OFFICIAL USE ONLY · OFFICIAL USE ONLY MIGA/R2009-0005 February 3,2009 For meeting of Committee:...

OFFICIAL USE ONLY MIGA/R2009-0005

February 3,2009

For meeting of Committee: Wednesday, February 11,2009

FROM: Vice President and Corporate Secretary

Multilateral Investment Guarantee Agency Quarterly Unaudited Financial statements

as at December 31,2008

1. Attached are the unaudited MIGA Financial Statements as at December 3 1,2008, together with a memorandum f rom the Director and Chief Financial Officer to the Chairman o f the Audit Committee dated January 29, 2009. The unaudited statements will be discussed at a meeting o f the Audit Committee o n Wednesday, February 11,2009. The document i s being distributed in less than the normal lead time in order to maintain the scheduled Committee meeting date.

2. by noon o n Friday, February 13,2009), the MIGA Financial Statements (Unaudited) as at December 3 1 , 2008, will be deemed approved and so recorded in the minutes o f a subsequent meeting o f the Board o f Directors o f MIGA.

In the absence o f objection (to be noti f ied to the Vice President and Corporate Secretary,

3 . Questions o n these documents may be addressed to Mr. Lu (ext. 33572).

Distribution:

Executive Directors and Alternates President Bank Group Senior Management Vice Presidents, Bank, I F C and MIGA Directors and Department Heads, Bank, I F C and MIGA

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its content: may not otherwise be disclosed without World Bank Group authorization.

THE WORLD BANWIFC/M.I.G.A.

OFFICE MEMORANDUM DATE: January 29,2009

TO: Mr. Abdulrahman M. Almofadhi, Chairman, Audit Committee

FROM: Kevin Lu, Director & Chief Financial Officer, MIGA // EXTENSION: 33572

SUBJECT: December 3 1,2008 MIGA Financial Statements

Please find attached the Financial Statements at December 31, 2008 for the Multilateral Investment Guarantee Agency (MIGA) and a description o f operational and financial highlights that took place during the f i rs t half o f FY09.

ODerational Highlights

During the first hal f o f FY09, thirteen new contracts were issued. The year-to-date new contracts issued amounted to US$554.4 million, compared to US$ l ,146.1 mi l l ion during the same period in FY08. As a result o f the global financial crisis, a number o f projects in MIGA’s guarantee pipeline are being delayed. However, due to the increased risk perception, guarantee contract cancellations have also declined. During the f irst hal f o f FY09, MIGA recorded only US$40.4 mi l l ion o f contract cancellations, compared to US$308.6 mi l l ion during the same period in FY08. Expiries, reductions and translation adjustments amounted to US$25 1.8 mi l l ion compared to US$202.2 mi l l ion during the same period in FY08. During the second quarter o f FY09, MIGA heavily re-insured several large financial sector contracts in Russia and Ukraine.

As a result o f these factors, the size o f MIGA’s gross portfolio grew to US$6,737.3 million, a historic high, compared to US$5,936.5 mi l l ion during the same period in FY08. MIGA’s total net exposure stood at US$3,562.4 million, compared to US$3,397.2 mi l l ion during the same period in FY08.

Financial Highlights

Impact of Financial Crisis

In the financial sector today, the recent ratings downgrades o f several financial services companies have raised concerns about counter-party credit risk. However, these downgrades have not directly affected MIGA. MIGA continues to actively assess the impact o f the financial crisis on its business. For MIGA’s counter-party risk o f reinsurers, the Finance and Risk Management Group i s constantly monitoring the ratings o f MIGA’s reinsurance partners to ensure they continue to meet our minimum rating requirements. MIGA has also started to analyze exposure against reinsurance entities with different credit ratings. For MIGA’s counter-party risk on investments, the World Bank Treasury as our Investment Manager i s performing a parallel task with respect to our counterparts that transact and hold our invested assets.

On the insurance risk, MIGA has been conducting various stress tests to assess potential impact on MIGA’s finances o f guarantee risk under a range o f scenarios o f global, regional and country events, and will share outcome o f these tests with the Audit Committee and the Board in the upcoming oral briefings.

MIGA’s asset mix composition remains stable from the previous quarter and given the large allocation to short-term investments, MIGA’s investment income i s expected to be lower for the remainder o f FY09.

Capital Subscriptions

During the f irst ha l f o f FY09, Iraq completed i t s membership requirements in October, bringing the total number o f member countries to 173. There were no new payments received on account o f General Capital Increase. As o f December 3 1 , 2008, cumulative subscriptions to the GCI totaled 68,934 shares representing 87.75% o f the total GCI.

Income from Guarantees

During the first hal f o f FY09, total gross revenues earned from guarantee activities amounted to US$31.5 million, compared to US$25.2 mi l l ion during FY08. O f this amount, US$18.6 mi l l ion was for net premium earned and US$3.9 mi l l ion was for commissions and fees, compared respectively to US$15.8 mi l l ion and US$2.4 mi l l ion during FY08. N e t Premium earned increased by US$2.8 mi l l ion and Fees and Commissions increased by US$1.5 mi l l ion during the f irst hal f o f FY09.

Table 1. Premium Income Analysis FY06-FY09 (Hl)

U S $ Millions FY06 FY07 FY08 FY09 FY08

Total Guarantees Issued 1,302 1,368 2,098 554 1,146 Gross Exposure 5,362 5,301 6,475 6,737 5,936 Net Exposure 3,310 3,209 3,578 3,562 3,397

Premium income Premium ceded Fees and commissions

52.9 49.0 54.4 31.5 25.2 (20.5) (17.3) (21.1) (12.9) (9.4)

4.8 4.6 5.6 3.9 2.4

Net premium income 37.2 36.3 38.9 22.5. 18.2

Effective Premium Rate* on 1.00% 0.98% 0.95% 0.97% 0.98% average portfolio during the FY Effective Premium Rate* on 0.74% 0.94% 0.73% 0.73% 0.88% new issuances * Effective premium rate is based on premium earned during the fiscal year on average exposure

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Investment Income

As o f December 3 1 , 2008, MIGA's investment portfolio generated US$23.6 mill ion compared to US$28.5 mi l l ion o f investment income during the same period in FY08. The 12-month rolling return (from December 31, 2007) for Tranche 1 i s 3.77%, and the annualized return since inception (from August 3 1 , 2004) for Tranche 2 i s 4.02%.

Table 2. Investment Income FY06-FY09 (Hl)

US$ Millions FY06 FY07 FY08 FY09 FY08

Investment portfolio 787 84 1 915 93 3 878 Total return on 1.5 5.4 5.3 2.6 3.4 investments % * Investment income * 11.4 42.8 45.3 23.6 28.5

* The "total return on investments" figures are calculated to reflect the total economic gains/losses, including unrealized gains/losses, and are therefore comparable. Numbers reflect annual return for FY06-08, and year- to-date return for the first half o f FY08 and FY09.

Table 3. YTD Investment Return of MIGA Investment Tranches (non-annualized)

USD Tranch 1 USD Tranch 2 Multi-currency Portfolio

U S Treasury 4.10% 4.10% N/A Operational Cash 1.53% N/A NJA MBS N/A 5.72% N/A Time Deposits 1 .OO% 1 .OO% 1.99% Total 1.96% 3.16% 1.99% Total MIGA Portfolio 2.61%

Reserve for Claims

As o f December 31, 2008, MIGA's gross and net reserve for claims amounted to US$203.3 mi l l ion and US$171.9 mi l l ion compared respectively to US$191 .O mill ion and US$157.4 mi l l ion as o f June 30, 2008. MIGA recorded a provision for claims o f US$14.5 mi l l ion as o f December 31,2008.

