Upload
others
View
4
Download
0
Embed Size (px)
Citation preview
Risk transfer solutions for corporate agribusiness clientsfor corporate agribusiness clients
The Australian GrainsIndustry Conference29 30 July 200829-30 July 2008
Agenda
SwissRe at a glance
Food security: main driversFood security: main drivers
Risk of stakeholders / agriculture supply chain
Crop shortfall covers (solutions and examples)
Weather index covers (solutions and examples)Weather index covers (solutions and examples)
Conclusions
Slide 2
S i R i l b l fi i l i fiSwiss Re is a global financial services firm with a long history of success
Swiss Re is …a financial services firm with 144 years of experience… 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
R t A dQ i k F t (31 12 2007)
… a pioneer and leader in capital market solutions
Recent Awards• Best Global Reinsurer (Reactions 2007)
• Top-10 “Green Giant” (Fortune Magazine,
Quick Facts (31.12.2007)
• Revenues CHF 42.8 billion
• Net income CHF 4.2 billion2007)
• Top-50 “Low Carbon Pioneers” (CNBC, 2007)
• Total investments: CHF 228 billion
• Rated AA- by S&P and Aa2 by Moody’s
• 11 000+ employees• Insurance Borrower of the Year
(Euromoney, 2007)
• #1 Capital Raising of the Year (Reactions,
• 11,000+ employees
• 90 offices in 25 countries
• Headquarters in Zurich, Switzerland
Slide 3
2006)
The nature of our business requiresThe 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 g , y g
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 teamSwiss Re Centre for Global Dialogue Zurich to tap into its expertise and build a global team.Swiss Re Centre for Global Dialogue, Zurich
Asia11%
Europe 1)
42%
Americas%
Geographic split
47%
Slide 4
gPremiums (2007)
The “Gherkin”, London A presence on every continent1) incl. Middle East and Africa
Food security: i d i l ti thmain drivers are population growth,
dietary changes, biofuels, and climate change
Climate changeWorld biofuel consumption Population growth 1950-2050160
140120
100 Mtoe
World
Brazil
12
10
8
6
billi
ons)
80
6040
200
China
EU
USA
4
2
01950 1970 1990 2010 2030 2050
(b
Today: 6.7 billion, by 2050: 9.2 billionMajor growth in less developed regions (5.4bn to 7.9bn)
Crop productivity is projected to decrease in tropical regions due to climate extremes
2005: 20m tons of oil equivalent or 1% of total road transport fuels
2030: 147m tons of oil equivalent or
2004 2010 2015 20300
(5.4bn to 7.9bn)Population in developed regions remains constant (~1.2bn)Increasing demand for high protein food
Climate change induced increase of undernourished people: 40-170million by 2080Novel risks often beyond experience
2030: 147m tons of oil equivalent or 7% of total road transport fuels
Average growth / year: 8.3%Competition with food production
Source: Biofuels, Issue Brief WBCSD 2007 Source: World Pop. Prospects, UN 2006Novel 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.
Slide 5
Food supply will be affected by increased climate variability.
…in the more recent droughts both the maximum and minimum temperatures have been higher as has potential evaporation
Slide 6Source: Climate Change in Australia – Technical Report 2007
material price impact of crop shortfall when market are tight….
Slide 7Source: DZ Bank, Bloomberg
Ri k lti l l th i lt lRisks are multiple along the agricultural supply chain and can affect many players
(Re)insurance provides comfort and credit enhancement in the value chain
Financial Institutions / other lenders
GrowersCountry
Buyers
Inland
Logistics
Traders
& Marketers
Grain
Processors /Additional
Logistics
Input
Suppliers
Trading Co’s
uye s og st cs & a ete sUsers
og st cs
Individual Growers
Merchants
GovernmentRoad
Rail
Supp e s
Elevators
Ocean
Seeds
FertilisersMillers
CFAO’s*Marketing
Boards
Growers C t ll d
Co-Operatives
Verticalised Producers
Government / Marketing
Boards
Rail
Storage
Ocean Freight
Other Service
Providers
Fertilisers
Chemicals
Machineries
CFAO s
Industrial Grain Users
Controlled Companies
Producers Providers
Swiss Re’s global experience and expertise enables to provide tailored risk transfer solutions to the stakeholders involved in the agricultural supply chain
Slide 8*Confined Animals Feeding Operations
solutions to the stakeholders involved in the agricultural supply chain
Broad value propositionBroad value proposition in all agricultural segments
Sector Weather Peril
Pest & Disease
Epidemics
Food (e.g., cereals, vegetables, coffee, fruits)
Beverages (e.g., fruit juice, beer, wine)
Li t k ( lt k b f d i ) ( )Livestock (e.g., poultry, pork, beef, dairy) ( )
Pulp & Paper (timber)
Input suppliers (e.g., chemicals, fertilizer, seed, feed) ( )put supp e s (e g , c e ca s, e t e , seed, eed) ( )
Financial Institutions and other lenders
Machinery (e.g., tractors, equipment) ( )
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 unchangedEpidemic 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 b t t lik i d/ d i ti t t
Slide 9
by structures like insurance and/or derivative contractsIndex structures are most effective for major crop types planted at large scale in markets with systemic weather perils (drought, flood, frost, storm)
Two ways of covering risks
Production shortfall (Volume / Price) Weather Index
Risk: Volatility in earnings due to lack of raw material from th il / di d l t d i fl t ti
Risk: Volatility in earnings due to weather exposure f bl th il t thweather perils / diseases and related price fluctuations
Production index = (planted area * Yield * Price) in excess of retention
from measurable weather perils at weather stations
Weather index = Temp/Precip * Price per Tick
Measure of shortfall:1. Government production data; company statistics2 Third party assessments (eg inspectors)
Measure of shortfall:1. Weather data
2. Third party assessments (eg inspectors)3. Crop forecast models
Indemnity: Deviations from yield and/or price from agreed
2. Satellite-based drought index
Indemnity: Deviations (“ticks”) from agreed weather parameters measured at weather stations
values from agreed data
Perils: Hail, flood, drought, excessive rainfall, frost, storm, fire, pests, diseases, lower quality, etc.
