Storm clouds are appearing on the horizon. While insurers say they’re not abandoning the print industry, they are definitely more wary. It is clear why they are treading carefully. Over recent years, printers all over the country have gone bust, leaving a trail of bad debts, especially among paper suppliers, which in turn have required big payouts from insurers.

The numbers tell part of the story. According to the Australian Bureau of Statistics, external administrations for the 2011/12 financial year totalled 10,757 – the highest number on record for one financial year. This figure is 9.4% higher than the same period last year. It is 7.5% higher than 2008/09 during the Global Financial Crisis. 

That specific piece of ABS data did not detail how individual industries were faring but an ABS analysis of business exits and entries shows that more printers were closing down than in many other industries. Insurers say printers are performing almost as badly as the woeful construction and retail sectors.

Ben Zammit, a regional risk manager for insurance giant Coface Australia, says there are plenty of horror stories of paper suppliers who lost their insurance cover for a particular client because it was regarded as high risk, but were so desperate for the sale that they took the risk themselves. When the client went bust, it hit their business hard.

“That would require quite a substantial amount of sales to cover a bad debt to make the same profit margin that they budgeted for at the beginning of the year,” says Zammit. 

“Anyone that is not credit insured runs that risk daily. Not every company has credit insurance. Those companies are making those calls on a daily basis and if a company goes bust on them, it does impact their profit and loss statements and balance sheet.”

Naughty corner

Kirk Cheesman, managing director of insurance broker National Credit Insurance, says print is right up there with retail and construction as a sector in trouble, although it is performing marginally better than those two.

“The two main industries that are causing pain at the moment are building and construction and retail and mainly electrical retail,” Cheesman says. 

“We look after 65% of the brokered credit insurance market place in Australia and New Zealand and the bulk of our claims are coming from those two sectors at the moment.”

Cheesman says that while insurers are not abandoning print completely, they are definitely taking a harder line. “They’re becoming very wary. They are expecting people in the printing industry to wear more risk.

“We used to look after a lot more clients in the printing industry than we do now. Some will self-insure, some have moved to other suppliers. It’s a tough market.”

Insurers, stung by losses, are clamping down hard and tightening up policies. In the past, for example, a paper supplier could get indemnity for up to 90% of the losses and have a $10,000 excess for claims. Now insurers are more likely to provide only 80-85% indemnity and ask the supplier to carry a $20,000 excess. All this is adding to their costs, which are invariably passed on to printers.

“Insurers are only willing to take on a smaller share of the risk and naturally prices are going up,” says Cheesman. “In that sector, probably depending on the loss history, [the increase] could be anywhere from 25% to 60% depending on the losses.

“If the insured party has had good credit management and not been burned and not lodged a claim on the insurer, then it would be a much smaller level of increase. But over the past year, there wouldn’t have been that many that haven’t had a bad debt or a claim. Unfortunately the print and paper sector has been one of those industries that has continued to have a bad run.”

But while things are bad now, they could get a whole lot worse if the unsustainable level of claims continues. Cheesman says if insurers pulled cover even further, suppliers would have to become more vigilant, setting shorter terms and reviewing their credit levels. It is likely they would start looking for more security from printers in the form of personal guarantees and bank guarantees. 

But before painting the scrupulous insurer as the bad guy, remember they have been provoked into tightening the purse strings.

“To be honest, the insurers have probably done the paper and printing industry a lot of favours over the past five or six years because they have paid a lot of claims,” says Cheesman. 

“They would have paid more in claims than they would have collected premiums in the past five years. So we shouldn’t be too tough on the insurers. They have definitely assisted suppliers in the paper and printing industry by having the credit insurance in place but there comes a point as in any business where you have to weigh up and say ‘If we continue to pay out more claims than premiums, we will have to adjust this somehow’. 

“I think it is just coming to a point where enough is enough.”

Out of favour

Craig Brown, chief executive of BJ Ball Paper, agrees that print and paper is increasingly out of favour with insurance companies. “The current economic environment is showing that some of
our customers are stretched. The level of failures is growing and a cautionary approach to credit is essential.”

He doesn’t shy away from the idea that paper merchants must share in the responsibility for this sorry state of affairs. “I think the industry’s approach to credit has been fractured for a long time and in general terms paper merchants need to put their hand up for this. 

“Historically credit has been extended too easily with little due diligence. The impact has been a rising cost of insuring debt, which has, therefore, resulted in a tightening of credit policies. 

“We have taken a commercial position to insure our debtors. The reality is that credit insurers now have a jaundiced view of our market. It is becoming increasingly difficult to have credit limits underwritten to the levels once enjoyed. The credit insurers are all looking to reduce risk in our market given the volatility,” says Brown.

