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Gallagher London is a trading name of Arthur J. Gallagher (UK) Limited

Registered in England No. 1193013 Authorised and regulated by the Financial Services Authority

“…not only do emerging markets remain exposed to political risk – but investors now live in a world that is increasingly unpredictable in both an economic and political sense…” Financial Times 28 January 2011

POLITICAL RISKS INSURANCE (PRI) Report and Market Update

January 2011

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PRI Report and Market Update January 2011

Contents

Market Report – January 2011 3

Commercial Market Overview – January 2011 5

Available Market Capacity – January 2011 8

Total Capacity Available by Tenor – January 2011 9

Available Market Capacity Comparison 10

Trade Credit Insurance – January 2011 11

Emerging Markets Country Risk Ratings 13

Arthur J. Gallagher & Co 16

Gallagher London Political, Project & Credit Risks Contact Details 17

The information contained in this PRI Report and Market Update has been compiled by Gallagher London from information provided by each insurer. The figures expressed reflect the theoretical maximum possible lines available which are dependent upon many underwriting factors including the nature of the risk, the country of risk and available country capacity at the time which may reduce the amount of capacity actually available and is subject to change without notice.

PRI Report and Market Update does not purport to be comprehensive or to give legal advice. While every effort has been made to ensure accuracy, Gallagher London cannot be held liable for any errors, omissions or inaccuracies contained within the document. Readers should not act upon (or refrain from acting upon) information in this document without first taking further specialist or professional advice.

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Market Report – January 2011

The Gallagher London PRI Market Update for January 2011 reflects the changes in line structure and tenor available from commercial PRI insurers during the second half of 2010 and for the New Year. Any such changes tend to reflect reinsurance renewals and business planning that have been completed in the intervening period as well as the advent of new entrants who have successfully implemented new reinsurance programmes and opened for business.

The confidence of insurers continues to grow in the wake of the steady recovery from the global financial crisis evidenced by two insurers expanding their operations. Beazley are opening a new underwriting operation in New York which will write their full Political and Trade Risks offerings. In the July 2010 Market Report, we reported the establishment of Ironshore’s New York underwriting operation. Ironshore has now established an European underwriting operation writing out of Ireland to complement their New York office.

The overall changes since the last report in July 2010 are identified in the following charts and reflect:

Ark: Tenors for CEN and CF have been reduced from 7 years to 5.5 years. Ark has withdrawn its CR capacity.

Chaucer: Line size for CR has increased from USD 5m to USD 7.5m.

CV Starr: Established a Company Market operation, under the carrier of Starr Insurance and Reinsurance Ltd, with lines of USD 40m for CEN and CF, tenors of up to 10 years and a line of USD 20m for CR with tenor of up to 5 years. CV Starr have increased their Lloyd’s lines for CEN and CF to USD 50m, each with tenors remaining up to 7 years, and have increased their Lloyd’s line for CR to USD 25m with tenor remaining at 5 years.

Garant: Garant is the most recent entrant on Gallagher’s approved market security list. They offer lines of EUR 20m for CEN and CF with tenors of up to 5 years.

Kiln: Increased lines for CF and CR from USD 30m to USD 40m with tenors remaining up to 5 years.

O’Farrell: Increased lines for CEN and CF from USD 10m to USD 20m with tenors increasing to up to 5 years.

Sovereign: Increased line for CF from USD 50m to USD 80m with tenor remaining at 15 years. Line for CEN amended from USD 100m to USD 80m to reflect actual utilisation of capacity.

Consequently the overall market capacity for Project Risks has increased by USD 70m to USD 1,293m. Trade Risks Political has increased by USD 130m which is a positive indication of insurers’ returning confidence. Despite the withdrawal of Ark’s CR capacity, Trade Risks Commercial capacity has increased to USD 768m due to Chaucer, CV Starr and Kiln increasing their respective CR lines.

The figures expressed reflect only the theoretical maximum possible lines available which are dependent upon many underwriting factors including the nature of the risk, the country of risk

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and available country capacity, but serve as a good indicator of commercial insurers’ support for these classes of business.

Encouragingly, the overall market capacity for Trade Risks Political and Trade Risks Commercial are at the highest levels seen since the first Report and Market Update issued in September 2001.

