industry- and country-based avoid them from the start. underwriters, in many geographic locations in order to have a close physical presence to its customers’ buyers. Credit insurers will also analyze payment information about its policyholders’ buyers to identify early signs of financial trouble to ensure early intervention is initiated.

These risk analysts research and evaluate information about individual buyers and use that information to partially or fully approve or decline credit limit requests to the policyholders. The analysis of this information allows companies to make more informed decisions about how much credit to extend to their customers. More importantly, it enables companies to avoid losses through the close monitoring of their customers. Page | 44

7 A Guide to Credit Insurance | WHITE PAPER HOW DOES A CREDIT INSURANCE POLICY WORK?

Knowledge to pick & keep At the onset of the policy the credit the right customers insurance carrier will analyze the creditworthiness and financial stability of the policyholder’s Your Your Customer insurable customers and assign them Company a specific credit limit, which is the amount they will indemnify if that Coverage & Risk Monitoring for Default or Slow Pay insured customer fails to pay.

Unlike other types of business insurance, once a company This information is constantly updated and cross purchases trade credit insurance, the policy does not get referenced. When signs indicate a company is filed away until next year’s renewal − the relationship experiencing financial difficulty, the insurer notifies all becomes dynamic. A trade credit insurance policy can policyholders that sell to that buyer of the increased risk change often over the course of the policy period, and and establishes an action plan to mitigate and avoid loss. the credit manager plays an active role in that process. THE GOAL OF A TRADE CREDIT INSURANCE POLICY It is the credit insurer’s responsibility to proactively monitor its customers’ buyers throughout the year to The ultimate goal of a trade credit insurance policy is ensure their continued creditworthiness. They do this not to simply pay claims as they arise, but more by gathering information about buyers from a variety importantly to help policyholders avoid foreseeable of sources, including: visits to the buyer, public records, losses. If an unforeseeable loss should occur, the and information supplied by other policyholders that indemnification aspect of the trade credit insurance sell to the same buyer, receipt of financial statements, policy comes into play. In these cases, policyholders etc. By implementing credit insurance, the policyholder’s would file a claim with supporting documentation, and credit management team has been enhanced by the insurer would pay the policyholder the claim benefit, the thousands of professionals associated with these typically within 60 days from the date of loss on carriers; your credit insurer essentially becomes an domestic claims. extension of your team. The coverage does attach should a buyer default Throughout the life of the policy, the policyholder may because they were a victim of fraud associated with request additional coverage on a specific buyer should another party, including preparing fraudulent or that need arise. The insurer will investigate the risk of misleading financial or credit statements. Disputes increasing the coverage and will either approve the also fall outside of the cover of a trade credit insurance additional coverage, or maintain with a detailed policy, though they will become covered losses once the explanation. Similarly, policyholders may request coverage situation is effectively resolved. on a new buyer with which they’d like to do business. Page | 45

8 A Guide to Credit Insurance | WHITE PAPER CHOOSING A CARRIER

Your insurance partner will work with you on a daily basis. There are many carriers to choose from but you want to make sure you are working with a partner who understands your business and brings in industry experts who are specialized.

The better-established credit insurers are “limits unable to pay, and that event was not foreseeable, the underwriters,” meaning that the policyholder’s more insurer will pay a claim up to the predetermined amount significant buyers will be analyzed individually and each established within the policy parameters and qualified assigned a credit limit for coverage. This is where the by the credit professional. type and amount of information the insurer collects on a buyer plays a very important role in monitoring, Limits underwriters like to name as many accounts to their because credit limits are assigned based on the policies as possible and they are equipped to handle large information available about that particular buyer. volumes of credit limits to be reviewed. These include companies like Euler Hermes, Coface and Atradius. For a company’s less significant buyers, a credit insurer will often cover these accounts under a blanket, or self- By contrast, “discretionary underwriters” do not have the underwritten type of cover, known as a discretionary same level of staffing to look at a high volume of credit credit limit or DCL. The insurer does not individually limits. Their expertise comes into play underwriting the underwrite the buyers that fall under the discretionary internal credit management of a company and being credit limit, but rather it is the policyholder’s selective who they take on as insureds, these companies responsibility to approve credit and be aware of any include AIG, FCIA, HCC, QBE and others. The warning signs that these buyers’ creditworthiness is discretionary underwriters will give larger DCLs, in turn deteriorating. If one of these accounts should become they look for policies with fewer credit limits to underwrite.

