trade credit & political risk la rims meetingaug 20, 2014 · 6rxufh ' hsw r i& rpphufh ' hsw r...

Trade Credit & Political Risk LA RIMS Meeting

www.hubinternational.com

http://www.rims.org/

1

HUB INTERNATIONAL

• Corporate headquarters in Chicago, IL

• Privately held company with partners that include Hellman & Friedman LLC

• Specialize in middle-market and large corporate clients

• Fastest growing broker in US

• Top 10 US/global broker, $1.25B Rev in 2013

• One of the largest Management Liability Practices in CA

• Dedicated Trade Credit and Political Risk Specialists in CA

http://www.rims.org/http://www.wbnglobal.com/default.asp

2

WHAT IS TRADE CREDIT & POLITICAL RISK


3

WHAT IS TRADE CREDIT INSURANCE?

http://www.rims.org/http://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&docid=fKw-fJQUHm3JqM&tbnid=q2eo3h1hxJ_bRM:&ved=0CAUQjRw&url=http://www.business2community.com/social-media/ceo%E2%80%99s-repeat-after-me-%E2%80%9Cwe-are-not-afraid-to-tweet%E2%80%9D-21-success-tips-026102&ei=qEjyU56PBYaVyASwqYDIAQ&bvm=bv.73231344,d.aWw&psig=AFQjCNELNN2nJPjlc_UJtsLpIn8bLhfkcg&ust=1408473626476220

4



5

WHAT IS POLITICAL RISK INSURANCE?


6

WHAT IS TRADE CREDIT & POLITICAL RISK INSURANCE?


7



8



9



10



11


Shareholder #1

Shareholder #2

Shareholder

#4

Shareholder #3 Shareholder

#5 Shareholder

Shareholder

Shareholder

http://www.rims.org/http://greylining.files.wordpress.com/2011/02/mob_440.jpg

12


Trade Credit & Political Risk Insurance


13

TRADE CREDIT & POLITICAL RISK 101


14

WHY PURCHASE TRADE CREDIT / POLITICAL

RISK INSURANCE?

Top reasons for purchasing Trade Credit and/or Political Risk Insurance:

• Expand sales domestic/export to new and existing customers

• Foreign investment and business income protection • Balance sheet protection / stabilize cash flow • Concerns about economic & political changes • Concerned about customer concentration • Obtain attractive bank financing or borrow against trade

receivables • Interested in replacing letters of credit (L/C’s) • Reduce bad debt reserves • Supplement credit risk management

Claims

HUB Trade Credit Specialists

Vanessa De La Cruz Damion Walker Steven Knartzer

Office: 310-568-7618

Office: 949-623-1030

Office: 949-623-1043

Mobile: 626-376-7540

Mobile: 213-219-1991

Mobile: 714-724-9592

[email protected] [email protected] [email protected]

TRADE CREDIT INSURANCE

HUB Trade Credit Specialists Vanessa De La Cruz

Damion Walker

Office: 310-568-7618

Office: 949-623-1030

Mobile: 626-376-7540

Mobile: 213-219-1991

[email protected] [email protected]

n today’s rapidly changing world, where companies are looking for growth beyond domestic boarders and

return on investment is paramount to the business’ survival, a growing organization cannot afford a major loss

in cash flow due to default of one or more of its customers. Trade Credit Insurance provides protection for

companies that sell goods or services on credit terms against the risk of non-payment due to a customer’s

insolvency, protracted default, political risks or acts of war that prevent contract performance and failure to

perform obligations under contract. Covered perils include:

IInnssoollvveennccyy For the United States: Chapter 7, 11 Filing Foreign bankruptcy per country of buyer’s domicile

PPrroottrraacctteedd DDeeffaauulltt Simple non-payment, usually verified by third party Continued delinquency / non-payment

PPoolliittiiccaall RRiisskk Confiscation, Expropriation, Nationalization Currency Inconvertibility / Transfer Risk Political Violence

The HUB Trade Credit Insurance team provides a team of dedicated specialist brokers to each client ensuring a

superior experience in terms of program design, analytical support and coverage negotiation capabilities, daily

program management, coverage certainty in insurance documents and proactive, experienced claims management

to ensure your claims are paid quickly and accurately. Fully integrated within HUB International, HUB’s Trade

Credit team has the scale and flexibility to service any organization from small start-ups to the largest multinational.

