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Alix McCabe: It is no secret, businesses are facing a huge variety of challenges these days.


Teresa Matney: We've had a lot of layoffs over the past year, year and a half.


Steve Georgetti: What we do see is a lot of uncertainty economically. Bankruptcies are on the rise.


Matt Cobo: We've got issues with limited skill labor available, it's higher costs for borrowing, higher costs for that labor.


Alix McCabe: From inflation and interest rates to supply chain issues, labor strife, and the tug of war over remote work, there's a lot for companies to keep an eye on and taken together, those dangers certainly warrant a spot on ...


Audience: Wheel of Risk!


Alix McCabe: Hi, and welcome to Wheel of Risk, proudly presented by Allianz Trade. I'm your host, Alix McCabe. On every episode, we spin the wheel, land on a new worry, and then tackle it head on by bringing you expert insights and advice to help you keep your business solvent, secure and well ahead of the competition. We have an extra special show for you today. First off, I'd like to welcome back a familiar voice from season one of the podcast. Steve Georgetti is Director of Risk Underwriting for the Americas at Allianz Trade. Hello, Steve, nice to see you again.


Steve Georgetti: Hey, Alix. Good to be back.


Alix McCabe: So listen, I hope you have not been skipping arm day at the gym, Steve. Because it's time to spin the wheel.


Steve Georgetti: I don't skip. I'm ready to spin the wheel. Let's do it.


Alix McCabe: Let's go for it.


Steve Georgetti: Okay, here we go. Ready?


Alix McCabe: Oh man. You've landed on spot the hazards.


Steve Georgetti: Oh boy.


Alix McCabe: That is a tough topic to tackle alone, so I think you're going to need some backup.


Steve Georgetti: No problem. I know exactly who to bring in. Hey Teresa. Matt, I'm going to need you to come down to the Wheel of Risk set now.


Matt Cobo: Right now? Okay.


Teresa Matney: Yeah, you bet. No problem. Phew. Okay, we made it.


Matt Cobo: We're here. We're here.


Steve Georgetti: Thank God. Alix, please allow me to introduce two members of my risk team,

Teresa Matney and Matt Cobo.


Alix McCabe: Hi Teresa. Hi Matt. Welcome to the podcast.


Teresa Matney: Hey Alix. Happy to be here.


Matt Cobo: Great to be here.


Alix McCabe: This is fantastic. It's our first ever round table discussion. Never done before on Wheel of Risk, so let's get into it. Remember way back when the pandemic first started and everyone thought, well, at least things can't get any worse. Well, little did we know that was only the start of a multi- year rollercoaster ride, affecting businesses in almost every sector of the economy, but there's no doubt certain industries have been more disrupted than others. Let's kick off our discussion today by looking at what we're broadly going to describe as the tech sector. So Steve, which sub- sectors or business areas should we focus on in your view?


Steve Georgetti: So at Allianz Trade, the tech sector is widely described, we split it between what we consider high- tech and services, so some things included could be financial services, IT distribution, and even a little bit of travel, hospitality and entertainment to name a few.


Alix McCabe: Okay. So Teresa, which of those should we zero in on today?


Teresa Matney: I think there's some bits and pieces to highlight with each of them, and I'd possibly even want to talk briefly about consumer electronics. It's just such a big important piece to the sector overall.


Alix McCabe: Okay, so let's get that in there. Where does the risk lie in this sector and in the specific business areas that you and Steve just mentioned?


Teresa Matney: Yeah, Steve did bring up quite a few issues across this sector. So just to kind of focus in on a few things, the biggest thing I'd want to mention is tech layoffs. We've had a lot of layoffs over the past year, year and a half, companies, very big companies and smaller companies. And this is something that it's probably not over yet. There's a lot of indications that these companies are giving off that these types of actions are going to continue. So there was such a hiring frenzy during the pandemic to keep up with demand and now companies have to rightsize their workforce, which is really important for them going forward, especially to remain profitable.


Alix McCabe: It makes sense.


Teresa Matney: Another thing that was brought up, the entertainment sector. Not so long ago we saw the end come to the writer's strike, which caused just a lot of turmoil in the sector and it has some aftermath. I mean, there was a lot of people laid off for a long time. We'll see how this impacts things going forward. They'll take time to build back from that strike that they had experienced for a much longer time than I think anyone anticipated.


Alix McCabe: That did go on for a long time.


