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Credit Insights

A message from our leadershipWelcome to the first edition of Aon Credit International (ACI) UK’s bi-annual newsletter, Credit Insights.

The purpose of this newsletter is to provide you with insightful commentary from the credit insurance market; covering the innovations and developments which are currently occurring.

Within this edition, Chris Williamson, the Chief Economist of Markit, has provided a global economic analysis, specifically looking at the rapidly

changing investment environment and the puzzle of the Chinese economy, as well as a brief look at other topics. We also spoke with Anil Berry, the newly appointed CEO of Euler Hermes World Agency, as part of our new segment, the Insurer Profile. Here you can read candid insights into Anil’s role, as well as a look at the sectors that Euler Hermes are recognising to be more likely to face challenges with globalisation.

In addition to the market and economic commentary, Credit Insights will also keep you up to speed with upcoming events, as well as providing summaries of past events. Within this edition we cover our second Insight event of 2015, which was held on the 42nd floor of our global headquarters - 122 Leadenhall Street, otherwise known as The Cheesegrater.

I hope you find our first edition of interest and please feel free discuss any of these themes with your Aon Credit International contact.

Regards,

Stuart Lawson Chief Executive Officer Aon Credit International, EMEA stuart.lawson@aon.co.uk +44 (0)20 7086 0351

In this Issue2 Introductory update

3 Global economic outlook

5 Insurer profile

7 Aon news

8 Meet an Aon Risk Analyst

8 Client conversation

Issue 1 March 2016

Credit Insights | Aon Credit International | March 2016 2

Introductory update2015 was an interesting year for the UK credit insurance market, where we witnessed historically soft rates and plenty of capacity was available for clients. During the second half of the year, however, the UK and Global economy witnessed headwinds which suggested that GDP was slowing.

Within our own market, the value and frequency of claims increased with some notable insolvencies, including Tullis Russell and PC Harrington in the UK. During 2015 ACI UK’s claims settlement rate was 98.5% with net settlements of £56.3m and claims settled on average 32 days.

At the same time we witnessed increased demand for credit insurance as a tool to raise finance with banks as the insured or insurance a condition precedent of finance being available with the bank as a loss payee. Such transactions accounted for 45% of the deals closed by ACI UK in 2015. The drivers for cover were:

1. Credit concentrations

2. Risk management

3. Capital optimisation 2015’s top 10 insolvencies for UK clients

In order to meet emerging client requirements, ACI set up a Financial Institutions specialism, which was rolled out across EMEA and worldwide in February. The aim of this practice is to ensure our people have the best knowledge, tools and training to provide advice to clients and financial institutions as the competitive landscape changes and becomes more complex.

Turning our attention to 2016, the economic headwinds appear to have accelerated, with a number of underwriters taking and reducing cover in particular markets including China, South America and South Africa. The EU referendum on the 23rd June is causing uncertainty within the UK economy. Ludovic Subran, Chief Economist of Euler Hermes, covered the potential impact of Brexit at our November Insight event. He stated that Brexit could effect export, cause a volume drop on the back of lower FDI inflows and disinvestment, as well as tighter financing conditions.

The International Monetary Fund recently warned that the global economy is “highly vulnerable to adverse shocks” and this weakening had come “amid increasing financial turbulence and falling asset prices.” China’s slowdown is adding to these concerns with the Chinese economy growing at its slowest rate for 25 years. This was in addition to the IMF downgrading its forecast for global economic growth to 3.4% in 2016 and 3.6% in 2017.

We will cover these topics in greater detail during the course of the year and export collections activity will be discussed at our Regional Insight events which will be sponsored by Atradius in Birmingham, Glasgow, Leeds and Manchester in May.

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Progress plant (Yorkshire) Ltd

Target Canada

Caparo UK

PaperlinX UK

Tullis Russell Papermakers Ltd

Fujian Xinhongyu

Metalmecanica Maia Ltd

PC Harrington Contractors Ltd

Informa SARL

MTL Group Ltd

Credit Insights | Aon Credit International | March 2016 3

Global economic commentaryChris Williamson, Chief Economist at Markit shares his views on the global economy.