The total reserves consist o f two main parts: (i) the Specific Reserve and (ii) the Insurance Portfolio Reserve. As o f December 3 1 , 2008, MIGA's Specific Reserve stands at US$37.1 mi l l ion on net basis compared to US$29.6 mi l l ion as o f June 30,2008. In the Specific Reserve, MIGA currently identifies twelve contracts. The Insurance Portfolio Reserve i s calculated at US$134.8 mi l l ion on net basis compared to US$127.8 mill ion as o f June 30,2008.

MIGA's Specific Reserve was increased by US$7.5 mi l l ion due to the two additional contracts which were added to the probable loss reserve. The Insurance Portfolio Reserve increased by US$7.0 mi l l ion primarily as a result o f a decrease in the discount rate used in MIGA's provisioning models, the attribution o f specific reserving parameters to the

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two new contracts and the reduced recovery assumption for the one contract in the probable loss reserve. Also contributing to the increase in the Insurance Portfolio Reserve were rating downgrades in the second quarter o f FY09 for 24 covers in 2 1 countries (nine o f which being for Transfer Restriction risk in the E C A region). The impact o f these downgrades i s however limited because MIGA’s portfolio as o f Dec 31 consisted o f a total o f 687 covers on 279 contracts. The impact was further mitigated by a slight decrease in overall net portfolio exposure outstanding from June to December.

MIGA utilizes an economic capital framework to establish the size o f i t s Insurance Portfolio Reserve at the 95th percentile loss level. The underlying loss distribution for this quarter, at the policy-based 99 year horizon, is shown below in Chart 1. The chart shows the cumulative probability distribution and provides loss data at different percentiles.

Chart 1. Loss Curve for Portfolio as o f end-December 2008 FYOS Q2 Aggregate Portfolio Loss Distribution

(as Cumulative Distribution Function) 99 year horizon

0 100 200 300 400 500 600 Loss ($ millions)

Administrative Expenses

The administrative expenses as o f December 31, 2008 amounted to US$14.4 mi l l ion on an accrual basis and US$15.8 mi l l ion on cash basis compared to US$14.3 mi l l ion and US$16.3 mill ion during the same period in FY08. This represents 38% and 41% percent o f the budget compared to 38% and 44% during the same period in FY08. The FY09 budget allocation (excluding a contingency o f US$0.6 million) on a straight l ine basis i s US$18.8 million.

The major undenun pertains to staff cost l ine item that includes salaries, benefits & staff retirement costs. This i s due to delays in filling budgeted staff vacancies. The vacant positions are expected to be filled by end o f the third quarter in FY09.

Net Income (Loss)

N e t loss for the six months ended December 31, 2008 amounted to US$1.7 million, compared to an income o f US$33.3 mi l l ion during the six months ended December 31, 2007. However, the net premium income during the f irst half o f FY09 showed an increase o f US$4.3 mi l l ion compared to the same period o f FY08. The net loss i s primarily driven by foreign currency translation losses on mainly Euro and British Pounds denominated investments, lower investment income and charge for provision for claims.

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Liquidity

MIGA measures liquidity by reference to: (i) the resources that are available to pay claims (“Sources o f Cash”), and (ii) the capital and reserves that are available to sustain losses and support the on-going business (“Operating Capital”). As o f December 31, 2008, Sources o f Cash amounted to US$1,051 million, including MIGA’s cash and investment portfolio o f US$939 mil l ion and promissory notes o f US$112 million. Operating Capital o f US$1,027 mill ion was comprised o f an Insurance Portfolio Reserve amounting to US$135 million, Retained Earnings and other income o f US$529 million, and Paid-in Capital o f US$363 million. In addition, MIGA was supported by US$1.5 bil l ion o f callable capital.

Table 4. Liquidity FY06-FY09 (Hl)

U S $ Mil l ions FY06 FY07 FY08 FY09 FY08 (HI) (Hl)

Cash and investmentda) 792 847 92 1 93 9 885 Credit facilities 50 0 0 0 0 Promissory notes 109 110 113 112 111 Sources of Cash 951 957 1,034 1,051 996 Insurance Portfolio 120 118 128 135 127 Reserve (net) Retained earnings & 3 84 472 530 529 505

Paid-in capital 359 3 60 361 3 63 3 60 Operating Capital 863 950 1,019 1,027 992

(a) Investment amounts are shown net o f receivable and payable for trading securities.

other income

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Quarterly Financial Statements

U N A U D I T E D

December 31,2008

MIGA Financial Statements

Table o f Contents December 31. 2008

Balance Sheet ............................................................................................................................................................. 1

Statement o f Income ................................................................................................................................................... 2

Statement o f Comprehensive Income ......................................................................................................................... 3

Statement o f Changes in Shareholders’ Equity .......................................................................................................... 3

Statement o f Cash Flows ............................................................................................................................................ 4

Notes to Financial Statements .............................................................................................................................. 5-19

MIGA Financial Statements 1

Balance Sheet December 31. 2008 (unaudited) and June 30. 2008 Expressed in thousands of U S dollars

Assets CASH ....................................................................................................................................

INVESTMENTS . Note B ............................................................................

NONNEGOTIABLE. NONINTEREST-BEARING DEMAND OBLIGATIONS ..........................................................................................

OTHER ASSETS Receivable for investment securities sold ...................................................................... Estimated reinsurance recoverables ............................................................................... Prepaid premiums ceded to reinsurers ........................................................................... Net assets under retirement benefits plans ..................................................................... Miscellaneous ................................................................................................................

TOTAL ASSETS ..................................................................................................................

Liabilities and Shareholders’ Equity

LIABILITIES Payable for investment securities purchased .................................................................. Accounts payable and accrued expenses ........................................................................ Unearned premiums and commitments fees ............................. ........... Reserve for claims - Note E

Specific reserve for claims ...................... Insurance portfolio reserve ..........................

....................................

Reserve for claims - gross ...................................................................................... Total liabilities ........................................................................................................

CONTINGENT LIABILITIES . Note D

December 3 1

$ 8. 122

938. 782

112. 207

3. 832 3 1. 400 18. 367 48. 245

9.363 111.207

$1.170.318

June 30

$ 3 0 1 6.

966.047

113. 203

29. 284 33. 600 13. 695 47. 0 15 10.740

134.334

$1.219.885

$ 15.241 $ 85.434

20. 526 18.918

39.460 33.274

63. 500 55. 200 139. 800 135. 800 203. 300 191. 000

278. 527 328. 626

SHAREHOLDERS’ EQUITY Capital stock . Note C

Authorized capital (184. 754 shares- December 3 1. 2008; 184. 404 shares-June 30. 2008) Subscribed capital (175. 129 shares- December 3 1. 2008; 174. 779 shares-June 30. 2008) 1.894. 896 Less uncalled portion o f subscriptions .................................................................... 1 3 3 3. 445

361. 45 1 Payments on account o f pending subscriptions ............................................................. 1. 357

3 62. 808 Retained earnings ............................................................................................................ 506. 866 Accumulated other comprehensive ncome .................................................................... 22.117

Total shareholders’ equity ...................................................................................... 891.791

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY ............................................... $1,170.3 18

1.891. 109 1.530. 415

360. 694 67

360. 761 508. 545 2 1.953

891.259

$1.2 19.885

See accompanying notes to the financial statements .

