Leveraging Credit Insurance

Santiago Tommasi:

Because so much so I didn’t know yesterday that they were recording this, I thought it was a picture only so- I’m famous now. So thank you for coming. Thank you very much for coming. She said my name is Santiago Tommasi. I work in Mosaic. The area today to talk about credit insurance. We are going to talk about great insurance in general, concepts about great insurance, great insurance is how it works. The main idea here in this presentation is to talk about the ways about great insurance. Well, this doesn’t work. The best practices to leverage Credit insurance is linking personal experience in our company with success stories in order to learn from them and to share with you. Before starting, I would like to give a quick introduction about Mosaic because you will see, you will have some more perspective about the numbers we have. So Mosaic is a fertilizer company. We produce commercial fertilizer and we have operations in several countries such as the US, Ghana, China, India, and Brazil. So the company gets about 8 billion dollars a year and all these sales are covered by credit insurance all over the world. So that’s a key point to consider- a lot of it says credit limits are big and probably one of the reasons that it gets the credit insurance it needs is because if you are selling to a certain country, you have 20 to 30 million dollar credit limit. You know, having created more affordability to a company especially to the Treasury Department, that kind of risk management comes with experiencing great insurance.

Santiago Tommasi:

Okay. Well, you will have an idea about great insurance but of course, I may use it. I’m not an expert, so if you want to answer that question all you need to know so broadly is probably not me to ask but someone as a broker for example. Good. So what is great insurance? It is basically a risk mitigation tool that covers you as a seller. If there is a non-payment situation from the buyer, the non-payment situation could be triggered by different reasons. It could be intrinsic reasons within the customer. The insolvency of the buyer or refusal to pay the invoice due but also can be triggered by political risk, which is in my opinion, the most fascinating part of trade insurance as well as credit management. You have way more challenges when you go international versus domestic. For international trade, there are extrinsic reasons. You say the government is for the number of government restrictions encumber the ability to fixing convertibility, civil war, escaping appropriations, etc. Just as I said, I’m going to try to link these with personal experience- currency convertibility. I’m from Argentina. A few years ago with the previous government, there were a lot of restrictions to access effects in Argentina. I was fresh out of there. We have this situation all the time that we were the importer and we weren’t able to pay to honor our debts because of the incumbent’s ability. Why borrow more resources? But the thing is that we found ourselves dealing with a central bank in order to get permission. You’re not sold, you’ve probably seen this. Okay. So yes to get permission from the central bank to get access to the effect, you don’t have to pay. We have looked at currency but we didn’t have the access to the effect to pay.

Santiago Tommasi:

Finally, we had to pay installments. It was like a 200 dollars or something a day which was painful with 20 installments to have the invoice paid and that couple into all the import fair in Argentina. So the insurance company was involved in that situation because it was a high-risk country but the customer wasn’t that. Risky in many cases. Right. So that’s an example of all that conflict and we are going to talk about Venezuela later because it’s another case to talk. So basically how it works- there is a contractual relationship between the insurer and the seller, the contract is the policy itself. So this is what mandates the relationship between both parties. Key benefits. I would say that the key benefit is simplicity. Once you have the insurance program in place in your company, it’s pretty easy to get the coverage for your sellers. Risk management is legal to mitigate the account. The concentration of risk to protect account receivable for catastrophic losses reveals the company’s leverage to improve or to grow. Let’s say as an example, you want to sell in a new industry or you want to sell in a different country that you don’t feel comfortable about, this tool allows you to go on and have certain core simplicity about the “says” when you are selling on town’s simplicity. Letter of Credits, yeah. So it’s very complicated to do it and is probably a one-time transaction. Once you have it in place, you are done. You have only to do what you have to do, which is paying the premiums to report they say is to get in touch with their insurance company.

Santiago Tommasi:

Then financing. So it facilitates tradition throughout the issues relating to working capital and management. This means basically if you are a lender to a company that has great insurance supporting and if there is an important item in the assets, you will feel more comfortable because you have a certain confidence that the customer will be able to collect from their customers. And this also improves internal ratios. For example, what we have in Brazil is we use credit insurance to firstly allow financial instruments. In that, we transfer the opening of a year to a third-party financial institution. And so Mosaic keeps the risk. However, we are able to get rid of the open a year because of the great insurance. Our auditors allow us to clear the open a year from our books. This is because of the great insurance is allowed because of the great insurance. Any questions? So if you’re clearing it from your books but you said that you still retain the risk who’s doing the collections on the areas of the financial institution or is it your organs. No. Is it a financial institution? Yes. So you’re hoping that they do right by you and my effort to collect.

