1 2012 Economic Challenges & Credit Risk Mitigation Damion Walker, EVP, Willis Financial Solutions

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2012 Economic Challenges & 2012 Economic Challenges & Credit Risk Mitigation Credit Risk Mitigation

Damion Walker, EVP, Willis Financial SolutionsDamion Walker, EVP, Willis Financial Solutions

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The AgendaThe Agenda

• Key Economic Client Concerns for 2012

• Introduction to Credit Insurance

• Underwriting - How Its Done

• Current Market Conditions

• Q & A

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Key Client Concerns for 2012Key Client Concerns for 2012

Global

•Consumer demand drops due to fiscal policy tightening in the US

•Currency fluctuation due to push for exports

• Upward pressure on the dollar already hurting export growth

•The “Break-Up” – Eurozone

•US & European banking sector faces tightening credit conditions

•Global rising risk of strikes and civil disturbances

•Tightening bank capital due to Basel III:

• The current 20% risk-based capital requirement for Trade Finance Lending under Basel II will now be 100% under Basel III

• European banks twice as leveraged as US banks

Source: S&P, Chartis

Corporate Credit Defaults Inversely Correlated to the Economy

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Western & Eastern Europe•Austerity measures create a prolonged period of economic uncertainty in the region

•PIIGS + France are affected by recent ratings downgrades

•Consumer demand weakening further especially in IT and Pharmaceuticals sectors

•Russia (Putin’s election), Turkey (Risky funding of deficit). Hungary (At odds with IMF/EU), Ukraine – (IMF/Russia help)

Asia

•Asia’s (especially China’s) construction boom causing bubble concerns

•North Korea and Kim Jong-Un causing tension with South Korea

•Contracting economy limiting recovery in Japan, another natural disaster

•Indonesia still viewed as corrupt, expropriations by the government continue

•Political instability (Yellow vs. Red) in Thailand

•In Vietnam poor fiscal policy creating inflation and currency instability

Source: EIU, Chartis

Real GDP will Remain Below Trend

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Middle East & Africa

•Political Instability and the price of oil are key concerns

• Possible regional conflict and/or oil crisis as US/EU and Arab Sanctions against Iran

•Sub-Saharan African commodities spurs economic growth but there are ongoing risks of uprisings, coups, and terrorist attacks (Nigeria at risk - Oil).

•Threat of civil war in Syria and Yemen

LATAM

•Argentina – Inflation, currency controls

•Latin America is exposer to a commodities bubble (Chile, Peru, Brazil)

•Unsafe business environment due to increased drug trafficking in Mexico, now spilling over into Central America

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What is Trade Credit Insurance?What is Trade Credit Insurance?

Protection for a company’s commercial accounts receivable (Foreign and/or Domestic) risk against NON-PAYMENT for goods shipped on unsecured credit terms. Covered perils:

Insolvency• For the United States: Chapter

7, 11 Filing

• Foreign bankruptcy per country of buyer’s domicile

Protracted Default• Simple non-payment, usually

verified by third party

• Continued delinquency / non-payment

Political Risk• Confiscation, Expropriation,

Nationalization

• Currency Inconvertibility / Transfer Risk

• Political Violence

• Contract Frustration

• Wrongful calling of on-demand bonds

• Trade Disruption

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Why Purchase Trade Credit Insurance?Why Purchase Trade Credit Insurance?

Top reasons for purchasing Trade Credit and/or Political Risk Insurance:

• Expand sales domestic/export to new and existing customers• Balance sheet protection / stabilize cash flow• Concerns about economic & political changes• Concerned about customer concentration• Obtain attractive bank financing or borrow against trade receivables• Interested in replacing letters of credit (L/C’s)• Reduce bad debt reserves• Supplement credit risk management

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Alternative Credit Protection Alternative Credit Protection

Accounts Receivable Purchase Contracts - “Put Options”

• Bilateral contract which gives the holder the right to sell receivables to the investment bank upon the insolvency of a debtor

