These days, when Joe Ketzner, executive vice president of credit insurer Euler Hermes ACI in Baltimore, talks about the outlook for his business, the upbeat mood is palpable. “This is the golden era of credit insurance, it’s an exciting time for the industry.”

And he’s in good company. Brett Halsey, who heads Atradius Trade Credit Insurance in Baltimore, is just as enthusiastic. He points to a credit industry group’s research that finds growth of 18 percent in U.S. export credit insurance usage over the last several years.

In New York, Michael Ferrante, president of COFACE USA, finds similar prospects: “We’ve seen consistent export coverage growth, at a double-digit rate, in recent years, and 2008 will bring more.”

It’s not hard to find the causes of their buoyant mood. Some are current, immediate conditions; others are longer-term trends that have given export credit insurance a real boost.

The short-term side

Most immediately, the weaker dollar has driven the export upsurge, and, inevitably, more sales have generated more insurance.

But, also important: the expanding sales often involve new and riskier markets, and new and unfamiliar buyers—classic circumstances that turn exporters toward credit insurance protection.

“Know-how on emerging markets is needed, and we are providing a center of expertise—on countries, politics, and cultures, all part of risk mitigation,” says Atradius’s Halsey. “Middle-sized companies are opening lines of credit for buyers in Colombia, Ecuador, Venezuela, to be ahead of the competition, and they have to secure their receivables.”

Now, the lower dollar is being joined by the prospect of a global economic downturn. But no matter: that is playing to the insurers’ advantage. “With a recessionary climate in the air, exporters want to convert their receivables into cash, which insurance supports,” says Halsey. “It’s enhancing our role with both larger corporations and smaller and middle-size firms.”

So, the bottom line: credit insurance is playing to both the up-side and the down-side of the global trade environment.

 

The long-term side

At the same time, a group of longer-term trends is even more important in driving the coverage growth.

They include: changes in the way that trade is financed, the impact of technology, lower (and more attractive) premiums, and a significant expansion in the ranks of the credit insurers themselves.

In trade finance, a massive shift, underway for several years, has seen the use of letters of credit (LC) plummet steadily. One recent study estimates they now support as little as 7 percent of American exports.

The LC, a venerable financial instrument that dates back centuries, involves very low risk, since it transfers most of the responsibility for payments from buyers and sellers to the international banking system. Even with automation, however, it can still be expensive, and time consuming for the traders.

But the LC has been replaced by huge growth in the use of open account terms (payment due on receipt of an invoice). And that has brought far more risk, thus triggering fresh demand for insurance.

Also, when receivables are backed by a letter of credit, they can often be discounted by banks, so exporters obtain immediate cash. Open account receivables, on the other hand, are not as easy to discount. But, if they are insured, banks often include otherwise ineligible foreign receivables in a customer’s borrowing base. That’s a big difference.

Meanwhile, more banks now pro-actively require that exporters buy insurance as a condition of financing their trade. In this, they are starting to resemble European banks.

“In Europe, banks insist on insurance,” says Joe Ketzner at Euler Hermes ACI. “When an exporter applies for receivables finance, he’s asked: is there any insurance? And the bank wants to know who the insurer is.” U.S. banks, he notes, have not usually asked.

In addition, banks themselves increasingly are the insured party, often relying on credit cover for a portfolio of export receivables.

And more non-bank lenders, especially factors, are now buying export receivables, and want insurance protection. “Middle-sized factors, working with middle market clients, are growing insurance users,” says Gary Mendell, head of Meridian Finance Group (Santa Monica, California), an insurance brokerage and trade finance specialist.

Technology: more efficiency, lower premiums

Technology has also had a far-reaching hand in reshaping the world of trade credit insurance, and made it more popular. A powerful combination—computers, software, the Internet, and mathematical algorithms—has transformed the field.

In Europe, the credit insurers, particularly the Big Three (COFACE, Euler Hermes, Atradius), have constructed massive databases on a global scale. This infrastructure, updated continuously, has created a powerful risk management tool with information on millions of companies (one group claims files on 40 million). Its benefits are used by both insurers and exporters.

Insurers use them to assess risk, adopt customer credit limits, and put protection in place for the buyers involved. And, with the help of statistical software (and mathematical algorithms), a few insurers automate the underwriting process, so that decisions on smaller, short-term transactions can be delivered in moments. One claims it approves 12,000 credit limits and related insurance cover every day.

Plus, this capacity not only enables insurers to underwrite individual buyers, but to “score” entire portfolios of buyer risk.

And exporters are using these Internet-based systems themselves, to check out buyer risks, and manage their own credit limits. COFACE has even made a separate business of its databases (its @rating program).

Perhaps inevitably, these enhanced data management tools have made credit insurance a more efficient business, and brought down premium rates.

Lower premiums

But efficiency has not been the only source of lower premiums. The insurance industry is characterized by cycles: when losses and claims grow, rates are raised, and then when the cycle turns, fewer losses and claims lead to reduced premiums.