In this Report we have also included a ‘year to year’ 2009 – 2010 comparison of Country Risk Ratings from data provided by IHS Global Insight.

We also include a brief review of the traditional multi-debtor credit insurance market.

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Commercial Market Overview – January 2011

(Highlights indicate changes since last report)

Insurer: ‘Company Markets’

Project Risks (CEN)

Trade Risks Political (CF)

Trade Risks Commercial (CR)

Ratings

Total max per risk (USD)

Max Tenor (years)


Max Tenor (years)


Max Tenor (years)

ACE European Group Ltd*

80,000,000 10 60,000,000 10 30,000,000 5 AA- [S&P]

Aspen* 70,000,000 7.75 70,000,000 7.75 70,000,000 7.75 A [S&P]

Atradius 70,000,000 5 70,000,000 5 70,000,000 5 A- [S&P]

Axis 50,000,000 7 50,000,000 7 35,000,000 7 A+ [S&P]

Chartis 120,000,000 15 120,000,000 15 75,000,000 3 A+ [S&P]

Coface 70,000,000 10 70,000,000 7 70,000,000 7 AA- [Fitch]

Houston Casualty 30,000,000 5 30,000,000 5 30,000,000 5 AA [S&P]

Garant** 25,000,000 5 25,000,000 5 0 0 Unrated

Ironshore 0 0 20,000,000 5 20,000,000 5 A- [A.M. Best]

Liberty Mutual Insurance Europe Ltd

30,000,000 5 30,000,000 5 30,000,000 5 A [A.M. Best]

QBE* 50,000,000 7 50,000,000 7 50,000,000 7 A+ [S&P]

Sovereign 80,000,000 15 80,000,000 15 0 0 AA- [S&P]

CV Starr* 40,000,000 10 40,000,000 10 20,000,000 5 A [A.M. Best]

Zurich 150,000,000 15 150,000,000 15 50,000,000 7 AA- [S&P]

Total: ‘Company Markets’

865,000,000 + 8.8% 865,000,000 + 16.1% 550,000,000 + 8.9%

Total: July 2010

795,000,000 745,000,000 505,000,000

Notes: * can be written via either their company or Lloyd’s syndicate ** Garant is owned 83% by ONDD (Rated AA+ by Standard & Poor’s) and 17% by Ingosstrakh (Rated

BBB- by Standard & Poor’s). Lines of EUR 20m for CEN and CF available, but for the purposes of this Report have been converted to USD.

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Insurer: ‘Lloyd’s Markets’ [All Lloyd’s Markets rated A+ by S&P]

Project Risks (CEN)




Max Tenor (years)


Max Tenor (years)


Max Tenor (years)

ACE Global Markets* Lloyd’s Syn 2488 80,000,000 10 60,000,000 10 30,000,000 5

Amlin Lloyd’s Syn 2001 12,500,000 3 10,000,000 3 0 0

Ark Lloyd’s Syn 4020 20,000,000 5.5 20,000,000 5.5 0 0

Ascot Lloyd’s Syn 1414 15,000,000 5 10,000,000 5 0 0

Aspen* Lloyd’s Syn 4711 35,000,000 7.75 35,000,000 7.75 35,000,000 7.75

Beazley Lloyd’s Syn 623 30,000,000 7 30,000,000 7 20,000,000 7

Catlin Lloyd’s Syn 2003 90,000,000 10 65,000,000 10 65,000,000 7

Chaucer Lloyd’s Syn 1084 20,000,000 5 20,000,000 5 7,500,000 5

Hardy*** Lloyd’s Syn 382 20,000,000 5 20,000,000 5 20,000,000 5

Hiscox Lloyd’s Syn 33 25,000,000 5 25,000,000 5 25,000,000 5

Kiln Lloyd’s Syn 510 60,000,000 5 40,000,000 5 40,000,000 5

Liberty Syn Mgmt Lloyd’s Syn 4472 15,000,000 5 15,000,000 5 3,000,000 2

O’Farrell Lloyd’s Syn 1036 20,000,000 5 20,000,000 5 0 0

Marketform Lloyd’s Syn 2468 20.000,000 5 20,000,000 5 10,000,000 5

MAP Lloyd’s Syn 2791 20,000,000 3 20,000,000 3 0 0

Novae Lloyd’s Syn 2007 20,000,000 5 20,000,000 5 10,000,000 5

Notes: * can be written via either their company or Lloyd’s syndicate ***Correct as at July 2009. Up to date information not provided.

