Latin Report: Public-Private Insurance
Latin Report: Public-Private Insurance
by Moina Varkie, manager, marketing guarantees department, MIGA
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June 1, 2000—Partnerships between public and private insurers of political risk are one of the most positive developments in the marketplace today. The Multilateral Investment Guarantee Agency (MIGA), a member of the World Bank Group, has been at the forefront in facilitating some pioneering transactions, involving coinsurance and reinsurance arrangements, that have benefited both investors and countries in the Latin America and Caribbean region.
Latin America boasts some of the most dynamic economies in the world, and the past decade of reform has seen a return of investor confidence and offered some exciting opportunities for international investors. Yet, despite considerable progress in liberalization, perceived political (or non-commercial) risks remain a deterrent to many foreign investors. By providing guarantees to private investors against the risks of expropriation, currency transfer restrictions, breach of contract, and war and civil disturbance, MIGA has been facilitating increasing levels of foreign direct investment (FDI) to the region.
As a member of the World Bank Group, MIGA’s participation in a project enhances confidence that an investor’s rights will be respected; an advantage inherent in the Agency’s set-up as an international organization whose shareholders are the governments of 152 countries. MIGA’s membership structure enables it to provide an umbrella of deterrence, and allows it to bring to bear its own influence with host countries in the resolution of potential disputes or claims. In its 12-year history, the Agency has had only one claim, and it has been successful in resolving a number of investment disputes before they result in claims. Another strength is that MIGA’s underwriting and risk analysis capabilities benefit from the World Bank Group’s resources and unparalleled global knowledge of emerging economies.
MIGA has been using its unique market position to focus on projects that have a strong development impact, and increasingly to catalyze FDI in frontier areas in partnership with other insurers. To date, the Agency has issued over $7 billion in insurance, facilitating over $32 billion in foreign direct investment in 75 developing countries. Roughly half of MIGA’s global insurance portfolio is in Latin America and the Caribbean. In fact, three of the top five recipient (host) countries worldwide for MIGA guarantees are in Latin America Brazil, Argentina, and Peru. The portfolio in these countries accounts collectively for about 30% of MIGA’s gross portfolio.
Since 1990, MIGA has supported over 100 projects in 18 countries in the region, facilitating over $17 billion of FDI. The contracts range in size from under $1 million for an eco-tourism project in Costa Rica to $230 million for a telecommunications project in Brazil. The projects cover a range of sectors, including banking, mining, oil and gas, manufacturing, tourism and others. The financial sector accounts for the largest portion of the regional portfolio, followed by infrastructure.
In the late 1990s, MIGA experienced a surge in demand for its guarantee program, and its shareholders responded by doubling its capital base, which allowed MIGA to increase its country and project coverage limits. MIGA’s insurance capacity was further expanded by its reinsurance activities with public and private insurers, and its Cooperative Underwriting Program, where MIGA acts as the insurer-of-record for the whole amount, but retains only a portion of the risk. Treaty reinsurance agreements were signed with two Bermuda-based private insurers – XL Insurance Company Ltd. and ACE Bermuda Insurance Ltd. This allows MIGA to issue up to $200 million of coverage per single project and up to $620 million per country.
MIGA’s partnerships with the insurance industry have substantially increased its ability to respond to the demands of its clients. During the past 18 months, through the use of facultative reinsurance and the Cooperative Underwriting Program, MIGA has mobilized over $650 million in additional political risk insurance for the Latin America and Caribbean region. As Motomichi Ikawa, executive vice-president of MIGA notes:“The political risk insurance industry is growing at a rapid rate and MIGA is actively seeking to complement the activities of other insurers. With the growth of large-scale complex infrastructure projects, the continuing trends in privatization, and the evolution of non-recourse financing in recent years, there is tremendous scope for private and public insurers to work together and find innovative ways to expand the capacity of the industry as a whole. The Cooperative Underwriting Program is specifically designed to increase capacity by encouraging other insurers to offer coverage in developing countries where they might not otherwise, without the involvement of a multilateral institution such as MIGA.”
The Latin America and Caribbean region has particularly benefited from MIGA’s coinsurance and reinsurance programs. For example, in 1999, MIGA signed its first reinsurance agreement with ACE Global Markets’ Syndicate 488/2488 of Lloyd’s of London for a project in Argentina. MIGA issued $45 million in coverage to Lloyd’s Bank Plc of the UK for a shareholder loan to its wholly-owned branch subsidiary to expand its residential mortgage lending operations. It was one of MIGA’s first joint projects with a private insurer, and the first time Lloyd’s had extended cover for 15 years.