Chris has played a major role in Markit’s development as a world-leading provider of business surveys and economic indicators, including the Purchasing Managers’ Index (PMI) series. The PMI business now encompasses all major economies and the surveys are commonly cited as some of the most important sources of economic information available to central banks, financial markets and business decision makers. As Chief Economist, Chris is regularly quoted in the international business press and asked to speak at conferences on world-wide economic issues.

To say the year has started badly from an economics perspective would be an understatement, with many investors still hoping they will wake up from this bad dream. Global equity prices have slumped 10% as risk aversion has spread rapidly through the financial markets. Central bankers are queuing up to warn about downside risks to the economic outlook, warning of how financial instability could curb growth.

Markit’s worldwide PMI surveys showed global growth slowing to the weakest for just over a year. Emerging markets continue to act as a major drag on global growth but rates of expansion have also slowed or remain weak in the US, Eurozone and Japan, with cracks appearing in the UK’s resilience. Deflationary pressures have meanwhile intensified. What were nagging worries in late 2015 have turned into drivers of fear in 2016.

How has the business and investment environment changed so rapidly?

Economic growth is dependent on confidence: investors and firms need confidence that demand for products or services will continue to grow, for example, and families need confidence that a wage will continue to be paid. What has traditionally underwritten such confidence is the belief that governments, and especially policymakers in central banks, have the ability to successfully steer us through the bad times. History tells us that, through their understanding of how economies work and the tools available to them, governments can always find ways to revive growth. Sometimes it may take a while, but eventually the

good times return.

In 2016, this conviction is being challenged to an extent not seen since 2008, and perhaps even more so than then.

Chinese puzzle

The biggest concern is of course China. The official data show the economy to have grown at the slowest rate for 25 years in 2015, expanding by 6.9%. While that’s an enviable pace for most economies, it’s worryingly weak for a country that is trying to transition away from investment and manufacturing towards domestic consumption, meaning fears are intensifying about a potential ‘hard landing’.

China’s problems date back to the country’s response to the global financial crisis, which was to boost the supply of credit through the banks. This fuelled a construction boom in housing and industrial infrastructure, and the excessive expansion of state owned enterprises. With global growth failing to revive to anything like pre-recession rates, worries are mounting about the extent to which the loans made in China after the financial crisis can ever be fully repaid.

Excess industrial capacity is also being gradually closed, while the government’s commitment to reduce excessively polluting industry is further reducing growth. While some sectors are clearly booming – such as financial services and high tech industry & services – these are insufficient to offset this industrial decline.

Credit Insights | Aon Credit International | March 2016 4

The result is an economy that is slowing perhaps more than the government would like.

The traditional response would be to cut interest rates and make it easier for banks to lend money. However, the worry is that any such measures would merely pour more fuel on the problem of an economy which is already dealing with excessive debt.

Another typical response would be to devalue your currency, but this would lead to further capital flight out of China. The authorities are already eating into their (albeit vast) foreign currency reserves to prop up the Yuan and prevent a disorderly fall, though quite what the authorities are seeking to achieve in terms of a longer-term exchange rate target remains a mystery.

China’s authorities have meanwhile led to puzzlement in terms of their involvement in the equity markets. Last year saw a domestic surge in equity investment turn suddenly to collapse, a downturn that had to be limited by significant government intervention in the form of both active buying of equities by state players as well as restrictions on selling.

Importantly for many investors, suspicions over the reliability of official economic data, the lack of transparency in terms of policymaking and the government’s unpredictable interventions in currency and equity markets all suggest a worrying lack of experience in dealing with an economy that is opening up to market forces.

Energy sector slump

The slowdown in China has occurred at a time when a global supply glut of oil has led to a swift drop in inflation. Worries have escalated about loans made to the energy sector, repayments of which typically assumed oil prices far higher than today’s lows. The energy sector’s woes contributed to a sharp slowing

in US economic growth at the end of last year, but PMI data also indicate a more broad-based waning of US growth which has persisted at the start of 2016.