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Insurer: ‘Lloyd’s Markets’ (continued)

Project Risks (CEN)



Total max per risk

Max Tenor (years)

Total max per risk

Max Tenor (years)

Total max per risk

Max Tenor (years)

Starr PFR Consortium* Lloyd’s Syn 1919/1458

50,000,000 7 50,000,000 7 25,000,000 5

Pembroke Lloyd’s Syn 4000

10,000,000 5 10,000,000 5 2,500,000 3

QBE* Lloyd’s Syn 1886

50,000,000 7 50,000,000 7 50,000,000 7

Talbot Lloyd’s Syn 1183

20,000,000 5 20,000,000 5 10,000,000 5

Total: ‘Lloyd’s Markets’

632,500,000 + 6.7% 560,000,000 + 9.8% 353,000,000 + 3.6%

Total: July 2010 592,500,000 510,000,000 340,500,000

Notes: * can be written via either their company or Lloyd’s syndicate

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Available Market Capacity – January 2011 (Total possible maximum USD per risk)

Project Risks (CEN)



Company 865,000,000 865,000,000 550,000,000

Lloyd’s 632,500,000 560,000,000 353,000,000

TOTAL 1,292,500,000 +5.7% 1,240,000,000 + 11.7% 768,000,000 + 5.1%

Total: July 2010

1,222,500,000 1,110,000,000 730,500,000

* Totals do not ‘double count’ the Company and Lloyd’s lines of ACE, Aspen, QBE and Starr which can be written via either their Company or Lloyd’s syndicate.

Available Market Capacity – January 2011 (Total possible maximum USD million per risk)

865 865

550633

560

353

0100200300400500600700800900

1000

Project Risks (CEN) Trade Risks Political (CF) Trade Risks Commercial (Credit)

Cap

acit

y

Risk Type

Company

Lloyd's

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Total Capacity Available by Tenor – January 2011 (Total possible maximum USD per risk)

Max tenor (Years)

Project Risks (CEN)



15 350,000,000 350,000,000 0

10 630,000,000 515,000,000 0

7* 840,000,000 795,000,000 360,000,000

5** 1,260,000,000 1,210,000,000 687,500,000

2-3 1,292,500,000 1,240,000,000 768,000,000

* Aspen’s USD 70m can be extended to 7.75 years across all risks ** Ark’s USD 20m can be extended to 5.5 years for Project Risks (CEN) and Trade Risks Political (CF)

Total Capacity Available by Tenor – January 2011 (Total possible maximum USD million per risk)

1,293 1,260

840

630

350

1,240 1,210

795

515

350

768 688

360

0

200

400

600

800

1,000

1,200

1,400

2-3 5 7 10 15

Cap

acit

y

Tenor Available (Years)

Project Risks (CEN)


Trade Risks Commercial (Credit)

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Available Market Capacity Comparison (Total possible maximum USD million per risk) September 2001 to January 2011

Project Risks (CEN)