CHOOSING A CREDIT INSURANCE CARRIER

FEATURE LIMITS UNDERWRITERS (LUWS) DISCRETIONARY UNDERWRITERS (DUWS) Full-service Provides a full suite of services that add value beyond just risk transfer Pure Risk Transfer Country Limits Typically uses aggregates to determine coverage so there is no impact on Some DUWs use country limits, which can hamper desired your ability to gain desired coverage by country coverage on exports. Known Typically uses discretion on any cancellations Coverages will typically auto-cancel upon any lapse in a Coverages company’s Policy and Procedures Manual. Therefore, coverage eligibility is not known until the claim is processed. Protection for EH deductibles are typically lower than those of DUWs and more DUWs often use very large deductibles to keep rates down but smaller claims than 50% of policies have no deductible this discourages claims on anything but huge losses. Resources LUWs have world-class expertise in-house for you to leverage and a physical Many, but not all, DUWs are not mono-line carriers and don’t presence in over 50 countries, allowing us the most accurate, internationally specialize in trade credit insurance as a focus consistent credit intelligence available. Size Some LUWs can provide cover for businesses of all size without syndication. Many, but not all, DUWs are smaller outfits that rely on third Their size also means they have access to a more extensive knowledge base party intelligence for underwriting. from our risk experts around the world. Page | 46

9 A Guide to Credit Insurance | WHITE PAPER IS CREDIT INSURANCE FOR EVERYONE? Any company that has receivables on its balance sheet has a potential exposure to loss from the inability or failure of a customer to pay them.

Credit insurance is also widely used in export markets with credit insurance program. Trade credit insurance is essentially countries and customers where a business has no previous is the sum of the costs associated with a businesses risk experience or there is a political environment that makes it philosophy, sales restricted, systems, credit/financial more of a challenge to do business. While credit insurance can information, accounts receivable management, collection and be a smart investment for many companies, it may not be insolvency management, etc. All are real costs, and should be applicable to companies that sell exclusively to governments weighed against the cost associated with the credit insurance or consumers since trade credit insurance only covers business- policy where these services are included as an added benefit. to-business accounts receivable. What many will find is that trade credit insurance provides one of the best and most cost-effective solutions. For the most part, companies that conduct business-to- business trade are essentially already investing in a trade

HAVE YOU CONSIDERED THE HARD AND SOFT COSTS OF SELF-INSURANCE?

Many companies view self-insurance as the lowest cost risk mitigation solution – but is it? Like many credit insurance clients, the example company below actually realized a positive return on its investment in Credit Insurance. Use the worksheet below to calculate the hard and soft costs associated with self-insurance for your company. CREDIT INSURANCE vs. SELF INSURANCE How much more cost effective could it be to outsource this to a credit How much profit have you lost by holding down credit limits? $______insurer? Example Company A had $10M in annual sales and decided A company with a 15% profit margin, shipping eight shipments to use credit insurance instead of self-insurance. per year to would lose $60K in potential profit by holding a credit limit down by $50K on just one customer. Realized profits by extending just one credit limit by $50K $60K How much is in your bad debt reserve? $______Released majority of bad debt reserve converted $160K Companies keep up to 2.2% of yearly sales tied up in bad to earnings (Year One only) debt reserves Tax on remaining bad debt reserve @ 20% $8K How much in tax do you pay on your bad debt reserve? $______Credit services – included $0 Releasing this reserve in year one as earnings will result in tax savings in future years Cost of credit insurance @ .25% of annual sales $25K What is the cost on your credit function support? $______Tax savings from deducting policy as business expense $5K Systems, buyer monitoring, staff, third party credit services, collections, etc. are all costing you. Could you realize increased ADDITIONAL PROFITS AND SAVINGS: $192K efficiencies by allowing a credit insurer to perform some of these functions as an integral part of a policy? (Pays for itself and returns value to the company even without a claim and provides a guarantee on the only unsecured asset.) TOTAL COST: $______

Company A was able to reduce their bad debt reserve freeing up cash flow, increase sales by extending a limit on a riskier customer and obtain comprehensive support for their credit management. The extra sales revenue, tax savings, and the instant bump in earnings realized by releasing the majority of its bad debt reserve has offset the cost of the policy many times over. Not to mention, they have added coverage in the event of a catastrophic loss and additional credit management resources at their fingertips. Credit insurance was the clear choice for Company A. Page | 47

CONCLUSION

Ultimately, should an unexpected loss occur, the trade credit insurance policy provides indemnification, thus protecting the policyholder’s revenue and bottom line.