2 MIGA Financial Statements

Statement of Income For the three months ended December 31,2008 (unaudited) and December 31,2007 (unaudited) and for the six months ended December 31,2008 (unaudited) and December 31,2007 (unaudited) Expressed in thousands of U S dollars

Three months ended Six months ended December 3 1 December 3 1

INCOME Income from guarantees

Premium income ...................................................... Premium ceded ........................................................ Fees and commissions .............................................. Total .........................................................................

Income from investments ................................................ Translation gains (losses) ................................................

Total income ............................................................

EXPENSES Provision for claims - Note E .......................................... Administrative expenses - Notes F and G ....................... Other expenses ................................................................

Total expenses .........................................................

NET INCOME (LOSS) ..........................................................

2008

$ 15,624

2.232 11.431

14,776 (6.5 3 6)

19.671

(6,425)

4,400 7,499

244

12,143

$7.528

2007

$ 12,902

1.452 9.464

14,748 2.782

26,994

(4,890)

12,100 7,567

307

19,974

$ 7,020

2008

$ 31,501 (12,860)

3,897 22,538

23,583 (18.453)

27,668

14,500 14,360

487

29,347

$0

2007

$25,246

2,383 18,188

28,506 9,096

55,790

(9,441)

7,700 14,288

503

22.491

$33.299

See accompanying notes to the financial statements.

MIGA Financial Statements 3

Statement of Comprehensive Income For the three months ended December 31,2008 (unaudited) and December 31,2007 (unaudited) and for the six months ended December 31,2008 (unaudited) and December 31,2007 (unaudited) Expressed in thousands of U S dollars

Three months ended Six months ended December 3 1 December 3 1

$ (1.679) $33,299 NET INCOME (LOSS) .................................................................. $ 7.528 $ 7.020

OTHER COMPREHENSIVE INCOME Change in unrecognized net actusrial gains on benefit plans 36 9 74 18 Change in unrecognized prior service credits on benefit plans 45 ~ 44 90 88

................................... 53 164 106

COMPREHENSIVE INCOME (LOSS) ......................................... $ 7.609 $ 7.073 $ (1,515) $33.405

Total other comprehensive income 81 ~

Statement o f Changes in Shareholders’ Equity F o r the six months ended December 31,2008 (unaudited) and December 31,2007 (unaudited) Expressed in thousands o f U S dollars

CAPITAL STOCK Balance at beginning o f the fiscal year .......................................................................... New subscriptions. ......................................................................................................... Receipts on account o f pending subscriptions ............................................................... Ending Balance ..............................................................................................................

RETAINED EARNINGS Balance at beginning o f the fiscal year .......................................................................... N e t income (loss) .......................................................................................................... Ending Balance ..............................................................................................................

TOTAL ACCUMULATED OTHER COMPREHENSIVE INCOME Balance at beginning o f the fiscal year ..........................................................................

Other comprehensive income .................................................................................. Ending Balance ..............................................................................................................

. .

TOTAL SHAREHOLDERS’ EQUITY ................................................................................

$ 360,761 757

1.290

362,808

508,545 (1,679)

506.866

$ 359,651

359,651

442,824 33,299

476.123

21,953 28,843 164 106

22,117 28,949

$ 891.791 $ 864.723



Statement of Cash Flows For the six months ended December 31,2008 (unaudited) and December 31,2007 (unaudited) Exmessed in thousands o f U S dollars

CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ,......,........... .. .............. ................................... ..................................... Adjustments to reconcile net income to net cash provided by operating activities:

Provision for claims .............................................................................................. Translation losses (gains) .................. .... ........ ................ ....... .. ............. ........ .......... N e t changes in:

Investments - Trading ....................................................................................... Other assets, excluding investment receivables. .. .................. ........................... Accounts payable and accrued expenses ...... ........ ........... ....... ....... .................... Unearned premiums and commitment fees ........ .......... .. .................................. .

Net cash provided by operating activities

CASH FLOWS FROM FINANCING ACTIVITIES: Decrease in overdraft .................................................................................................... Capital subscription receipts (payments) . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . .. .

Net cash provided by (used in) financing activities

EFFECT OF EXCHANGE RATE CHANGES ON CASH ..................................................

Net increase in cash ....................................................................................................... Cash at beginning o f the fiscal year ...............................................................................

CASH AT END OF THE PERIOD ......................................................................................

2008

$ (1,679)

14,500 18,453

(34,006)

2,077 6.621 1,119

(4,847)

1,668 1,668

(966)

1,821 6,301

$ 8,122

2007

$ 33,299

7,700 (9,096)

(4,487) (2,182) 1,305

(1,827) 24.712

(24,272) (3 )

(24,275)

247

684 6.105

$ 6.789


MIGA Financial Statements 5 Notes to Financial Statements Purpose

The Multilateral Investment Guarantee Agency (MIGA), established on April 12, 1988 and located in Washington D.C., i s a member o f the World Bank Group which also includes the International Bank for Reconstruction and Development (IBRD), the International Finance Corporation (IFC), and the International Development Association (IDA). MIGA’s activities are closely coordinated with and complement the overall development objectives o f the other World Bank institutions. MIGA i s designed to help developing countries attract productive foreign investment by both private investors and commercially operated public sector companies. I t s facilities include guarantees or insurance against noncommercial risks and a program o f advisory services and technical assistance to support member countries’ efforts to attract and retain foreign direct investment.

Note A: Summary of Significant Accounting and Related Policies

Basis of Preparation MIGA’s financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board and with accounting principles generally accepted in the United States o f America (U.S. GAAP). The financial statements for the three and six months ended December 3 1,2008 and 2007 are in compliance with International Accounting Standard (IAS) 34, “Interim Financial Report.” The policy adopted i s that considered most appropriate to the circumstances o f MIGA having regard to i ts legal requirements and to the practices o f other international insurance entities. The Balance Sheet as o f June 30, 2008, included for comparative purposes only, i s derived from the audited financial statements as o f June 30,2008.

In the opinion o f management, all adjustments necessary for a fair presentation o f the financial position and the results o f operations for the interim periods have been made. For further information, refer to the financial statements and notes thereto included in the Agency’s Annual Report for the fiscal year ended June 30, 2008. The results o f operations for the three and six months o f the current fiscal year are not necessarily indicative o f results that may be expected for the full year.

Accounting & Reporting Developments The International Accounting Standard Board (IASB) issued International Financial Reporting Standard (IFRS) 4 “Insurance Contracts ” in March 2004 to achieve convergence o f widely varying insurance industry accounting practices around the world. IASB has divided the insurance project into two phases. In line with the requirements o f Phase 1, MIGA included additional disclosures beginning the quarter ended September 30,2005 that identify and explain the amounts in the financial statements arising from insurance contracts. Phase 2 o f the project i s expected to come into effect in 201 1. This will address issues relating to insurance accounting.