Sept 01

Jan 02

Jan 03

Jan 04

Jan 05

Jan 06

Jan 07

Jul 07

Jan 08

Jul 08

Jan 09

Jul 09

Jan 10

Jul 10

Jan 11

Company 580 564 495 495 470 490 515 545 660 855 840 870 920 795 865

Lloyd’s 574 274 278 280 318 335 368 388 423 453 478 560 593 593 633

TOTAL 1,154 837 773 775 788 825 883 933 1,083 1,228 1,238 1,350 1,348 1,223 1,293


Sept 01

Jan 02

Jan 03

Jan 04

Jan 05

Jan 06

Jan 07

Jul 07

Jan 08

Jul 08

Jan 09

Jul 09

Jan 10

Jul 10

Jan 11

Company 268 331 318 318 310 405 440 480 530 735 720 750 800 745 865

Lloyd's 389 188 203 195 239 256 297 332 347 377 381 456 502 510 560

TOTAL 656 519 520 513 549 661 737 812 877 1,052 1,041 1,146 1,157 1,110 1,240


Sept 01

Jan 02

Jan 03

Jan 04

Jan 05

Jan 06

Jan 07

Jul 07

Jan 08

Jul 08

Jan 09

Jul 09

Jan 10

Jul 10

Jan 11

Company 195 185 175 255 255 300 335 445 420 450 500 505 550

Lloyd's 73 57 79 103 167 190 208 238 251 307 346 341 353

TOTAL 268 242 254 358 422 490 543 653 641 727 731 731 768

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Trade Credit Insurance – January 2011

During 2010 the Credit Insurance Market recovered from the credit crunch and the big three monoline insurers, Atradius, Coface and Euler have to an extent recovered their risk appetite. The need to recover profitability means that they have also lowered rates in order to capture more market share and premium income.

This is good in the short term for the insured, but it does present some cause for concern for the future, because of the potential imbalance between premium income and risk carried. If insufficient reserves are built up there is every chance that there will be a similar withdrawal of cover to that seen in 2008 - 2009 if further economic problems are encountered.

One of the benefits of the crunch has been that insurers are decidedly better informed about the risks that they write, information is more detailed, is more thoroughly analysed, and more up-to-date.

From the insured’s point of view, the growing emphasis has been on ensuring certainty of cover which these three insurers have looked to support by providing extended notice periods before cancelling limits, or offering penalty structures that will react to reduced risk appetite levels.

This desire for continuity of cover has increased the attractiveness of the excess of loss insurers whose traditional approach has been effectively to act as reinsurers of the insured’s credit management programmes. As a consequence they maintained a more level headed approach during the credit crunch. The significance of the non-cancellable nature of the limits is that the cover could not be withdrawn. The underlying philosophy of understanding that the insured knows its customer means that even where the renewal of a policy allowed for cancellation, cover was more often maintained than not.

This behaviour has been recognised by insureds that may not have previously considered an excess of loss facility. By making changes to their credit management programmes and improving their own customer information, insureds are able to take advantage of the quality of cover these programmes provide.

Both established and new insurers have been attracted into this market over the past year. This has meant the arrival of most welcome additional capacity, including:

Markel – This multiline insurer recruited the well respected members of the ACE Trade Credit team and started writing trade credit and political risk business in April 2010. Trade credit excess of loss policies are its staple product both on a multi-buyer or single debtor basis.

Latin American Underwriters - started writing business on behalf of Allied World Assurance Company in the last quarter of 2010. it offers a variety of products for both the importer and exporter in Latin America and the Caribbean. These include non-payment coverage for short-term and medium-term exports to both private and public sector buyers, non-payment and non-performance coverage in respect of advance payments, and pre-financings of structured commodity trade and trade finance programs. It also offers unfair calling of bond cover.

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Equinox Global - This Company was established in October 2010 and is writing multi-debtor business on both excess of loss and ground-up basis on behalf of the Beazley and Pembroke syndicates and company market insurers Aspen and Liberty. Equinox offers excess of loss policies with non-cancellable limits, whole turnover policies where limits may be reviewed or cancelled only if externally produced buyer credit ratings deteriorate beyond an agreed benchmark, and key account policies either with cancellable or non-cancellable limits.

Ironshore - obtained a licence in Ireland at the beginning of 2011 that has given it the ability to write trade credit and political risk business in Europe. Amongst its products is trade credit on single debtor or multi-debtor (up to 12 buyers) basis, it can offer lines of USD 20m per obligor and tenors of up to five years.

Finally the support that insurers and their products can offer trade finance programmes is once again being recognised by major corporations, SME’s, insurers, and finance houses as well as by the banks whose capitalisation requirements have been impacted by the credit crunch. This has in turn restricted their ability to lend to companies. The ability to improve the quality of the risk through the appropriately structured credit insurance programme results in higher levels of eligible receivables, lower collateralisation, and improved lending rates. This is expected to be an area of good growth in the coming year.