HUB is a member of the Worldwide Broker Network which provides boots on the ground in more than 75

countries worldwide with unmatched flexibility to service our clients where and when they need us most.

TToopp rreeaassoonnss ffoorr PPuurrcchhaassiinngg TTrraaddee CCrreeddiitt//PPoolliittiiccaall RRiisskk IInnssuurraannccee::

Concerns about economic & political changes Expand sales domestic/export to new and existing customers

Concerned about customer concentration Obtain attractive bank financing or borrow against trade receivables

Interested in replacing letters of credit (L/C’s) Balance sheet protection / stabilize cash flow Reduce bad debt reserves Supplement credit risk management

Whether you want to grow your business in domestic or international markets or simply protect your cash flow

from a catastrophic customer event, HUB has the tools, resources and most importantly the people to support

your firm’s risk management needs. We provide your business with market leading credit insurance solutions that

are tailored to fit your organization.

I


15



16

WHAT IS POLITICAL RISK INSURANCE?

Political Risk Insurance: Political risk insurance (PRI) is a tool for businesses to mitigate and manage risks arising from the adverse actions or inactions of governments. As a risk-mitigation tool, PRI helps provide a more stable environment for investments into developing countries, and to unlock better access to finance.

- Political violence, such as revolution, insurrection, civil unrest, terrorism or war;

- Governmental expropriation or confiscation of assets;

- Governmental frustration or repudiation of contracts;

- Wrongful calling of letters of credit or similar on-demand guarantees;

- Business Interruption

- Inconvertibility of foreign currency or the inability to repatriate funds


17

In Millions of USD Project BS

Cash & Equivalents 300.00 Short Term Investments - Accounts Receivable - Trade, Net 1,000.00 Receivables - Other - Total Inventory 600.00 Prepaid Expenses -

Other Current Assets, Total 10.00

Total Current Assets 1910.00

Property/Plant/Equipment, Total - Net 900.00

Goodwill, Net 750.00 Intangibles, Net 100.00 Long Term Investments -

Other Long Term Assets, Total 5.00

Total Assets 3665.00

NOT INSURED

PARTIALLY INSURED (PROP)

PARTIALLY INSURED (PROP)

INSURED In USA

Projected Foreign Operations Balance Sheet

NOT INSURED


http://www.rims.org/http://www.rims.org/

18

ECONOMIC OVERVIEW


19

DAN NORTH EULER HERMES

Dan North Chief Economist, Euler Hermes North America Dan North has been with Euler Hermes North America since 1996, using macroeconomic and quantitative analyses to help manage Euler’s risk portfolio of more than $120 billion in annual U.S. trade transactions. As an economist he has appeared on CNBC, Fox Business News, France 24, and Bloomberg Radio and Television. He has been quoted by Barron’s, Business Week, Paris Le Monde, Tokyo Nikkei, the New York Times and the Wall Street Journal. After having predicted the 2008/2009 recession and its implications accurately, he was ranked 4th on Bloomberg’s list of the 65 top economic forecasters in 2010. Mr. North holds an MBA from the Wharton School of Business.


Euler Hermes Economics / Dan North & HUB International / Damion Walker

RIMS, Los Angeles, CA August 20th, 2014

The Outlook for the U.S. Economy

21

Euler Hermes: Global Leader in Trade Credit Insurance Founded in 1893 AA- S&P Rating and A+ AM Best Rating Offices in 52 countries providing coverage in over 200 foreign markets Backed by blue-chip ownership of the Allianz Group Insure over $120 Billion in US sales and over $1 Trillion globally. International Risk Database monitors over 45 million companies worldwide

Credit Insurance: Protection against bankruptcy and slow payment losses Safer sales growth in the US or overseas Knowledge to better manage risk Improved borrowing options Credit function support Reduce bad debt reserves Get paid for what you sell

