Swiss Re Corporate SolutionsFinancial Risk Solutions in a changing Energy Market

Juerg Trueb, 3. April 2017

1 Excluding contingent capital instruments (USD 1 102m, of which USD 352m in P&C Re, USD 750min L&H Re); basis for ROE and BVPS calculations

Group results in USD billions

in USD billions FY 2015 FY 2016

Premiums earned: 30.2 33.2

Net income : 4.6 3.6

Comm. shareholder’ equity: 32.4 34.5

Return on equity: 13.7% 10.6%

Return on investments: 3.5% 3.4%

Group combined ratio: 87.4% 94.8%

P&C combined ratio: 86.4% 93.5%

L&H operating margin: 9.9% 10.4%

Corporate Solutions combined ratio: 93.8% 101.1%

1

Over 150 years of experiencein providing wholesalere/insurance and riskmanagement solutions

We deliver both traditional and innovative offerings in Property & casualty and Life & Health that meet our clients’ needs

A pioneer in insurance-based capital market solutions,we combine financial strength and unparalleled expertise for the benefit of our clients

Our financial strength is currently rated: Standard & Poor’s: AA-/stable; Moody’s: Aa3/stable; A+/stable

Swiss Re at a glance

Premiums and fee income earned 2016(USD 33.2 bn)

Life Capital

P&C Re51.2%

10.5%

34.7%

3.6%

L&H Re

Corporate Solutions

Weather & Energy: Business footprintNew YorkTeam size

6

LondonTeam size

4

ShanghaiTeam size

1Established since

1998Established since

1998Established since

2009

ZürichTeam size

5SydneyTeam size

2

Established since

1998 Established since

2013

HoustonTeam size

6Established since

2012

CorSo Footprint

ECM Origination&Underwriting teams

� Full complement of underwriters and originators

� 2 weather producttraders

� Demand for all weather underlyings

� Strong weather/ gas or power price appetite

� Rainfall hedges used by hydro producers

� Wind and solar energy actively hedged

� Growing market in consumer weather products

� Corporate solutions global head office

� Home for management and underwriting team

� Demand for all weather underlyings

� Strong weather / gas or power price appetite

� Winter and summer demand

� Active ELPRO market

� Coverage for Latin American business

� Rainfall / fuel price hedges for hydro producers

� Growing wind activity

Sao PauloTeam size

1Established since

2012

� Strong summer temperature / power price hedging product demand

� ELPRO avtively used to manage price exposure

� Growing wind activity

Market insight: Who hedges weather and why?Company Location

Products & application

Volume of business

Motivation

“Big three” European utilities

Global, primarily Europe

Temperature index hedging, e.g:� Demand management in

winter� Managing volume-driven price

uncertainty

Estimated at 25% of total sales

Board-mandated view that stakeholders are not in the stock as “weather play”In general, hedging is closer to expected outcomes than tail risk

Investor-owned utilities in US

Texas, NortheasternUS, West Coast, MidWest

Temperature index hedging: � A/C demand load in summer

in Tex, MW� Mild winter demand hedging

in MidWest� Both cold and warm winter

hedging in northeast

Varies- some hedge nearly 100% of their anticipated volumes

Maintaining access to financial markets at attractive terms

Retail gas suppliers US and Europe Temperature index hedging Varies by client Demand uncertainty disrupts supplychain

Cash flow volatility impedes access to finance

Municipally-owned utilities in Europe

Primarily Germany, some Italy

Temperature index hedging Small, but growing Preserving cash flow needed to support other municipal services

Nordic utilities Sweden, Finland Temperature index hedging, largely for tail risk of severe winter power costs

Small, but growing Cash flow volatility signals management imprudence

Australian power producers and integrated “gentailers”

Eastern Australian states’ power pool markets

Temperature/ electricity price hedging to hedge tail risk associated with A7C load in hot spells

Extensive – weather hedging is commonplace among big Three in Australia

Severe volatility in price markets threatens financial stability

Power traders in Europe

Throughout Europe Wind index products Small, but will open up soonwith traded contracts

Manage exposure to wind impact on power prices

Weather & Energy Products

Rainfall protection

Notional terms

� Hydropower producers have less revenue when there is inadequate rainfall in the river basin. About half of the listed hydropower companies in China suffered losses because of drought in the last 15 years.