A trade credit insurance policy, if used properly, provides a valuable extension to a company’s credit management practices – a second pair of objective eyes when approving buyers, as well as an early warning system should things begin to decline so that exposure can be effectively managed.

By maintaining a strong relationship between the insurer and the credit management department, trade credit insurance may be the wisest investment a company can make to ensure its profits, cash flow, and capital are protected.

To schedule a meeting with a Euler Hermes representative, please call 877-909-3224 or visit us at www.eulerhermes.us for a free, no-obligation quote.

Euler Hermes North America Headquarters 800 Red Brook Boulevard Owings Mills, MD 21117

Phone: +1 877-909-3224 Fax: 410-753-0952

[email protected] www.eulerhermes.us Page | 48

ACCOUNTS RECEIVABLE MANAGEMENT SOLUTIONS from Euler Hermes

www.eulerhermes.us Page | 49 Accounts Receivable Management Solutions from Euler Hermes

Euler Hermes is the global leader in trade credit insurance compensation to help our customers maintain their business. and a recognized specialist in the areas of surety, collections, Our track record of excellence is why people trust us and share structured trade credit and political risk; helping customers our confidence in what tomorrow will bring. worldwide to trade wisely and develop their business safely. Our financial solidity, risk analysis and global business network AN INNOVATION MIND-SET empower companies of all sizes with domestic and export market knowledge, and support them in successfully managing Because digital technologies are quickly changing the nature trade receivables in changing economic environments. of trade, we put innovation and collaboration at the heart of our business. Our culture is to promote the development of OUR HERITAGE AND FINANCIAL STRENGTH new tools and products to help companies trade safely and be ready for the trade of tomorrow. Thanks to our predictive For 125 years we’ve thrived as the market leader; we have intelligence we can identify trends, move fast, and innovate deep roots that sustain us, even in tough economic times. So, accordingly. An innovation mindset is part of our DNA and it’s if the unexpected does arrive, we have the resources and the what makes us different. financial strength (AA S&P, A+ A.M. Best), to provide

EULER HERMES KEY FACTS: TRADE WITH CONFIDENCE

MARKET PRESENCE OPERATIONAL EXCELLENCE

NEARLY $1 TRILLION covered trade transactions globally

85 MILLION+ companies monitored in our proprietary risk database 6 CONTINENTS 52 COUNTRIES 20,000 credit requests processed per day (85% in less than 48 hours) 120+ AGENTS 52,000+ covering 50 states CLIENTS and all major WORLDWIDE 85,000 Canadian provinces claims paid per year

FINANCIAL RATINGS MARKET SHARE 34% WORLDWIDE U.S. MARKET AA A+ 39% SHARE Standard & Poor’s A.M. Best Company

Wholly owned by , one of the world’s leading financial services providers

2 Page | 50 IS ONE OF YOUR LARGEST ASSETS UNPROTECTED?

There is a greater chance that a business will experience a loss within its accounts receivable than any other asset.

ON AVERAGE, 40% OF A COMPANY’S ASSETS ARE IN THE FORM OF TRADE DEBTS. Land & Buildings Sometimes the figure is far higher. Accounts receivable are a Accounts critical component of your balance sheet — they directly affect Receivable your cash flow and profitability. Yet while you insure your The only major asset company against property loss, liability and other unpredictable, left uninsured Machinery & high-exposure events, you’re leaving one of your most valuable Equipment assets open to loss. There is a safer way to do business.

WHAT IS TRADE CREDIT INSURANCE?

Trade credit insurance, also called accounts receivable Inventories insurance, is a financial tool that manages both commercial and Cash political risks that are beyond a company’s control. It is Senior protection against your customer’s failure to pay its trade debts. Executives WHO SHOULD USE TRADE CREDIT INSURANCE? Uninsured Assets Insured Assets Any company selling on open account terms to other companies can benefit from credit insurance. Euler Hermes policyholders can be found in all industries and are companies of all sizes.

A credit insurance policy with Euler Hermes delivers the peace of mind that you will get paid for what you sell. This assurance empowers you to sell more, with confidence.

3 Page | 51 Accounts Receivable Management Solutions from Euler Hermes HOW DOES CREDIT INSURANCE WORK?

A credit insurance policy is more than just a piece of paper, it is a partnership. As a virtual extension of your company, Euler Hermes provides the knowledge and resources you need to manage, maximize and protect your receivables.

When you initiate a policy, we analyze the creditworthiness and financial Knowledge to pick & keep stability of your customers and assign the right customers them a specific credit limit, which is the amount we will indemnify if that insured customer fails to pay.

