Willis Financial Solutions Introduction to Credit Silicon Valley

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					2012 Economic Challenges &
   Credit Risk Mitigation

  Damion Walker, EVP, Willis Financial Solutions




                                                   1
The Agenda


  • Key Economic Client Concerns for 2012

  • Introduction to Credit Insurance

  • Underwriting - How Its Done

  • Current Market Conditions

  • Q &A




                                            2
Key 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               Corporate Credit Defaults Inversely Correlated to the Economy
     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

                                                                                                              3
Key Client Concerns for 2012
                                                              Real GDP will Remain Below Trend
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)
                                                                     Source: EIU, Chartis

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


                                                                                                 4
Key Client Concerns for 2012

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

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

                                                                                          5
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                   Protracted Default                     Political Risk
•   For the United States:        •   Simple non-payment, usually    •   Confiscation, Expropriation,
    Chapter 7, 11 Filing              verified by third party            Nationalization

•   Foreign bankruptcy per        •   Continued delinquency / non-   •   Currency Inconvertibility /
    country of buyer’s domicile       payment                            Transfer Risk

                                                                     •   Political Violence

                                                                     •   Contract Frustration

                                                                     •   Wrongful calling of on-
                                                                         demand bonds
                                                                     •   Trade Disruption




                                                                                                        6
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



                                                                            7
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)




                                                                                    8
 U.S. Insurer Characteristics

                              Non-                                                     Large                    Prefer The Insured
                  S&P                     Cancelable     Domestic                                 Large Global
    Insurer                 Cancelable                              Export Sales   Discretionary                Have An Established
                  Rating                 Credit Limits    Sales                                  Buyer Database
                           Credit Limits                                           Credit Limits                Credit Department


   ATRADIUS         A-                                                                            
    COFACE          A-                                                                             
 EULER HERMES      AA-                                                                             
     ACE           AA-                                                                                              
    CHARTIS         A                                                                                               
      FCIA
(GREATAMERICAN)
                   A+                                                                                              
     HCC           AA                                                                                               
     QBE           A+                                                                                               
    ZURICH         AA-                                                                                             


                                                                                                                                  9
Willis 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

              Willis Financial Solutions Summary 2010
             Number of Claims:          324
             Total Claim Value:         $196,000,000
             Largest Claim:             $8,000,000
             Average Claim Value:       $605,000

              Willis Financial Solutions Summary 2011
             Number of Claims:          176
             Total Claim Value:         $94,000,000
             Largest Claim:             $4,000,000
             Average Claim Value:       $534,000



                                                        10
Who is Purchasing: Clients by Sector




                                       11
Carrier Risk Approach – Euler Hermes Example



 Macro-
Economists                                            Credit Analysts (local)

               Trade Sector
                 Analysts

                                                              Buyer Grade
                                              1   2   3   4     5    6      7   8   9   10

Country Risk                             AA
                                         A
                         Country Grade




  Analysts
                                         BB
                                         B
                                         C
                                         D


                                                                                        12
Euler Hermes - World Risk Map 2012




                                     13
Cost 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



                                                          14
  Current 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



                                                                              15
Thank You!
    Damion Walker
Executive Vice President
    Willis Financial Solutions
 18101 Von Karman Ave. 6th floor
        Irvine, CA 92612
     Tel: +01 949 930 1771
   Damion.Walker@Willis.com




                                   16
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.



                                                                                                                                                                       17

				
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