Case Study – Catastrophic Loss Scenario

Client: Aviation Fuel Wholesaler
Topic: Catastrophic Loss Scenario

Situation

Largest independent wholesaler in the industry, experiencing good growth prospects with a strong balance sheet. Low margins and high exposures resulted in peak seasonal demand being held down by our prospect because of potential catastrophic credit loss.

Operating Facts

Annual Sales: $150 million, Average Accounts Receivable: $8.3 million, Gross Margin: 7%, Net Margin < 1%, Account Turns Per Year: 18, Credit Function Handled By a Full Time Credit Expert.

Objective

The company had sophisticated methods, and personnel, in place to manage the expected credit risk within their customer portfolio. They were interested in a program that would eliminate the potential catastrophic risk of an “unexpected” situation.

Solution

Implemented a credit insurance program that covered all accounts for their projected peak exposure, with a significant first loss position maintained by our client – truly a catastrophic program. The deductible level was established per our client’s ability to withstand the loss, any loss above the deductible would be covered by the program.

Results

Instead of limiting peak seasonal sales, our client confidently entered into sizable contracts which produced incremental profit that far exceed the cost of the program – providing catastrophic loss protection, reduced bad debt allowance, and enhanced their ability to negotiate with their lender – all for a true “zero net cost”!

Catastrophic Loss Situation

Large Exposure/Potential Loss: $800,000
By Net Margin: 1%
Additional Sales Required To Offset Potential Loss: $80 million

Required additional annual sales of approximately 53% to offset the loss – and still meet corporate bottom line profit objectives.

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