At any time during the policy’s life, you may request additional coverage for trade with any of your customers if the need arises. While we continuously Your Your monitor each of your insured customers, Company Coverage & Risk Monitoring Customer we will evaluate the risk of increasing the for Default or Slow Pay coverage and will either approve the additional credit limit request or decline it with a clear and timely explanation. You can also request a credit limit for a new customer with whom you would like to start doing business.

We receive over 20,000 credit limit requests every day and process 85% of them in less than 48 hours.

4 Page | 52

COST JUSTIFICATION

The extra sales revenue you’ll earn by increasing limits can offset the cost of a policy many times over. Below is a sample return on investment with a Euler Hermes trade credit insurance policy in place.

SAMPLE RETURN ON INVESTMENT WITH A EULER HERMES TRADE CREDIT INSURANCE POLICY

It is our responsibility to proactively Average A/R Balance ...... $5,000,000 monitor the creditworthiness of your Total Yearly Sales (Revenues) on Credit ...... $30,000,000 customers. We do this by gathering Gross Profit Margin from Sales ...... 10% information about your customers from a variety of proprietary and Total Number of Credit Customers ...... 50 public sources. Turns (No. of times you sell to a customer in a year) ...... 6 Estimated Premium ...... $45,000 While credit insurance indemnifies losses incurred from non-payment of Average Credit Limit – Size of A/R per Customer ...... $100,000 commercial debt, the ultimate goal is to help your business avoid foreseeable losses.

Based on the Gross Profit Margin, this is the amount of additional Revenue you need to offset the cost of the policy .... $450k Based on the average A/R per customer, this is the number of new shipments you need to offset the policy ...... 4.5 Based on the number of Turns, this is the total number of new customers you need to add to offset the policy ...... 75

By safely adding just one additional customer, this company would gain a return on its investment in credit insurance even if it never makes a claim.

5 Page | 53 Accounts Receivable Management Solutions from Euler Hermes BENEFITS OF TRADE CREDIT INSURANCE

A trade credit insurance policy is an investment — one that can offer attractive returns through the value of its benefits, even if you never make a claim.

SALES EXPANSION By minimizing risk, trade credit insurance enables you to sell more, confidently. With the assurance that you will be paid for what you sell, your credit staff can often approve higher limits to your existing customers and safely extend credit to new and unknown accounts. Your customer Your customer’s defaults on debt of profit margin = CATASTROPHIC LOSS PREVENTION $100,000 5% Credit Insurance protects a company from catastrophic bad debt losses — one of the top reasons for business failure. A large loss can lead to cash flow disruption, and the lost profit HOW DO YOU MAKE UP FOR is difficult to recover. THE LOST PROFITS?

COMPETITIVE ADVANTAGES IN EXPORTING Credit insurance provides a platform to grow your business internationally. Level the global playing field and win more business by offering safe open terms overseas.

BETTER BORROWING OPTIONS Banks typically limit what you can borrow based on the Your company perceived risk of international receivables, concentration of will need to produce additional sales of sales to large customers, or age of certain accounts. When $2,000,000 your domestic and international receivables are covered by a credit insurance policy, you may be able to borrow more — often at more favorable rates. A DEVASTATING LOSS OF CASH FLOW. SOLUTION? REDUCE BAD DEBT RESERVES A TRADE CREDIT INSURANCE POLICY. Trade credit insurance places a ceiling on bad debt losses, allowing you to release a significant portion of your bad debt reserves — a move that can have an immediate, positive impact on earnings.

6 Page | 54

Euler Hermes believes in a proactive approach when it comes to building a strong client experience and we embrace the opportunity to be a key partner in our customers’ credit management processes. That’s why we offer state-of-the-art services to help you meet your business needs in an efficient, streamlined manner. YOUR CLIENT EXPERIENCE

DEDICATED ACCOUNT MANAGEMENT

When you begin a partnership with Euler Hermes, you are assigned a single point of contact on our servicing team, empowered to resolve almost any issue related to your policy, from new credit limits to claims. Your service team understands the individualized needs of your company and is accountable to ensure your satisfaction. 95% of issues raised to ONLINE POLICY MANAGEMENT our customer service As a customer you’ll have access to our online policy management portal that empowers you with instant, secure online access to policy team are answered information, including the ability to obtain coverage decisions in real- time. Our portal enables you to: within one call • Fulfill new orders without delay by getting requests for coverage answered quickly • Access your current policy coverage and decisions report • Submit credit limit requests and monitor their status in real-time • Submit claims online and access updates on claims activity at any time • View buyer information and collection files in progress • Create reports to monitor and optimize your accounts receivable Euler Hermes pays CLAIMS SERVICES 85,000 claims per year When you insure your accounts receivable with Euler Hermes, you can count on being paid for what you sell, even if one of your covered accounts suddenly faces insolvency or is otherwise unable to pay. Our claims department handles all pre-claim activity, and is dedicated to providing world-class customer service. The claims team also provides special assistance to all first--time filers to ensure a smooth transaction.

