The American Dream North American trade-credit-insurance market is gearing up for a banner year.

After some dismal few years, North American credit insurers are finding salvation in the weak dollar, a booming Chinese market and a rise in the number of exporters offering credit. The three key players in this space – Coface, Euler Hermes ACI and Atradius – are expecting huge increases in demand during 2004. But, still, don’t expect big changes in pricing. Erika Morphy reports. Trade & Forfaiting Review – Volume 7 Issue 6, 2 Apr 2004

With little fanfare or formality, the North American trade-credit-insurance market is gearing up for a banner year. Finally. “The past few years have been brutal for the providers in this market,” says Victor Sandy, executive director of Global Commercial Credit, a specialty broker of all forms of trade credit insurance.

This year, 2004, will be markedly different though, for all the obvious reasons. “First the weak dollar is pushing up exports,” Sandy says. “Then there is the explosion of the market in China.” Also, he adds, the poor global economy of recent years has forced more exporters to offer open credit, whereas secured terms were once considered the norm.

“The exporters currently looking for coverage fall into several categories, but the one we see most often is the company that has been exporting on secured terms and is now forced by competition to offer credit,” Sandy says. “Customers are balking at putting up LCs, and as they expand into new markets where they don’t know the risk as well, export credit insurance is viewed as a way to safely expand while leveling the competitive playing field as far as offering credit terms is concerned.”

Such developments – or rather, realizations – on the part of North American firms could not be any more welcome to Coface, Euler Hermes ACI and Atradius (formerly Gerling NCM), the three main players in this market. This is not to discount the specialized service offerings that such providers as AIG or Zurich American offer exporters in North America. However, Coface, Euler Hermes ACI and Atradius inarguably represent the bulk of the market, and thus set the stage, not to mention pricing, terms and conditions, for buyers of these products.

“We are anticipating that our growth rate will be in excess of 25% this year,” says Mike Ferrante, president of Coface North America (CNA). “With the new value of the dollar, this is a great opportunity for Americans to look at exporting in an aggressive manner.” While the percentage might vary by a point or two or three, other industry statistics suggest that this market is indeed poised to grow significantly this year. “We are anticipating a huge demand as well,” promises Joe Ketzner, executive vice president of commercial operations for Euler Hermes ACI.

Not surprisingly, the three big players are ramping up operations in response. “All three companies have cleaned up their portfolios in the past few years,” Sandy says. Certainly this is true of Atradius. In addition to a back-office financial realignment, the firm, once the credit risk insurer of the struggling German insurance group Gerling, has completely rebranded under its new ownership by Swiss Re and Deutsche Bank. After the sale last May, the Gerling group reduced its stake to 3.04% from 55.9%. Swiss Re and Deutsche Bank are now the biggest shareholders in the company, with 47.5% and 35.32%, respectively.

The restructuring and new ownership led rating agency Standard & Poor’s (S&P) to affirm its A rating for counterparty credit and insurer financial strength on its six core operating entities. S&P had placed Gerling NCM on credit watch in December 2002 because of reinsurance subsidiary Gerling Global Re’s severe financial problems. Now, though, the new ratings “reflect the group’s strong capitalization, strong financial flexibility and very strong business position,” the agency said.

Coface North America can also boast of stronger ratings, thanks to its formal establishment last month of Coface North America Insurance Company, a Massachusetts insurance company licensed to issue insurance policies in 21 states. In late 2002, Coface acquired CNA’s credit-insurance operations. Under this arrangement Coface has been using CNA paper protected by Coface to serve the North American market, Ferrante explains. “By the end of 2003 we had acquired this inactive insurance company, which has now been renamed Coface North America Insurance Company, and starting this quarter we will begin to issue policies under the Coface name in the United States.” End users won’t see that much of a difference, save one: the AA rating from Fitch Ratings, which is higher than CNA’s rating. Coface Group is also rated Aa3 by Moody’s.

Coface Group expects to continue its North American expansion this year, Ferrante says. The group plans to extend its capacity, product offerings and servicing capabilities in Canada and Mexico. The biggest impact that the anticipated growth will have on operations, though, will be in sales, says Chris Short, vice president of international strategic accounts. “We will be adding staff to handle the increased demand,” he says. “On the agent side, we are looking at as much as 15%.”

The third player in this troika is Euler Hermes ACI. Like Atradius, it recently has undergone a brand and name change, albeit not as encompassing. Last November the firm announced the change from Euler American Credit Indemnity, or Euler Hermes ACI. The new name is a result of Euler Hermes ACI’s parent company, Euler, combining its activities with its long-time business partner, Hermes. “This new brand reflects a single name for an international group with common goals and ambition, and will be shared by each Euler Hermes subsidiary around the globe,” the firm said.

The rebranding and the way the global organization has been built will play well into Euler Hermes ACI’s push to expand its market share in North America, Ketzner says. Euler’s history is well known, of course. Over the years it has acquired principal underwriters in just about every developed market. In the US, American Credit Indemnity won the honors. “That has enabled us to create an operating model in which the specific debtor is underwritten by local underwriters. We are able to be that much more competitive because we have better access to the information in those markets and have a close touch and feel to what is going on in the respective economies,” Ketzner says.

Because of this structure, the capacity requirements for exports into any particular market is, as he says, “a nonevent for us”. Each subsidiary has its own reinsurance treaty, he explains. Ketzner believes this year will be a golden opportunity for the firm. “We will be conducting several marketing campaigns to take full advantage of this growing demand in North America.”

One overture to customers these firms won’t be making, however, is on price. Rates won’t rise dramatically, or even at all, in fact; but they certainly will not be cut in order to gain more market share. “Pricing will stay stable this year,” Sandy predicts.

Not that buyers should abandon comparison shopping. In fact, price is the last item Sandy advises organizations to consider. Terms and conditions and other contract language take precedence and actually could prove to be far more costly than straight rates.

His advice to buyers in this new demand-driven world? Get a clear definition of covered losses, especially political-risk-covered causes of loss. Do the same with exclusions – get a list of what is not covered. Be sure to get clear definitions of the terms used in the quotes you receive. Remember that credit-insurance policies are custom-tailored policies; when comparing different quotes it is impossible to compare apples to oranges. Make sure you understand the reporting requirements and premium-payment requirements; ask about sales and past-due reporting guidelines. And don’t be afraid to seek the help of a specialist broker who can assist in structuring the contract.

Sandy allows this last point is a shameless plug. However, given the exuberance in the market lately, no one is too inclined to quibble.

Erika Morphy is US correspondent for Trade & Forfaiting Review.