Presented to NACM Gateway Region by Mark Regenhardt September 18, 2007 Credit Insurance: Valuable Tool for Domestic & International Credit Management Presented to NACM Gateway Region by Mark Regenhardt September 18, 2007 Political Risk, Credit Insurance, and Trade Finance Solutions

Agenda Recent Industry Trends Types of Credit Insurance Distribution Channels Sample Policy Structures Claims Process & Recoveries Cost Benefit Analysis Open Account Customer Financing Medium-term Insurance & Political Risk Q & A Political Risk, Credit Insurance, and Trade Finance Solutions

Recent Industry Trends Very soft market Concern over tightening in credit High demand in certain industries Low claims Several new players Consolidation Over Insurers selling information Select risk is possible Growth in global policies Political Risk, Credit Insurance, and Trade Finance Solutions

What Does Credit Insurance Cover? Non-payment of trade obligations for political or commercial reasons: Political Risks (foreign transactions): Government acts/political events that restrict payment Currency inconvertibility (aka, transfer risk) War, riot, insurrection or civil disorder Embargo Terrorism Commercial Risks (foreign and domestic) Commercial bankruptcy or legally protected reorganization Protracted default (aka, slow pay) Exclusions include disputes Political Risk, Credit Insurance, and Trade Finance Solutions

Why Use Credit Insurance? Risk mitigation Increase sales via open account Facilitate financing or sale of A/R Access insurers information/database Reduce collection expenses Standardize credit decision process Political Risk, Credit Insurance, and Trade Finance Solutions

Credit Alternatives Vs. Risk CUSTOMER DESIRE REPAYMENT RISK High High Insured O/A Low Low CIA Letter of Credit Documentary Collection Open Account Political Risk, Credit Insurance, and Trade Finance Solutions

Types of Credit Insurance Short-Term Credit Insurance Export & domestic coverage covering non-payment of A/R Single and multi-buyer programs Supports up to one year repayment terms Medium-Term Credit Insurance Facilitates LIBOR-based equipment and project financing for foreign obligors Supports up to 1 to 5 year repayment terms Political Risk, Credit Insurance, and Trade Finance Solutions

North America: Short-term Credit Insurers Political Risk, Credit Insurance, and Trade Finance Solutions

North America: Medium-term Credit Insurers Political Risk, Credit Insurance, and Trade Finance Solutions

Credit Insurance Distribution Channels Captive Sales Agents (Euler, Atradius & Coface) Generalist Brokers Specialist Brokers Political Risk, Credit Insurance, and Trade Finance Solutions

Credit Insurance Policy Types Single Buyer (Export and Domestic) Short Term: Supports up to 1 year repayment terms Medium Term: 1 to 5 year terms Long Term: 5 to 7 years Banks or corporations can be the insured (policy holder) Multi-Buyer (Export and Domestic) Whole-Turnover Key Account (ex. Top 20 Buyers) Select Risk (ex. Latin America Only) Usually short-term cover but medium-term multi-buyer cover is possible Political Risk, Credit Insurance, and Trade Finance Solutions

Multi-Buyer Credit Insurance Styles of Underwriting Excess-of-Loss Policies with deductibles and discretionary authority Insured continues to make own credit decisions for most buyers American Style Underwriting Insurers include AIG, FCIA, Ex-Im Bank, HCC, QBE, ACE Ground-Up: Policies with low or zero deductibles and low or zero discretionary authority Insurance company makes most or all credit decisions European Style Underwriting Insurers include Atradius, Coface, and Euler Political Risk, Credit Insurance, and Trade Finance Solutions

Common Credit Insurance Parameters Policy Limit of Liability Deductible Indemnity (inverse of co-insurance) Premium Rates (Sales or Limits Based) Minimum Premium Credit Limits Non-Qualifying Loss Political Risk, Credit Insurance, and Trade Finance Solutions

Short-term Multi-buyer Key Account Policy Limit of Liability (LOL): $30,000,000 Indemnity: 90% Deductible: None Largest Buyer Limit: $30,000,000 Transaction Tenors: 30 – 120 days O/A Insurers: Two – Syndicated 50/50 Waiting Period: 90 days Countries: Peru, Mexico, Italy, U.S. & Canada No. of Buyers: 10 Premium rate: $0.065 per $100 Also mention syndication capability Political Risk, Credit Insurance, and Trade Finance Solutions

Short-term Single-buyer Policy Limit of Liability (LOL): $30,000,000 Indemnity: 80% Deductible: None Transaction Tenors: 120 – 240 days O/A Insurers: One Waiting Period: 90 days Country: Various Premium rate: None, Flat $300,000 Collection Fees: None Also mention syndication capability Political Risk, Credit Insurance, and Trade Finance Solutions

Typical Credit Insurance Policy Insurer Reports & Premium Claim Payment Broker Credit Insurance Policy HQ, St. Louis, MO Additional Insured, TX Additional Insured, KS Additional Insured, IL Political Risk, Credit Insurance, and Trade Finance Solutions