In September 2006, the Financial Accounting Standards Board (FASB) issued the Statement o f Financial Accounting Standards No. 157, “Fair Value Measurements” (FAS 157). FAS 157 defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurements. FAS 157 also requires that the valuation techniques used to measure fair value maximize the use o f observable inputs and minimize the use o f unobservable inputs. MIGA has implemented the standard as o f July 1, 2008.

In December 2007, the FASB issued the Statement o f Financial Reporting Standard No. 160, “Non- controlling Interests in Consolidated Financial Statements - an amendment of ARB No. 51 ” (FAS 160), which changes the accounting and reporting for minority interests. This statement i s effective for fiscal years beginning on or after December 15, 2008. FAS 160 will not impact MIGA’s financial statements.


Notes to Financial Statements In March 2008, the FASB issued the Statement o f Financial Accounting Standard No.161, “Disclosures about Derivative Instruments and Hedging Activities” (FAS 161). FAS 161 i s intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to better understand their effects on an entity’s financial position, financial performance, and cash flows. The provisions o f FAS 161 are effective for periods beginning after November 15, 2008. MIGA i s currently evaluating the impact o f the provisions o f FAS 161.

In May 2008, the FASB issued the Statement o f Financial Accounting Standards No. 163 “Accounting for Financial Guarantee Insurance Contracts, an Interpretation of FASB Statement No. 60” (FAS 163). For certain financial insurance guarantee contracts, this statement addresses premium revenue recognition, claim liability recognition and disclosures related to each. Except for certain disclosures that are applicable for quarter ending September 30, 2008 onwards, this statement i s effective for fiscal years beginning after December 15, 2008. FAS 163 will not impact MIGA’s financial statements.

Differences between US GAAP and IFRS On September 29, 2006, the FASB issued the Statement o f Financial Accounting Standard No. 158, Employers ’ Accounting for Defined Benefit Pension and Other Postretirement Plans (FAS 158). FAS 158 requires employers to recognize on their balance sheets the funded status o f their defined benefit postretirement plans, measured as the difference between the fair value o f the plan assets and the benefit obligation. Gains or losses and prior service costs or credits that arise during the period are recognized as part o f Other Comprehensive Income, to the extent they are not recognized as components o f the net periodic benefit cost. Additionally, upon adoption, FAS 158 requires unrecognized net actuarial gain or loss and unrecognized prior service costs to be recognized in the ending balance o f Accumulated Other Comprehensive Income. These amounts will be adjusted as they are subsequently recognized as components o f net periodic benefit cost, based upon the current amortization and recognition requirements o f Statement o f Financial Accounting Standard No. 87, Employers ’ Accounting for Pensions (FAS 87) and Statement o f Financial Accounting Standards No. 106, Employers ’ Accounting for Postretirement Benefits Other Than Pensions (FAS 106). FAS 158 has been adopted by MIGA effective June 30,2007.

MIGA’s accounting policy under International Accounting Standards (IAS) 19, Employee Benefits i s to recognize all actuarial gains and losses in the period in which they occur-but outside profit or loss-“in a statement o f changes in shareholder’s equity.” This i s a permitted alternative available under I A S 19 and MIGA considers that this will allow it to show the overhnder funded position on the balance sheet thereby making i t s financial statements more relevant and complete. SFAS 158 requires prospective application o f the standard, while the change in approach under I A S 19 requires retrospective application. In addition, SFAS 158 and I A S 19 differ in the treatment o f amortization o f unrecognized actuarial gains or losses. SFAS 15 8 requires the unrecognized actuarial gains or losses to be amortized to the Income Statement, and I A S 19 requires the unrecognized actuarial gains or losses to remain in Accumulated Other Comprehensive Income. As a result, N e t Income i s lower by $36,000 and $9,000 for the three months ended December 31, 2008 and December 31, 2007 respectively and by $74,000 and $1 8,000 for the six months ended December 3 1,2008 and December 3 1 , 2007 respectively as reported under U S GAAP compared to IFRS. MIGA does not believe these differences are material.

Use o f Estimates The preparation o f financial statements in conformity with International Financial Reporting Standards and accounting principles generally accepted in the United States o f America requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from these estimates.

MIGA Financial Statements 7 Notes to Financial Statements

Significant judgments have been made in areas which management views as most critical with respect to the establishment o f i ts loss reserves, the determination o f net periodic income from pension and other post retirement benefits plans, and the present value o f benefit obligations.

The significant accounting policies employed by MIGA are summarized below.

Cash Cash includes cash and cash equivalents which consist primarily o f highly liquid investments with insignificant interest rate risk and remaining maturities o f three months or less at the date o f purchase.

Investments MIGA manages i t s investment portfolio both for the purpose o f providing liquidity for potential claims and for capital growth. MIGA invests in time deposits, Mortgage/Asset-Backed Securities and government and agency obligations based on its investment policy approved by the Board. Government and agency obligations include highly rated fixed rate bonds, notes, bills and other obligations issued or unconditionally guaranteed by governments o f countries or other official entities including government agencies or by multilateral organizations. MIGA also enters into exchange traded futures and options transactions to manage i t s investment portfolio. The purposes o f these transactions are to enhance the return and manage the overall duration o f the portfolio. With respect to futures and options, MIGA generally closes out most open positions prior to expiration. Futures are settled on a daily basis.

MIGA has classified all investment securities as trading. Investments classified as trading securities are reported at fair value using trade-date accounting. Securities purchased or sold may have a settlement date that i s different from the trade-date. Securities purchased that could not be settled before the reporting dates are recorded as liability. Similarly, securities sold that could not be settled before the reporting dates are recorded under “Other Assets.”

For trading securities, unrealized net gains and losses are both recognized in earnings. N e t gains and losses include interest income under the caption “Income from investments.”

Nonnegotiable, Noninterest-bearing Demand Obligations on Account of Subscribed Capital Payments on these instruments are due to MIGA upon demand and are held in bank accounts which bear MIGA’s name. Accordingly, these instruments are carried and reported at face value as assets on the balance sheet.

Impairment of Reinsurance Assets MIGA assesses at each balance sheet date whether there i s objective evidence that the reinsurance asset i s impaired, and makes a provision for such impairment. Objective evidence may be in the form o f observable data that comes to MIGA’s attention periodically. If an impairment i s determined, the carrying amount o f the reinsurance asset i s reduced through the use o f an allowance account and the amount o f the loss i s recognized in the income statement

Reserve for Claims MIGA’s reserve consists o f two primary components, the Specific Reserve and the Insurance Portfolio Reserve. These components are comprehensive and mutually exclusive with respect to risk o f losses that may develop from each guarantee contract, and from the contingent l iabil i ty for the portfolio as a whole.


Notes to Financial Statements The Specific Reserve i s calculated based on contract-specific parameters that are reviewed every quarter by MIGA Management for contracts that have known difficulties. The Insurance Portfolio Reserve i s calculated based on the long-term historical experiences o f the political risk industry.

Assumptions and parameters used in the calculations are intended to serve as the basis for an objective and arms-length valuation o f insurance liabilities with a specified level o f prudence. Key assumptions, including frequency o f claim, severity, and expected recovery have been quantitatively derived from the political risk insurance industry’s historical claims data. The principal sources o f data used as inputs for the assumptions include the Berne Union and the Overseas Private Investment Corporation (OPIC). The historical analysis o f the data from those sources i s further augmented by an internal econometric scoring analysis in order to derive risk- differentiated parameters with term structure effects over time. The historical and econometric analyses cover periods that are over 30 years, and the derived parameters are considered stable in the short term; however the analyses are reviewed annually. Short-term risk changes are captured by changes in internal risk ratings for countries and contracts on a quarterly basis. For the purpose o f claims provisioning, MIGA discounts i t s reserves based on the 10-year U.S. Treasury rate.