US policy error?

All of which suggests it was an odd time for US policymakers to be choosing to hike interest rates for the first time in almost a decade. Suspicions are mounting that the Federal Reserve made an error when it tightened policy in December.

Higher US interest rates not only bring the risk of the US economy slowing further, but also the accompanying rise in the exchange rate raises the cost of debt servicing in many emerging markets where loans have been made in dollars. Risks of defaults have therefore intensified.

The US central bank is now therefore showing signs of pulling back from its optimism about the outlook for the economy, citing global growth worries and a lack of inflationary pressures.

Meanwhile, the European Central Bank has recognised the growing threat of deflation, already seeming to acknowledge that the stimulus package it announced in December is looking inadequate. The Bank of Japan has already moved this year, joining the ECB in pushing interest rates into negative territory. A gloomy Bank of England has likewise revised down its growth projections, upping the odds of the next move being more stimulus rather than a rate hike.

Lack of firepower

The problem that markets have is that, despite continual reassurances to the contrary from central bankers, there appears to be a lack of tools for policymakers to deal with another downturn. Quantitative easing can be increased, though there are big questions being asked as to how effective past QE has been. The distorting effects of ultra-low and negative rates are also a widespread concern, and likely to have been a key contributor to the recent slide in bank share prices.

With central banks and governments having failed to engender sustainable recoveries almost a decade after the global financial crisis hit, confidence in policymaking looks to be at an all-time low.

At the moment, the surveys are showing no signs of impending recession. But the data flow over the next few months is likely to prove pivotal to central bank policymaking in revealing the extent to which financial market conditions are feeding through to the real economy.

Credit Insights | Aon Credit International | March 2016 5

Insurer ProfileAn interview with Anil Berry, CEO, Euler Hermes World Agency

Anil Berry, the new Chief Executive Officer for Euler Hermes World Agency, is responsible for growing multinational business in all regions. He has been with Euler Hermes for 16 years and prior to his current position he was the Regional Commercial Director for Euler Hermes in Asia Pacific, and CEO of Euler Hermes both in the Middle East and Hong Kong. Euler Hermes World Agency is a dedicated team within Euler Hermes that is specifically tasked with providing tailored credit risk management solutions for multinationals and financial institutions operating all over the world.

1) How are you finding your new role in the World Agency?

I have spent my career at Euler Hermes by working in London, Dubai, Hong Kong and now Paris and have extensive experience of working with the World Agency so hopefully this equips me well for my new role.

Since I started I have met with a number of our clients, brokers and teams around the world; all these discussions confirm there is great scope to support the requirements of multinational businesses in all markets.

2) What are the key growth markets for Euler Hermes World Agency in 2016?

At World Agency we systematically contributed to 25% of the organic growth of the Euler Hermes Group.

2015 was a busy year as through Solunion (our joint venture created by Euler Hermes and MAPFRE to offer trade credit insurance solutions in Spain and Latin America) we expanded further into Peru, Uruguay and Panama. In 2016 the Euler Hermes Group will continue to invest in its growth markets: Americas, MMEA and Asia Pacific. With new strategic appointments in GCC, California and Asia, we will capture additional growth opportunities in those markets. We will also look to build on our South Africa business having opened an office in Johannesburg last year in collaboration with Allianz Global Corporate & Specialty (AGCS). As global market leader, Euler Hermes is well-positioned to play a leading role in South Africa. The Euler Hermes risk business model, based on proximity to risk and the local knowledge of our 1,500 analysts spread around the globe is a key enabler for businesses looking to grow safely with foreign clients. Our strategy of an on the ground global presence combined with our experience and expertise, mean we can understand our clients’ businesses and are flexible to support their growth into new markets.

3) What are the sectors that are proving challenging or are expressing more of an interest in globalisation?

