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Risk transfer solutions for corporate agribusiness clients.

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Presentation on theme: "Risk transfer solutions for corporate agribusiness clients."— Presentation transcript:

1 Risk transfer solutions for corporate agribusiness clients

2 Slide 2 Agenda SwissRe at a glance Food security: main drivers Risk of stakeholders / agriculture supply chain Crop shortfall covers (solutions and examples) Weather index covers (solutions and examples) Conclusions

3 Slide 3 Swiss Re is a global financial services firm with a long history of success Recent Awards Best Global Reinsurer (Reactions 2007) Top-10 “Green Giant” (Fortune Magazine, 2007) Top-50 “Low Carbon Pioneers” (CNBC, 2007) Insurance Borrower of the Year (Euromoney, 2007) #1 Capital Raising of the Year (Reactions, 2006) Quick Facts (31.12.2007) Revenues CHF 42.8 billion Net income CHF 4.2 billion Total investments: CHF 228 billion Rated AA- by S&P and Aa2 by Moody’s 11,000+ employees 90 offices in 25 countries Headquarters in Zurich, Switzerland Swiss Re is … … a financial services firm with 144 years of experience … the world’s leading and most diversified reinsurer … a proven expert in risk and capital management … a pioneer and leader in capital market solutions

4 Slide 4 The nature of our business requires true global cooperation Our clients come from all over the world … Our clients include all leading insurers, many global Fortune 500 companies, who rely on us for comprehensive risk solutions, as well as governments and recipients of microinsurance in emerging markets … and to serve them better we must be global, so we are! To ensure the best solutions for our clients, every employee is empowered to call upon any other unit from all around the world to tap into its expertise and build a global team. Geographic split Premiums (2007) Swiss Re Centre for Global Dialogue, Zurich Europe 1) 42% Americas 47% Asia 11% The “Gherkin”, London A presence on every continent 1) incl. Middle East and Africa

5 Slide 5 Food security: main drivers are population growth, dietary changes, biofuels, and climate change Source: Biofuels, Issue Brief WBCSD 2007 Source: World Pop. Prospects, UN 2006 Today: 6.7 billion, by 2050: 9.2 billion Major growth in less developed regions (5.4bn to 7.9bn) Population in developed regions remains constant (~1.2bn) Increasing demand for high protein food Climate change Crop productivity is projected to decrease in tropical regions due to climate extremes Climate change induced increase of undernourished people: 40-170million by 2080 Novel risks often beyond experience Source: IPCC 2007 Food supply and price security will be affected by demand for biofuels. Food demand patterns will be affected by population growth and demand for protein production. Food supply will be affected by increased climate variability. World biofuel consumption 2005:20m tons of oil equivalent or 1% of total road transport fuels 2030:147m tons of oil equivalent or 7% of total road transport fuels Average growth / year: 8.3% Competition with food production 2004201020152030 160 140 120 100 80 60 40 20 0 Mtoe World Brazil China EU USA 12 10 8 6 4 2 0 1950 1970 1990 2010 2030 2050 Population growth 1950-2050 (billions)

6 Slide 6 material price impact of crop shortfall when market are tight…. Source: DZ Bank, Bloomberg

7 Slide 7 Risks are multiple along the agricultural supply chain and can affect many players *Confined Animals Feeding Operations Trading Co’s Marketing Boards Growers Controlled Companies Growers Country Buyers Inland Logistics Traders & Marketers Grain Processors / Users Additional Logistics Individual Growers Co- Operatives Verticalised Producers Merchants Government / Marketing Boards Road Rail Storage Input Suppliers Elevators Ocean Freight Other Service Providers Seeds Fertilisers Chemicals Machineries Millers CFAO’s* Industrial Grain Users Swiss Re’s global experience and expertise enables to provide tailored risk transfer solutions to the stakeholders involved in the agricultural supply chain Financial Institutions / other lenders (Re)insurance provides comfort and credit enhancement in the value chain

8 Slide 8 Broad value proposition in all agricultural segments Weather perils, crop & pest diseases can cause high volatility in earnings due to lack of agriculture raw material for processing while production costs remain largely unchanged Epidemic livestock diseases can cause complete business interruption for meat/dairy processors and additional costs (disinfection, carcass removal) Financial impacts of weather perils / livestock diseases on earnings can be protected by structures like insurance and/or derivative contracts Index structures are most effective for major crop types planted at large scale in markets with systemic weather perils (drought, flood, frost, storm) Sector Weather Peril Pest & Disease Epidemic s Food (e.g., cereals, vegetables, coffee, fruits) Beverages (e.g., fruit juice, beer, wine) Livestock (e.g., poultry, pork, beef, dairy)( ) Pulp & Paper (timber) Input suppliers (e.g., chemicals, fertilizer, seed, feed) ( ) Financial Institutions and other lenders Machinery (e.g., tractors, equipment) ( )

9 Slide 9 Two ways of covering risks Production shortfall (Volume / Price)Weather Index Risk: Volatility in earnings due to lack of raw material from weather perils / diseases and related price fluctuations Production index = (planted area *  Yield *  Price) in excess of retention Measure of shortfall:  Government production data; company statistics  Third party assessments (eg inspectors)  Crop forecast models Indemnity: Deviations from yield and/or price from agreed values from agreed data Perils: Hail, flood, drought, excessive rainfall, frost, storm, fire, pests, diseases, lower quality, etc. Drawback: Historical data (area planted, yield) not always reliable or available, solution works best for large geographical areas Risk: Volatility in earnings due to weather exposure from measurable weather perils at weather stations Weather index =  Temp/Precip * Price per Tick Measure of shortfall:  Weather data  Satellite-based drought index Indemnity: Deviations (“ticks”) from agreed weather parameters measured at weather stations Perils: Rainfall and/or temperature with its extremes (excessive rainfall, drought, frost) Drawback: Weather station not accurately representing area of interest, short time series of weather records. Correlation not as high as for the energy sector