7 Page | 55

To schedule a meeting with a Euler Hermes representative, please call 877-909-3224 or visit us at www.eulerhermes.us for a free, no-obligation quote.

Euler Hermes North America Headquarters 800 Red Brook Boulevard Owings Mills, MD 21117

Phone: +1 877-909-3224 Fax: 410-753-0952

[email protected] www.eulerhermes.us

Euler Hermes Regional Offices

EASTERN REGION SOUTHEAST REGION SOUTHWEST REGION New York office Atlanta office Dallas office One Penn Plaza - Suite 3325 400 Perimeter Center Terrace, 15301 Dallas Parkway, Suite 1060 New York, NY 10119 Suite 150 Addison, TX 75001 Phone: +1 877-905-3224 Atlanta, GA 30346 Phone: +1 800-527-0346 Phone: +1 877-884-3224 CENTRAL REGION Chicago office Miami office 3333 Warrenville Road, Suite 160 10451 NW 117th Avenue Lisle, IL 60532 Miami, FL 33178 Phone: +1 877-904-3224 Phone: +1 305-269-1804

Page | 56 PROTECTING AGAINST PAYMENT RISK: SELF-INSURANCE OR CREDIT INSURANCE?

www.eulerhermes.us Page | 57 Protecting Against Payment Risk: Self-insurance or Credit Insurance | 2

PROTECTING AGAINST PAYMENT RISK: SELF-INSURANCE OR CREDIT INSURANCE?

The growth of your company requires establishing relationships with new customers, expanding business with existing customers, and possibly exploring new markets as well. But as you do all three, you also expose yourself to risk – there is no assurance that your customers, new and old, will pay their invoices.

To address the challenge, you need to assess your willingness to assume credit risk and then determine whether to protect your company via credit insurance through a strong third-party partner or by taking on the risk internally—using the “self-insurance” approach.

Whether it’s elected by conscious choice or by default, self-insurance offers flexibility but also comes with real risk and opportunity costs for the business owners. In case of late or unpaid invoices, self-insurance can be costly. It may require considerable effort to recover the money – with very uncertain results as to whether or not the money will ever be completely recovered. Page | 58 Protecting Against Payment Risk: Self-insurance or Credit Insurance | 3

DID YOU KNOW? WHAT IS SELF-INSURANCE?

UNPAID INVOICES A company engages in self-insurance when business owners agree to accept the loss of any invoice amounts that go unpaid plus the full costs required to manage their internal credit granting processes. Businesses typically self-insure 1 IN 10 by using a bad debt reserve to offset losses and by usining their own means to Invoices is research customers. delinquent Diligent self-insurers will undertake extensive research to learn about each customer’s financial health to make an educated guess as to whether to engage in the commercial relationship. This is a critical decision – if customers do not comply with the terms of their contract, or if there’s a long delay in payments, self-insurance requires the business owners to be responsible for any amounts that go uncollected.

To successfully self-insure, companies must first build structured processes for collecting the necessary financial information when acquiring and vetting new customers. If any invoices go unpaid, any recovery efforts must then be funded by the business including third party collections costs. Page | 59 Protecting Against Payment Risk: Self-insurance or Credit Insurance | 4

SELF-INSURANCE DRAWBACKS

Though self-insurance comes without a direct cost, the many indirect costs involved make it far from free for the company even in years with low bad debt losses.

Consider the following potential drawbacks of the self-insurance approach:

Unpaid Invoices Weaken Cash Flow: Self-insurance directly exposes your company to the risk of unpaid customer invoices. This can occur especially during economic downturns when Days Sales Outstanding (DSO) can increase. Many bankruptcy filings occur because of payment delays that lead to an unbalanced cash flow. These companies usually suffer from poor management of customer risk. A default does not necessarily lead to bankruptcy, but if unpaid invoices by major customers accumulate, they greatly weaken cash flow and can permanently paralyze business activity.