For the purpose o f the presentation o f the financial statements, insurance liabilities (or reserves) are presented on a gross basis and not net o f reinsurance. Therefore, MIGA’s reserve i s shown on a gross basis on the liability side o f the balance sheet, while establishing reinsurance assets on the asset side. Reinsurance does not relieve MIGA o f i t s primary liability to the insured.

Currency Translation Assets and liabilities are translated at market exchange rates in effect at the end o f the period. Income and expenses are translated at either the market exchange rates in effect on the dates on which they are recognized or at an average o f the market exchange rates in effect during each month. Translation adjustments are reflected in the Income Statement.

Valuation of Capital Stock Under the MIGA Convention, all payments from members subscribing to the capital stock o f MIGA shall be settled on the basis o f the average value o f the Special Drawing Rights (SDR) introduced by the International Monetary Fund, as valued in terms o f United States dollars for the period January 1, 1981 to June 30,1985, such value being equal to $1.082 for one SDR.

Revenue Recognition Premium amounts received on direct insurance contracts and reinsurance contracts assumed can be annual, semi-annual or quarterly and are recorded as unearned premium. Premiums are recognized as earned on a pro rata basis over the contract period. A receivable for premium i s recorded when the contract has been renewed and coverage amounts have been identified.

MIGA cedes reinsurance in the normal course o f business by obtaining treaty and facultative reinsurance to augment i t s underwriting capacity and to mitigate i ts risk by protecting portions o f i t s insurance portfolio. Premiums ceded (net o f commission) follow the same approach as for direct insurance contracts and are recognized as expenses on a pro rata basis over the contract period.

Fees and commissions income for MIGA primarily consists o f administrative fees, arrangement fees, annual fees, renewal fees, commitment (offer) fees, and ceding commissions.

Note B: Investments

MIGA classifies all investment securities as trading. Investments classified as trading securities are reported at fair value with unrealized gains or losses included in earnings. The unrealized net gains


included in the investment income for the six months ended December 31, 2008 i s $6,553,000 (unrealized net gains o f $4,065,000 - December 3 1,2007).

Fair Value Measurements (FAS 15 7) FAS 157 defines fair value, establishes a consistent framework for measuring fair value, establishes a fair value hierarchy based on the quality o f inputs used to measure fair value and expands disclosure requirements about fair value measurements.

MIGA has an established process for determining fair values. Fair value i s based upon quoted market prices, where available. Financial instruments for which quoted market prices are not readily available are valued based on discounted cash f low models. These models primarily use market-based or independently sourced market parameters such as yield curves, interest rates, volatilities, foreign exchange rates and credit curves. To ensure that the valuations are appropriate where internally-developed models are used, MIGA has various controls in place, which include both internal and periodic external verification and review.

Fair VaIue Hierarchy FAS 157 establishes a three-level fair value hierarchy under which financial instruments are categorized based on the priority o f the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level l), the next highest priority to observable market-based inputs or inputs that are corroborated by market data (Level 2) and the lowest priority to unobservable inputs that are not corroborated by market data (Level 3). When the inputs used to measure fair value fal l within different levels o f the hierarchy, the level within which fair value measurement i s categorized i s based on the lowest level input that i s significant to the fair value measurement in i t s entirety. Thus, a Leve l 3 fair value measurement may include inputs that are observable (Levels 1 and 2) and unobservable (Level 3). Additionally, FAS 157 requires that the valuation techniques used to measure fair value maximize the use o f observable inputs and minimize the use o f unobservable inputs.

Financial assets and liabilities at fair value are categorized based on the inputs to the valuation techniques as follows:

Level 1: Financial assets whose values are based on unadjusted quoted prices for identical assets or liabilities in active markets.

Level 2: Financial assets and liabilities whose values are based on quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in non- active markets; or pricing models for which a l l significant inputs are observable, either directly or indirectly for substantially the full term o f the asset or liability.

Level 3: Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement.

The following table presents MIGA’s summary o f the trading portfolio and the fair value hierarchy:


Notes to Financial Statements In thousands of US Dollars

December 31,2008 June 30.2008

Government Ob1 i gati ons Time Deposits Asset Backed Securities

Level 1 Assets Level 2 Assets Level 3 Assets

$ 210,367 481,811 246,604

$ 938.782

$ 72,072 865,110

1,600 $ 938,782

$ 82,70 1 624,964 258,382

$ 966,047

$ 146,345 8 19,702

~

$ 966.047

The maximum credit exposure o f investments closely approximates the fair values o f the financial instruments.

Asset backed securities ( A B S ) are diversified among credit cards, student loans, home equity loans and mortgage backed securities. Since these holdings are primarily investment grade, neither concentration risk nor credit risk represents a significant risk to MIGA as o f December 31, 2008. However, market deterioration could cause this to change in future quarters.

Note C: Capital Stock

During the six months ended December 31, 2008, 350 shares were subscribed. Each share has a par value o f SDR10,000, valued at the rate o f $1.082 per Special drawing rights (SDR).

Note D: Guarantees

Guarantee Program MIGA offers guarantees or insurance against loss caused by non-commercial r isks (political risk insurance) to eligible investors on qualified investments in developing member countries. MIGA insures investments for up to 20 years against four different categories o f risk: currency inconvertibility and transfer restriction, expropriation, war and civi l disturbance, and breach o f contract. Currency inconvertibility and transfer restriction coverage protects the investor against inconvertibility o f local currency into foreign exchange for transfer outside the host country. Currency depreciation i s not covered. Expropriation coverage protects the investor against partial or total loss o f the insured investment as a result o f acts by the host government that may reduce or eliminate ownership of, control over, or rights to the insured investment. War and civi l disturbance coverage protects the investor against losses from damage to, or the destruction or disappearance of, tangible covered assets, as well as a total loss due to business interruption extending for a period o f at least 180 days, caused by politically motivated acts o f war or c iv i l disturbance in the host country including revolution, insurrection, coup d’etat, sabotage and terrorism. Breach o f contract coverage protects the investor against the inability to enforce an award arising out o f an arbitral or judicial decision recognizing the breach o f a covered obligation by the host government. Investors may insure projects by purchasing any combination o f the four coverages. MIGA guarantees cannot be terminated unilaterally by the guarantee holder within the first three years from the date o f issuance without payment o f a termination fee except as provided in the contract. MIGA cannot terminate the contract unless the guarantee holder defaults on i t s contractual obligations to MIGA.

Premium rates applicable are set forth in the contracts. Payments against all claims under a guarantee may not exceed the maximum amount o f coverage issued under the guarantee. Under breach o f contract coverage, payments against claims may not exceed the lesser o f the amount o f guarantee and the arbitration award.


MIGA also acts as administrator o f some investment guarantee trust funds. MIGA, on behalf o f the trust funds, issues guarantees against loss caused by non-commercial risks to eligible investors on qualified investments in the countries specified in the trust fund agreements. Under the trust fund agreements, MIGA, as administrator o f the trust funds, i s not liable on i ts own account for payment o f any claims under contracts o f guarantees issued by MIGA on behalf o f such trust funds which at December 3 1,2008 amounts to $3,496,000 ($3,5 17,000 - June 30,2008).