The industry lately has enjoyed a favorable environment. “Premiums have never been lower,” says John Salinger, president of AIG Trade & Political Risk, a unit of American International Group in New York. “Over the last five years, the underwriting results have been very good for most insurers in the business.”

That is expected to change somewhat in 2008, with the spread of an economic downturn and rising risk profiles. But lively competition among the insurers is likely to moderate any up-tick in rates. Brokers see the higher premiums focused on specific countries and sectors.

Plenty of insurers out there now

American exporters are lucky these days: ten credit insurers now compete aggressively for their business. And Lloyd’s of London provides at least some cover (usually for larger and complex deals), while the U.S. Ex-Im Bank is also deeply involved.

As specialty broker Edward Yauch (International Risk Consultants, Columbus, Ohio), puts it: “There’s plenty of capacity and appetite for risk out there.”

The current contingent divides into three groups: Europe’s Big Three, the U.S. home-grown companies, and the rest.

Europe's Big Three

The large European underwriters “have long viewed the U.S. market as the last big uncovered opportunity,” says Joe Ketzner. Europe, in contrast, “is a saturated market, with single digit growth,” notes Brett Halsey. The European firms have bulked up through consolidation, and each bought a U.S. domestic insurer as part of its North American strategy.

Atradius Trade Credit Insurance, in Baltimore, part of Atradius Group (Amsterdam), was just restructured: CYC, a large Spanish credit insurer, now owns 64 percent. Atradius has 160 offices in 40 countries, claims a 31 percent global market share of the business.

Euler Hermes ACI, in Baltimore, part of Euler Hermes (Paris HQ), is owned by Germany’s Allianz, a giant insurer.

COFACE North America, in New York, part of COFACE Group (Paris), is owned by Natixis, a large French bank. COFACE has a direct presence in 60 countries, offers services in 93 nations through a partner network.

The U.S. contingent

The U.S. insurers include two of the long distance runners in the business and a more recent entry.

FCIA Management Company, New York, a pioneer (it originally teamed up with Ex-Im Bank in 1961), underwrites on behalf of Great American Insurance Co. (Cincinnati), a large specialized group.

AIG Trade & Political Risk, New York, a unit of American International Group, got into the business in the late 1970s, operates globally.

HCC Credit Group, in New York, was launched as an operating division of Houston Casualty Company in 2005.

The rest

The four other insurers with a growing U.S. business include:

Australia’s QBE Trade Credit, part of QBE Insurance Group, which opened its New York HQ in 2005. The parent company is active internationally.

Zurich Emerging Markets Solutions, part of giant Zurich Financial Services Group, which has a Washington, D.C. headquarters, was launched in 1997 and offers trade credit and political risk coverage.

Bermuda’s Ace Ltd., one of the island’s two big insurers, delivers trade credit and political risk protection in the U.S. through its Ace Global Markets unit.

Exporters Insurance Company Ltd., based in Bermuda, is a specialty trade credit and political risk underwriter whose customers are partly its owners as a “captive” insurer.

The current product mix

The trade credit product mix has changed dramatically in recent years. The multi-buyer policy remains the central, major engine of the field, but the arrival of Europe’s Big Three has brought two sharply contrasting and competing underwriting styles in delivery.

In the European style (offered by the Big Three), the underwriters evaluate the creditworthiness of buyers (or most of them) up front, set a credit limit on each, and back up that judgment with insurance. To support that process, they have invested heavily in a global information infrastructure.

In the American style, the insurers instead evaluate the credit management capability of the exporters. Managers are interviewed, credit procedure manuals perused, detailed applications filled out. The policy reflects “a cultural difference: U.S. firms manage their own receivables,” says AIG’s John Salinger.

The American policy, he notes, is a risk management tool, covering an “excess of loss,” which is very different from the European business culture, where the credit function is outsourced to insurers.

And, if U.S. exporters now have a choice, the specialty insurance brokers are working with both products.

As veteran broker Carey Fiertz at Export Risk Management (Salisbury, Connecticut) sees it: “Of course, each approach has its merits. As a result, the American approach tends to feature lower premium rates than the European style, but deductibles and the cost of administration are often higher.”

The European model, he stresses, “appeals particularly to exporters with limited credit department resources, since the insurer does all the credit research, whereas the American approach puts more authority and responsibility on the exporter.” And: “We work with both to ensure that our clients get the best possible solution to their needs.”

Key buyer, medium-term policies

Changes also have surfaced in the popularity of other policies. “Key buyer” coverage, now gaining usage, is an approach that both the European and American underwriters share. Here the exporter buys protection for its most important customers, maybe two to three, and up to 20, and all are underwritten up front. It’s especially helpful when a company has a heavy concentration of risk among just a few customers.

And more private insurers are now expanding their business in medium-term equipment sales protection, a business that Ex-Im Bank has dominated. Medium-term policies cover from two to five-year payment terms.

Several insurers offer the coverage. Zurich Emerging Markets Solutions, which works with larger companies, can even extend protection to seven years in some cases, and up to $35 million per deal. But, where the insured party is a bank, it can also mean working with several smaller or mid-size exporters (who are the bank’s clients).