Santiago Tommasi:

Exactly. We have to collaborate with them if there is any delay in their payment but they are refusing to collect. This is their way of structure. The insurance is going to kick in if that company defaults. But it did not default. You still are responsible. Yeah. Yeah but I mean in their contractual relationship you have something characteristic so if the financial institution doesn’t collect that amount in some time they have to communicate to us and then we have the right to step on to negotiate with the customer itself. If not, the risk comes through our book. There cover quite a number of accounts there. We have another question.

Audience:

When are you able to clear that from your books?

Santiago Tommasi:

Right. Early on in the process. Yeah right. When I receive the money because I transfer that opening a year to the bank and I receive their money and this is it. However, there are special shill accounts that register these numbers because they are off-balance sheet.

Audience:

So how many days past due would your auditors be comfortable with you writing that off and sending that across?

Santiago Tommasi:

Well, we clear the account right away. I mean I receive the money from their bank. We clear the accounts. Ok. So once the account receives, their bank then has to sort out the collection of the collection process. Right after 30 days of POS. I mean 30 days by the old account. It kind of comes back to our dollar books. So we have to reverse the initial extending and pay the amount by the bank back.

Audience:

So, how is that different from factoring? It sounds very similar.

Santiago Tommasi:

I guess it’s pretty similar. It’s like a record. Right. Factoring, however, is different in the way it is structured. This is, for example, called in 30 years. It’s very very popular in the agricultural market in Brazil. Their rates are subsidized by the government. This is the key. I think its cheap rates allows farmers and cooperatives to access cheap financing tool. So it’s not private. There are a few private banks but ours is more to state banks. So I mean- it’s a really good tool to use in a high-risk environment. Yeah yeah, which is the case.

Audience:

How is the cost-benefit a relationship if you use insurance? Because with us then you can transfer the fees to the customers.

Santiago Tommasi:

So yeah here we don’t have any fee on our side. We sell with full payment of 180 days and then within 15 days, we transfer it to their bank. This is the model being used in Brazil. You use it in the U.S. and Canada too. They’re the model you are using for the insurance. Now, I was just wondering about the fact that Canada is effectively using it most of the time you know, because of its private insurance, not the environment. We don’t have these for us in the U.S. It’s only in Brazil. The program about the traffic open once A/R in the US when we sell a very short time domestically. Now I will comment on the differences between Brazil and North America. So this is quite a high level. In some popular type of insurance policies, you have a multi-buyer which covers the whole opening and you have insured key accounts of which customers share certain characteristics. And this is where we have a difference between Brazil and North America. Because in Brazil, we do have the multi by your policy. We cover 100 percent of our transactions that are done in terms of Brazil while in North America. We shifted a few years ago to defer more than just an export account, which could cause catastrophic losses to the company.

Santiago Tommasi:

So we define what a catastrophic loss is for us. The million dollars could be significant for the company. I’m thinking that in China and India we have also a multi-buyer and then a single buyer. And if you do business with their specific or specific business or on a specific customer your government request these to your broker but this is pretty expensive, especially because you are not in the market and the insurance companies say they prefer to have diversity and they always would go to the multi-buyer instead of a single one and the medium term is more related with the agricultural equipment capital equipment. For example- traction telecommunications. Longer-term is up to seven years. Very specific for certain industries.

So how do you select the right policy structures? You might have a different meaning for me from summarizing here in the audience. So, in my opinion, the right answer is to say how much comfortable will I view as it relates to a credit policy you have, with a risk management guidelines that you have in your organization and they got this is what defines what is right for your company. So different aspects to consider, well, it required you for your risk on how much you want to maintain. This is related to their indemnity level and how much premium you want to pay. And there are other companies fine. We are going to talk about finding a broker but something that they would like to highlight is about having clear and communicated follow great procedures. This is something that gives to the gate insurance agent for the ability to approve your program especially when you have discretionary credit limits. Meaning that you have the right to approve and you only communicate through that to the insurance company that you have approved that they limit to that given customer. Let’s move on now. We go to different examples. We’re going to talk about the six practices and these related each case with one example of that I want to share with you so find an expert broker. The broker is the guy or the company that will push for you or will negotiate your premium from these shows and we’ll go to the market in order that you get the best coverage for your needs. To do that, the broker needs to understand your company covers the history claim to understand the industry where you are. It’s completely different if you are selling like us, fertilizer or selling cars. It’s completely different. The payment terms, it’s important too.

