Aon Credit International’s Review of 2015A year end summary and some thoughts for 2016

Aon Risk SolutionsAon Credit International

Risk. Reinsurance. Human Resources.

2 Trade credit 2015: overview

2015 trade credit insurance market

2015 was an interesting year for the UK trade credit insurance market. There have been soft market conditions and premium rates have been at historically low levels, with the size and frequency of claims increasing alongside this. In 2016 we expect market conditions to remain competitive and pricing to stabilise. This is due to the claims environment and global uncertainty from commodity price volatility, the Chinese stock market and a potential housing bubble in the UK.

At Aon Credit International (ACI), we have seen a significant increase in business where raising finance and working capital is the main driver, with either a financial institution as the insured or insurance is a condition precedent of the financing facility and the financier taking a loss payee / joint insured position.

Generally there are three reasons as to why a financier will look to utilise insurance within a deal structure:

1. Risk ManagementSupporting internal credit decisions by providing risk mitigation, credit enhancement on investment and non-investment grade risks

2. Credit ConcentrationsProviding alternatives to funded/unfunded syndication, allowing the financial institution to utilise insurer capacity to hold a higher proportion of the deal

3. Capital optimisationUsing insurance and guarantee products as eligible unfunded credit protection to improve capital relief

Finance was the driver behind 45% of the deals closed during the course of 2015. We picked up on this trend during late 2013 and launched our Special Products offering, whilst formalising a financial institutions deal team within the UK. This proposition will be rolled out across EMEA during the first quarter of 2016.

We have seen a need to develop products which not only support factoring and invoice discounting but also asset based lending and off-balance sheet receivables finance, as these types of financing have become more popular with multinationals and UK corporates. During 2015 new solutions for stock finance, leasing and football finance (transfers and TV rights) were also developed.

Rob Michael Head of Business Development

+44 (0)20 7086 0330 robert.michael@aon.co.uk

An overview

Aon Credit International 3

An insight intoA leading automotive company obtaining off-balance sheet finance

The client was looking to put in place a £90m off balance sheet receivables finance facility for their mid-year, financing trade debtors across their business to reduce their net debt burden as much as possible.

A credit insurance wrap was key to gaining auditor agreement that the finance facility was suitable for off balance sheet treatment and could be de-recognised. Wishing to assist the client in meeting their aim we introduced a major French bank. The bank had not previously provided such a solution to clients in the UK and looked to ACI to lead the deal.

Using our expertise, we were able to structure a credit insurance wrap that transferred more than 95% of the trade debtor risk to the underwriter.

This provided sufficient comfort for the client’s auditors to agree that the finance facility could be de-recognised and they were able to reduce their net debt burden by £90m when cover incepted.

4 Trade credit 2015: overview

Special Products

Within Special Products we work with corporations and financial institutions across credit, as well as bonds and guarantees (surety), on mostly transactional and structured deals.

For corporations, we have seen a trend for a more sophisticated use of these products, where treasury and finance use credit insurance and surety to improve working capital across the payables, receivables and guarantees areas of their business.

Over the past 12 months, we have helped clients use these products to improve supply chain and receivables finance facilities, replace existing collateral with insurance and extend credit terms. We have also seen the increased use of top up and syndication to cover shortfalls in cover on existing insurance programmes.

In the surety world, we have seen the continued growth of commercial bonds being issued by sureties as an alternative to letters of credit from banks. Sureties have issued on demand guarantees in respect of a range of obligations such as deductibles under general insurance policies, pension deficit repayments and deferred consideration on acquisitions. The

benefit of surety is that it is normally an unsecured credit facility for the client which is off balance sheet. The latest innovation that Aon has developed has been the replacement of collateral for the gaming industry.

For financial institutions, 2015 saw the increased awareness of how credit insurance and surety can help risk distribution and provide capital optimisation. As a general comment, whilst credit insurance has been used for capital relief on single risk transactions for a number of years, we have seen this extend into multi-debtor receivables financing.

Looking forward to 2016, with the development of new products and an increase in insurer capacity (in both quantum and tenor), we are excited about what the year ahead holds. We will certainly be encouraging corporations to take a fresh look at credit insurance and surety to see how these products can improve their working capital, and we expect that financial institutions will continue to be a growing purchaser of the products, with capital optimisation and management of credit concentrations being the key drivers for purchase.

