Credit Insurance Market Conditions January 2010

General Overview

The market for Credit Insurance has improved marginally over the last few months but is very
fragile at best. Credit Insurers across the board have been re-evaluating risk and have reduced
exposure to many sectors and companies.

For the moment, the levels of claims are sustainable and consequently, the tightening has
stopped. This has allowed a slight improvement in risk appetite, but Insurers are very nervous
of a sudden worsening in Market Conditions. ABI figures reported that Credit Insurers paid out
£125m during the third quarter or 2009, up from £38m on the third quarter of 2008*. The speed
of the recovery remains uncertain and no one can predict with certainty the path the next 12
months will take.

The Market

Company failure levels have steadied, and Credit Insurer’s exposure to them has reached a
plateau where risk and premium is balanced. There are, however, certain risks on the near
horizon that might trigger a further increase in the number of failing companies:

As of 20 December last year, the Business Payment Support Service had approved more than
249,700 ‘time to pay’ arrangements totalling £4.37bn**. HMRC remains one of the principal
creditors in many insolvencies and we fear that when the current “time to pay” scheme, which
provided a lifeline to many businesses, is finished there will be a significant rise in company
failures likely from Q3 2010 onwards

Consumer spending seems to be holding up well as measured by the results over Christmas. It is
generally agreed that this is because interest rates are low and hence disposable income is high.
The amount of their income that British consumers spend on mortgage payments is at its
lowest level in five years at 12%, according to the Council of Mortgage Lenders***. This is the
second lowest rate since they began collecting data in 1974. There is concern though that the
Bank of England will raise interest rates and that the Government Bond Market will drive
mortgage rates higher as the Government manages its huge debt. If consumption tails off this
will obviously affect Business’s that are already weak.

Import costs are also rising as the pound is weak. Given the decline in
manufacturing over the last few decades and the move to the Service industry,
the benefit of the cheap pound in assisting home grown manufactures is not
feeding through as much as it used to. It is likely that more manufacturing will
move ‘home’, however, this will take time and in the meantime, increased costs
will dampen demand.

Lack of corporate access to bank funding will remain a key issue for UK
companies. Potential interest rate increases cannot be discounted but are
probably an event factor in H2 2010. Q4 2009 continued to see a number of key
equity raising programmes by major UK and European companies to reduce
balance sheet gearing, which was undoubtedly positive from a risk perspective.
While we expect these programmes to continue through Q1 2010 it is still unclear
whether the investor appetite remains throughout 2010.

Major retailers are expected to report strong Christmas sales but they remain very cautious about
forecasting sustained consumer led growth within the UK. The increase in VAT to 17.5% on 1 Jan
2010 is likely to be absorbed by the retailers and will not prove to be a major immediate event
but over the year this will have an impact. In the medium terms an increase in the VAT rate to
20% will not be a surprise, but this is probably likely to take place after the UK General Election.
This could have a significant impact on UK consumer led growth during 2010. We expect to see a
number of smaller retailers fail in Q1 and specific attention will be taken to minimise exposure in
this segment.

Credit Limits

Credit Limit availability has marginally improved over the last few months as risk and reward have
balanced as mentioned. Capacity has been also been restricted by the Re-Insurance market, but
we have probably reached the lowest point and capacity will either stay static or slightly improve.

There are other issues, however, primarily around company results reflecting the 2008 and 2009
years. Traditionally Underwriters use historical accounts to grant limits. The results coming out
now reflect the worse years and not the current stabilisation. Consequently, expect underwriters
to request up to date management accounts on marginal business as they look to try and write
limits.

* ABI December 2009
** Accountancy Age January 2010
*** Times Online January 2010

Source: Chartis UK

Debtor Insurance is provided by Lloyds TSB Commercial Finance Limited and underwritten by Chartis Insurance UK Limited.