/
Collateral Analysis & Negotiations: Collateral Analysis & Negotiations:

Collateral Analysis & Negotiations: - PowerPoint Presentation

cheryl-pisano
cheryl-pisano . @cheryl-pisano
Follow
459 views
Uploaded On 2015-11-09

Collateral Analysis & Negotiations: - PPT Presentation

An Actuarys Perspective Aon Global Risk Consulting Ron Schuler FCAS MAAA Associate Director amp Actuary ronschuleraoncom Overview At a minimum the process of estimating and evaluating collateral amounts should seek to achieve the following objectives ID: 188532

credit risk collateral amp risk credit amp collateral analysis information financial calculation term cash assets equity strength loss ratios measure revenue measures

Share:

Link:

Embed:

Download Presentation from below link

Download Presentation The PPT/PDF document "Collateral Analysis & Negotiations:" is the property of its rightful owner. Permission is granted to download and print the materials on this web site for personal, non-commercial use only, and to display it on your personal computer provided you do not modify the materials and that you retain all copyright notices contained in the materials. By downloading content from our website, you accept the terms of this agreement.


Presentation Transcript

Slide1

Collateral Analysis & Negotiations: An Actuary’s Perspective

Aon Global Risk ConsultingRon Schuler FCAS, MAAAAssociate Director & Actuary ron.schuler@aon.comSlide2

Overview At a minimum, the process of estimating and evaluating collateral amounts should seek to achieve the following objectives:

Provide quantitative or qualitative information to be used for decision-making by risk management and its partners, constituents, and counter-parties.Improve clarity, understanding, and eliminate ambiguities underlying the collateral determination process.Provide a robust set of supportable and understood

analytics and information which can be used to better understand and support the determined collateral position(s) as well as other related estimates and costs that impact the Total Cost of Risk (TCOR).Slide3

Overview Understanding A Company’s Collateral Position: Why is it relevant?

Actual costs, credit capacity, and opportunity costs.Managing expectations, effective communication, and negotiations require information (that will be provided to and used by various parties).Defines positional arguments.

Components of Total Cost of Risk (TCOR) shouldn’t be viewed in isolation, and thus, collateral impacts other risk financing decisions.

Provides risk management perspective on performance relative to prior expectations, performance metrics, and/or benchmarks.

Quantifies statistical information which provides insight into trends, operational changes, or changes in risk profile.Facilitates efficient audit, accounting, and risk management processes.Provides prospective guidance for risk management and other financial purposes.

Assist with brokerage support, guidance, and recommendations.

Provide the necessary actuarial documentation which is consistent with actuarial, financial, and accounting standards of practice.Slide4

OverviewOutputs are directly related to information provided to:

Financial ReportingAccounting / BudgetRisk Management (General)Benchmarking / Performance Metrics

Internal / External Audit

Insurers / Regulators

Insurance Placement (Brokerage / Captive / Other )Loss Control / Claims ManagementOther Parties (M&A+D / Vendors)Slide5

The Basics: Collateral Calculation

Foundation of the Collateral Calculation:Actuarial Loss Reserve Analysis – RetrospectiveLoss Forecast Analysis – ProspectiveRisk Load Analysis – Retrospective & Prospective

Roll-Forward Analysis – Prospective

Financial Strength / Credit Risk Analysis – Prospective

Collateral = Ultimate Loss + Loss Forecast + Risk Load – Actual Paid – Expected Paid – Working Fund (+/ – ) Other (+/ – ) Credit Adjustment Other: Overdue Premium, Audit Premium, Retro Adj, LCF, LBA, etc.Slide6

The Basics: Collateral Calculation

Collateral Calculation & Negotiation Process: The Challenge Don’t be a spectator: Actively manage the process.

Challenge the

experts

.Challenge the methods, assumptions, data, and considerations underlying the various analyses.Challenge the status quo.Analysis vs. Approach

Retrospective & Prospective Components

Core Assumptions: Credibility, Complement, Risk, Coverage, Characteristics , Availability of Statistics, & Other

Determination & translation of credit risk to a probability of default (or vice versa)Other Considerations: Technical and ContractualOther General: e.g. Funding OptionsEvery item underlying the collateral calculation can be quantified: Quantify, Challenge, Understand, Communicate, Repeat.Slide7

Collateral Calculation – An ExampleSlide8

Collateral Calculation – An ExampleSlide9

Financial Strength / Credit Risk Analysis

Used to assess financial strength and/or creditworthiness of insuredInsurer Perspective: There are two types of risk (Reserve, Credit). Insurer is in the business of insurance (i.e. not a bank), thus primary goal is to eliminate exposure to credit risk

Utilized by insurers to determine

viability of writing program and/or underwriting

surcharge / discountGenerally based on insurer judgment versus a more technical evaluation of credit strength

Consideration of relevant factors such as general economic conditions and how they impact the insured, insured pro forma statements, the probability and timing of default, variance / risk in loss estimates, expected recovery rates, interest yields, and time value of money.Slide10

Financial Strength / Credit Risk Analysis

Type of financials and information provided impact credit evaluation (Audited, Reviewed, Compiled, & Internal)Preferred financials to review: Latest Audited, Interim, and supplemental information

Other Information reviewed:

Public Information: S&P, Moody’s, Fitch, D&B

Company Specific Information: SEC filings, Pro Formas, Interview, etcIndustry Specific Information: Competitive, Industry, Key Economic Variables

Financial credit review results in credit “rating” which, in turn, should be converted to expected probabilities of default

Probabilities of Default similar to Rating Agencies (S&P, Moody’s, Fitch)BBB+ and Above: Investment Grade / SuperiorBBB to BBB-: Speculative / AverageB and Below: Distressed / In DefaultSlide11

Financial Strength / Credit Risk Analysis

Types of financial ratios: Liquidity, Leverage, Profitability, and Cash FlowLiquidity Ratios: Measure ability to meet short-term obligations.

Net Working Capital = Current Assets less Current Liabilities

Current Ratio = Current Assets / Current Liabilities

Rules of Thumb:NWC > 0 for Y year periodCR > 2

Leverage Ratios: Measure the extent to which a company is financed with debt.

Long-term debt (LTD) to Equity or LTD to Tangible Equity : Provides an indication of long-term solvency. Tangible Equity = Equity less Goodwill less Intangible AssetsTimes Interest Earned (TIE) = EBIT / Interest ExpenseRules of Thumb:LTD / E < 1 is acceptable; LTD / E > 2 implies a potential issue to pay interest and principle3 < TIE < 5 is acceptable; TIE < 3 is poor and TIE > 5 is goodSlide12

Financial Strength / Credit Risk Analysis

Profitability Ratios: Measure ability to meet short-term obligations.Return on Sales = Net Income / Revenue; measures operating marginOperating Margin = EBIT / Revenue; measures operating margin before interest & taxReturn on Total Assets = Net Income / Total Assets or EBIT / Total Assets; measures how effectively firm assets are used.Return on Equity = Net Income / Equity; measure the return on invested capital

Rules of Thumb:

Need to review short- and long-term

ROE > Industry Benchmark Cash Flow Ratios: Measure whether firm is a cash generator or user.Net Cash Flow: CF > 0 (generator), CF < 0 (user)CF to Revenue = CF / Revenue; measures the cash generating ability of revenues

CF to CMLTD = CF / CMLTD; measures firms ability to generate sufficient cash to meet short-term fixed obligations; CMLTD = Current maturity of LTD

Rules of Thumb:

Need to review short- and long-termCF / Revenue > 0 is acceptable