Our economic research monitors both country and sector risks. With the help of our risk underwriters all around the world, our economists provide thorough insights on the economic environment for trading securely. Let’s first consider their forecasts. According to our Economic Research department, global trade will grow by +0.9% in value in 2016 and +3.7% in volume, compared to +6% each year between 2000 and 2010. We estimate 300,000 corporates will go under in 2016, as after 6 years the decline in insolvencies will be officially over.

According to our latest economic research, global is the new local. Businesses, big or small, are feeling the impact of continued uncertainty in both macro and industry environments. The economic developments in China, the huge fall in many emerging markets’ currencies, the lower commodity prices and the continued question around US interest rates rising all confirm change is inevitable and ongoing.

At the same time, trade has become increasingly globalised, markets more competitive and companies must react accordingly to stay ahead, not easy when deflationary pressures, underscored by low commodity prices, shape the business landscape. Who are the winning sectors and who are the losers?

In the Construction sector growth will be shaped by a mix of divergent country trends. Our latest global sector report suggests businesses should keep an eye open on housing prices, as some bubbles keep on inflating (China) while others are slowly deflating (France).

The car industry is going through some major shifts - the rise of the shared economy, car manufacturers striking new partnerships with disruptive tech companies, and diesel scandals rocking big players. But despite the countless challenges the Automotive sector is facing, global sales growth is stable at +3%. Bottom line: a global presence is still a must for companies to benefit from global growth.

Credit Insights | Aon Credit International | March 2016 6

While low oil prices mean a windfall for some sub-sectors of the Transportation sector, and as many airlines’ stretch their wings not everybody can cash in on the cheap energy bonanza. Maritime shipping profits have sunk over the last year as overcapacity and low freight rates undermine sea transportation.

Over capacity, especially in China, is also an issue when it comes to Metals. Add to that the impact of collapsing demand in Brazil and Russia and you see why the steel industry, facing a decline in volumes and values, must restructure – and fast.

Stakeholders of the Energy and Chemicals sectors might be delighted – or disappointed – by more mergers and acquisitions. In any case, the M&A trend requires careful monitoring.

Consumers in Europe and North America will reap the benefits of retail’s search for a mixed online-offline business model and low energy prices.

As for what all this means for customers, this year consumers will probably have more purchasing power than in a long time. Cold comfort for some industries; a boon for others.

Against this uncertain backdrop is always opportunity. With trade credit insurance support, businesses will be underpinned and can build and grow, as the risks associated with both new and existing markets are managed.

4) Euler Hermes has a dedicated bank and financial institution focus: how do the needs of banks differ from those of corporates?

Traditionally banks have used Euler Hermes products for protection, information and to increase their financing capacity. In a post-crisis regulatory environment, banks are increasingly partnering with us to achieve risk-weighted asset optimisation and to distribute credit risk. We offer them a highly rated (S&P AA-) and non-systemic and non-competing alternative to achieve efficient portfolio management across a variety of financing lines; receivables finance, trade finance, export finance and corporate finance. We can also risk share with banks in the typically low return bond and guarantee space which can free up much needed capacity within credit lines. Not only do banks like to insure themselves, they also like their customer base to be insured. Our insurance protects their customers’ main asset (trade receivables) and enables their customers to grow safely and profitably, reducing the likelihood of the bank’s customer defaulting.

5) Where do you see trade credit insurance in 10 years’ time?

On the surface, it appears credit insurance as a product has changed very little during the last half century. From an operational standpoint, though, during the past 50 years we at Euler Hermes for instance have made huge advances investing in our global operations and, investing in our business intelligence around the world. With new technologies we live in a fast -paced environment with higher expectations of faster service, faster data with greater choice as well as greater risk.

As our clients’ businesses evolve digitally, you can expect to see digitalisation of nearly all aspects of our business, including access to information. All service industries must adapt quickly their mind-set and processes to serve customers better in response to new market realities. We need to be changing faster to ensure we remain as our clients’ trusted business partner, today and in the future. I can’t see the human element changing though, the understanding that brokers and insurers have built with clients form the basis of a close working relationship.