Additional Costs Add Up Quickly: The cost of self-insurance is not easily measured. But contrary to conventional wisdom, the cost can quickly exceed the premium of a credit insurance policy when considering the effort to resolve unpaid invoices. Self-insurance requires strict organization and may generate additional expenses such as the cost to purchase customer credit information and collection costs.

More Resources Required: Managing customer risk also demands significant internal resource time and specific skills, which add to the overall cost of the business infrastructure. Additional resources are essential to search and analyze customer information in advance as well as for follow-up recovery procedures. When invoices go unpaid, the company must act quick when its payment reminders do not elicit a response from debtors. The company must then invest time, pay a significant recovery fee to a company that specializes in collections, or even commence court proceedings that require paying lawyers for legal services.

Additionally, choosing to self-insure is sometimes frowned upon by financial lenders. They value the guarantees and the security offered by credit insurance, and customer hedging can reassure bankers so that they feel more comfortable offering loans. Page | 60 Protecting Against Payment Risk: Self-insurance or Credit Insurance | 5

DID YOU KNOW? THE VALUE OF CREDIT

COMPANY ASSETS INSURANCE

When compared to the alternative approach for protecting against bad debt 40% risk, credit insurance provides businesses with a predictable safeguard against Unpaid uninsured non-payment of commercial debt. invoices With a credit insurance policy in place, you can ensure your invoices will be paid, and you can manage the commercial and political risks of trade. This results in safer and more strategic accounts Land & receivable management. Policies can be tailored for small businesses and multinational companies Buildings Accounts through offerings that take into account the specifics of their vertical industry and their markets. Receivable The only major When you partner with a credit insurance provider, its recovery experts can also be brought to asset left uninsured bear on your behalf, implementing fair procedures for collecting on delinquent invoices and/or Machinery & Equipment identifying fair compromises. This is especially helpful in cases involving customers and litigation that take place abroad.

You also benefit from access to credit experts who can quickly respond to your requests for Inventories guaranteeing payment on a particular prospect’s invoices. With their expertise in your industry, you Cash can receive reliable information about your prospects — a competitive advantage in your customer Senior Executives risk management program. The savings on third party credit reports and extra internal resources required for vetting credit applications can offset the premium of a credit insurance policy even if you never make a claim. Page | 61 Protecting Against Payment Risk: Self-insurance or Credit Insurance | 6

HAVE YOU CONSIDERED THE HARD AND SOFT COSTS OF SELF-INSURANCE?

CREDIT INSURANCE vs. SELF INSURANCE How much more cost effective could it be to outsource this to a credit insurer? Example Company A How much profit have you lost by holding down credit limits? $______had $10M in annual sales and decided to use credit insurance instead of self-insurance. A company with a 15% profit margin, shipping eight shipments per year to would lose $60K in potential profit by holding a credit limit down by Realized profits by extending just one credit limit by $50K $60K $50K on just one customer. Released majority of bad debt reserve converted to earnings (Year One only) $160K How much is in your bad debt reserve? $______Tax on remaining bad debt reserve @ 20% $8K Companies keep up to 2.2% of yearly sales tied up in bad debt reserves How much in tax do you pay on your bad debt reserve? Credit services – included $______$0 Releasing this reserve in year one as earnings will result in tax Cost of credit insurance @ .25% of annual sales $25K savings in future years Tax savings from deducting policy as business expense $5K What is the cost on your credit function support? $______Systems, buyer monitoring, staff, third party credit services, collections, etc. ADDITIONAL PROFITS AND SAVINGS: $192K are all costing you. Could you realize increased efficiencies by allowing a credit insurer to perform some of these functions as an integral part of a policy? (Pays for itself and returns value to the company even without a claim and provides a guarantee on the only unsecured asset.) TOTAL COST: $______

DID YOU KNOW? WHICH APPROACH MAKES

ALMOST SENSE FOR YOUR COMPANY?