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Overall Risk Ratings take into account six components: - Political, Economic, Legal, Tax, Operational and Security. These ratings are principally measuring stability. Political Risk Ratings analyse four factors:- - Institutional performance - Representation of the population and organised

interests - Internal political consensus - External political consensus

Emerging Markets Country Risk Ratings

The following pages analyse the Country Risk Ratings, compiled by IHS Global Insight, of various Emerging Markets. We compare the Overall Risk Ratings and the Political Risk Ratings as at the time of publication of this Market Report, and as at 1 January 2009. These countries have been selected from the International Monetary Fund’s World Economic Outlook for Emerging and Developing Economies, April 2010.

The Risk Ratings have the following meaning:

Sub-Sahara Africa

Overall Risk at 01 Jan 2011


Political Risk at 01 Jan 2011


Burkina Faso 3.51 High 3.51 High 3.50 High 3.50 High

Côte d'Ivoire

4.21 Very High

3.92 High 4.50 Very High

4.00 High

Democratic Republic of Congo

4.46 Very High

4.34 Very High

4.00 Very High

3.75 High

Ghana 2.78 Medium 2.78 Medium 2.75 Medium 2.75 Medium

Kenya 3.35 Significant 3.29 Significant 3.50 High 3.50 High

Liberia 3.96 High 4.02 Very High

4.00 Very High

4.00 Very High

Nigeria 4.06 Very High 3.86 High 4.00

Very High 3.75 High

Sierra Leone 3.85 High 3.89 High 3.50 High 3.75 High

South Africa 2.31 Moderate 2.22 Moderate 2.50 Moderate 2.25 Moderate

Tanzania 3.30 Significant 3.36 Significant 3.00 Significant 3.00 Significant

Risk Rating Risk Description 1.00 – 1.24 Insignificant 1.25 – 1.74 Negligible 1.75 – 1.99 Low 2.00 – 2.49 Moderate 2.50 – 2.99 Medium 3.00 – 3.49 Significant 3.50 – 3.99 High 4.00 – 4.49 Very High 4.50 – 5.00 Extreme