Contingent Liability The maximum amount o f contingent liability o f MIGA under guarantees issued and outstanding at December 31, 2008 totaled $6,737,302,000 ($6,475,136,000 -June 30, 2008). A contract o f guarantee issued by MIGA may permit the guarantee holder, at the start o f each contract period, to elect coverage and place amounts both on current and standby. MIGA i s currently at risk for amounts placed on current. The maximum amount o f contingent liability i s MIGAs maximum exposure to insurance claims, which includes "standby" coverage for which MIGA i s committed but not currently at risk. At December 31, 2008, MIGA's actual exposure to insurance claims, exclusive o f standby coverage i s $5,721,600,000 ($5,159,055,000 - June 30,2008).

Reinsurance MIGA obtains treaty and facultative reinsurance (both public and private) to augment i t s underwriting capacity and to mitigate i t s risk by protecting portions o f i t s insurance portfolio, and not for speculative reasons. All reinsurance contracts are ceded on a proportionate basis. However, MIGA i s exposed to reinsurance non-performance risk in the event that reinsurers fai l to pay their proportionate share o f the loss in case o f a claim. MIGA manages this risk by requiring that private sector reinsurers be rated by at least two o f the four major rating agencies (Standard & Poor's, A.M. Best, Moody's and Fitch), and that such ratings be above a minimum threshold. In addition, MIGA may also place reinsurance with public insurers o f member countries that operate under and benefit from the full faith and credit o f their governments and with multilateral agencies that represent an acceptable counterparty risk. MIGA has established limits, at both the project and portfolio levels, which restrict the amount o f reinsurance that may be ceded. The project limit states that MIGA may cede no more than 90 percent o f any individual project. The portfolio limit states that MIGA may not reinsure more than 50 percent o f i t s aggregate gross exposure.

Of the $6,737,302,000 outstanding contingent l iabil i ty (gross exposure) as at December 3 1, 2008 ($6,475,136,000 -June 30, 2008), $3,174,913,000 was ceded through contracts o f reinsurance ($2,897,318,000 - June 30, 2008). N e t exposure amounted to $3,562,389,000 as at December 31, 2008 ($3,577,818,000 - June 30,2008).

As o f December 3 1,2008, no reinsurance was assumed by MIGA.

Premiums relating to direct, assumed, and ceded contracts for the three and six months ended December 31,2008 and December 31,2007 were as follows:

I n thousands of US dollars Three months ended Dee. 31, 2008 Dee. 31, 2007

Premiums written Direct Assumed Ceded

Premiums earned Direct Assumed Ceded

$18,927 $14,368

8,856 5,199

15,624 12,882 20

6,425 4,890


Notes to Financial Statements

I n thousands of US dollars Six months ended Dee. 31, 2008 Dee. 31. 2007

Premiums written Direct Assumed Ceded

Premiums earned Direct Assumed Ceded

$37,077 $23,73 1

17,532 8,439

31,501 25,149 97

12,860 9,44 1

Portfolio Risk Management Controlled acceptance o f political risk in developing countries i s MIGA's core business. The underwriting o f such risk requires a comprehensive risk management framework to analyze, measure, mitigate and control risk exposures.

Claims risk, the largest risk for MIGA, i s the risk o f incurring a financial loss as a result o f a claimable political risk event in developing countries. Political risk assessment forms an integral part o f MIGA's underwriting process and includes the analysis o f both country-related and project- related risks.

Country risk assessment i s a combination o f quantitative and qualitative analysis. Ratings are assigned individually to each risk for which MIGA provides insurance coverage in a country. Country ratings are reviewed and updated every quarter. Country risk assessment forms the basis o f the underwriting o f insurance contracts, setting o f premium levels, and provisioning for claims.

Project-specific risk assessment i s performed by a cross-functional team. Based on the analysis o f project-specific risk factors within the country context, the final project risk ratings can be higher or lower than the country ratings o f a specific coverage. The decision to issue an insurance contract i s subject to approval by MIGA's Senior Management and concurrence by the Board o f Directors. In order to avoid excessive risk concentration, MIGA sets exposure limits per country and per project. The maximum net exposure which may be assumed by MIGA i s $600 mi l l ion in each host country and $180 mi l l ion for each project.

As approved by the Board o f Directors and the Council o f Governors, the maximum aggregate amount o f contingent liabilities that may be assumed by MIGA i s 350 percent o f the sum of MIGA's unimpaired subscribed capital and i t s retained earnings, and insurance portfolio reserve plus such portion o f the insurance ceded by MIGA through contracts o f reinsurance as the Board o f Directors may determine. Accordingly, at December 3 1, 2008, the maximum level o f guarantees outstanding (including reinsurance) may not exceed $1 1,878,000,000.

Portfolio Diversification MIGA aims to diversify i ts guarantee portfolio so as to limit the concentration o f exposure to loss in a host country, region, or sector. The portfolio shares o f the top five and top ten largest exposure countries provide an indicator o f concentration risk. The gross and net exposures o f the top five and top ten countries at December 31,2008 and June 30,2008 are as follows:


I n thousands of US dollars December 31,2008 June 30,2008

Exposure in Exposure in Exposure in Exposure in Top Five Top Ten Top Five Top Ten Countries Countries Countries Countries

Gross Exposure $ 3,282,585 $ 4,285,119 $ 2,883,310 $ 3,906,457 % o f Total Gross Exposure 48.7 63.6 44.5 60.3

Net Exposure $ 1,180,955 $ 1,795,537 $ 1,131,058 $ 1,757,518 % o f Total Net Exposure 33.2 50.4 31.6 49.1

A regionally diversified portfolio i s desirable for MIGA as an insurer, because correlations o f claims occurrences are typically higher within a region than between regions. When a correlation i s higher, the probability o f simultaneous occurrences o f claims will be higher.

The regional distribution o f MIGA’s portfolio at December 31, 2008 and June 30, 2008 i s as follows:

In thousands of US dollars December 31,2008 June 30,2008

Yo of Yo of Gross Net Total Net Gross Net Total Net Exposure Exposure Exposure Exposure Exposure Exposure

Africa $1,001,533 $789,333 22.2 $1,015,491 $798,182 22.3 Asia 676,759 461,809 12.9 688,516 470,012 13.1 Europe & Central Asia 3,188,002 1,243,523 34.9 2,898,430 1,254,045 35.1 Latin America & Caribbean 1,319,635 759,894 21.3 1,320,969 747,393 20.9 Middle East & North Africa 681,268 372,778 10.5 681,625 373,134 10.4 Adjustment for Master Agreement * (129,895) (64,948) (1.8) (129,895) (64,948) (1.8)

*Adjustment for master agreement accounts for MIGA’s maximum exposure to loss with a single investor being less than the sum of the maximum aggregate liabilities under the individual contracts.