As you determine whether to self-insure your invoices or to rely on the services 1 IN 10 of a credit insurance partner, here are some general guidelines to facilitate your Public companies decision-making process: fails each year • Self-insurance is beneficial for companies that provide products and services to a few well- known, investment-grade customers and operate mainly within local markets. • Self-insurance makes more sense if you never require financing to grow the company and if you generate sufficient margins to absorb unpaid invoices. • Credit insurance is preferable if you provide products and services to a large, diversified customer base or if you have large A/R concentrations with only a few large buyers. • If you operate in or plan to expand into international markets, credit insurance may be critical since vetting customer credit histories and pursuing litigation in foreign countries can be extremely complex and time-consuming. • If your business is looking to expand its borrowing base, you may also discover that with a credit insurance policy in place your lending partners will consider more of your receivables toward your lending base, increase your margining rate and may extend more favorable rates – in fact, in many lending relationships, credit insurance may be required. Page | 63 Protecting Against Payment Risk: Self-insurance or Credit Insurance | 8

To learn more about credit insurance and to discover the solutions offered by the world’s number one credit insurance company, Euler Hermes, Euler Hermes North America Headquarters visit www.eulerhermes.us. 800 Red Brook Boulevard Owings Mills, MD 21117

Phone: +1 877-909-3224 Fax: 410-753-0952

[email protected] www.eulerhermes.us

Euler Hermes Regional Offices

Page | 64 HOW DATA CAN KEEP YOU ONE MOVE AHEAD OF THE COMPETITION

www.eulerhermes.us Page | 65 How Data can Keep you One Move ahead of the Competition | 2

HOW DATA CAN KEEP YOU ONE MOVE AHEAD OF THE COMPETITION

In the early days of humans versus computers in chess, we humans routinely won. Those chess-playing programs were rudimentary by today’s standards. Chess-game programmers became better and eventually grandmasters, including the world champion, lost to computers.

Then a funny thing happened. In 2005, a team of two amateur players entered an online tournament that placed few restrictions on play. Computers were among the contestants. Grandmasters, too. But the amateur team had an edge over its competitors’ digital and human brains: special software they developed to help them play against computers, plus a methodology that helped them determine when to rely on their computer’s advice and when to favor their brainpower.

The amateur duo won the tournament.

While today’s most powerful chess-playing computers are virtually unbeatable by human players alone, humans and computers in partnership not only have a chance, they can and do win.

The analogous question for your business is this. How can your company get a winning edge by combining the power of data analytics with brainpower? It’s a question you could apply to nearly any area of your business. Here are three areas where your company stands to benefit the most from a smart-data plus smart-human approach. Page | 66 How Data can Keep you One Move ahead of the Competition | 3

USE DATA TO KNOW CUSTOMERS AND STRENGTHEN RELATIONSHIPS

When your people can connect the dots between cause and effect as they apply to customers, including marketing efforts and their results, your company knows what customer-relationship efforts equal the best ROI. It all starts with truly knowing your customers. What their needs are. What they think of your company’s ability to meet them. And all the while, assuming there’s more to know.

How you obtain this data from customers — surveys, interviews, or any other query method you devise — doesn’t matter so much as accumulating it on a continual basis. Asking customers what’s important to them fosters a greater sense of collaboration. Knowledge-sharing arrangements may develop where you learn about future needs. Ideas for new products and services may come about.

Obtaining more customer data leads to obtaining more customer data. You can never know too much when you desire to engage customers in meaningful ways. At every touch-point. And in your marketing communications. Such analytics should be at the core of how you run your business. HAVE DATA-DRIVEN PICTURES OF CUSTOMERS — AND OPPORTUNITIES

Big data might as well be a big mess if you don’t use it to drill down revealingly into individual customer relationships. Closely examine the data you’re collecting on a regular basis. Look for underlying trends. And what steps you can take to exploit their potential.

But your data, internal and external, is only as good as it is clearly understood. Understandable data is actionable data.

Consider dashboards in general. Or yours specifically. They should be designed so your company “...your data, internal and external, can distill data into quick-read performance metrics, as well as those for demand and engagement. Well-designed dashboards reveal all in “Aha!” visualizations that cause good things happen. Some is only as good as it is clearly examples. Your staff can track customer referrals and their influence on your sales pipeline. They can understood. Understandable data track and evaluate customer retention rates to isolate where improvement opportunities lie. They can account for cross-sells and upsells. They can identify candidates for case histories to highlight in is actionable data.” upcoming proposals.

The best dashboards realize the potential of big-data analytics in combination with big-brain talent. If your company is already using dashboards, are they as optimized as current data-mining allows? If your IT department can’t answer that question, chances are IT consultants to your industry can. Page | 67 How Data can Keep you One Move ahead of the Competition | 4

WHICH CUSTOMERS TO GROW WITH; WHICH TO AVOID OVER-COMMITMENTS WITH

The longer the customer’s history with your company, the more historical data you can rely upon in projecting their value — while of course keeping that familiar securities investing caveat in mind about how past performance is no guarantee of future results. Due diligence requires, well, diligence—the diligence of current data, evaluated and understood on behalf of informed decision-making.