6) What do you like to do away from work?

As part of my job I am always travelling so it’s nice to spend some quality time in Paris with my wife and 2 children – often relaxing cooking with aspirations of a Michelin star!

7) Sum yourself up in 3 words:

On the phone!

Credit Insights | Aon Credit International | March 2016 7

Aon NewsA look at what is happening within Aon Credit International.

Recent appointmentsA number of great additions have been made to our Aon Credit International team to support and drive our business

Save the date!If you would like to attend one of the following events or would like more information, please contact Charlee Light: charlee.light@aon.co.uk

FI Roundtable, 22nd March 2016 City of London Club Sponsored by AIG

Regional Insights, 17-19 May 2016 Birmingham, Manchester, Leeds & Edinburgh Sponsored by Atradius

Insight Nordic, 23rd May 2016 Stockholm Sweden Sponsored by Euler Hermes World Agency

Global Roundtable, June 2016 A city of London location tbc Sponsored by Euler Hermes World Agency

Pieter Van Ede Head of Global Business Development Pieter joined the Aon trade credit division in September. His role focuses on taking leadership of the overall sales strategy in the multinational segment, working with local leaders to execute the strategy.

In recent news...London Insight: A global economic outlook

Nic Carreño Head of Strategic Planning - ACI EMEA Having worked for Aon for 11 years, Nic joined the ACI team in February. Nic is responsible for ensuring effective and ambitious growth plans are defined and executed throughout our geographies.

Marcel van den Akker Executive Director Global Clients - ACI EMEA Marcel joined ACI in February to focus on supporting local teams with managing and expanding key global client relationships as well as developing new client opportunities in this segment.

Eran Charit Special Products Director - ACI UK To augment the ACI UK Special Product team, Eran will be joining in May. He will be responsible for growing our new business opportunities around Credit & Political Risks Insurance and Surety Bonds & Guarantees.

On November 4 2015 we welcomed 120 guests to the 42nd floor of the new Aon headquarters, The Leadenhall Building. As well as the breathtaking views across London, the guests were treated to some expert insights into the global economy, and the key themes and trends which we are seeing in our market. We heard insights from Tanya Beckett from the BBC and Euler Hermes Chief Economist, Ludovic Subran. To read more and discover the key points that were covered, head to our website.

Credit Insights | Aon Credit International | March 2016 8

Client conversation Topical trade issues - the latest fears and hopes for global trade growthIndia becomes world’s fastest-growing economy

� Based on official figures, India has overtaken China to become the world’s fastest-growing economy, with growth of 7.5 percent in 2015

versus China’s 6.9 percent. However, some have questioned the data, reported the BBC, pointing to weaker exports, railway freight, cement

production and investment, as well as flat order books, as signs that India, like China, may no longer be booming as strongly as it has been.

� India is already the world’s tenth or eleventh biggest economy, and is set to become the third largest in the next 15 years. Whatever the

doubts about the reliability of official data, the country’s rising economic importance cannot be denied, argued the Guardian. Its rising

economic influence is likely to lead to an increase in political clout in the coming years, which could radically alter international relations.

Uncertainty and hope over global trade growth

� China’s exports shrank by 11.2 percent year-on-year in dollar terms, based on January figures – significantly more than the 3.6 percent

forecast; imports fell by 18.8 percent – compared with the 1.8 percent decline expected, the Financial Times reported. This led to a Chinese

trade surplus of Rmb406 billion ($63 billion), which could reduce some of the downward pressure on the renminbi seen in recent months.

� The U.K. saw its biggest goods trade deficit on record in 2015, at £125 billion ($180.5 billion), but had a record surplus of £90 billion ($130

billion) in the service sector, reported the BBC. The strong pound has hurt U.K. exports, but low oil prices have reduced import costs.

