Sept. 2017 Receivables Insurance Canada News

Stories this month come via Euler Hermes Canada, Allied World Canada, Global Trade Credit, Atradius Canada, Coface Canada, and many other Receivables Insurance Association of Canada members. Please read, share and subscribe, if you haven't yet.

The subscribe button is right on the issue's webpage: Please just click into the image below or go to this url news.receivablesinsurancecanada.com and click subscribe!

How Accounts Receivable Insurance Can Help Your Deal 

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By Jeff Anderson and Kent Paisley 

Deal-making is back, with mergers and acquisitions experts seeing no slowdown for the foreseeable future. While many are focused on the number of transactions announced, we are closely watching the number of transactions that fail. According to Harvard Business Review, “study after study puts the failure rate of mergers and acquisitions somewhere between 70% and 90%.” There are many reasons cited for these mergers and acquisitions falling short of expectations.[1] 

This staggering figure highlights the need for risk management, due diligence and insurance around transactions. Representations and warranties insurance, which has historically been used as a reactive deal tool, is now being used more strategically to allow buyers to propose a much lower escrow from sellers. What’s more, buyers are using the insurance product to lengthen their discovery periods and increase the amounts available (or indemnity caps) for unexpected breaches of sellers’ warranties. 

Transaction failures are also driving more thorough due diligence. It is now standard practice for buyers to dig deeper and look at a wide range of risks, including those related to cyber and environmental exposures and supply chain management. 

Despite more comprehensive due diligence, both buyers and sellers face a range of exposures during the deal negotiation and after it has been completed. For example, a post-acquisition exposure that is sometimes overlooked is accounts receivables reliability. In any deal, the buyer is essentially acquiring a balance sheet, of which the accounts receivables are usually one of the biggest assets. Accounts receivables are the heart that pumps blood around a company and keeps it alive. If the flow of accounts receivables is impeded, cash flow dries up and the business suffers a hit to working capital, impeding its ability to grow the company and manage its own payment obligations. 

Although buyers will perform due diligence and obtain a measure of disclosure from the sellers, future accounts receivable performance is one area in which they have limited control, and the risk of a debt default is sometimes very difficult to detect. Without conducting due diligence on customers directly, it is almost impossible to fully understand the issues that may affect a customer’s ability to continue to operate in the future and to pay what they owe. Times and circumstances change, so after a deal has closed, accounts Jeff Anderson Kent Paisley receivables may not be as robust as they appeared on the balance sheet. 

Buyers can obtain more certainty and protection over cash flow through accounts receivable insurance. Companies insure every step in the supply chain and sales process, from concept to delivery. What is often not insured is the last but most important part of a sales transaction — getting paid. 

Accounts receivable insurance provides protection for companies that sell goods or services on credit terms and are exposed to the risk of nonpayment due to their domestic and/or export customers’ insolvency, protracted default or political risks that may prevent the debtors from fulfilling their payment obligations. More than just protection from nonpayment, accounts receivable insurance puts companies in a stronger position to secure improved working capital financing with a more secure accounts receivable portfolio. With the coverage acting as a backstop or mitigation against nonpayment issues that may arise, a company can provide a more effective security or collateral package, in the way of insured accounts receivable. 

Companies that are covered by accounts receivable insurance also have a competitive edge. Their suppliers are able to extend credit to their customers instead of requiring payment in advance or upon delivery. This coverage can also be helpful in extending payment terms with customers to match or exceed the competition and allows for growth strategies without taking additional balance sheet risk. Coverage can also help to obtain an enhanced lending package with lenders that use accounts receivables as collateral. This will provide increased liquidity without having to increase the asset base, which can sometimes result in a more cost-effective borrowing package from a financial institution. 