In practical terms, a given client’s long-term value to your company is a dynamic, risk-versus- reward projection. It should be continuously under review, even for clients with sterling credit histories. Checking credit a variety of ways is best. Visiting the customer, consulting public records, seeking information from other companies that have dealings with the customer, obtaining financial statements and past-due reports — all of this data accumulation informs projections of customers’ long-term value. So, too, do macro-economic trends and industry and sector trends. Even anecdotal information can have value, depending on the source.

Not every company has the risk-management staff, or expertise on that staff, to perform every potential check on individual clients. Seeking additional expertise can fill in the gaps as well as enhance a company’s efforts exponentially. The bank you partner with is one potential source of information. Customers who know other customers might be other sources.

Depending on the provider, trade insurance coverage can offer an overlay of risk-management thoroughness greater than you might find anywhere else. With this type of coverage, your insurer has skin in the game. For a trade insurer, monitoring your customers’ financial health is as important to them as it is for you. They’re providing information on your customers—with a guarantee on your customers. That puts customer value projections in a new light.

Knowing which customers are the ones to grow your business in tandem with avoiding over- commitments to customers not on solid financial footings means keeping your company’s focus “...a given client’s long-term value where it should be. to your company is a dynamic, risk-versus-reward projection. It should be continuously under review, even for clients with sterling credit histories.” Page | 68 How Data can Keep you One Move ahead of the Competition | 5

DATA-BACKED DECISIONS MAKE KNOWLEDGE A CHIEF ASSET FOR YOUR COMPANY

Data on competitors will enable your company to In chess, you face billions of potential moves in a understand what it’s up against when competing for typical game. In the game of business, poor moves have real-word consequences. So combine the most business. Market data on customer industries can thorough, current data you can obtain with the keenest suggest sliding emphasis from one industry segment brainpower available, both within and outside your to another. Data can help you accounting for the company. Then the moves you make in business will overall business environment, too. more often than not be winning ones.

To learn more about how our experts can help guide your business visit www.eulerhermes.us. Page | 69

Seven Reasons To Use A Credit Insurance Broker Reason Result Negotiating Influence Better Program Terms A broker with a dominant market share and global reach gives the insured underwriting insight, access to the insurer’s senior management, and maximum negotiating leverage.

Placement Insight Program Validation Marketing expertise and industry benchmarking gives the broker the ability to determine if a program is priced competitively. Benchmarking goes beyond collecting rating information by including limits, deductible, Discretionary Credit Limits and buyer risk by industry class.

Cost Governor Role Lower Premium The broker creates a competitive tension on direct placements. This is achieved by leveraging their global volumes and market knowledge, resulting in better premium rates and best in class policy structures.

Program Analytics Improved Risk Transfer The broker can provide a treasury oriented viewpoint to provide risk transfer in line with Corporate Risk Management guidelines: • Risk Bearing Capacity to assist in setting the most advantageous deductible levels • Policy Audit to ensure broadest coverage terms. • Political Risk modeling to assess CAT exposure to country risk. • Limits based pricing to maximize high turnover, under-insurance and excess coverage. • Multi-year contracts to reduce market volatility and No Claims Bonus’ to reward credit management • Coordinating insurance limits with reserve levels and sales goals

Market Intelligence Smarter Decision Making The broker is able to provide a global perspective of the credit insurance marketplace to make more intelligent risk financing decisions. Their insight will include market updates, carrier information, best credit management practices and the latest in risk financing options. They also help clients develop carrier relationships with “second best friends” should the occasion occur where they need an alternative or partner insurer.

Claims Assistance Increased Claims Recovery One of the greatest services a broker brings to a direct underwriters’ relationship is claims advocacy following a major loss. They will solely represent the client’s interests to ensure maximum recovery. The claims review starts before you have a claim through a detailed review of your business operations to address policy language that meets your specific needs. Mock claims reviews can be performed to test your documentation and credit practices.

Loss Control Consulting Greater Operational Efficiencies With direct underwriters’ emphasis on loss control, it is critical to look at an insured’s total cost of risk (TCOR), including the risk of exceeding buyer limits as well as falling short of sales objectives. This is where a broker not only provides cost saving alternatives but gives their clients independent advice and coverage options to provide an equitable balance of risk sharing.

MARSHMark Regenhardt, Senior Vice President, [email protected], Ph. 847-257-4304, Cel. 847-651-0851