� The adoption of the Trade Facilitation Agreement (TFA) announced by the World Trade Organisation in December could reduce worldwide

trade costs by 12.5 to 17.5 percent, and boost developing country exports by up to $730 billion a year, according to the World Bank.

Oil prices hit new low, see hopes rise

� Crude oil fell to its lowest price since May 2003, as the Organisation for Petroleum Exporting Countries (OPEC) increased production by

another 280,000 barrels a day in January, reported USA Today. Rumors of OPEC cuts in production have seen occasional surges in prices in

recent weeks, as analysts predict an increase in bankruptcies in the energy sector in 2016 on the back of falling profits.

� Some are expecting a turn-around in 2016, said BloombergBusiness. Although investors are betting on further falls for non-energy

commodities, with raw materials falling to a 16-year low, energy funds are starting to attract fresh investment as markets bottom out.

Payment incidence

As liquidity tightened throughout 2015, most credit managers experienced increases in payment incidence. This is not alien territory for many of

us and historically the insurance market has benefited from working with buyers that are experiencing cash flow issues. The current economic

climate dictates that the frequency of these incidences will rise. If underwriters show the same level of commitment to rescheduling debts as

before, this will help mitigate losses. As with most things communication is key, so the successful rescheduling of a debt will depend upon the

payments being received in time and in full with the underwriter receiving regular updates.

Information requests

Another challenge that credit managers are facing is increased requests for additional information. It is recognised that this forms an essential part

of the underwriting process and in order to lighten the workload for credit managers, brokers are assisting in sourcing information. This broker

service will be the norm moving forward.

Credit Limit reductions

Another point that has raised challenges for credit managers has been credit limit reductions. Although credit limit reductions have been

common place ever since credit insurance began, they can prove significantly disruptive to policy holders that have special stocks, contracts or

seasonal work. As systems have evolved, the lines of communication have improved. However, I feel this could be expanded by underwriters to

include discussions with clients about key credit limit decisions. This can reduce frustrations and allow a solution to be reached that better fits

with the dynamics of a business and the insurer’s requirements.

Meet an Aon Risk AnalystMark Powell, Executive Director, is responsible for supplying risk analytic support for major Aon clients across EMEA. When asked what the key challenges credit managers have faced over the past year, and how they have been solved, he had the following to say...

Oliver Henderson Head of Global +44 (0)118 929 5115 oliver.henderson@aon.co.uk

Graham Bristow Head of National +44 (0)161 687 2423 graham.bristow1@aon.co.uk

Robert Michael Head of Business Development +44 (0)20 7086 0330 robert.michael@aon.co.uk

Barrie Watson Executive Director - Special Products +44 (0)20 7086 0356 barrie.watson1@aon.co.uk

Steve Taylor Executive Director - Special Products +44 (0)20 7086 1631 stephen.taylor2@aon.co.uk

James Ponsford Business Development Director +44 (0)20 7086 0387 james.ponsford@aon.co.uk

Ana Dieguez Reading Executive Director +44 (0)118 929 5084 ana.dieguez@aon.co.uk

Charles Arbuthnott Glasgow Branch Director +44 (0)141 222 3385 charles.arbuthnott@aon.co.uk

Debbie Peters Birmingham Branch Director +44 (0)121 335 3814 debbie.peters@aon.co.uk

Duncan Wilson London Branch Director +44 (0)20 7086 0415 duncan.wilson@aon.co.uk

Mike Butler Leeds & Manchester Branch Director +44 (0)161 687 2458 mike.butler@aon.co.uk

Key Contacts

About Aon Aon plc (NYSE:AON) is a leading global provider of risk management, insurance brokerage and reinsurance broker-age, and human resources solutions and outsourcing services. Through its more than 72,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative risk and people solutions. For further information on our capabilities and to learn how we empower results for clients, please visit: http://aon.mediaroom.com/

© Aon plc 2016. All rights reserved.

FPref: FPACI14.03.16 The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular

individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that

such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without

appropriate professional advice after a thorough examination of the particular situation.

Risk. Reinsurance. Human Resources.