There are some cases where insurance is not the answer, and by looking deeper into a target’s accounts receivable strategy, you’ll find red flags that could bring into question whether or not the company is a good investment or merger partner. In fact, insurers will not take the risk of covering a company that has had a deficient payment strategy or track record. Insurers do their own due diligence to assess the accounts receivable risks, and risk rating is based on a company’s portfolio. Taking a lesson from the insurer’s due diligence, here are some things to watch for when assessing a target’s accounts receivables: 

1. Are the key customers financially secure? What is their risk profile? 

2. Do they pay on time? 

3. How long have these customers been with the company? 

4. What are the terms of payment? 30 days? 60 days? 

5. Is the company effective in collecting debt? 

6. What is the time frame of the conversion from accounts receivable to cash? 

7. Does the company have enough working capital or is it impeded due to delayed payments? 

8. Do they have credit management to properly assess client base? 

Those are some simple questions, but will be very telling in assessing the risk. However, it isn’t as simple as it seems. Consider this scenario that is more layered than just looking at payment terms: A wallet maker is selling to a major luxury retailer on net 30 days' payment. The retailer is going through a tough period and has a cash-flow crunch. The retailer has to make decisions about which manufactures to pay. Will they pay the smaller wallet maker or another luxury brand that is in high demand and will help them make quotas? Perhaps they decide to delay payment, and the wallet maker is not paid until 90 days, when the original period was 30 days. The repercussions here are that the wallet maker’s working capital will be tight, which will impinge their capacity to make more wallets for other clients. 

Due diligence is a critical part of the M&A process, and with so many risks to assess, accounts receivable often does not get the attention it deserves. 

We hope that insurance tools and a stronger focus on due diligence will lead to more successful transactions in the future. Currently only about 7 to 8 percent of North American companies utilize accounts receivable insurance, a small fraction compared to the approximately 70 percent who purchase the coverage in Europe,[2] where it is mandated by most boards. 

A fresh look at accounts receivables risks, with more thorough due diligence and review of insurance options, will protect companies against buying a company that might become a drain on cash. 

Jeff Anderson is a senior vice president and the North American M&A practice lead at Allied World Insurance Company. Kent Paisley is a senior vice president at Allied World and the accounts receivable insurance lead of the global crisis management division. Allied World is a member of the Receivables Insurance Association of Canada.

[1] Christensen, Clayton M., Richard Alton, Curtis Rising, and Andrew Waldeck. "The Big Idea: The New M&A Playbook." Harvard Business Review. N.p., Jan. 29, 2016. Web. June 14, 2017. https://hbr.org/2011/03/the-big-idea-the-new-ma-playbook 

[2] Green, Paula L. "Risk Management: Insuring Trade Credit." Global Finance Magazine. N.p., n.d. Web. June 14, 2017. https://www.gfmag.com/magazine/february-2014/riskmanagement-insuring-trade-credit

This article is published under Perspectives and M&A and Accounts Receivable Insurance at the Allied World website. Law360 (New York) also published this article on July 20, 2017, here.

"Insurance Business Canada" discusses Receivables Insurance

Graham MacLachlan, managing partner at Global Trade Credit and member of the Receivables Insurance Association of Canada, talks with Insurance Business Canada's Sam Boyer in P&C brokers not offering trade credit insurance “underservicing their clients”. Receivables insurance has only 20% market penetration.

From British Columbia to Thunder Bay, Ontario, there are only a handful of specialty brokers selling receivables insurance. There is one other broker in Alberta and one main broker in BC selling it... (To read the full article, click here)

David Dienesch, chief executive of Euler Hermes Canada and member of the Receivables Insurance Association of Canada, also discusses the subject with Sam Boyer in Credit insurance the “big secret” brokers should be looking to incorporate into their sales.

Credit insurance, or receivables insurance, protects business-to-business companies against bad debt, in the forms of unpaid bills, customer bankruptcies, and the like, and protects companies whether they’re selling nationally or internationally. (To read the full article, please click here)

June 2017 Receivables Insurance Canada News available online

This month's issue is published. Please click here or click on the image below to read the full issue of Receivables Insurance Canada News. The Association highlights an article published at The Canadian Trade Commissioner Service page of the Government of Canada website - great article, don't miss it!

Other stories this month come from Association members, Euler Hermes, Coface Canada, Atradius Canada, Export Development Canada and Marsh Canada. There are also an extra number of "What's Receivables Insurance all about?" videos in this issue. Take a look!

Risk Mitigation Tool - Receivables Insurance - Helps Companies Ease Market Entry

“Generally (receivables insurance) customers purchase a policy that insures all of its buyers in all of the geographic regions in which it sells,” says Mark Attley, President of RIAC. “Individual limits are established for each buyer that ideally reflect the maximum outstanding receivables balance under normal trading.”