22

The Outlook August, 2014

• Cautious optimism, still weak growth, lots of risks • Global growth 2.8% in 2014, vs 2.4% in 2013, most

coming from emerging markets (4.3% vs 4.2%), China (7.5% vs 7.7%) and India (5.6% vs 5.0%)

• Eurozone (1.0% vs -0.4%) • U.S. growth a modest 2.1% in 2014, vs. 2.2% in 2013, due

to our debt crisis and structural unemployment • Forces and measures • Government responses

• Conclusions

23

The four forces which started and ended the recession can help forecast the outlook: • Oil • Fed policies • Fear in financial markets • Housing

Gross Domestic Product (GDP): Everything produced by the economy. It’s the “size” of the economy; $17T, ave. growth 3.3%. Broadest measure of economic health. Use it to measure the “size” of other big numbers like budget deficit/debt..

24

-5%

0%

5%

10%

-200%

-100%

0%

100%

200%

300%

400%19

7119

7319

7519

7719

7919

8119

8319

8519

8719

8919

9119

9319

9519

9719

9920

0120

0320

0520

0720

0920

1120

13

Real Crude Prices (average of Brent,Dubai, WTI spot prices), Y/Y% growthReal GDP, Y/Y% growth

Source: Dept. of Commerce, Dept. of Labor, World Bank, EHACI

oil price shocks often contribute to recessions

Oil Price Shocks and the Economy

290%

140%

56%38%21% 28% 36%

-36%

28%

32%

25

-5%

0%

5%

10%

-200%

-100%

0%

100%

200%

300%

400%19

7119

7319

7519

7719

7919

8119

8319

8519

8719

8919

9119

9319

9519

9719

9920

0120

0320

0520

0720

0920

1120

13

Real Crude Prices (average of Brent,Dubai, WTI spot prices), Y/Y% growthReal GDP, Y/Y% growth




290%

140%

56%38%21% 28% 36%

-36%

28%

32%




290%

140%

56%38%21% 28% 36%

-36%

28%

32%

1%

-1%




290%

140%

56%38%21% 28% 36%

-36%

28%

32%

1%

-1%

…with a lag…

2014 ytd falling; tailwind in ’14 yld

26

-300

-200

-100

0

100

200

300

400

500

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

source: Federal Reserve, BEA

Yield spread:10yr-3 mo Treasuries (bps)

The Treasury Yield Spread (Curve) vs. GDPFed Policy

yld

27

-300

-200

-100

0

100

200

300

400

500

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

source: Federal Reserve, BEA

Yield spread:10yr-3 mo Treasuries (bps)

Real GDP Growth,Y/Y % Change

The Treasury Yield Spread (Curve) vs. GDPFed Policy

CI

28

Fear in the Credit Markets

hsng

7%

8%

9%

10%

11%

12%2Q

742Q

762Q

782Q

802Q

822Q

842Q

862Q

882Q

902Q

922Q

942Q

962Q

982Q

002Q

022Q

042Q

062Q

082Q

102Q

122Q

14

Commercial & Industrial Loans Outstanding as a % of GDP

source: Federal Reserve

improving but still not

recovered

29

Housing

fund

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

U.S. Housing Market

sources: S&P Case Shiller, Census

Real GDP growth (left axis)

Case-Shiller Home Price Index(right axis) bubble bursts 2006,

leads recession... ...but recovers in 2009, helping us out...

...then slowed us down again...