• No retention options

• Typically used for distressed buyer concerns but can be used for all risk

• Offered by investment banks and hedge funds

• Offering Banks : JPMorgan Chase and Wells Fargo

• Normally costs 0.50%-3.00% per month on notional value (Limit)

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U.S. Insurer CharacteristicsU.S. Insurer Characteristics

InsurerS & P Rating

Non-Cancelable

Credit Limits

Cancelable Credit Limits

Domestic Sales

Export SalesLarge

Discretionary Credit Limits

Large Global Buyer Database

Prefer The Insured Have An

Established Credit Department

ATRADIUS A-

COFACE A-

EULER HERMES AA-

ACE AA- CHARTIS A

FCIA (GREATAMERICAN)

A+ HCC AA QBE A+

ZURICH AA-

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Willis US Claims 2009 to 2011Willis US Claims 2009 to 2011

Willis Financial Solutions Summary 2009

Number of Claims: 135 Total Claim Value: $18,100,000 Largest Claim: $4,000,000 Average Claim Value: $137,100


Number of Claims: 324 Total Claim Value: $196,000,000Largest Claim: $8,000,000Average Claim Value: $605,000




Number of Claims: 135 Total Claim Value: $18,100,000 Largest Claim: $4,000,000 Average Claim Value: $137,100





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Who is Purchasing: Clients by SectorWho is Purchasing: Clients by Sector

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Macro-Economists

Country RiskAnalysts

Credit Analysts (local)

Trade SectorAnalysts

Buyer Grade

1 2 3 4 5 6 7 8 9 10

Cou

ntry G

rad

e

AA

A

BB

B

C

D

Increasing Risk

Carrier Risk Approach – Euler Hermes ExampleCarrier Risk Approach – Euler Hermes Example

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Euler Hermes - World Risk Map 2012Euler Hermes - World Risk Map 2012

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Cost of Credit InsuranceCost of Credit Insurance

Primary Price Drivers:

• Total sales insured

• Geographic location of buyer portfolio

• Average four year loss history

• Credit quality of the buyer portfolio or key buyers

• Insured industry sector risk

• Customer concentration

• Country risk

• Payment terms

• Economic Conditions

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Current Market ConditionsCurrent Market Conditions

• Insurers’ ratings have stabilized, improving

• Trade Credit insurance rates and retention levels are extremely soft

• Overall market capacity has grown substantially due to new entrants

• Claims volume and collection actions starting to slow domestically; once again picking up in Europe and Asia (Since Q4 - 2011)

• Payment plan requests more frequent – carriers are supportive

• Coverage on distressed credit via A/R Purchase Agreements increasingly popular due to dropping cost levels (SEARS)

• Euler Hermes driving market conditions - pricing & growth

• Many new-to-market multinationals considering coverage

• Buyers market

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Damion WalkerExecutive Vice President

Willis Financial Solutions18101 Von Karman Ave. 6th floor

Irvine, CA 92612Tel: +01 949 930 1771

[email protected]

Thank You!Thank You!

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DISCLAIMER The statements provided herein are based solely on the opinions of Willis and are being provided for general information purposes only. Neither the information nor any opinion expressed constitutes an offer or a solicitation to buy or sell any securities or other financial instruments. Any opinions provided herein should not be relied upon for investment decisions and may differ from those of other departments or divisions of Willis Group Holding PLC (“Willis”) or its affiliates. Certain information may be based on information received from sources Willis considers reliable; however, the accuracy and completeness of such information cannot be guaranteed. Certain statements contained herein may constitute “projections,” “forecasts” and other “forward-looking statements” which do not reflect actual results and are based primarily upon applying retroactively a hypothetical set of assumptions to certain historical financial information. Any opinions, projections, forecasts and forward-looking statements presented herein reflect the judgment of Willis only as of the date of this document and are subject to change without notice. Willis has no obligation to provide updates or changes to these opinions, projections, forecasts and forward-looking statements. Willis is not soliciting or recommending any action based on any information in this document.

Documents

1 2012 Economic Challenges & Credit Risk Mitigation Damion Walker, EVP, Willis Financial Solutions