More recently, MIGA issued $100 million of coverage to VBC International Corporation (VBC-I) for a loan guarantee of a $200 million syndicated loan arranged by Banque Sudameris of France. A number of major banks participated in the deal and ACE Global Markets provided reinsurance in support of the guarantee. The Inter-American Development Bank (IDB) co-insured the second tranche of $100 million, marking the first project-based cooperation between MIGA and the IDB. The project involves the final stages of completion, upgrading and expansion of three power companies in some of the fastest growing areas of Brazil – the states of Goias, Rio Grande do Sul and Sao Paolo. It is part of a $4 billion project involving power distribution systems and a hydropower plant.
MIGA also supported one of the largest mining projects in Latin America; the Antamina copper-zinc project in Peru, which qualified for LatinFinance’s 1999 project of the year. The financing was one of the largest assembled for a greenfield mining project. MIGA coverage was issued for the equity investments made by the original Canadian project sponsors – Rio Algom Ltd., Noranda Inc., and Teck Corporation – that formed the Compãnía Minera Antamina, as well as for the senior loans by Citibank N.A., which led a consortium of commercial banks. The non-shareholder debt was covered under a common investment insurance policy, involving the Export Development Corporation (EDC) of Canada, the Office National du Ducroire (the Belgian national insurer), and several private insurers. The advantage of the common policy was that it provided the commercial banks with a single policy. MIGA also guaranteed investments made by Mitsubishi Corporation of Japan, which later acquired shares in the project.
MIGA’s involvement in the Brazil-Bolivia and Argentina-Chile gas pipelines enabled the Agency to provide multi-country coverage i.e., coverage against actions taken by either government that would affect the project enterprise in either country. MIGA’s guarantees protect investments made by subsidiaries of El Paso Energy International Company in both projects. The Brazil-Bolivia pipeline is one of the largest foreign investments in Latin America, and MIGA provided El Paso Energy International Company with a $14.6 million guarantee to protect its investment in the construction and operation of the natural gas pipeline.
More recently, MIGA issued its largest single contract to a syndicate of lenders when it covered part of a five-year non-shareholder loan of $650 million to BCP S.A. in Brazil. The loan represents part of the restructuring of an earlier $1.8 billion bridging loan arranged in 1998 for BCP, which was awarded the concession in 1997 to provide cellular telephone services in São Paulo. The project will provide an improved telecommunications infrastructure for Brazil and continued employment for 2,000 Brazilians.
The lending syndicate receiving the guarantee consists of major international banks with expertise in lending to Latin American telecommunications projects, including ABN Amro, Bank N.V., Banc of America Securities LLC, and B.E.A.L. Westdeutsche Landesbank Girozentrale. The MIGA guarantee provides the lending syndicate with up to 95% of political risk insurance coverage. MIGA will support $230 million of the $650 million loan, with OPIC and AIG underwriting all but a small portion of the remaining amount. In taking on the $230 coverage, MIGA is utilizing its Cooperative Underwriting Program and retaining only a portion of the risk ($55 million) for its own account, with the remainder being covered by Chubb Group of Insurance Companies, seven Lloyd’s syndicates, and Unistrat Corporation of America.
In another landmark transaction in Brazil, MIGA provided a guarantee that will be used to support the securitization of dollar-denominated loan and lease receivables in the international capital markets. The guarantee of $150 million, which was issued in two tranches of $75 million each, was provided to an investor providing loan and lease financing for high technology equipment. The guarantee covers 90% of the scheduled payments to be made by borrowers and lessees under the securitized loan and lease receivables. Six Lloyd’s syndicates provided reinsurance support for the guarantee, as did FMO (the Netherlands Development Finance Company), which reinsured MIGA’s policy for $15 million and issued its first political risk insurance coverage for the deal.
This will be the first capital markets issue that has been supported by MIGA and the first securitization of Brazilian loan and lease receivables. As such, it marks a milestone for both MIGA and Brazil. The issue is expected to receive an investment grade rating on the Class A and B, senior secured notes. If the issue is successful, it will be the first time that a guarantee holder has utilized MIGA’s political risk insurance to obtain a rating above the sovereign country ceiling. As Roger Pruneau, vice-president of guarantees, MIGA, notes: “This is a project with high development impact, which will help improve the provision of health care in Brazil. By raising the rating of the deal above the sovereign rate to make it investment grade, MIGA’s guarantees have been able to effectively reduce country risk. We will be seeking to cooperate with our insurance partners to underwrite more such transactions in other countries.”
The evolving and growing political risk insurance market will continue to provide investors with new ways to structure and arrange deals, and challenge MIGA and other insurers to continue seeking innovative ways to serve their clients needs. As MIGA looks forward, its focus in Latin America and the Caribbean region will continue to be on innovative partnerships and transactions, with a special emphasis on diversifying its guarantees portfolio and increasing its operations. Cross-border investments within the region will also be a priority, as will regional projects involving multi-country guarantees, which are well suited to MIGA’s unique strengths as a multilateral agency.
For more information, please contact:
Mr. Pierre Nadji
Guarantees Department
Telephone: (202) 473-5577 / Facsimile: (202) 522-2630
UPDATED July 20, 2001