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UGG’s INTEGRATED RISK FINANCING PROGRAMME

UGG’s INTEGRATED RISK FINANCING PROGRAMME. Presentation Outline. Who we are Why we started How we proceeded What we did Parting Thoughts. Who we are. Company Profile. Canada’s First Co-operative (1906) Business = the Provision of Products & Services to Western Canadian Farmers

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UGG’s INTEGRATED RISK FINANCING PROGRAMME

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  1. UGG’s INTEGRATED RISK FINANCING PROGRAMME

  2. Presentation Outline • Who we are • Why we started • How we proceeded • What we did • Parting Thoughts

  3. Who we are

  4. Company Profile • Canada’s First Co-operative (1906) • Business = the Provision of Products & Services to Western Canadian Farmers • Converted to a Public Company in 1993 (Traded on the Toronto Stock Exchange) • Sales C$2 billion Net Assets Employed C$500 million

  5. Four Inter-related Business Segments • Grain Handling & Merchandising • Crop Input Sales (Seed, Fertilizer & Crop Protection Products • Livestock Services (Feed & Genetics) • Farm Publications

  6. UGG’s Current Turf     

  7. Revenue SourcesGross Profit (C$ million) Grain Handling Crop Inputs Feed Manufacture Publications & Other

  8. Why we started

  9. Trends in the Financial Community • Corporate Governance • Regulators concern following Barings / Orange County - US “Treadway” / Canada “Dey” Reports • Stock analysts and investors • increasingly sensitive to earnings volatility and unfavorable deviations from earnings targets • Accounting rules • evolving toward increased disclosure of risks • Credit rating agencies • using more sophisticated methods to evaluate a firm’s risks

  10. How we proceeded

  11. Risk “Brainstorming” Identification of major business risks Ranked the risks Selected “shortlist” to analyze and quantify Data Collection Risk Mapping (severity vs frequency) Identified options for business risks and start pricing process Explored the feasibility of an integrated risk financing vehicle Determined cost of risk financing on a stand-alone and integrated basis From Risk Identification to anIntegrated Risk Financing Programme

  12. The Major Business Risk:- Grain Handling Volume • UGG’s largest “business” risk: THE WEATHER • Weather is beyond UGG’s control • Other factors may also affect grain handling volume (as in 1999) • therefore sought a volume (not just weather) related solution

  13. What we did

  14. UGG Integrated v. Traditional Program - Conceptual Property Tower Integrated Layer Grain Handling Volume Sub-limit Integrated P&C/Volume Retention Traditional Integrated

  15. Rationale for an Integrated Program Integrating grain volume coverage with traditional insurance risks combined “leverage” from UGG’s favourable loss history with the “portfolio effect” • Reducing average long-term cost of risk • Reducing earnings volatility • Reducing the need for “precautionary capital” • Making it possible to increase financial (balance sheet) leverage • All of which has the potential to increase the stock price and shareholder value

  16. Average Annual Cost of Risk

  17. Trend Operating Income Actual /Adjusted Adjusted Operating Income Actual Operating Income

  18. Leverage and the Cost of Capital

  19. Parting Thoughts

  20. “Cultural” pre-requisites • A pragmatic environment • Where people feel comfortable seeking innovative solutions to practical problems • A consultative/collective approach to issues • “tapping into” available ideas • An ability to recognize in-house capabilities (and limitations) when it’s time to “go outside” for external expertise • Tolerance for “step-by-step” risk-taking in the inquiry / research process

  21. A Changed Mindset • “Traditional” Risk Management is tactical and defensive • avoidance, reduction or transfer of risk • “Enterprise” (Integrated) Risk Management is strategic and more “offensive” activity • earnings / shareholder value management • Ensures the same rigour and consistency is brought to managing “business” risks as is practiced towards (traditionally) insurable risk

  22. “Political” Considerations • Senior Management and the Board of Directors must be “on side” • Ultimate acceptance requires that they understand the “concept” and are in touch with progress so that they support the expenditure of Resources (time and money) • This is a perfect opportunity to help build (up) a multi-discipline, multi-divisional team to deal with a high level, strategic activity

  23. Ongoing Management Issues • Responsibility and authority for risk management are not disconnected • Risk Management is not quantification only … or process only • The approach is not a “panacea” • Not all risks should (or can) be intensively quantified … or transferred • some risks are better handled through internal management controls - or even complete avoidance

  24. Practical Observations • Don’t “bite off more than you can chew” • Integrated Risk Management is a continuous improvement process • Avoid overly sophisticated solutions • it has to “sell” to succeed • Communicate program objectives within the organization to ensure the broad “buy-in” and alignment of operations with “risk management” goals

  25. Questions Comments

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