“What we will continue to see is reducing credit limits that will force shorter payment terms across the whole market. As an industry, we must be prepared to manage these changes. Short of getting the end user to pre-pay for their print work, there is no way the industry could survive on a COD basis.”

Dysfunctional relationship

The paper-print relationship is simple, at least on the surface. Paper suppliers give printers stock on credit. This credit is covered by insurance firms. The four big firms in Australia providing credit insurance for paper suppliers are QBE, Atradius, Euler Hermes and Coface. When insolvency hits, bad debt rolls up the line from printer to paper supplier to insurer. If the failed company is a major paper user, the exposure can be staggering, especially if the payment terms are extended 

To calculate the potential size of the problem, do a bit of back-of-the-envelope maths. Imagine a major print group turning over $400 million a year. Say paper comprises an average of 30% of the price of a print job. That means $120 million in paper every year, or $10 million a month. Merchants have been telling ProPrint they have worked hard to bring payments back into sensible terms, but for the sake of argument, imagine this major print group is on 90 days. That means at any given time, the merchant would be exposed to the tune of up to $30 million. It is a worst-case scenario, but not beyond the realms of possibility. 

An exposure of that size is enough to give anyone the willies. Major firms like Blue Star, Geon, PMP and IPMG each turn over hundreds of millions of dollars a year, with correspondingly high paper bills, and they rely on healthy credit arrangements with suppliers. 

Compound the volume of paper consumption with the rumours flying around that major insurers are already informing merchants that they will not cover some of the less stable groups and that printers must raise bank guarantees for credit or pay cash on delivery, and the whole credit insurance situation starts to look like a house of cards.

Consider the situation at Blue Star. The company’s future is cloudy as the search for a buyer continues. It is unclear what shape the sale will take or what kind of price the business will fetch. There can be little doubt that the company’s suppliers, especially paper merchants, will be watching the process with keen interest. 

Blue Star chief executive Phillip Bower has acknowledged that insurers are tightening up and that this is having an impact on printers, particularly companies of his size.

“What I have heard is that insurers are concerned about their exposure to the printing industry and they are looking at ways of managing that risk effectively,” Bower says.

“Suppliers are now more mindful of the quantum of outstanding credit they are providing to their customers. The fact is, we are a significant customer. Because of our size, it puts us in a difficult position.”

Andy Preece, general manager of Paperlinx Merchanting Australia, says insurers now are much more likely to be talking directly to their customers’ customers, the printers who buy from
the paper suppliers on credit. 

“Trade credit insurers under their policies have the right to request financials from the client and it is usual for the client and the trade credit insurer to engage directly. Is that happening more? Probably. Does it happen more as you go higher up the tree? Absolutely. We all view the larger levels of debt coming under larger scrutiny,” he says.

An insurer’s perspective

The best way to clarify if this widespread perception about wary insurers is true would be to ask the insurers themselves. Unfortunately they weren’t all willing to be upfront about the situation. QBE, the largest insurer to the printing industry, refused to comment. Euler Hermes
would not return calls. 

David Huey, managing director of Atradius, says insurers are not dumping print, they are just more careful and adjusting policies. He agrees that print, like construction and retail, is in insurers’ bad books.

“I would say paper sits behind construction and retail as areas of concern right now. It’s certainly not number one,” Huey says. “But yes, it’s ailing and cash flows are challenged and digitised economies are making it harder for that industry. It’s something we look at closely.”

But he says Atradius would continue to provide insurance cover for the industry. “We don’t take a punt and say ‘printing is bad so we won’t cover that’ and ‘electronics are dodgy so we won’t cover that’,” he says. 

“We look at the individual buyers. We don’t do blanket things like say we will get out of paper, because there are good manufacturers, there are good suppliers, there are good printers so
we look at the individual buyers.

“We are more wary and we will look more closely at who we will insure but there are good customers in poor industries, just as there are poor ones in good industries. We don’t make an across-the-board judgement based on value or industry. We look at individual companies and there are still some good paper companies out there.”

He says that will come down to determining how much risk the customer will wear. It might also come down to reducing the indemnity the insurer has to pay out in the event of a loss.

“Sometimes it might not necessarily be whether we think there is a problem with their buyer, it’s just that we might have four other customers selling into that buyer and our capacity might be getting a little strained,” he says. “If we can’t cover as it is, we look at the risk share.”

The insurer is now more likely to want to talk to a printer direct. “We will try to get more information. We’ll get the customer to give us contact with the buyer, have a look at the financials and talk to the CFO. Information is life’s blood for us.”