$6,737,302 $3,562,389 100.0 $6,475,136 $3,577,818 100.0

The sectoral distribution o f MIGA’s portfolio at December 31,2008 and June 30, 2008 i s shown in the following table:



December 31,2008 June 30,2008 % of Total % of Total

Sector Exposure Exposure Exposure Exposure Exposure Exposure Gross Net Net Gross Net Net

Infiastructure $ 2,546,512 $ 1,499,582 42.1 $ 2,648,422 $ 1,543,358 43.1 Financial 2,791,320 1,159,374 32.5 2,411,171 1,117,441 31.2 Tourism, Construction and Services 234,768 2 0 9,3 2 3 5.9 239,206 213,137 6.0

Oil and Gas 328,934 256,442 7.2 329,519 256,910 7.2 Mining 267,778 90,112 2.5 269,069 90,885 2.5

Manufacturing 489,534 277,199 7.8 495,385 282,560 7.9

Agribusiness 78,456 70,357 2.0 82,364 73,527 2.1 $ 6,737,302 $ 3,562,389 100.0 $ 6,475,136 $ 3,577,818 100.0

Note E: Claims

Reserve for Claims MIGA’s gross reserve for claims at December 31, 2008 amounted to $203,300,000 ($191,000,000- June 30, 2008) and estimated reinsurance recoverables amounted to $3 1,400,000 ($33,600,000- June 30,2008).

An analysis o f the changes to the gross reserve for claims for the six months ended December 3 1, 2008 and for the fiscal year ended June 30,2008 appears below.

I n thousands of US Dollars December 31,2008 June 30,2008

Gross reserve balance $ 191,000 $ 184,200 Less: Estimated reinsurance recoverables 33,600 35,800 Net reserve balance, beginning o f the period 157,400 148,400

~

Provision for claims-net o f reinsurance 14,500 9,000

Net reserve balance 171,900 157,400 Add: Estimated reinsurance recoverables 3 1,400 33,600 Gross reserve balance, end o f the period $ 203,300 $ 191,000

The charge o f $14,500,000 for provision for claims, net o f reinsurance for the six months ended December 31, 2008 compared to a charge o f $9,000,000 for the twelve months ended June 30, 2008 has primarily resulted from the increase in the Specific Reserve provided for an additional project during the period and a decrease in the discount rate used in MIGA’s provisioning models.

Specific Reserve for Claims The specific reserve for claims i s composed o f reserves for pending claims and reserves for contracts where a claimable event, or events that may give r ise to a claimable event, may have occurred, but in relation to which no claim has been filed, but where a loss i s probable. The parameters used in calculating the specific reserves, Le. claims probability, severity and expected


recovery, are assessed for each contract placed in the specific reserves on a quarterly basis. At December 31,2008, the specific reserves amounted to $63,500,000 ($55,200,000 -June 30,2008).

The following table shows how the estimates o f the specific reserves for each reporting period have developed over the past seven years:

In thousands of US dollars Reporting Period FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09-Q2 Total Estimate o f Cumulative Claims: At end o f reporting period 121,800 9,900 37,800 27,610 1,062 2,800 6,500 One year later 68,600 4,600 23,550 40,380 Two years later 3,000 4,530 8,343 45,900 Three years later 5,650 3,279 6,800 45,600 Four years later 5,775 700 1,300 Five years later 5,700 700 Six years later 5,500 Estimate o f cumulative claims at Dec 31,2008 7,300 700 1,300 45,200 3,200 6,500 64,200 Cumulative payments (700) (700) Specific reserves at December 3 1,2008 7,300 1,300 45,200 3,200 6,500 63,500

Pending Claims Included in Specific Reserve for Claims at December 3 1, 2008 are four claims. MIGA’s ultimate l iabil i ty for these claims has not yet been determined as the claims have not been settled.

On January 24, 2008, MIGA received a claim for a project in Kenya. The amount o f loss was not specified in the claim. The maximum aggregate l iabil i ty under the contract i s $0.5 mill ion. MIGA requested the Guarantee Holder to furnish the required information for it to proceed with claims determination, which MIGA received during the quarter ended September 3 0,2008.

On December 22, 2008, MIGA received a second claim related to the project in Kenya. The new claim arises under coverage for debt to the project enterprise and asserts that a $0.9 mil l ion debt service payment was missed due to a covered event. MIGA has requested support for the claim and for information on the cause o f the default, and has increased i t s reserve for this claim.

On November 29, 2006, MIGA received a claim in the amount o f $54 mi l l ion for expropriation o f a project in Nicaragua. The Guarantee Holder asserted that the project had been expropriated due to i t s inability to obtain approvals for tar i f f adjustments in accordance with the terms o f the concession agreements for distribution o f electricity and other acts o f the Government o f Nicaragua (GoN), which have rendered the project unviable. The GoN and the guarantee investor have been in negotiation o f settlement o f the dispute and the processing o f the claim has been suspended pending the results o f those discussions.

On October 6, 2004, MIGA received claims for expropriation o f projects in Kyrgyz Republic, in the amount o f $0.9 mill ion. A Settlement Agreement has been negotiated, but i s not yet effective. MIGA i s maintaining the provision for this matter until the agreement i s implemented.



Note F-Pension and Other Post retirement Benefits

MIGA, IBRD and IFC participate in a defined benefit Staff Retirement Plan (SRP), a Retired Staff Benefits Plan (RSBP) and a Post-Employment Benefi ts Plan (PEBP) that cover substantially al l o f their staff members.

All costs, assets and liabilities associated with these plans are allocated between MIGA, IBRD, and IFC based upon their employees’ respective participation in the plans. In addition, MIGA and IFC reimburse IBRD for their proportionate share o f any contributions made to these plans by IBRD. Contributions to these plans are calculated as a percentage o f salary.

The following table summarizes the benefit costs associated with the SRP, RSBP, and PEBP for MIGA for the three and six months ended December 3 1,2008 and December 3 1,2007:

I n thousands of US dollars

Three months ended

Benefit Cost Service cost

Interest cost

Expected return on plan assets

Amortization o f prior service cost

Amortization o f unrecognized net loss (gain)

Net periodic pension cost (income)

SRP RSBP PEBP

Dec 31, Dec 31, Dec 31, Dec 31, Dec 31, Dec 31, 2008 2007 2008 2007 2008 2007

$ 661 $ 694 $ 131 $ 116 $ 62 $ 52 1,395 1,220 192 161 45 36

(2,524) (2,490) (234) (220) 23 21 22 22 2 1

9 (1) 27 10

$ (445)$ (555) $ 120 $ 78 $ 136 $99

I n thousands of US dollars Six months ended SRP RSBP PEBP

Dec 31, Dec 31, Dec 31, Dec 31, Dec 31, Dec 31, 2008 2007 2008 2007 2008 2007

Benefit Cost Service cost $ 1,323 $ 1,388 $ 261 $ 232 $ 123 $ 105

Interest cost 2,789 2,440 385 322 91 72 Expected return on plan assets

Amortization o f prior service cost

(5,048) (4,981) (468) (439) 45 43 43 43 3 2

Amortization o f unrecognized net loss (gain) 19 (2) 55 20 Net periodic pension cost (income) $ (891)$(1,110) $ 240 $ 156 $ 272 $ 199

At December 3 1,2008, the estimate o f the amount o f contributions expected to be paid to the SRP and RSBP by MIGA during fiscal year 2009 remained unchanged from that disclosed in the June 30, 2008 financial statements: $627,000 for the SRP and $400,000 for the RSBP.

Note G: Receivables and Payables from Affiliated Organizations

At December 3 1, 2008 and June 30, 2008, MIGA had the following payables to (receivables from) i t s affiliated organizations with regard to administrative services and pension and other postretirement benefits.


