Accounting Standards and Business Models: a Two-way RelationshipPrague, 13 September 2007

Raoul Ascari, Chief Operating Officer

EXPORT CREDIT INSURANCE (ECI) FOR THE MEDIUM LONG TERM: A FEW FACTS

• ECI is still – everywhere – a State-backed business. However the business model can greatly differ: - private companies running a program on behalf of the State; - State companies running an independent business; - State agencies / departments.

• The ECI Medium Long Term business, by any model, is carried out within a specific mandate and under the supervision of a National Guardian. The mandate can be: - narrowly defined (national export) or - ample in scope (national interest).

• The business presents all features of a private insurance business, plus some that are not so typical:

- liabilities are contingent on some (probabilistic / uncertain) events; but - risks are not always insurable, based at least on market definitions,

- revenues are cashed well before expenditures occur; but - financial assets are not always actively managed.

MOVING FROM ONE MODEL TO ANOTHER. WHAT CHANGES?

A business run on State account is essentially a “cash business” although some “notional items” can be introduced (e.g. the return on “notional capital”);

An own-account business is based on “accruals” and accepted accounting insurance standards (e.g. IFRS, GAP);

As the ECI business presents some peculiarities and is supported by the State (usually by means of a counter-guarantee), accounting may show some deviations from standards;

Accounting drives policy changes. In turn, policy changes carry the need for ever better accounting methods.

HOW ACCOUNTING STANDARDS DRIVE POLICY CHANGES (1)

(A) Reserve policy

None. Claims are paid through the State Budget and losses are recognized as they occur.

Expected losses are estimated ex-ante and covered through “unearned premia”. Net annual income must be adequate to top-in reserves when risks in the portfolio worsen.

None. Unexpected losses are diversified within the State Budget

The OECD Minimum Premium policy aims at break-even

None.

The pricing policy must cover expected losses, remunerate economic capital and cover ad costs. Models may differ but tend to be “price – to – risk”, based on market spreads. If pricing is correct, the business should generate a positive ROE.

A positive ROE requires a dividend policy that balances between remunerating the shareholder and generating new resources for growth.

Before

(B) Economic capital policy

(A+B) Pricing policy

Dividend policy

After

Economic capital must be adequate to cover potential unexpected losses an to allow for the growth of the business.

HOW ACCOUNT STANDARDS BRING ABOUT POLICY CHANGES (2)

(A) Investment policy

Before

None. It’s a cash business

After

A Treasury / Investment dept is needed to mange financial assets embedded in reserves and economic capital. This activity can be a major source of income.

An effective risk management policy frees economic capital for growth. New tools are needed: options, swaps, etc.

Limited. Mostly at the time of underwriting.

Mostly in underwriting.

(B) Risk management policy

(A+B) Key staff in the company

New key staff include CFO, Treasury / Investment Manager, Risk Manager.

HOW ACCOUNTING STANDARDS BRING ABOUT POLICY CHANGES (3)

Reserve and capital optimization require better portfolio diversification achieved also through:

- new products and services - new markets and clients - a better market reach (domestic and international)

A ROE goal requires exploiting all value-creating activities: - improve claims recoveries (e.g. outside Paris Club) - use all available resources efficiently - strive for customer satisfaction

A financially sound company can expand its activities without relying on Budget support. A change in the scope of the company, in line with today’s global environment, should meet less preoccupation from private players and national / supernational authorities (e.g. State aid issues).

This, in turn, requires even stricter accounting rules that promote: - transparency - accountability - solvency

Achieved through: - audited accounts - independent rating

SOME PRELIMINARY CONCLUSIONS

Greater room for cooperation among ECAs:

risk management: swaps; re insurance; etc.

claims recoveries: outside the Paris Club.

Greater room for (un) level playing field:

OECD MPR vs price-to-risk

approach to pricing in industrialized countries

A CASE STUDY: SACE S.p.A. BALANCE SHEET (in euro million)

Assets FY06 FY05

Fixed Assets 3,2 4,6

Cash and Cash-Equivalents (4) 9.852,9 5,708,0

Receivables (Paris Club Debt) 1.828,6 5.999,5

Other Assets (5) 25,9 32,3

Total Assets 11.710,6 11.744,4

Liabilities & Equity FY06 FY05

Equity 8.868,8 8,671,8

Technical Reserves (1) 2.253,3 1.938,4

Other Provisions (2) 119,9 83,2

Current Liabilities (3) 468,6 1.051,0

Total Liabilities and Equity 11.710,6 11.744,4

(1) Against expected losses

(2) Other liabilities (e.g. litigation)

(3) Debt vis–a-vis policyholders

(4) Investments

(5) For reinsurance purposes

Memo item

Contingent Liabilities 21.000 17.000

(Capital only)

SACE S.p.A. PROFIT & LOSS (in euro million)

Profit & Loss account FY06 FY05

Premia Written 175,4 175,2

Claims Paid, net of Recoveries (1) 328,4 217,5

Other Income (Charges) (2) 297,2 533,8

Change in Technical Reserves (310,1) (105,8)

Extraordinary Income (Charges) 0,3 16,3

Income before Taxes 491,2 837,0

Taxes (3) 73,9 (135,7)

Net Income 565,1 701,3

(1) Recoveries > claims

(2) Financial income, Paris Club debt interests, etc

(3) Per 2006 positive due to deferred taxes for previous fiscal losses

CONTACTS

Torinoc/o ICE - Via Bogino 13 - 10100 • TorinoTel. +39 011 836128 - Fax +39 011 836425

Venice-MestreViale Ancona 26 - 30172 • Venezia - MestreTel. +39 041 2905111 - Fax +39 041 2905103

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