“Canadian businesses need to be aware that they are not alone. There are insurers who will not only protect them, but help them in understanding the buyers they want to deal with and essentially helping them grow their sales by providing them with information that they may not be able to get,” says Attley.

To read the full article and learn much more, please visit the Canadian Trade Commissioner Service page of the Government of Canada website, or click into the image below. Thank you Robyn Finlay for writing this article. For the French version of this article, please visit this page.

April 2017 ISSUE OF RECEIVABLES INSURANCE CANADA NEWS

The April issue of the Association's online newsletter features our new YouTube channel and updates from many of the association's members. Trade Securely videos explain how receivables insurance makes Canadian businesses more profitable. Check these videos out!

Please click into the image below to read the full issue. When you visit YouTube, please consider subscribing to our channel.

TradeSecurely.ca launched by Receivables Insurance Association of Canada

March 14, 2017 - The Receivables Insurance Association of Canada is proud to announce the launch of its new interactive, newsworthy website, www.tradesecurely.ca. This new website will feature content from RIAC members including AIG, Atradius, Euler Hermes, Coface, EDC, The Guarantee, Red Rock, Zurich, Aon, Credit Insurance, Inc, GCRM, Gobal Trade Credit, Marsh, Millenium and Dan Lawrie Insurance Brokers.

www.tradesecurely.ca was created to promote the business opportunity for receivables insurance – also known as trade credit insurance – to Canadian insurance brokers, the banking industry and businesses engaged in domestic trade and exporting. The Receivables Insurance Association of Canada also works to advance industry innovation and product integrity, solve any business problems related to government legislation, and represent the interests of its members by facilitating an open exchange of information and ideas.  This new platform will allow Canadian businesses to have access to a variety of content on receivables insurance in one central location.

“With so much information about receivables insurance available from so many different sources, we hope that tradesecurely.ca will become a “go-to” source for the latest and most accurate information on receivables insurance for Canadian businesses.” - Ian Miller, RIAC Board Member

In much the same way as mortgage insurance is designed to protect a bank in the event of a foreclosure due to the financial failure of the mortgagee, receivables insurance protects your business from buyers – in Canada or abroad – that are unable to fulfil their invoice payment obligations. Such inabilities can be the result of  buyer insolvency, protracted default (failure to meet obligations on time due to inadequate cash flow), or political disruptions that lead to a loss on current receivables. Receivables insurance policy coverage can trigger more favourable finance rates and/or increase the percentage of financing on a working capital loan – allowing your business to grow sales faster.

The Receivables Insurance Association of Canada hopes that this new website will help educate Canadian business owners about what receivables insurance is, how it can help their business grow and protect them from default payments.

For more information on The Receivables Insurance Association of Canada, please visit: www.receivablesinsurancecanada.com

About the Receivables Insurance Association of Canada

The Receivables Insurance Association of Canada promotes the business opportunity for receivables insurance – also known as trade credit insurance – to Canadian insurance brokers, the banking industry and businesses engaged in domestic trade and exporting. The Receivables Insurance Association of Canada also works to advance industry innovation and product integrity, solve any business problems related to government legislation and represent the interests of its members by facilitating an open exchange of information and ideas.  

March 2017 issue of Receivables Insurance Canada News

This month's issue is online with stories via members, Euler Hermes Canada, Coface Canada, Atradius Canada, The Guarantee Company of North America, Zurich Canada, Credit Assur Inc., Aon Canada, Export Development Canada and others. The launch of the Association's new interactive website is also mentioned in this issue: please visit: www.tradesecurely.ca 

Please click on the image below to read the full issue!

Canadian economy in Trump era: Commentary from Receivables Insurance Assoc. of Canada member, Euler Hermes' Dan North

The following article - In 2017, Canadian economy will get its first taste of the Trump era - by Canadian Press reporter Andy Blatchford, was published in the Montreal Gazette and at CTV News.ca on 22 December 2016. Dan North, a senior economist for financial services firm Euler Hermes North America, which is a member company of the Receivables Insurance Association of Canada, shared his insights with Andy Blatchford for this article...

OTTAWA - The Canadian economy exits 2016 with bruises from the still-tough adjustment to weak crude prices and scars from the devastating wildfires that singed the oil patch.

It enters 2017 with lingering challenges and a potential new obstacle that could attract more attention than the rest: the economic unknowns of a Donald Trump presidency.