...recovery

30

Housing

recp

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

0

500

1,000

1,500

2,000

2,500Ju

l-04

Jul-0

5

Jul-0

6

Jul-0

7

Jul-0

8

Jul-0

9

Jul-1

0

Jul-1

1

Jul-1

2

Jul-1

3

Jul-1

4

U.S. Housing MarketFundamental Measures, Seasonally Adjusted Annualized Rates

sources: National Association of Realtors, Census

Existing Sales;-3% y/y, -30% from peak (rhs)

New Sales;-12%, -71%

Starts;+22%, -53%

Permits;+8%,-54%

31

Recap • Four forces caused/ended recession • Oil prices slight tailwind • Yield spread positive • Lending good • Housing recovering (but sporadically) • So things are looking up, but…

recp

32

Recap • Four forces caused/ended recession • Oil prices slight tailwind • Yield spread positive • Lending good • Housing recovering (but sporadically) • So things are looking up, but…

• Headwinds: • GDP, income, confidence weak • Labor market with structural problems • Fiscal policy with drag of taxes and debt • Monetary policy with long term inflation risk • Uncertainty of Dodd-Frank, true costs of Obamacare,

2014 elections

• Those are the forces… what do the measures say? gdp

33

GDP very weak

pce

-10%-8%-6%-4%-2%0%2%4%6%8%

10%Real Gross Domestic Product (GDP)

annualized quarterly growth rate

source: BEA

still < 4.6% recovery ave

34

The Consumer... The Ability to Spend, Income

conf

-4%-3%-2%-1%0%1%2%3%4%5%6%7%

Jun-

07

Dec

-07

Jun-

08

Dec

-08

Jun-

09

Dec

-09

Jun-

10

Dec

-10

Jun-

11

Dec

-11

Jun-

12

Dec

-12

Jun-

13

Dec

-13

Jun-

14

source: BEA

Real Personal Consumption Expenditures (PCE) & Disposable Personal Income (DPI) y/y % growth rate

consumptiontepid

long-term average

taxes hurt DPI

35

brupt

Confidence… The Willingness to Spend

80

90

100

110

20

40

60

80

100

120Ju

l-07

Jul-0

8

Jul-0

9

Jul-1

0

Jul-1

1

Jul-1

2

Jul-1

3

Jul-1

4

Consumer and Small Business Confidence

Small Bus.Optimism100 = 1986

Consumer confidence (left)>100 economy strong>90 stable

source:Conference Board, NFIB

95.7

90.9

36

Business bankruptcies still falling

mfr

0

5,000

10,000

15,000

20,000

25,000

30,0004Q

82

4Q84

4Q86

4Q88

4Q90

4Q92

4Q94

4Q96

4Q98

4Q00

4Q02

4Q04

4Q06

4Q08

4Q10

4Q12

4Q14

U.S. Business Bankruptcy Filings

40-50% annual growth rates from 2008 - 2009

source: Administrative Office of the U.S. Courts, Euler Hermes

full year forecast2014 -10%

37

Manufacturing rebounding

job

-20%

-15%

-10%

-5%

0%

5%

10%Ju

l-04

Jul-0

5

Jul-0

6

Jul-0

7

Jul-0

8

Jul-0

9

Jul-1

0

Jul-1

1

Jul-1

2

Jul-1

3

Jul-1

4

Manufacturing Industrial Production, y/y

4.9%LT ave 3.5%


38

But employment still worrisome

Cuml jbs

4%

5%

6%

7%

8%

9%

10%

-1,000

-800

-600

-400

-200

0

200

400

600Non-Farm Payroll Jobs Created (000's) (left scale)

Jobs Created and the Unemployment Rate

source: Labor Department

UnemploymentRate (right axis)

39


Cuml jbs

-10,000

-8,000

-6,000

-4,000

-2,000

0

2,000

0 6 12 18 24 30 36 42 48 54 60 66 72 78

'80 '74 '81 '90 '01

source: BLS, Euler Hermes

Cumulative Job Loss By Months of Recession, 000s

40


Cml jbs

-10,000

-8,000

-6,000

-4,000

-2,000

0

2,000

0 6 12 18 24 30 36 42 48 54 60 66 72 78


'80 '74 '81 '90 '01 '08


6+ years later, just breaking even...