He says Atradius looks at each on a case-by-case basis, and takes into account the customer’s credit management. “We don’t insure someone who trades recklessly.”

What happens if they are not happy with the printer? How should the paper supplier respond?

“We are looking at the finances. We are talking to customers so we come back to them and say we think there is problem, in that we think there is a possibility of failure. They will take that advice because that intelligence and information is life’s blood. That’s available to our customers,” says Huey.

“There are some individual companies where we have told our customers we don’t think you should be supplying because we think there is an issue. Part of what insurance brings is that market intelligence.”

And that’s when the paper supplier has to make a decision. “The customer would have to make a decision whether they want to continue supplying at their own risk. It’s more likely they will have to find another customer because the insurer would only pull that cover if they thought there was a problem. 

“Our customers wouldn’t be dealing with us if they didn’t trust our judgement so the majority of the time, they would start reducing supplies,” says Huey.

‘A lot more scrutiny’

Simon Doggett, managing director of paper supplier KW Doggett, says it is more difficult to get insurance for customers. 

“The behaviour of the insurers is definitely changing. It is harder to retain insurance on companies. It’s harder to get the endorsed limits that you need, there is a lot more scrutiny and the acceptable payment terms, the average days out-standing, is being reduced considerably.

“In some case the insurer will say ‘I’m not prepared to give this customer 60-day terms anymore, it should only be 30 days’. Then we have to get the customer to speak to the insurer and disclose financials or have direct conversations.”

What does that mean for Doggett’s?

“Let’s say I sell one hundred grand of paper to XYZ Printing,’ he says. “I would go to my insurer and say I would like to have $30,000 credit on this customer and I need 60-day terms. In the past the insurer would say: ‘Yes not a problem providing you have done your own credit checks and the trading history stacks up we will endorse one hundred grand on 60-day terms.’ 

“But in the current climate we might have to jump through a few more hoops to get 30 grand. The insurer might also say they want to see financials before they endorse that limit.”

“Also if the printer doesn’t pay on 60 days, say they pay on 70 days in one month, we have an obligation to report through to the insurer where the printer doesn’t comply with the terms. The insurer may come back to us and reduce the cover automatically or he may come back and ask questions.”

And if the insurer refuses to cover that particular job?

“In our case, Doggett’s would have to make a commercial and informed decision that involves us getting closer to the customer and asking the customer to co-operate with us and provide us with enough information to make an informed decision. Anyone who provides credit needs to understand what they’re providing for,” says Simon Doggett.

“We might say to them we need to see your financials to make sure we can support this level of credit or it might go down the path where we say we need a personal guarantee or we might need some security but it’s all about being able to make an informed decision. That means co-operation between the credit provider, being Doggett’s, and credit required, being the printer.”

He says Doggett’s is also encouraging printers to talk directly to the insurers. “We try to encourage the customer to develop a relationship with the insurer where warranted because at the end of the day, we can only tell the insurer what we know from our trading history. More often than not, the ability to gain insurance requires the insurer to have a confidential conversation with the company directly.”

The paper bank

Still, some printers are saying the tougher insurance climate is not such a bad thing for their business.

Peter Orel, the chief executive of Finsbury Green, says: “If there are no credit insurers for the paper and print industry, perhaps the paper merchants will be tougher with their credit policies. For some time, paper merchants have been acting as financiers for a lot of printing companies by having the security of credit insurance. I don’t see that paper merchants should be financiers; that should be something left to the banks.

“Senior executives at paper companies have relied on the credit insurers to make their jobs easier. They say credit insurance is a business requirement, however, this is possibly the easier option rather than self-management, which would require greater management,
but could come at a lower cost.”

Seth Watts, chief executive of printing company New Litho, says insurers are now active stakeholders in the supply chain and need to be looked after. “It’s gone from being a subject that wasn’t being discussed five years ago to being something that is front and centre. Clearly for the paper companies it’s a front-and-centre issue, which is making it front
and centre for us.”

He says insurers pulling back would be a good thing for his business. “It would be fantastic. It’s a moral hazard issue. Essentially, the paper supplier has a justification to prop up weaker players when they have insurance. It’s not good for me to have the weaker players propped up. If the paper companies had to make difficult and direct credit decisions, it would be a good thing for the industry.”

But some printers see it all as a way of insurers to extract more money from the industry.

David Fuller, managing director of Focus Press, says the statistics about insolvencies are misleading because printers are lumped in the same category as publishers. The insurers, he says, are using that.

“They are talking to a sector where they have a monopoly, so they can make the statistics look bad, they can make the risk look high and they can charge a lot,” Fuller says. “These guys are coming from a very strong position.” 

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