Teresa Matney: And then another issue, Alix, I'd be remiss if I didn't say financial services and experience back towards the beginning of the year with the collapse of Silicon Valley Bank. And this was something that we definitely, I would say came through a little bit unscathed. It could have been a lot worse, but what's important to note for business owners and the like is that given that collapse, we've got a lot of lenders out there now and venture capitalists that are going to be really nervous about taking on risk and lending money. So access to funds for companies is just not as easy as it used to be. There's a lot more scrutiny in that sector.


Steve Georgetti: To piggyback on that one in particular, the Silicon Valley Bank collapse. When it happened, us here at Allianz Trade, highly concerned about the contagion impact that could have created in the broader economy, the collapse of the regional banks. As Teresa mentioned, it did not pan out that way, but that could have proven to be absolutely catastrophic to the economy.


Alix McCabe: Yeah, agreed. SVB is actually a topic that we dig in on a different episode of Wheel of Risk. So a little plug there. Season two, episode one is actually about the collapse of SVB. What else, Teresa? Anything else to add?


Teresa Matney: Yeah, as I mentioned, I think consumer electronics sector, it is just such a big piece of this industry and I think what's important really to kind of highlight there is that the growth rate has dropped pretty significantly the past year. But it's important to know, we have to keep in mind that that massive growth that companies thrived on during the pandemic, that just wasn't something that was sustainable. So it's not any surprise that it has dropped. I will say that sector's pretty known for stability and consistency, but now companies really have to focus on remaining profitable during very challenging times that we're in. They've got to deal with constant innovation and change, what consumer preferences are and that results in them having to constantly shift focus and try to meet demands. And consumer spending is definitely slowing with all the economic uncertainties in the high interest rate environment.


Alix McCabe: So what are the key indicators in the tech sector, Teresa? And what's your current outlook?


Teresa Matney: Overall, the outlook is still fairly good in the sector, and I say that because there's always going to be a demand. It's expected to continue, when you think of things like artificial intelligence, the internet of things, the cloud. So it's very essential across practically all sectors. It's a major backbone to the economy. So that said, as we've just kind of talked about, the sector also comes with no shortage of issues. We are going to have to pay particular attention for the ability for companies to support their growth through being innovative and to try to stay competitive. How are companies going to do this with a slowdown in the economy? There's cost- cutting measures left and right, they're trying to find efficiencies to help grow the revenues and remain profitable at the same time.


Steve Georgetti: Yeah, I mean when we were going through a review of all the major companies during the pandemic and shortly thereafter, clearly this sector, especially IT distribution, consumer electronics, the real indicator was the growth rate. You had a huge demand, especially on consumer electronics, on IT equipment. So the key indicator at that time really was the growth. Now it's profitability. Even despite slowing growth rates, companies have an extreme challenge to remain profitable because that same dollar of sales they generated before is now even more compressed because interest rates are two, sometimes three times higher than they were two, three years ago. So really that's what we're looking at focusing on now is how profitable companies are and what type of cashflow they're generating as a result.


Alix McCabe: Makes sense. So then building on that, Teresa, what are the red flags you are looking for that could indicate trouble or ongoing uncertainty looking forward?


Teresa Matney: Honestly, Alix, we could dedicate a whole podcast to talking about red flags.


Alix McCabe: Let's do it.


Teresa Matney: What are all the things we look at, the metrics, all the risks that we monitor, but we really want to pay close attention to some things like maybe supply chain disruptions. A lot of these companies as we've moved through the pandemic and having shortages, and then all of a sudden there's a excess of inventories that they're having to move. So we have to pay attention if there's a need for discounting for companies to try to shed off inventory and keep their margins intact and remain profitable. On top of that, I'd say very highly important to pay attention to the balance sheet of the companies. We're looking at the debt load carried and the company's ability to refinance, especially with the interest rate environment that we're in today, it's also important to watch for trends within their specific lines of business, and the company's ability to be innovative and try to differentiate themselves to remain competitive going forward.


Alix McCabe: So in your view, in light of all of this, how can working with Allianz Trade support companies that do business with or in the tech sector?


Teresa Matney: I mean we are here to provide companies with the knowledge that they need to help support their ongoing business decisions and ultimately protect their business from bad debt. And by doing that, that's going to help a company identify and manage the risk. And then at the end of the day, hopefully strengthen the resiliency of the company all while enhancing working capital and accelerating growth.