41


unem

-10,000

-5,000

0

5,000

10,000

15,000

0 6 12 18 24 30 36 42 48 54 60 66 72 78


'80

'74'81'90

'01

'08


6+ years later, just breaking even...should have 5-10M more jobs

42


part

4%

5%

6%

7%

8%

9%

10%

-1,000

-800

-600

-400

-200

0

200

400

600Non-Farm Payroll Jobs Created (000's) (left scale)

Jobs Created and the Unemployment Rate

source: Labor Department

UnemploymentRate (right axis)

43

Structural unemployment, not just cyclical

bev

58%

60%

62%

64%

66%

68%7/

50

7/54

7/58

7/62

7/66

7/70

7/74

7/78

7/82

7/86

7/90

7/94

7/98

7/02

7/06

7/10

7/14

Labor Force Participation Ratelabor force / population

source: BLS

recession starts

Structural unemployment: plungingparticipation rate - people give up, rely on incentives not to work, and Boomers aren't replaced fast enough

44


bev

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

3% 4% 5% 6% 7% 8% 9% 10% 11%unemployment rate

job

open

ing

rate

sourece: BLS

Job Opening Rate vs. Unemployment Rate

"normal" recovery

45


dur

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

3% 4% 5% 6% 7% 8% 9% 10% 11%unemployment rate

job

open

ing

rate

sourece: BLS

Job Opening Rate vs. Unemployment Rate

unemployment should be here

Structural unemployment: skills mismatch due in part to training / education and in part immobility / housing market

2009-'14 recovery

"normal" recovery

46


imped

05

10152025303540457/

507/

547/

587/

627/

667/

707/

747/

787/

827/

867/

907/

947/

987/

027/

067/

107/

14

Average Duration of Unemployment, Weeks

source: BLS

41Structural unemployment: those unemployed a very

long time become unemployable

32

21

47

Structural Unemployment is a Major Impediment to Growth

• Plunging participation rate – incentives not to work,

Boomers not being replaced fast enough. • Change incentives (35 states pay > minimum wage

in welfare benefits, 13 pay > $15/hr, 6 states pay > starting computer programmer)

• More skilled legal immigration

• Skills mismatch due in part to education / training and in part to immobility from underwater houses. • Need more vocational education / training, housing

improving. • More skilled legal immigration

• Long time unemployed become unemployable. recap

48

Recap

• Four forces caused/ended recession • Oil prices slight tailwind • Yield spread positive • Lending good • Housing recovering (sporadically) • Manufacturing rebounding • Headwinds: Weak income, confidence, structural

unemployment, uncertainty

• GDP, recovery still weak • Employment situation still terrible • To fix it, the government has been causing two big

long-term problems: Debt & Potential Inflation

49

FISCAL POLICY

Congress, Administration Spending, taxing, borrowing

deficits/debt, budgets…

math

50

• Year 1: spent $80 • Original budget for year 2: spend $110 • Final budget for year 2: spend $90

• In most places spending $10 more the second year would be an increase in spending.

• Not in Washington. This is what they call a $20 “cut”; they wanted to spend $110 but only get to spend $90.

• Both sides do this every time.

Budget Math in Washington

def

51

Gov’t spends $10

Gov’t gets tax revenue $8

Deficit $2

Treas. gets loan, issues $2 notes/bonds

Spending, Deficits and Debt

tax

52

Spending, Deficits and Debt

Gov’t spends $10

Gov’t gets tax revenue $8

Deficit $2

Treas. gets loan, issues $2 notes/bonds

This $2 is a TAX our kids will have to pay (and we’re not paying enough tax?)