Steve Taylor Executive Director, Special Products

+44 (0)20 7086 1631 stephen.taylor2@aon.co.uk

Aon Credit International 5

An insight intoJames Ponsford

Development Director +44 (0)20 7086 0387

james.ponsford@aon.co.uk

Securing single risk cover for an energy trader

The client is the UK trading arm of a global energy trader who traditionally mitigate credit risk utilising Letters of Credit. Our client was looking to make multiple trades of Liquified Natural Gas (LNG) with a major state owned Latin American oil trader (State Oil Trader), who were unwilling to post Letters of Credit.

The client requested we source contract frustration insurance on their behalf to secure payment against the State Oil Trader. ACI sourced capacity on the State Oil Trader from a number of company and Lloyd’s markets – a challenging risk which was also downgraded during the marketing exercise.

The key to successfully closing this business was our ability to obtain cover for settlement risk and M2M exposure. We developed a bespoke wording which addresses key points including advanced claim payments for any frivolous disputes.

The global downturn in commodity prices has led to a rise in demand for non-payment insurance in the natural resource sector. In particular, with increased price volatility, a growing area of interest has been securing mark to market cover* (M2M) in addition to the traditional settlement risk. Our team have worked hard in 2015 to expand M2M capacity within the Lloyd’s and London market through market presentations and strategic broking strategies.

*Mark to market cover insures the difference in sales contract price received by the Insured to an alternative buyer (often under distressed circumstances) after the original buyer defaults. If the market price deteriorates the M2M peril covers the Insured against this Loss.

6 Trade credit 2015: overview

2015 saw the headline value of claims that Aon settled at GBP 58.5m compared with GBP 75m in 2014. It is important to highlight that although it would appear this shows a reduction in claims, the 2014 value contains the exceptional loss on the Phones 4U insolvency which totalled GBP 36.4m. By excluding this loss, and by looking at the number of claims, the actual trend is that claims are increasing. The number of claims during 2015 was 706 which has risen since 2014 where the number of claims was 668.

Whilst Phones 4U grabbed the headlines in 2014, we saw a number of substantial insolvencies in 2015, not only in the UK, but also overseas. The failure of OW Bunker, PaperlinX UK and the resulting failure of Tullis Russell Papermakers Ltd, coupled with, in Q4, the insolvencies of most of Caparo Group’s UK businesses, provided a clear indication that a number of trade sectors are facing significant challenges in terms of commodity prices and cost control, as international competition intensifies. The closure of SSI’s UK plant, as an example, provides further evidence of this.

ACI continued it’s strong claims performance in 2015, with 98% of completed claims agreed or paid. Of the 2%, of claims declined, ACI’s intervention resulted in insurers reviewing their initial decisions on more than half of the 14 claims involved and settling an additional GBP 454k of “out of order” claims. That is a performance which I firmly believe leads the market and is greatly valued by our clients.

Claims overviewMatthew Tuckey

Claims Director +44 (0)118 929 5078

matthew.tuckey@aon.co.uk

ContactsRob Michael Head of Business Development +44 (0)20 7086 0330 robert.michael@aon.co.uk James Ponsford Development Director +44 (0)20 7086 0387 james.ponsford@aon.co.uk Steve Taylor Executive Director, Special Products +44 (0)20 7086 1631 stephen.taylor2@aon.co.uk Matthew Tuckey Claims Director +44 (0)118 929 5078 matthew.tuckey@aon.co.uk

Aon Credit International (ACI) is the leading international trade credit insurance broker offering solutions to protect against trade credit risk, enhance business growth and facilitate access to trade finance.

With teams in 57 countries, ACI brings distinct expertise, analytics and creativity to identify and propose the right solutions for businesses in any sector whether they are UK based or trade internationally. As market leaders, ACI has tangible leverage in the market, optimising coverage and limit capacity whilst also delivering an all-encompassing, tailored service proposition.

About Aon Credit International

About Aon Aon plc (NYSE:AON) is a leading global provider of

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to empower results for clients in over 120 countries

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Risk. Reinsurance. Human Resources.