Steve Georgetti: To follow up on that, I mean one of the biggest assets as a company we have is the global purview on corporate performance, on the political environment, on a global basis. And I think today here we're talking about the US tech sector, but the tech sector is really global in nature. So the ability for us as an insurance company to have a view of sectors in, for instance, China, especially consumer electronics, a lot of the inputs are coming from China. So what does the business environment look like there and in other markets around the world, what past due trends are we seeing from companies?

We provide all that information to our clients. It's much more than just a myopic view of one environment, one sector. We provide that global view.


Alix McCabe: Let's move on to part two of today's round table looking at the manufacturing sector. So as we did with tech, we're going to lump a bunch of business areas together. So Steve, what is on your list for this?


Steve Georgetti: Like tech, manufacturing as the name suggests, I mean everything is manufactured effectively. So within this sector are things such as airlines, automotive manufacturing, construction, whether it's residential or commercial, just to name a few.


Teresa Matney: Okay.


Matt Cobo: I'd actually add two more interesting areas. One, construction, of course, but specifically specialty contractors within construction, and automotive transport, for example, logistics.


Teresa Matney: Let's throw those into the mix. So Matt, same question to kick things off with you, where does the risk lie in this sector and in the specific business areas that we're going to focus on today?


Matt Cobo: Sure. Well, for me it all starts with looking at the claims and collections, slow payment trends, things like that. And specific to the construction industry, we've got issues with limited skill labor, available as higher cost for borrowing, higher costs for that labor. And there's just a real big difficulty balancing those investments and all that really ends up leading to higher rate of payment defaults, and it's a really difficult mix and that's what we've got here. So when you look at the numbers for construction specifically specialty contractors, our claims are way up year to date, actually more than double, and until very recently, even past dues were way up as well. So it kind of makes sense that what's going on in that market is what we're seeing in our claims and collections.

On the other side, another pocket of trouble I'd have to say is transportation services, specifically some of those smaller logistics companies. Now here, the story is much the same. You have higher claims activity by dollar volume, that's up substantially year to date and the number of claims as well. So there's a lot of small ones out there too, we call frequency claims.

Here, we think it's a bit of a reaction to the sudden declines in the shipments, particularly due to retailers that may have overstocked in previous quarters and now they've pulled back on those orders as consumer spending starts to come down a bit, and that's really cut into their earnings and liquidity. The good news here though is that it looks like our forward- looking indicators' past two reports have come down a bit and hopefully those declines will continue because I think what we're seeing here is just companies adapting to these new realities, to these new levels of demand.


Alix McCabe: Matt, what have been some lessons learned over the past few years regarding businesses that operate in manufacturing? And how maybe has the risk picture shifted?


Matt Cobo: Well, I think simply put, some companies are better than others at being proactive versus reactive. We see time and time again, companies making investments in technology when it's too late, and really what that ends up doing is forcing catch up investments, which is not a great way to do business. But really no matter what in the end, it's all about the financial statements. They don't lie. Strong capital structures, competent leadership always wins the day and you can't go into a review of a company without being very specific to everything they're going through. So you can't necessarily broad brush everything just because they're in a particular sector. There's always winners and losers.


Steve Georgetti: To add to that, two of the major headline sectors that we follow are always automotive and aviation, the airlines. And during the pandemic, I mean especially the airlines, these are companies that receive billions upon billions of dollars effectively being saved from potential bankruptcy. If you look at the performance of them today, most are doing extremely well, so very resilient. On the same side of that, let's look back to the major automotive manufacturers. Everyone remembers how much used car vehicles went up, how you couldn't drive past a parking lot for a Ford or GM or Chevy dealership, they were bare. Drive past them today, the lots are full, production is back. The major headlines regarding remember semiconductors, no one could get their hand on a semiconductor. Now the lots are full, cars are being sold again, you're seeing prices normalize. Again, speaking to the resiliency within those sectors.


Matt Cobo: Just to say a little more to that, especially with automotive internally, we've seen real significant jumps in demand for us to support trade within those automotive sectors. So it's just all kind of playing out the way Steve described it.


Alix McCabe: So Matt, what's your current outlook? And maybe you can touch on key indicators that you're following.


Matt Cobo: Well, to be as concise as possible, stable with pockets of negativity. I mean I guess it's always like that. But while we're definitely better off than we were a few years ago, there's still some areas that are struggling. We're following the impacts of higher borrowing costs and inflation, and we think that's going to continue being an important issue now and into 2024. So it definitely clouds things a bit. No matter what sector you're in, you're always looking at balance sheet health, cashflow, gross margins, profitability, et cetera. But in construction, you have things like backlogs and that's always a good indicator. Even beyond that, the other thing we've learned over the years is that each sub- sector has their own niche and we have to underwrite in a unique way because not all sectors are the same. Each one has their own special conditions.