How big is $2T? Don’t know - measure against size of the economy - GDP

Dbt GDP

53

1991-2007U.S. 63%Italy 110%Germ. 58%UK 42%

Accumulated deficits become debt…

20%

30%

40%

50%

60%

70%

80%

90%

100%

110%19

6419

6719

7019

7319

7619

7919

8219

8519

8819

9119

9419

9720

0020

0320

0620

0920

1220

1520

1820

2120

24

Federal Debt as a % of GDP

source: CBO, Euler Hermes

Dbt GDP

54

1991-2007U.S. 63%Italy 110%Germ. 58%UK 42%

More debt = slower recovery

Accumulated deficits become debt…

20%

30%

40%

50%

60%

70%

80%

90%

100%

110%19

6419

6719

7019

7319

7619

7919

8219

8519

8819

9119

9419

9720

0020

0320

0620

0920

1220

1520

1820

2120

24

Federal Debt as a % of GDP

source: CBO, Euler Hermes

pie

55

2012 Outlays, $3.5T HUD, Labor, Edu. Ag., State, Justice, Trans. , Energy, Homeland Sec, Treasury, Commerce,

Interior, EPA

Health, 23%

Social Security, 22%

Income Security, 15%

Interest, 6%

Defense, 19%

Discretionary, 14%

def

56

HUD, Labor, Edu. Ag., State, Justice, Trans. , Energy, Homeland Sec, Treasury, Commerce,

Interior, EPA

deficit Health, 23%

Social Security, 22%

Income Security, 15%

Interest, 6%

Defense, 19%

Discretionary, 14%

Even w/sequester, total outlays still rise: 2013 = 3.45, 2014 = 3.52, 2015 = 3.77

2012 Outlays, $3.5T

entl

57

Entitlements • Entitlement spending, particularly Medicare or some

other form of national healthcare, will be the issue for our time.

• One generation will not be getting the benefits they think are owed.

• Another generation will be taxed to exhaustion to try to provide them.

• 2030 Medicare fund exhausted, can only pay 85% of claims.

• 2034 Social Security trust fund exhausted, can only pay 77% of benefits (Disability fund 2016).

• But it is not hopeless, the math is simple, legal immigration could help.

• No political will to fix it. revw

58

Fiscal Policy Review

• There has been no plan, no budget for four years. • Latest agreement to keep government running? Spend

more and tax more. • No plan to reform entitlements. • Tax reform badly needed- world’s highest corporate

rate. • Still borrowing more every day… $billions this week

alone. • Debt is a drag and it is not coming down. • It’s not politics, it’s just bad policy to burden the next

generation with debt that’s not even theirs.

59

MONETARY POLICY

The Federal Reserve Bank, Janet Yellen, Ben Bernanke

60

MONETARY POLICY • Lowering the short term Fed Funds interest rate

usually works

61

MONETARY POLICY • Lowering the short term Fed Funds interest rate

usually works • But this time needed an extra boost, lowering long

term interest rates - Quantitative Easing (QE): • Fed prints new $ bills • Buys Treasury/MBS bonds in open market • Raises bond prices, lowering interest rates (prices and

rates move in opposite directions) • Puts $ into financial system as excess reserves • And creates inflationary pressures

• Now tapering QE3-4 which likely had limited effect. • Bernanke: QE2 = 15 - 45bps, each round less effective • Rates near record lows, plenty of excess reserves –

banks don’t want to lend them and demand weak. QE wrk?

62

Did QE2 work?

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%4/

107/

109/

1011

/10

1/11

3/11

5/11

7/11

9/11

11/1

11/

124/

126/

128/

1210

/12

12/1

22/

134/

136/

138/

1310

/13

1/14

3/14

5/14

Yield on 10 year Treasury Note


QE2

hoped for this

63

Did QE2 work?

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%4/

107/

109/

1011

/10

1/11

3/11

5/11

7/11

9/11

11/1

11/

124/

126/

128/

1210

/12

12/1

22/

134/

136/

138/

1310

/13

1/14

3/14

5/14



QE2

but got this: recordrate of increase

64

Did QE2 work?

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%4/

107/

109/

1011

/10

1/11

3/11

5/11

7/11

9/11

11/1

11/

124/

126/

128/

1210

/12

12/1

22/

134/

136/

138/

1310

/13

1/14

3/14

5/14



Arab SpringJapan euro

worries

risk aversion

oil prices, weak data, US & euro worries

QE2 ends

QE2

65

QE does not work, does not address problem… already record low rates and have huge excess reserves. Banks averse to lending them and demand weak.

Did QE2 work?