While it remains to be seen what will become of the U.S. president-elect's vows in areas like taxation, trade and investment, their implementation could have significant impacts for Canada.

Canadian policy-makers say they will closely follow developments after Trump takes office Jan. 20.

For now, decision-makers like federal Finance Minister Bill Morneau are reserving judgment on how changes would affect the country.

"Looking towards next year, the change in the U.S. will of course present us with a different economic environment — it's too early to have a clear view of the impacts," Morneau said in a recent interview.

"But what I can assure you ... is that we're working to understand the new administration's economic policies and to present how we can work together with them to enhance their growth and our growth; because our view is that we do better if we are open to helping others.”

For example, Trump has vowed to drop the tax rate for top-income earners by six per cent and by three per cent for middle-income earners.

He promised to bring the U.S. corporate rate, one of the highest in the world, down to 15 per cent from 39 per cent. Such a cut would make the U.S. corporate rate far lower than the average effective rate in Canada, where it's about 26 per cent when federal and provincial rates are combined.

Prime Minister Justin Trudeau was asked in a recent roundtable interview with The Canadian Press about the potential impact of Trump's promised tax cuts on Canada's efforts to bring in foreign investment dollars.

"Let's not respond too much to hypotheticals," Trudeau said.

"Obviously, you have to be thoughtful about potential paths, but I'm not going to react to an administration that's not actually in place yet.”

Trudeau said while taxes are always a consideration, he argued that Canada is attractive to investors for other reasons, including its well-educated workforce, openness to immigration and stability.

University of Calgary tax-policy expert Jack Mintz has said Canada's ability to lure business investment and top talent would be threatened if the U.S. moves ahead with Trump's vows to significantly cut tax rates for U.S. corporations and for the highest income earners.

Trump has also made it clear he wants Buy American rules in his planned $1-trillion infrastructure program, which could leave out Canadian companies.

To add to the unknowns for Canada, Trump has called for the renegotiation of the North American Free Trade Agreement.

But some experts say the expectations of Trump's business-friendly promises are poised to lift the U.S. economy, which would help Canada.

Dan North, a senior economist for financial services firm Euler Hermes North America, said U.S. business confidence has climbed since the election, in large part due to the prospect of corporate tax reductions. As a result, North said his company bumped up its 2017 U.S. growth projection to 2.4 per cent from 2.1 per cent.

"We have a fair amount of confidence that we're looking at a pretty solid year in the U.S. next year, which of course should translate into higher demand for Canadian exports," North said.

Former Bank of Canada governor David Dodge agreed in a recent interview that he expected faster post-election growth in the U.S. to be a positive for the Canadian economy over the short term.

Over the medium and longer term, however, Dodge thinks Canada could struggle in areas like trade, attracting investment and, in particular, tax competitiveness.

"It's an enormous challenge, I think, for Ottawa," he said.

"It is a very unfortunate problem that the minister of finance will have to deal with.”

In 2017, the central bank will remain focused on whether Canada's disappointing export performance can show real signs of life, current governor Stephen Poloz said earlier this month, during his final news conference of 2016.

Poloz said the bank will also look for the economy to continue to adjust to the sting of low oil prices and for the expected pickup in U.S. growth.

When asked, he declined to discuss what new policies might be introduced in the U.S. and how they could affect Canada. He did, however, say that uncertainty among companies expanded during the election campaign and he believes that sentiment remains "undiminished.”

Still, after what Poloz called a "challenging year" in 2016, he sounded cautiously optimistic for 2017.

"We have enough confidence that we're on track, but we need to continue to monitor that," he said. "Of course, the economy and the world economy have shown the capacity to disappoint in the past."

Exploring Receivables Insurance - a Broker Opportunity

Receivables Insurance (also knows as credit insurance) has been supporting global businesses for decades. The Canadian market for credit insurance is currently valued at over $200 million and it is expected to expand as awareness of its value grows within the business community.

Credit insurance can be a new source of income for the broker, banker or business. The video below, produced by Receivables Insurance Association of Canada member, Atradius, is designed to provide an overview of credit insurance, the types of credit insurance policies available, the revenue opportunities and competitive advantages it provides, as well as a roadmap for finding clients.

Please ensure audio is activated on your device

Note: The above video is best for mobile users, if you would like to access the user-operated video, please click into to this link on the Atradius website.