Global Credit Insurance Policy Insurer U.S.A. Reports & Premium Claim Payment Broker U.S.A. Master Policy HQ St. Louis, MO Locally Sub-Policy Mexico Locally Sub-Policy Brazil Broker Mexico Broker Brazil Insurer Brazil Insurer Mexico Political Risk, Credit Insurance, and Trade Finance Solutions

Benefits of Global Policy (Global Negotiation- with Local Service) Global & Centralized Policy Negotiation Local Language Service & Support Compliance with Local Insurance laws (which differ by country) Premiums Are Fully Tax Deductible Claim Payments Match Country of Loss Political Risk, Credit Insurance, and Trade Finance Solutions

Policy Administration Sales reporting & premium payment Qualifying customers for insured lines of credit Past due reporting Cease-shipment or automatic withdrawal of cover provisions Rescheduling of debt must be pre-approved Claim deadlines and “satisfactory” filing of claim form and supporting documents Political Risk, Credit Insurance, and Trade Finance Solutions

Syndicated Policy Multiple Insurers - one policy Increasing in popularity Can be for one or multiple buyers Insurers agree to pricing and other policy terms Leverages global insurance capacity Insurer No. 1 $10 Mil. Buyer Limit Insurer No. 2 $10 Mil. Buyer Limit Insurer No. 3 $10 Mil. Buyer Limit $30 Mil. Total Buyer Limit Political Risk, Credit Insurance, and Trade Finance Solutions

Top-up Policy Two or more policies Can be for one or multiple buyers Common with existing policies Price varies by layer Layer 2 lower priced than Layer 1 Excess Insurer Policy 2 $15 Mil. $30 Mil. Total Buyer Limit Primary Insurer Policy 1 $15 Mil. Political Risk, Credit Insurance, and Trade Finance Solutions

Claim Payment Flow Chart 0 - 90 Days Past Due 30 Days 30 – 60 Days Invoice Period Waiting Period Claim Processing Period Claim Payment Collection Expense Paid by Insurer ** Collection Effort Responsibility of Insured Collection Expenses Avoided by Insured ** Some Insurers Indemnify this expense Political Risk, Credit Insurance, and Trade Finance Solutions

Sample Claim Payout Claim Payout $750,000 x 90% = $675,000 Recovery $1,000,000 Bad Debt $1,000,000 Total Claim Claim Payout $750,000 x 90% = $675,000 $750,000 Insured Limit Recovery Sharing % $675,000/$1,000,000 = 67.5% Insurer, 32.5% Insured $1,000,000 Total Claim $675,000 Claim Payment Political Risk, Credit Insurance, and Trade Finance Solutions

Recovery Scenario (After Claim Payment) $100K Recovered From Debtor $85K Net Recovery 15% Insurer Collection Expense $1,000K Total Claim Recovery Sharing % Insurer $85K X .675 = $57.3K Insured $85K X .325 = $27.7K $27K Recovery $675K Claim Payment Political Risk, Credit Insurance, and Trade Finance Solutions

Top Reasons for Claim Denial Unresolved disputes Failure to meet credit limit requirements Non-payment of premium Past-due reports not filed Shipments made when customer had excessive past dues Late claim filing Unauthorized debt restructuring Key required documents missing Documents not properly executed Political Risk, Credit Insurance, and Trade Finance Solutions

Cost Benefit Analysis Assumptions: Insured sales: $30,000,000 Gross margin: 20% 50%/50% domestic/export Premium rate: $0.20 per $100 Estimated premium: $60,000 Largest credit limit: $3,000,000 Average credit limit: $250,000 Political Risk, Credit Insurance, and Trade Finance Solutions

Cost Benefit Analysis Incremental Sales Needed to Pay for Policy: Incremental Credit Limit Needed to Pay for Policy: $300,000/6 = $50,000 (60 days O/A) Incremental Sales Needed to Pay for Largest Loss: $3,000,000/.20 = $15,000,000 or 50% ! Political Risk, Credit Insurance, and Trade Finance Solutions

Profit & Loss Impact (‘000) No Ins. Insured Revenue: $30,000 $30,000 Less Bad Debt: $3,000 $300 Less Insurance: $60 Net Profit: $3,000 $5,640 Savings $2,640 / $60 = 44 Year Payback Return Political Risk, Credit Insurance, and Trade Finance Solutions

Open Account Trade Finance Program Insurance + Bank A/R purchase program = open account trade finance program Reduces cash flow burdens of the customer Credit insurance protects the balance sheet as sales and A/R exposure grows DSO rises, so exporter sells the insured foreign A/R to bank monthly or bi-monthly Pass bank finance and insurance costs to customer, perhaps even adds a small margin for especially long terms Political Risk, Credit Insurance, and Trade Finance Solutions