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Asia Pacific





Cambodia 3.11 Significant 3.13 Significant 2.75 Medium 3.00 Significant

China 2.87 Medium 2.90 Medium 2.75 Medium 2.75 Medium

India 2.73 Medium 2.73 Medium 2.50 Medium 2.75 Medium

Indonesia 2.76 Medium 2.87 Medium 2.50 Medium 2.75 Medium

Laos 3.26 Significant 3.33 Significant 3.25 Significant 3.25 Significant

Papua New Guinea

3.29 Significant 3.29 Significant 3.50 High 3.50 High

Pakistan 4.01 Very High 3.67 High 4.25 Very High 4.00 High

Philippines 4.01 Very High 3.67 High 4.25 Very High 4.00 High

Thailand 2.97 Medium 2.82 Medium 3.50 High 3.25 Significant

Vietnam 2.95 Medium 2.87 Medium 3.00 Significant 3.00 Significant

Europe and CIS





Belarus 3.55 High 3.73 High 3.75 High 4.00 Very High

Czech Republic 1.94 Low 1.94 Low 1.75 Low 1.75 Low

Greece 2.67 Medium 1.95 Low 2.75 Medium 1.75 Low

Kazakhstan 3.07 Significant 3.01 Significant 3.25 Significant 3.25 Significant

Kyrgyzstan 3.67 High 3.42 Significant 4.00 High 3.75 High

Poland 1.99 Low 2.06 Moderate 2.00 Moderate 2.00 Moderate

Romania 2.47 Moderate 2.39 Moderate 2.25 Moderate 2.50 Medium

Russia 3.01 Significant 2.88 Medium 2.75 Medium 2.75 Medium

Slovakia 1.86 Low 1.92 Low 1.75 Low 2.00 Moderate

Ukraine 3.20 Significant 3.13 Significant 3.25 Significant 3.25 Significant

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Latin America and Caribbean





Argentina 3.36 Significant 3.30 Significant 3.50 High 3.50 High

Bolivia 3.52 High 3.69 High 3.75 High 4.00 High

Brazil 2.66 Medium 2.63 Medium 2.50 Medium 2.50 Medium

Colombia 2.96 Medium 3.05 Significant 3.25 Significant 3.25 Significant

Dominican Republic

2.82 Medium 2.85 Medium 3.00 Significant 3.00 Significant

Ecuador 3.75 High 3.75 High 3.75 High 4.00 Very High

Guatemala 3.31 Significant 3.22 Significant 3.50 High 3.75 High

Peru 2.89 Medium 2.86 Medium 3.25 Significant 3.25 Significant

Nicaragua 3.62 High 3.53 High 3.75 High 3.75 High

Venezuela 3.86 High 3.81 High 4.00 Very High 3.75 High

Middle East and North Africa





Algeria 3.08 Significant 2.95 Medium 3.25 Significant 3.00 Significant

Bahrain 2.19 Moderate 2.03 Moderate 2.75 Medium 2.50 Medium

Egypt 2.89 Medium 2.78 Medium 3.25 Significant 3.00 Significant

Kuwait 2.51 Medium 2.20 Moderate 3.00 Significant 2.50 Medium

Lebanon 3.19 Significant 3.48 Significant 3.50 High 3.75 High

Libya 2.96 Medium 2.85 Medium 3.00 Significant 3.00 Significant

Saudi Arabia

2.50 Medium 2.39 Moderate 2.75 Medium 2.75 Medium

Tunisia 2.87 Medium 2.11 Moderate 3.25 Significant 2.25 Moderate

United Arab Emirates

2.12 Moderate 1.77 Low 2.00 Moderate 1.50 Low

Yemen 3.83 High 3.57 High 4.00 Very High 3.00 Significant

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Arthur J. Gallagher & Co

Arthur J. Gallagher & Co. is the fourth largest insurance broker and risk management firm in the United States and the fifth largest in the world. Founded in 1927, Arthur J. Gallagher & Co. provides a full range of property, casualty and employee benefits products and services to clients of all sizes. Gallagher London Gallagher London is a trading name of Arthur J. Gallagher (UK) Limited which is authorised and regulated by the Financial Services Authority. Political, Project & Credit Risks Division The Political, Project & Credit Risks division comprises a well established team of highly experienced political risk insurance market practitioners which now incorporates the former FirstCity Trade and Political Risks team (since April 2010) as well as the former Rattner Mackenzie Credit Insurance division (since October 2009). With representation or correspondent relationships in all the major financial centres the Political, Project & Credit Risks team services a truly global client base. The combined resources offer the most comprehensive service that:

• provides access to specialist London and international insurers and reinsurers • covers the full range of Political Risks, Trade Credit, Terrorism (including War and

Political Violence) and Surety markets • is dedicated to structuring innovative insurance solutions that go beyond transactional

broking • has the resources and relationships to negotiate competitive and appropriate terms • maintains the highest standards of documentation management, accounting and claims

collection As an integrated division of more than 20 market professionals, Gallagher London’s product offering includes all aspects of: Political Risks Project Risks Credit Risks

Risk to contracts Risks to project developers Private buyer insolvency risks

Risks to overseas assets Risks to lenders Protracted default risks

Risks to receivables Currency transfer risks Export or domestic credit risks

Risks to revenues Political violence and war risks Counterparty bank default risks

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Gallagher London Political, Project & Credit Risks Contact Details

London New York Sao Paulo Kit Brownlees Gabe Mansky Tatiana Moura Managing Director Senior Vice President Commercial Director Direct: +44 (0)20 7204 8586 Direct: +1 212 994 7068 Direct: +55 11 2155 7390 [email protected] [email protected] [email protected] Political and Project Risks Mark Gubbins David Evans Executive Director Divisional Director Direct: +44 (0)20 3425 3194 Direct: +44 (0)20 7204 6156 [email protected] [email protected]

Credit and Surety Rupert Murray Stephen Taylor Executive Director Divisional Director Direct: +44 (0)20 7204 8560 Direct: +44 (0)20 7204 8563 [email protected] [email protected]

Political Violence, War and Terrorism Rupert Morgan (US) Ewan Wauchope (Int’l) Divisional Director Divisional Director Direct: +44 (0)20 3425 3199 Direct: +44 (0)20 3425 3201 [email protected] [email protected]

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