I n thousands of US dollars December 31,2008 June 30,2008

Pension and Pension and Other Other

Administrative Postretirement Administrative Postretirement Services Benefits Total Services Benefits Total

IBRD $ 2,201 $ (2,017) $ 184 $ 2,217 $ (2,033) $ 184 IFC 2,025 2,025 2,236 2,236

$ 4,226 $ (2,017) $ 2,209 $ 4,453 $ (2,033) $ 2,420

Receivable from IBRD relates to MIGA’s portion o f PEBP pension plan assets in IBRD’s books.

Note H: Fair Value Measurement

Fair value i s defined as the price that would be received to se l l a financial asset or paid to transfer a financial l iabil i ty in an orderly transaction between market participants at the measurement date. MIGA uses observable market data, when available, and minimizes the use o f unobservable inputs when determining fair value. The fair values o f MIGA’s cash and non-negotiable, non interest- bearing demand obligations approximate their carrying values. The fair values o f government obligations are based on quoted market prices and the fair values o f asset backed securities are based on pricing models for which market observable inputs are used. The degree to which management judgment i s involved in determining the fair value o f a financial instrument i s dependent upon the availability o f quoted market prices or observable market parameters. For financial instruments that trade actively and have quoted market prices or observable market parameters, there i s minimal subjectivity involved in measuring fair value. Substantially a l l o f MIGA’s financial instruments use either o f the foregoing methodologies to determine fair values that are recorded on i t s financial statements. The fair values are only indicative o f individual financial instrument values and should not be considered an indication o f MIGA’s fair value.

Note I: Risk Management

The responsibility for approving MIGA’s risk management policies lies with the Board o f Directors. The Audit Committee o f the Board deals with risk management issues.

While the Executive Vice President assumes the responsibility for overall risk management with the support o f the senior management team, the responsibility for the design and operational implementation o f the risk management framework l ies with the Finance and Risk Management Group with coordination from the Legal Affairs and Claims Group, the Operations Group and the Economics and Policy Group.

Risk Categories

MIGA i s exposed to a variety o f r isks and uses risk management programs such as an Economic Capital Framework, and reinsurance arrangements to manage i ts risk. Below i s a description o f risk management systems o f the important risks for MIGA.

e Insurance Risk Political risk assessment forms an integral part o f MIGA’s underwriting process, and includes the analysis o f both country-related and project-related risks. Insurance risk arises from MIGA’s core business o f issuing investment guarantees. MIGA’s earnings depend upon the extent to which claims experience i s consistent with assumptions used in setting prices for products and


Notes to Financial Statements establishing technical provisions and liabilities for claims. If actual claims experience o f the Agency i s less favorable than underlying assumptions, then income would be reduced. MIGA monitors claim activities and provisions for pending claims.

In order to prevent excessive risk concentration, MIGA sets exposure limits per country and per project. MIGA uses an Economic Capital model to evaluate concentration risk in MIGA’s guarantee portfolio and to support decision making in pricing new large projects, or new projects in countries with large exposure. I t s reinsurance program, including treaty and facultative reinsurance, helps manage the risk profile o f the portfolio.

CreditRisk Counter-party credit risk in MIGA’s portfolio i s the risk that reinsurers would fai l to pay their share o f a claim. MIGA requires that private sector reinsurers, with which it conducts business, be rated by at least two o f the four major rating agencies (Standard & Poor’s, A.M. Best, Moody’s and Fitch), and that the ratings be above a minimum threshold. Also, MIGA has established limits at both the project and portfolio levels, which restrict the amount o f reinsurance.

MIGA’s investment portfolio does not have significant credit risk exposure as o f December 3 1, 2008. However, market deterioration could cause this to change in future quarters. MIGA currently invests in fixed income securities with high credit quality. The Investment Authorization stipulates that government or agency sponsored debt securities be AA-rated or above, time deposits be A-rated or above, and corporate debt securities be AAA-rated.

0 Interest Rate Risk Interest rate changes affect the market values o f MIGA’s invested assets. A need to liquidate assets to pay for claims in an unfavorable interest rate environment may reduce investment income. Changes in interest rates will also affect prepayment speeds o f mortgage and asset backed security holdings, which may affect the duration o f the asset portfolio.

Foreign Exchange Rate Risk The majority o f MIGA’s assets and contingent liabilities are denominated in USD, but some guarantee contracts are issued in other currencies such as EUR. To the extent that a claim i s made in a non-USD currency and requires payment in excess o f MIGA’s holdings o f that currency, MIGA may face a foreign exchange related loss in converting to the needed currency to pay for a claim.

Operational Risk Operational risk i s intrinsic to financial institutions and i s an important component o f the agency- wide risk management framework. The most important types o f operational risk involve breakdowns in internal controls and corporate governance.

MIGA attempts to mitigate operational risks by maintaining a sound internal control system. Since 2000, MIGA has adopted Committee o f Sponsoring Organizations (C0SO)’s integrated internal control framework, in l ine with IBRD/IDA and IFC, to regularly evaluate the effectiveness o f internal control system. In addition, MIGA has introduced an operational risk management system to strengthen monitoring o f the operational risks and controls in the financial reporting process, and the effectiveness o f key controls in the financial reporting process are assessed through the internal quality assurance review process.

MIGA’s internal control system i s regularly evaluated through independent review by the Internal Audit Department (IAD) o f the World Bank Group.


0 Legal Risk Legal risks arise primarily from changes in the legal parameters o f MIGA’s member countries as a result o f legislation or court decisions that may affect MIGA’s activities. There are also legal risks associated with MIGA being involved in legal disputes and arbitration proceedings, especially in the context o f claim resolution or settlement.

MIGA manages these risks by monitoring current and prospective future developments by way o f ongoing discussions with member countries’ representatives on the Board o f Directors and Council o f Governors. MIGA also shares information and analyses with other members o f the World Bank Group, the IMF and the United Nations. In addition, MIGA actively participates as a member o f the Berne Union in discussions and analyses o f the changes in the operating investment environment in i ts member countries.

Economic Capital and Portfolio Risk Modeling

For portfolio risk management purposes, MIGA currently utilizes an Economic Capital Model, based on the latent factor model of the Merton framework in credit risk modeling. The Economic Capital (EC) concept i s a widely recognized risk management tool in the banking and insurance industries, defining the amount o f capital an organization needs to hold in order to sustain larger than expected losses with a high degree o f certainty, over a defined time horizon and given the risk exposure and defined risk tolerance. MIGA defines i t s economic capital as the 99.99th percentile o f the aggregate loss distribution over a one year horizon, minus the mean o f the loss distribution, which i s in line with industry practice.

The model helps evaluate concentration risk in the guarantee portfolio and facilitates active, risk- based exposure management by allocating the Economic Capital to particular regions, countries, sectors, covers, or individual contracts, based on their respective risk contribution.

MIGA employs the EC model to manage i t s insurance portfolio r isks as the cornerstone o f i t s capital adequacy framework. In addition, it provides the analytical basis for risk-based pricing o f i t s products as well as quantification o f the need for prudent technical provisions for claims and liquidity holdings.

OFFICIAL USE ONLY · OFFICIAL USE ONLY MIGA/R2009-0005 February 3,2009 For meeting of Committee:...

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