X res

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%4/

107/

109/

1011

/10

1/11

3/11

5/11

7/11

9/11

11/1

11/

124/

126/

128/

1210

/12

12/1

22/

134/

136/

138/

1310

/13

1/14

3/14

5/14



Arab SpringJapan euro

worries

risk aversion

oil prices, weak data, US & euro worries

QE2 ends

QE3mrtgs +90 bps

QE4+130 bpsQE2

taper-50 bps

66

QE created massive amounts of unused money

X res

0%

5%

10%

15%Ju

n-04

Jun-

05

Jun-

06

Jun-

07

Jun-

08

Jun-

09

Jun-

10

Jun-

11

Jun-

12

Jun-

13

Jun-

14

Excess Reserves as a %of GDP

source: Fed BEA

ave = 0.03%

67

QE created massive amounts of unused money

notes

15%, 580x ave

0%

5%

10%

15%Ju

n-04

Jun-

05

Jun-

06

Jun-

07

Jun-

08

Jun-

09

Jun-

10

Jun-

11

Jun-

12

Jun-

13

Jun-

14


source: Fed BEA

ave = 0.03%

68

0%

5%

10%

15%Ju

n-04

Jun-

05

Jun-

06

Jun-

07

Jun-

08

Jun-

09

Jun-

10

Jun-

11

Jun-

12

Jun-

13

Jun-

14


source: Fed BEA

ave = 0.03%

FF unchanged 68 mos; previous record, 18 mos. Real FF negative 57 mos; previous record 37 mos. Fed hasn’t tightened in ten years… …and growth is still weak.

The futility of monetary policy

Ast infl

15%, 580x ave

69

QE also meant to inflate assets, spur consumption.. didn’t work, big risk reversing it.

recap

7.8%

24.2%

3.7%3.8%

10.5%

3.0%

-1.1% -0.7% -1.1%-5%

0%

5%

10%

15%

20%

25%

30%

2012 2013 2014 ytd

StocksHousesConsumption

Performance Above/Below Long-Term Averagesreal y/y growth rates

sources: S&P, BEA

70

RECAP • Monetary policy impotent w/big inflation risk.

Asset inflation here now. • Fiscal policy a mess but can be fixed in long

term. Significant debt load and uncertainty now. • Neither fixing structural unemployment caused

by mis-matched skills, incentives not to work, demographics.

• But despite those long-term risks, stable oil prices, positive yield curve, lending, rising confidence, falling bankruptcies indicate continued modest growth.

• And more good news, rebound in manufacturing!

ulc

71

Unit Labor Cost (ULC): labor cost to make one widget

U.S. Country X Hourly wage $20 $15 Hrs. to make one widget (productivity)

1 2

Unit labor cost

$20 $30

ulc

72

U.S. Manufacturing Very Competitive; low wage growth+high productivity=low ULC

china

50

100

150

200

U.S.

JapanKorea

Germany

Canada

Italy

Taiwan

Unit Labor Costs

source: BLS

73

The ULC Gap with China is Closing

$0

$5

$10

$15

$20

$25

$30

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Effective Manufacturing Wage Gap

assumptions:wages and yuan grow at historical rate 2006-19U.S. worker 3.4x as productive

$17

$7

China

U.S.

Not nuf

74

$0

$5

$10

$15

$20

$25

$30

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Effective Manufacturing Wage Gap

assumptions:wages and yuan grow at historical rate 2006-19U.S. worker 3.4x as productive

$17

$7

China

U.S.

The ULC Gap with China is Closing

The $7 benefit maybe not enough to offset: • Quality • Lower trans. cost • Lower inventory cost • Time to market • Keeping technology

ulc

75

gas

-8%

-6%

-4%

-2%

0%

2%

4%

6%2Q

09

2Q10

2Q11

2Q12

2Q13

2Q14

All IndustriesManufacturing

-6.5%

+4.6%

Growth in Unit Labor Costs Since End of Recession

source: BLS

76

Big Advantage, Cheap Energy

NG vh

02468

101214161820

7/07

7/08

7/09

7/10

7/11

7/12

7/13

7/14

Price of Natural Gas, $/MMBtu

U.S.