The characteristics of the company and the market is pretty important by knowing these, the broker will be able to share a different issue, different theme options or combination that you can make the decision better which fit your needs. So another thing which I think is important is to review frequently the condition to keep you up to date on their market trends and insurance conditions. And that’s something that we have in place. We have quarterly calls with their brokers in order to have this update and also use for them to put information from us to keep the broker and insurance company updated about news in the company or in our customer side broker. We have a game, Brazil. So is coming here to broker and this is something that’s happened a few years ago. We implemented the ‘create insurance’ program in Brazil and corporate at the time which is located in Minnesota- said well, Brazil please take these brokers. So our team in Brazil, use these brokers. What happens is that we develop the insurance program and we started doing business and paying the premiums reporting there to say some keep paying premiums to zero claims until one day we have their issue which was well customer didn’t pay on time. We tried to negotiate, we decided not to litigate about it and placing the claim in the company. Copying that opportunity that we found that these off-balance transactions they won that we were talking before. Remember we sell to the customer we transfer the open A/R to a bond we collect the money. We sell to their insurance company and we pay a premium set to take on them. The customer didn’t pay. OK. And then we found that that transaction was in capturing the policy; meaning, no payments. Yes, sir.

Audience:

So just help me understand how all of the pieces of the transaction work. So when you transfer the balance to the financial institution to collect for you that’s not actually a claim. Not at all just the normal way.

Santiago Tommasi:

They claim what happens when the customer doesn’t pay. Then A/R counts back to you and then you have a positive account. Of course, you can pay the financial institution back. This is out of the discussion. What I’m saying is that the insurance company didn’t pay us because this wasn’t considering the policy. OK. Exactly. Exactly. And they claim. Yeah exactly. That’s it. That’s the key message here with the broker. There are others. So the broker didn’t know anything and the learning experience for me was, well we probably know everything. Hearing I believe that we know everything incorporates about, you know, you have to live there, sure enough, is also to make their decision. So it ended up changing the broker we have now where a local broker we have a close relationship with that broker but they have a department that these dedicated only for creating sure this other guy is everything. Liability property etc. Do you have any experience in creating insurance? In the agriculture market.

Audience:

I think you and I are going to have a much longer conversation now.

Santiago Tommasi:

Okay good. Nothing to do with us. We can talk about this afterward. So moving on and we only have seven minutes. I thought that he was going to have more time to develop the agreed policy towns. Of course, those are courses that you have to consider when we talk already about that indemnity level. I have maximum liability terms deducted etc. I will go to the specific transactions and we are talking about something similar to what happened in Brazil but in this case, it was successful we didn’t fail. So barter. I’m proud of you. You are going to be interesting. Are these two terms 30 days 90 days. 80 days within that window of time the farmer calls you ISIS. Well, I want to. Barter is a very useful way of doing business in the agriculture market in Argentina with means is we sell fertilizer which sells fertilizer to a farmer one million dollars. Here you are an invoice to one of the payment turns these to barter transactions or instead of paying you the U.S. dollar, the US dollar is related to that invoice. I will deliver something extra, you know, money brings soybean, corn, sunflower. Yeah. So if their main obligation, their main document which was the invoice is disappeared and you have a new document they contract where you have all their conditions for rates which is they leave a playtime price if their prices are already giving always a future price so all these complexities in the system will be very complicated to do it within the system and we have to grant a good a reporting tool in order to communicate these two through the company because again they are easily out of obligation. The reason the document disappears, there is a new commitment that is not to pay but deliver something. So this is successful because we didn’t have any claim. No, we have a claim but they were successful because we were able to collect on the project was done in the right way. Yes.

Audience:

When you’re doing the barter are you taking into consideration the price of the commodity?

Santiago Tommasi:

Of course. Yeah. Yeah. Because you have a relationship. The customer owes you a million dollars so you have to make that contract with enough soybeans to pay a million dollars. I could be a future price too.

Audience:

So there are more like these two and do you have a special department in your company that we use?

Santiago Tommasi:

Yeah. 40 percent of their sales in Argentina in the agricultural market is down or even more probably by about them. Because there is a tax benefit will have to make a quick decision because we have only three minutes to go to talk about the right price which is basically you never know if you are paying the right price but the broker should be able to help you to understand if you have a good pricing structure for the credit policy. Go into the market and discussing with these Fed and insurance companies you know that you see. In order to see if you are having a fair deal. Here’s a quick example of what we are to ensure, as I said, 100% of the sales in North America for experts which were about $1 billion. So we paid $1 million a year. Then we changed to catastrophic losses abroad so our insurances dropped to 300 million. But after the fee agreement, we started with a broker. It was a flat fee so that the number that we were we used to sell $1 million was pretty significant based on a new set scenario so we had to renegotiate these and we moved from the flat fee to a percentage over the premium which is usually that covers the problems that we didn’t want to have their percentage over the premium when we used to pay such big premiums over $1 billion. That’s how we can do this and we have to negotiate these according to the new conditions, every time you change the strategy, to me, it is one minute.