� The listed hydropower companies face the risk of being de-listed if it has three consecutive loss years

� The hydropower companies with PPA have to purchase external power to fulfil its contract obligations and thus incur additional costs

Product: Hydropower generation hedge with rainfall put/insurance

Location: Yunnan Province, China

Index (X) : The accumulated rainfall in the river basin of the hydropower producer during the insured period

Strike (k): 1400 mm rainfall

Payout: MAX (0,(k-X))* Notional

Tick ornotional (N):

USD 50,000

Term: January to December

Client: Rainfall protection for Guangdong Meiyan JixiangHydropower Co., Ltd.

Problem: The consecutive drought years from 2009 to 2011 in the region of Guangdong caused significant revenue losses for Meiyan

Solution: Swiss Re CorSo structured the first rainfall index insurance solution for Meiyan in 2012

Location: The insurance policy would pay out up to RMB 80 million if the average accumulated rainfall in the specified ares is lower than the predefined trigger

Result: Meiyan Hydropower would have received an insurance payout of RMB 17 million if the insurance policy had been in place in 2011

Case study

The correlation between power generation and rainfall

Exposure and application

Notional terms

Case study

Hedging temperature and gas pricesExposure and application

� Gas retailers face both temperature and commodity price risk:

� temperature drives demand and gas prices drive margins

� Since temperature is unpredictable, risk managers must guess when they put price hedging in place – most hedge to a normal level of demand

� Even modest fluctuations around those “normal” volumes play havoc with gas price hedges

� Financial index products compete very effectively with other ways to manage this risk (active delta hedging, storage, flex in gas contracts)

Product: Temperature / gas swap

Location: London Heathrow Airport (LHR)

Index (X) : Heating Degree Days (HDDs): daily, the difference between that day's average temperature and 18° C, if negative. Gas Index (Price) = NBP day-ahead price

Strike (k): Set by client according to hedging strategy

Payout: Daily Payout = (HDDActual – HDDStrike) x (PriceActual – PriceStrike) x Notional Volume

Tick or notional (N):

Can be fixed or shaped by gas demand

Term: November to March

Client: UK household gas retail cooperative

Problem: Delta hedging strategy was not effective in smoothing margins, and carried high transaction costs

Solution: Gas / temperature swap to offset variability in underlying operating profits

Location: 12 locations weighted to match load and service area

Result: Operating profits were protected, giving business unit much more earnings stability

Option payout mechanics

HD

Ds

HD

Ds

Payout to Client

No payout

No payout

Payout to Client

SRCS receives

SRCS receives

Client receives

Client receives

Swap payout mechanics

Structure

Electricity PRice and Outage Protection

Using CorSo Outage Contingent Options / Insurance (ELPRO)

� Discount to traditionalhedges

� Automatic /perfectlook-back settlementagainst transparent price indices

� Structures are tailor-made to ensurematching risk transfer

� Written in eitherderivative or insuranceform

Case study

� Generator owners and unit-contingent off-takers face two kinds of risk during an outage or derate:

– Volume Risk (unknown duration)– Price Risk (exposure to higher spot market)

� Simultaneous management of price and volume risk is difficult and extremely expensive to dynamically hedge

� Generators with firm delivery or load serving obligations risk cost of higher priced replacement power from spot market

– Outages often cause or exacerbate high price events

� Merchant generators risk opportunity costs when potentially profitable power cannot be generated

Notional terms

Covered Facility: Single power plant or fleet of plants

Term: November 1, 2015 – March 31, 2016

Covered Capacity: 500MW or percentage of plant

Covered Events: Unplanned outages and unplanned derates

Event Duration Limit: 90 consecutive calendar days

Electricity Index: ISO-NE Mass Hub RT for up to the first 48 Hours

Electricity Call Strike:Fixed or floating (can also be heat rate based)