10 Slide 10 Production Shortfall Cover Situation Systemic perils with large scale effect (e.g. drought, flood, storm, frost, pest and disease) Advantage of crop shortfall cover Earning stability, better working capital management Target Clients Cooperatives, large-scale producers processors, packers, elevators, transporters, financing institutions, Contract farming operators Applications Sugar operators impacted by cyclones cannot optimise their sugar mills turnover Grain Hanlding Co. impacted by grain shortfall & have fix handling costs US citrus fruit packer faces financial distress due to fruits production shortfall after severe frost Meat processors with own poultry/pig portfolio faces business interruption from various epidemic diseases

11 Slide 11 Case study: Grain Handling Co. Situation Grain Handling company purchases / handle different grain varieties in several regions/states incur 40% production shortfall or more in drought years Insurance product covers production shortfall of Grain Handling Company below de-trended historical average production in function of gross margin per ton shortage Definitions Average Production (Grain Handling Co. only) (AP): 2.5 mio MT as 10 year de- trended average Average Area Seeded (not only Grain Handling Co.) (AAS): 6 mio ha as 10 year average Trigger: 2.2 mio MT (88% of AP) Cover: 0.5 mio MT Indemnity: fix amount per ton based on gross margin Indemnity Trigger adjusted if Actual Area Seeded < 90% of AAS Indemnity when Actual production compensating tonnage shortfall up to a maximum of 0.5 mio MT (cover) at a fix amount per MT (gross margin) Average 2.5 Trigger 2.2 Cover 0.5

12 Slide 12 Input provider / lender portfolio protection Situation Systemic perils with large scale effect (e.g. drought, flood, frost) Collateralization of future harvest. Credit exposure of lenders Financial institutions and other lenders are reluctant to provide operational capital due to volatile earnings of processors that rely on local production as input. Solution Risk transfer solution: Crop shortfall cover as protection for the lender or the barter trading counterparty Applications Banks financing large scale agriculture operations Agrochemical companies barter trading their products against crop

13 Slide 13 Weather index covers Situation Processors is exposed to drought risk (peril measurable at weather station) Solution Processor buys a deficit rainfall cover (put on rainfall) Strike K = 300 mm Tick D = 100 Currency/mm Calculation Period: 10 May - 1 October 2008 Actual Rainfall: 250 mm at settlement day Payment: (300 mm – 250 mm) * 100 = 5000 Currency/mm Situation Processors is exposed to excess rainfall inducing lower quality Solution Processor buys excess of rainfall cover (call on rainfall) Payout: graduated or digital Location: Melfort weather station, Saskatchewan Maximum Payout: $1mio Strike: 80 mm rainfall Calculation Period: Aug 20 to Sept 20, 2008 Tick: $10,000 per mm rainfall P(x,K): Put payoff K : Strike (mm) D : Tick size (Currency mm -1 ) x : Rainfall index (mm)

14 Slide 14 Other protection covers Mexico: Cattle ranchers protection Small cattle ranchers rely mainly on natural pastureland to feed their animals and are affected by drought Insurance based on satellite images (Vegetation Index) measuring available biomass Canada: Wildfire suppression costs cover aircraft cost, aviation fuel, equipment cost, manpower cost, other supply and services costs The loss is calculated by multiplying the area burnt in hectares with CAD 300 per hectare (based on variable suppression costs) Annual cover of CAD 100m above CAD 100m retention

15 Slide 15 Conclusions Increasing demand for commodities (BRIC, biofuel boom) exceeds supply which can only be overcome by increased production Consolidation (emergence mega farms), vertical integration and specialization in production Correlation with oil price increases input costs (fertilizer, fuel, pesticides) Lack of investments in agriculture infrastructure in emerging markets Climate change impacts with trend to increased drought frequency / severity … As result: concentration of risk, higher earning volatility (volume and price risk); pressure to deliver stable returns (especially with foreign capital involved)... Solutions: Innovative tailor-made risk management tools help running operations - crop shortfall covers, - weather index covers, - capital markets instrument with an insurance trigger

16 Thank you very much Bernard Belk Director Global & Large Risks Corporate Agro Business TEL : +41 43 285 7464 Mob.: +41 79 401 8023 Email:

17 Slide 17 "This presentation is for information purposes only and does not constitute an offer or commitment, a solicitation of an offer or commitment, or any advice or recommendation, to conclude any transaction whether on the indicative terms shown or otherwise. While information herein has been obtained from sources believed to be reliable, we do not represent it to be accurate or complete. Before you enter into the proposed transaction or any other transaction, you should ensure that you fully understand the potential risks and rewards of that transaction and that you independently determine that the transaction is appropriate for you given your objectives, experience, financial and operational resources, and other relevant circumstances. You should consult with such advisors as you deem necessary to assist you in making these determinations. None of Swiss Reinsurance Company, Zurich (“SRZ”),or its affiliates is acting as your financial advisor or fiduciary in any transactions unless SRZ, or its affiliates have agreed to do so in writing. SRZ, and its affiliates may have positions and may effect transactions in any underlying securities or investments described herein. The information contained herein may vary significantly from that provided by other sources. This presentation will be conducted in accordance with all relevant competition and anti-trust regulation. Accordingly, there will be no discussions of pricing, market sharing or any other potentially anti-competitive matters."

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