parameters measured at weather stations
Perils: Rainfall and/or temperature with its extremes (excessive rainfall, drought, frost)
Drawback: Historical data (area planted, yield) not always reliable or available, solution works best for large geographical areas
Drawback: Weather station not accurately representing area of interest, short time series of weather records. Correlation not as high as for the energy sector
Slide 10
g g p the energy sector
Production Shortfall Cover
Situation ApplicationsSystemic perils with large scale effect (e.g. drought, flood, storm, frost, pest and disease)
ppSugar operators impacted by cyclones cannot optimise their sugar mills turnover
Advantage of crop shortfall coverEarning stability, better working capital
t
Grain Hanlding Co. impacted by grain shortfall & have fix handling costs
management
Target Clients
US citrus fruit packer faces financial distress due to fruits production shortfall after severe frostTarget Clients
Cooperatives, large-scale producers processors packers elevators transporters
frost
Meat processors with own poultry/pig portfolio faces business interruption from variousprocessors, packers, elevators, transporters,
financing institutions, Contract farming operators
faces business interruption from various epidemic diseases
Slide 11
Case study: Grain Handling Co.
Situation Grain Handling company purchases / handle different grain
i ti i l i / t t i 40% d ti h tf ll
DefinitionsAverage Production (Grain Handling Co. only) (AP): 2 5 mio MT as 10 year devarieties in several regions/states incur 40% production shortfall
or more in drought years
Insurance product covers production shortfall of Grain Handling
only) (AP): 2.5 mio MT as 10 year de-trended averageAverage Area Seeded (not only Grain Handling Co.) (AAS): 6 mio ha as 10 Insurance product covers production shortfall of Grain Handling
Company below de-trended historical average production in function of gross margin per ton shortage
year averageTrigger: 2.2 mio MT (88% of AP)Cover: 0.5 mio MTIndemnity: fix amount per ton based on gross margin
I d itA 23
4
MT)
IndemnityTrigger adjusted if Actual Area Seeded < 90% of AASIndemnity when Actual
Average 2.5
1
2
Prod
uctio
n (m
io
Trigger 2.2
Cover 0.5
Indemnity when Actual production<Trigger => compensating tonnage shortfall up to a maximum of 0.5 mio MT (cover) at a fix amount per
01980 1985 1990 1995 2000 2005
Years
Slide 12
MT (gross margin)
Input provider / lender portfolioInput provider / lender portfolio protection
Situation Systemic perils with large scale effect (e g drought floodSystemic perils with large scale effect (e.g. drought, flood, frost)
Collateralization of future harvest Credit exposure of ApplicationsCollateralization of future harvest. Credit exposure of lenders
Financial institutions and other lenders are reluctant to
ApplicationsBanks financing large scale agriculture operations
Financial institutions and other lenders are reluctant to provide operational capital due to volatile earnings of processors that rely on local production as input.
Agrochemical companies barter trading their products against crop
SolutionRisk transfer solution: Crop shortfall cover as protection for the lender or the barter trading counterparty
Slide 13
Weather index covers
Situation Processors is exposed to drought risk (peril
Situation Processors is exposed to excess rainfall inducingProcessors is exposed to drought risk (peril
measurable at weather station)
SolutionProcessor buys a deficit rainfall cover (put on rainfall)
Processors is exposed to excess rainfall inducing lower quality
SolutionProcessor buys excess of rainfall cover (call on rainfall)Processor buys a deficit rainfall cover (put on rainfall)
Strike K = 300 mmTick D = 100 Currency/mmCalculation Period: 10 May - 1 October 2008
Processor buys excess of rainfall cover (call on rainfall) Payout: graduated or digitalLocation: Melfort weather station, Saskatchewan Maximum Payout: $1mioCalculation Period: 10 May - 1 October 2008
Actual Rainfall: 250 mm at settlement dayPayment: (300 mm – 250 mm) * 100 = 5000 Currency/mm
Maximum Payout: $1mioStrike: 80 mm rainfallCalculation Period: Aug 20 to Sept 20, 2008Tick: $10 000 per mm rainfally Tick: $10,000 per mm rainfall
P(x,K): Put payoff K : Strike (mm)D : Tick size (Currency mm-1)D : Tick size (Currency mm-1)x : Rainfall index (mm)
Slide 14
Other protection coversOther protection covers
Mexico: Cattle ranchers protectionMexico: Cattle ranchers protection
Small cattle ranchers rely mainly on natural pastureland to feed their animals and are affected by droughtdrought
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
Slide 15
Conclusions
Increasing demand for commodities (BRIC, biofuel boom) exceeds supply which can only be overcome by increased production y y p
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);… 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
Slide 16
Thank you very much
Bernard BelkBernard Belk
Director
Global Agro Corporate Business
TEL: +41 43 285 7464
Mob.: +41 79 401 8023
Email: [email protected]
"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 , , y ,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 andany 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 oraffiliates 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 "discussions of pricing, market sharing or any other potentially anti-competitive matters.
Slide 18