Sample Bank Term Sheet for A/R Purchase Facility Recent term sheet from a large commercial bank for a $15 million foreign receivable purchase facility. Terms included: Credit insurance required with assignment of proceeds to bank Supported invoiced terms of up to 180 days A/R sale/purchase could be made weekly or bi-weekly with a $500,000 minimum purchase per transaction Bank purchases title to invoices and pays 90% (the amount of insurance indemnity) of the face value of invoices less the bank's "Discount Margin“ The bank's "Discount Margin" was LIBOR + 0.75% per annum, calculated on the basis of 90% of the face value of each invoice purchased Seller retains "First Loss Deficiency Guarantee" of $150,000 to match the credit insurance policy deductible One-time structuring fee: $25,000 Political Risk, Credit Insurance, and Trade Finance Solutions

General Structure (Relative to Previous Sample Bank Term Sheet) Credit insurance policy issued to exporter Insurance attaches when shipment is made or service rendered Bank that purchases insured A/R is assigned as Loss Payee Claim payments made to bank Exporter/insured must retain policy risk retention Bank has recourse back to exporter for uninsured amounts (deductible, co-insurance, or non-compliant A/R) Exporter responsible for administration of insurance policy A/R Collection Bank buys A/R and hires exporter back as the servicing agent on what is now the bank’s asset, or Bank services/collects the A/R on its own Political Risk, Credit Insurance, and Trade Finance Solutions

Supplier Credit Receivable Finance Program (Insurance Backed) Insurer 3. Assignment of Insurance Policy Proceeds Bank 2. Receivable Purchase Agreement Insured/ Seller 1. Credit Insurance Policy 5. Receivable Purchase 4. Invoice 6. Payment Customer Political Risk, Credit Insurance, and Trade Finance Solutions

Alternative Structure: Bank as the Insured Credit insurance policy issued to bank May be of greater interest to bank for purchases of Largest Accounts A/R (such as Top 10 customers) Coverage attaches once bank purchases the A/R from exporter Claims filed by the bank Bank must retain policy risk retention Bank generally cannot have recourse back to exporter (A/R seller) for uninsured amounts (deductible, co-insurance, or A/R out of compliance) Bank responsible for administration of insurance policy Bank must collect all necessary documentation from A/R seller/exporter to ensure it can file a complete and satisfactory claim A/R Collection Bank buys A/R and hires exporter back to be servicing agent on what is now the bank’s asset, or Bank services/collects the A/R on its own Political Risk, Credit Insurance, and Trade Finance Solutions

Buyer Credit Finance Program Bank/ Insured Insurer 1. Credit Insurance Policy 4. Receivable Purchase Seller 2. Loan Agreement 3. Invoice 5. Payment Customer Political Risk, Credit Insurance, and Trade Finance Solutions

Medium-Term Credit Insurance “Medium-Term” defined as transactions with repayment terms greater than one year Available for capital equipment or project financing transactions Supports LIBOR-based loans by a U.S.A. bank to overseas buyers Maximum terms to dealers is 2 years Maximum terms to end-users is up to 5 years (depending on transaction size) Semi-annual payments of principal + interest Transaction backed by comprehensive (political & commercial) credit insurance Political Risk, Credit Insurance, and Trade Finance Solutions

Ex-Im Bank MT Basics Coverage carries full faith & credit of U.S. government Limited coverage for foreign content 15% minimum down payment required 100% indemnity on amount financed Equal semi-annual payments of principal + interest Flat rate premium based on country, payment terms, disbursement period, and financial strength of obligor Buyer or supplier credit structure Standard documentation used for obligors in any country Political Risk, Credit Insurance, and Trade Finance Solutions

Private Sector MT Basics Unlike Ex-Im Bank, private insurers typically structure coverage with 90% indemnity Typically an alternative when foreign content precludes Ex-Im Bank coverage No down-payment requirements Underwriting criteria less stringent and application process less cumbersome than Ex-Im Bank, and turn-around times are much faster in the private market Bank funds the MT notes but will need recourse back to exporter for the uninsured portions in the event of a default Private insurers require exporter to develop legally enforceable promissory note and other documentation Political Risk, Credit Insurance, and Trade Finance Solutions

Private Insurers Maximum Terms Insurer Maximum Terms AIG 3 years FCIA 5 years EIC 5 years Atradius 5 years Coface 5 years HCC 5 years Zurich 7 years Political Risk, Credit Insurance, and Trade Finance Solutions

Why Use Political-Risk Insurance? Protect overseas assets against Confiscation, Expropriation, Nationalization (CEN) and Political Violence (PV) Obtain Currency Inconvertibility (CI) cover to protect profit repatriation from foreign operations Protect against wrongful-calling of guarantees Cover trade transactions with sovereign obligors Protect against Contract Repudiation or Non- Delivery Political Risk, Credit Insurance, and Trade Finance Solutions

Thank You Mark Regenhardt International Risk Consultants, Inc. 212 Crystal Street Suite B Cary, IL 60013 Tel 847-462-0547 Fax 614-224-7901 Cell 847-651-0851 E-mail: mregenhardt@irc-group.com Web: www.irc-group.com Political Risk, Credit Insurance, and Trade Finance Solutions