Alix McCabe: What would you say are maybe the warning signs you're looking for that could indicate rocky waters or uncertainty looking forward? Steve?


Steve Georgetti: Broadly speaking, when I look at the manufacturing sector, Matt didn't mention it, but the big index that I look at to gauge the health of the sector is the ISM Manufacturing Index. And generally speaking, anything below 50 indicates that manufacturing is in a recession and most recent data indicates that we're at 47. 6. While it's increasing slightly, what that still shows is that there are still very much pockets of uncertainty, of contraction, whether it's from a financial perspective or maybe at a sector overall. But I really look at that index as the key indicator to gauge the health of the manufacturing sector.


Alix McCabe: So Matt, how can working with Allianz Trade offer protections for companies that conduct business in or with the manufacturing sector?


Matt Cobo: Well, I think it boils down to the fact that we have a terrific information and underwriting team. We have access to many private companies, much of it based on meaningful dialogues in addition to confidential figures that are shared with us. And these are companies that we've spent decades literally building relationships, cultivating contact with. So that makes us really unique and enables us to acquire vital confidential information that just isn't available elsewhere, and that's what we use to help support a lot of our decisions.

Lastly, I can't emphasize this enough, but we've been doing this for over 100 years as an organization, and we've seen and learned quite a lot, specifically from at least in recent history, between the Great Recession and now this post pandemic reality. There's things that we've learned and lessons that we've applied that we've used to help shape our risk mitigation, and I think that just makes us an ideal risk partner.


Alix McCabe: Thanks for that, Matt. So this has been a great discussion, but sadly that music we're hearing means it is time to wrap things up. But before we roll the credits, I'd like to give each of you a chance to share a piece of maybe parting wisdom with our listeners. So Teresa, I'm going to go to you first. What is the number one hazard for business owners right now in your mind?


Teresa Matney: I guess my parting wisdom would be to really take time to always look beyond the surface of the companies that they're doing business with. Don't just assume because you're getting paid fine, maybe it's been that way for years, that's not as far as you need to go. You need to pay greater attention because there's just so many things that can impact a business and ultimately their financial health. So it's really important to be proactive. Take the time to dig a bit deeper and look beyond just the simple business transaction.


Alix McCabe: Okay, thanks, Teresa. Matt, same question.


Matt Cobo: I'd have to emphasize looking out for anyone who's being complacent and if they have a failure to adapt. In the manufacturing industry especially, there's lots of innovations and there's lots of big players, and what they have is self- sustaining models that carries them through the hard times that when things are good, they take off. So we think the roller coaster is going to continue and as a company, you've got to continue to be resilient and ready to make those changes need to make to be successful ultimately.


Alix McCabe: Thanks, Matt. Okay, Steve, bring us home here. What do you want business owners to take away from this conversation?


Steve Georgetti: Yeah, I mean, we spoke about a lot today, but I think if we step back from all of it, what we do see is a lot of uncertainty economically. Bankruptcies are on the rise. We're projecting plus 47% increase this year, another 22% increase in '24, and we're not seeing a contraction till 2025. That's a really good reason to continue to partner with a company like us.

Matt talked about the relationships that we have, not only with buyers, but also our clients, and all of that information can come through on an economic basis, it could be on a sector basis or a specific company that you're doing business with or looking to do business with. So all good reasons to partner with a company like us.


Alix McCabe: Thanks, Steve. Guys, this has been super informative. Many thanks to each of you for being on the show and for sharing your insights with us.


Matt Cobo: My pleasure.


Steve Georgetti: Thanks, Alix. Appreciate the time.


Teresa Matney: Thanks, Alix.


Alix McCabe: My guests for this round table discussion have been my colleagues, Steve Georgetti, Teresa Matney, and Matt Cobo.

I'm Alix McCabe and this is Wheel of Risk, brought to you by Allianz Trade. Thank you so very much for listening. If you learned something, which we hope you did, we'd appreciate it if you'd leave us a positive review. I'd also love to connect with you on social media. You can find myself, Steve, Teresa, and Matt, all on LinkedIn, so look for us there. Thanks, and talk to you soon.