JapanKorea

China

U.K.Germ.

source; Energy Intelligence

77

Nat Gas cars represent huge potential. Only a few Nat Gas passenger cars available in US;

Honda Civic, Dodge, Chevy, Ford pickups

Source: NGV Journal, WSJ

CountryNatural Gas

Vehicles%of total

Iran 3,300,000 19%Pakistan 3,100,000 18%Argentina 2,183,487 13%Brazil 1,733,469 10%China 1,500,000 9%India 1,500,000 9%Italy 746,470 4%Others 2,875,326 17%U.S. 112,000 1%Total 17,050,752 100%

Heavy Duty Trucks: • of all sold, 1% nat gas in 2013, 5% in 2014 • Lowe’s 100% by ‘17 • P&G 7% to 20% in 2 yrs. • UPS buying 1,000 by end ‘14 • FedEx 30% in 10 yrs. Experiments underway in trains and planes

Auto sale

78

8

9

10

11

12

10

12

14

16

18

2019

95

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

millions of units(left axis)

Auto Sales and Age of Fleet

source: Autodata, Bureau of Transportation Statistics, Consensus Forecasts

median age, years, US light vehicles

(right axis)

16.5

11.4

16.1 15.5

Manufacturing Indicators; Autos

concl

79

Conclusions, Global

•Global growth 2.9% in 2014, vs 2.3% in 2013, most coming from; •Emerging markets (4.3% vs 4.1%) •China (7.5% vs 7.6%) and •India (5.3% vs 4.4%) •Europe (1.0% vs -0.4%)

80

Conclusions, U.S. Positives

•Ultra loose monetary policy will eventually help •Yield spread positive •Stable oil prices •Bank lending •Housing market recovery •Confidence rising slowly •Bankruptcies falling •Manufacturing re-birth; cheap energy, U.S. workers highly productive, slow wage growth

Negatives •High structural unemployment •Weak confidence, consumption, income •Housing market small, risky •Debt, taxes •Future inflation risk •Uncertainty from WDC (2014 elections) •Geopolitical uncertainty

GDP growth a modest 2.1% in 2014, not terrible, not great…

Thank you for your attention.

82

TRADE CREDIT & POLITICAL RISK SPECIALISTS

Damion Walker Senior Vice President Office: 949-623-1030 Mobile: 213-219-1991

Vanessa De La Cruz Senior Vice President Office: 310-568-7618 Mobile: 626-376-7540

THANK YOU


83

Disclaimer

These assessments are, as always, subject to the disclaimer provided below.

Cautionary Note Regarding Forward-Looking Statements

The statements contained herein may include statements of future expectations and

other forward-looking statements that are based on management’s current views and

assumptions and involve known and unknown risks and uncertainties that could

cause actual results, performance or events to differ materially from those expressed

or implied in such statements. In addition to statements which are forward-looking by

reason of context, the words "may", "will", "should", "expects", "plans", "intends",

"anticipates", "believes", "estimates", "predicts", "potential", or "continue" and similar

expressions identify forward-looking statements. Actual results, performance or

events may differ materially from those in such statements due to, without limitation,

(i) general economic conditions, including in particular economic conditions in the

Euler Hermes Group’s core business and core markets, (ii) performance of financial

markets, including emerging markets, and including market volatility, liquidity and

credit events (iii) the frequency and severity of insured loss events, including from

natural catastrophes and including the development of loss expenses, (iv)

persistency levels, (v) the extent of credit defaults, (vi) interest rate levels,

(vii) currency exchange rates including the Euro/U.S. Dollar exchange rate, (viii)

changing levels of competition, (ix) changes in laws and regulations, including

monetary convergence and the European Monetary Union, (x) changes in the

policies of central banks and/or foreign governments, (xi) the impact of acquisitions,

including related integration issues, (xii) reorganization measures, and (xiii) general

competitive factors, in each case on a local, regional, national and/or global basis.

Many of these factors may be more likely to occur, or more pronounced, as a result

of terrorist activities and their consequences.

No duty to update.

The company assumes no obligation to update any

information contained herein.

trade credit & political risk la rims meetingaug 20, 2014 · 6rxufh ' hsw r i& rpphufh ' hsw r...

Documents