 “The U.S. is a real growth market for this kind of cover,” says Daniel Riordan, EVP and managing director of the Zurich unit.

Still a ways to go

Even so, the U.S. has a long way to go to build credit insurance into the business it has long been in Europe. There it’s embedded in the culture, while U.S. market penetration for domestic and export coverage combined is an estimated 2 percent or less. The rough guesses on export cover range from 5 to 10 percent.

So, it’s a big opportunity. Joe Ketzner isn’t expected to lose that buoyant mood anytime soon. wt

Sidebar: Insuring Growth: Why foreign businesses outsource credit insurance and many Americans don't. By Brett Halsey

Imagine a colossal seesaw connecting a manufacturer in California to a buyer in India. Global economic shifts and the U.S. growth recession create an inevitable drop in California that, in turn, levitates India.

Yet, American businesses refuse to let economic shifts anchor their growth. Domestic companies are reigniting their export efforts to capitalize on emerging markets, like India, and take advantage of the ebb and flow of global enterprise.

With a weaker dollar spurring U.S. export business and paving entrances into new markets, American executives are learning more about a little known financial tool long at play in Europe: credit insurance.

Credit insurance may be a new concept for some American CFOs, but their European counterparts have historically embraced this tool as a way to minimize bad debt risk and maximize foreign growth opportunities. 

Why? Culture and tradition. European businesses rely on cross-border trading. Further, credit insurance is woven into Europe’s financial education fabric.

In the U.S., there is also a misconception that outsourced credit insurance replaces internal credit management departments. On the contrary, this tool supports internal managers’ decision-making functions and the organization’s overall solvency.

A new view

American businesses should consider credit insurance if they plan to leverage emerging markets and secure their accounts receivable. With international trade hazards ranging from political instabilities to incompatible accounting practices—delayed payments and defaults can squeeze cash flows and bankrupt businesses.

For U.S. businesses crippled by the credit crunch and subsequent liquidity barriers, credit insurance also can provide companies with greater financing options, essentially converting risk capital into growth capital. 

Don’t teeter in the balance of today’s volatile market. Learn how credit insurance supports business growth amid a domestic downturn in the economy.



Brett Halsey is NAFTA Regional Director – Commercial, for Atradius Trade Credit Insurance, Inc.

Sidebar: For Ex-Im Bank: A challenging moment

In 2007, when the  released its annual Competitiveness Report, for the first time the Washington agency acknowledged that its performance vis-à-vis its rivals in Europe, Canada, and Japan had slipped (it gave itself a lower grade).

Since then, the Bank’s Board, with the Report in mind, has launched an intensive exercise to identify problems and lay the groundwork for adjustments. Failing to make such an effort, the Board cautioned, would mean Ex’Im’s “value and relevance” will diminish.

A key challenge, it acknowledged, is its domestic content rules, which limit the amount of foreign parts and components in an exported product that Ex-Im will finance. At a time of accelerating globalization and growing import supply chains, the Bank is not reflecting changes in the economy.

A broad consensus is considered necessary to adjust the rules. Labor unions are adamantly opposed, arguing that such a move would damage American jobs. Congress will, therefore, have to be involved in the consultative process.

One apparent result of the U.S. content rules: many of the large corporate exporters that dominated Ex-Im Bank operations for many years are gone. Fewer of their names appear in the Board and Credit Committee transaction minutes. They have found other financing resources for their deals, including private insurance.

Ex-Im has had some success, however, in expanding its role with smaller exporters, especially in its working capital guarantees, where it has found (and encouraged) more lenders to fund transactions. But in medium-term (five-year payment) equipment deals, smaller firms complain about burdensome Ex-Im procedures and unwillingness to take risk.

Here, a new factor has emerged. Ex-Im Bank is beginning (for the first time) to fund its operations out of its own fee income, not rely on Congress to “appropriate” money. To be sure it has enough resources to pursue that strategy, the Bank may reduce the risks it will take. It remains to be seen.

Meanwhile, Ex-Im’s share of U.S. exports keeps dropping. In fiscal 2005 it financed nearly $18 billion worth. That slipped to $16.1 billion in 2006, and to $16 billion in 2007. The Bank’s Board, widely respected among exporters and trade bankers, has its work cut out.

Sidebar: Importers Also Turn to Credit Insurance

Expanded use of export credit insurance, now highly visible, has had its counterpart in the import arena.

At Orion America Inc., (Princeton, Indiana), Pat O’Toole, credit and collections manager, has worked with insurance protection since 1991. The company, an importer of consumer electronics, has a multi-buyer policy (from Atradius) that it employs with a large number of U.S. buyers.

O’Toole applies the coverage in two ways. One is protection against non-payment, the other is an information resource for making decisions.

“We do business with accounts that are not approved for insurance, and others that are covered but not active.” However, “when we submit names to the insurer, if one is turned down, we look at it hard, so it’s kind of a credit reference,” he says. And, lately, the Internet has sped up the approval of credit limits.

On claims, he reports: “Yes, we’ve had some, three times actually, and collected.”