“The financial crisis is hitting companies with great ferocity”. Interview with Dr. Gerd-Uwe Baden, CEO of Euler Hermes Kreditverischerungs AG (Germany), member of Euler Hermes Group Management Board, supervisor of Euler Hermes Group Risk Activities.
Dr. Baden, the latest survey of insolvency administrators which Euler Hermes conducted again this year indicates that we face the prospect of a record number of insolvencies in 2010 at the latest. What are the reasons for this?
Dr. Baden: The main reason is doubtless the serious financial and economic crisis. Quite simply, companies’ order intake has slumped drastically. This is exacerbated by knock-on effects caused by insolvencies on the part of customers or suppliers. Companies which are owned by private-equity investors are particularly at risk. And restrictive bank lending practices are also making themselves felt, of course.
How many insolvencies can we expect in Germany?
Dr. Baden: We currently project around 39,000 insolvencies in 2010, which is roughly on a par with the previous record measured in 2003. The insolvency administrators whom we questioned, who are currently handling around 21,000 cases, estimate that 34 percent of the insolvency applications are due to the present crisis. The financial crisis is hitting companies with great ferocity, with small mid-size enterprises languishing in particular.
Are there any other factors in addition to the economic crisis resulting in corporate insolvencies?
Dr. Baden: Management errors continue to be a frequent trigger of insolvency. In times of crisis, strategic mistakes in particular may have dire consequences for a company. Examples include insufficient reserves, a lack of flexibility and the rigid retention of antiquated business models. In a recession, mistakes such as these tend to take their toll more quickly than in good times. So the economic crisis amplifies these effects.
Märklin, Rosenthal, Schiesser, Woolworth and now also Arcandor – there is no shortage of prominent examples. What mistakes did these companies make?
Dr. Baden: Frequently, a whole series of factors leads to insolvencies. Each individual case has its own unique characteristics and its own momentum. That’s why we as a credit insurer must examine each risk on a case-by-case basis and avoid making decisions based solely on individual criteria such as the sector involved. Even in currently critical sectors, there are solid companies which are weathering the crisis effectively.
What role are credit insurers playing at the moment? Recently, credit insurers’ practices have been facing considerable criticism – also in connection with Arcandor, for which you again increased the deductibles shortly before the insolvency application was lodged.
Dr. Baden: First of all, I want to make it quite clear that the change in deductibles from an average of 25 to 40 percent shortly before this company went into insolvency only related to deliveries on or after the date of change – none of the existing contracts were affected. Such precautions are taken to address a further drastic deterioration in the risk situation. Arcandor is a very good example of the fact that credit insurers do not leave their customers to their own devices when the going gets tough despite the frequent claims to the contrary. We remained committed to Arcandor right up to insolvency. Accordingly, our customers and, thus, several hundred companies from a whole range of different sectors, were able to rest assured that they would not lose outstanding amounts upon Arcandor going into insolvency.
How high is the loss which your company has sustained as a result of the Arcandor insolvency?
Dr. Baden: The potential loss stood at between EUR 30 and 40 million as of the date of insolvency. The actual amount ultimately depends on the outcome of the insolvency proceedings.
Arcandor is not the only major claim which you have had to digest in the past few months. Your claims expense has surged in the wake of the crisis; as a result, claims expense exceeded premium income in the first quarter. How long can you withstand this?
Dr. Baden: Like all other insurers, we are required by law to set aside fluctuation reserves to provide for difficult times. And this is precisely what we have done. To this extent, we are well equipped to face the crisis and have sufficient capital.
What is your view on government aid for credit insurers? There has been discussion on this matter for months in Germany and the German government is under pressure to take action. When will the aid eventuate and what form will it take?
Dr. Baden: Talks between the ministries and the industry association are still ongoing, so no results have merged yet. It is important to realize that the current difficulties in obtaining insurance cover for commercial credit are being experienced by the debtors and not by the credit insurers. The private-sector credit insurers have sufficient capital and liquidity and therefore do not require any government assistance. However, if the government takes the view that it must support businesses during the crisis by providing them with credit insurance which they would not receive in the private sector, then this is a political decision. Needless to say, we would respect this decision and assist the government in implementing it. On the one hand, we would be able to help our customers and the German economy in this way and, on the other, the credit insurers are the only entities able to handle such tasks on account of their risk analysis skills.