Technical Person:

You have technically a minute and a half but we have a buffer as well as still time for Q&A so if you want to keep going. Okay, I will talk about it more. I was talking about the communication, making your insurance annually, meaning you need to have to communicate with the customer, the insurance needs to know what is going on in your company in the marketing industry and that’s when we have annual meetings with them. But also, if it’s needed, we have more frequent conversations about updates on certain countries or situations, specifically for these policies. So again, Tokyo Customer Academy, Mexico joining me on a $25 million credit limit, the insurance company they have a field goal for the roll-out for approving this number. Because, you know, in Latin America here we base our decisions on financial statements, but in Latin America, many countries are depending on the customer itself. Actually, I will say that is really unlikely that you find the financial statements that reflect the real situation of the customer, right. So you see the financial product customer was a weak customer from a financial standpoint, but he got a lot of personal assets so we visited the Gulf and we started trying to build a relationship, not only Mosaic credit and the customer but also the insurance company in order to start building that trust. Well, long story short, we shared laughter after a couple of drinks. Now after dinner, we were able to provide customers a quality over their personal assets in order to support part of the credit limit and by having that code out there. The insurance company was able to approve the $25 million. Any Questions? Okay, we will talk about the compliance with the policy I think is out of the discussion, but mistakes. You know, forgetting to pay a premium on time or to report the sale of a given customer also happened to us. So, you have to report the sales and you pay premiums over the sales if for some reason you forget to add the customer in the report or there is something wrong with the report we are not paying the premium.

Santiago Tommasi:

If you don’t pay the premium or user insurance like car insurance or home insurance. So, is important, especially in proceeding arrows. And, of course, another new method does for us as customers as sellers are to notify the company, if an event, of course, like if there is a delay, you’re on negotiating a payment term with a cultivator. And then, of course, you have to follow all the policy terms and be aware of these. And it’s very important to have these communications with appropriate another to make sure you have a good understanding of your terms. At some level that you have a payment time approved in the policy up to 60 days and for some reason when you start selling 90 days to the customer or all customers. You are not accomplishing the requirements, no insurance last comment will let you. Another thing that we did is a fake, or we conducted the fake all in order to make sure that we are in compliance. If we have a claim so we made up a claim, based on a real situation we provided all the documentation to the insurance company and there we go. The answer says that you are good to go, or you would be good to go.

Okay, the last comment about Latin America is I’m sure all of you are aware of the administrative situation and the sanctions here from all of our money laundering, a lot of things have to move within Israel and within companies. The thing is that something, it’s just another learning experience we will have a customer in Colombia. Many a million dollars credit limit and they get to a place pretty well and we said they couldn’t leave it’s based on Colombia because the customer has its operations in Colombia. However, ownership. That’s the key thing, the owner of that customer is picking you in which a petrochemical branch of the government the minister so it’s press in my room, managed to pick even the company. So, the sanctions also are applicable to customers or companies that in other countries not in ministry only. But, owned by the government have an answer not directly or indirectly. Long story short here. We found our serve almost two years ago with $14 million over a year, and the customer, how the liquidity to be in Colombia and currency but they weren’t able to pay us because they banks weren’t able to process a bank Citibank for example here, they said, we don’t want to deal with any compliance issues. I’m not processing the payment. So it wasn’t a claim, but it would be it would have been supported by the insurance company we weren’t able to collect, but we were very creative. There is some other stuff, you know, to get the money back. Yeah, yeah. Because a lot of local currency is like a kind of factory. But they like it running out of time. $40 million. Okay, I think let’s see here.

Technical Person:

So we still have five minutes left for the session. So I want to make you aware of the following sessions that are coming up. Nobody will be in this room afterward. Santiago. If you’re still available for Q&A. I’d be happy to be a mic runner. Thank you. Any questions besides you?

Audience:

Just, just very quickly, so what we do is try to look for a collateral sort of coverage attic account or customer level. So I guess in this scenario may be insurance you were saying it’s more expensive, and probably it is better to keep an older type of securities with assets or standbys. What do you recommend based on? You know, it’s not that expensive insurance. It depends on the brand you have. But you Yeah, of course, done by us, he would be great, but that’s expensive. It’s pretty much expensive. We work pretty well with equality lucky for several hours. We also need to grant additional force our guarantee, so we need to hire lawyers in there. The country and make sure you can afford the guns, of course, follow all the rules in order to have the right to collect but you know I bring it over there with a quality that we have in place with these characters witnessing, embarrassing to see we have a lot of characters. Again, being created there with me so grains and other acids and insurance companies go for that, but we also have a very well explained like a historian claims, you know, a few, how we sell, we may not have premiums every year. I think they are making enough money from us.

Audience:

Hi, my name is Jeanette, I’m from Pelican products. So, just an understanding in reference to a broker. Do you recommend that to use a broker or you just make sure that the broker has your best interests?

Santiago Tommasi:

Yeah, I recommend using a broker, of course. But what I also recommend is doing a good job. To determine who is going to be the broker based on the experience based on the knowledge shared on the market. You are doing it based on our industry, of course, yes. But the broker is not the question, I wouldn’t go to the insurance company. I did in the past year.