Settlement: For each hour, Max[ 0, (Electricity Index –Electricity Call Strike) * Covered Capacity ]

Unplanned outage

Losses hedged

$0

$100

$200

$300

$400

$500

$600

Strike Price

Matching Volume and Price risk exposure transferred to insurance provider Client: New England based generator

Problem: Potential revenue impact if an outage or derate coincides with extremely high prices during an excessively cold winter (polar vortex winter conditions of 2014)

Solution: ELPRO for full capacity of plant covering all hours during the winter with a MW- deductible (portion of plant remains self-insured)

Result: 3-day outage in 2014 winter due to valve leak that resulted in purchase of replacement power at USD 300/MWh which ELPRO covered for

Exposure and application

Reference stories

Reference stories

Location Client Motivation TriggerProtectionstructure

Risk Period Currency Limit

Algeria ShariketKahrabaHadjret

Insuring outage risk for debt requirements

Forced generation outage

ELPRO Cal 16 USD 33,000,000

Australia Infigen Energy Reducing cash flow volatility to improve debt performance

MWh of power production

Collar Apr 15 – Mar 16 AUD 5,000,000

China GuadienEnergy Group

Eliminate downside wind production risk

Windspeed Wind Generation Index put

Cal 15 RMB 30,000,000

Colombia EmpresasPublicas deMedellin

Manage price risk whendrought affects hydro production

Rainfall in two locations

Drought-triggeredprice protection

May 16 – Apr 20 USD 250,000,000

Finland Undisclosed Manage risk of short power position when demand is high

Cold temperature

Weather-contingent power price call

Dec – Feb EUR 700,000

MultipleUS

Undisclosed Reducing winter earnings volatility

Temperature and gas prices

Temperature/Gas swap

Nov 15 – Mar 16 USD 15,000,000

Texas Undisclosed Lower price exposure from generation outage

Forced generation outage

ELPRO Summer 2012 USD Undisclosed

Uruguay UTE Manage price risk when drought affects hydro production

Rainfall in 36 locations

Rainfall/crude oil production index

Jan 14 – Jun 15 USD 450,000,000

US NEPOOL

Nucleargenerator

Manage price exposurein unplanned outage

Forced generation outage

ELPRO Q1 14 USD 50,000,000

UTE drought protectionStructure

� In 2012, Uruguay’s national energy company faced

financial distress when hydropower shortages had to

be replaced with expensive oil-fired generation

� Working with the World Bank, management wanted to

avoid a repeat of the “perfect storm” of low production

and high oil prices

SolutionDrought-triggered oil price protection

Product: Drought triggered oil price call option

Risk period: Jan 14- Jun 15

Datasource:

Existing ground weather stations, as audited by a third party

Index: Uruguay Potential Hydropower Energy Index (UPHEI), based on cumulative rainfall in 36 locations and front month in ICE Brent Futures price/ bbl

Strike: Various levels of rainfall shortage, differing season by season

Limit: USD 450 000 000

Payout: Min(Max(Strike – Index,0)* PayoutVolume in GWh, Limit)

Premium Not disclosed

ExposureDrought creates hydroelectric power shortages

� Protection is triggered by prolonged

period of low rainfall

� Settlement is based on crude oil prices

at the time of the drought

Legal notice

©2017 Swiss Re. All rights reserved. You are not permitted to create any modifications or derivative works of this presentation or to use it for commercial or other public purposes without the prior written permission of Swiss Re.

The information and opinions contained in the presentation are provided as at the date of the presentation and are subject to change without notice. Although the information used was taken from reliable sources, Swiss Re does not accept any responsibility for the accuracy or comprehensiveness of the details given. All liability for the accuracy and completeness thereof or for any damage or loss resulting from the use of the information contained in this presentation is expressly excluded. Under no circumstances shall Swiss Re or its Group companies be liable for any financial or consequential loss relating to this presentation.