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Swiss Re America

Swiss Re America. Financial Risk Management CAS Special Interest Seminar April 12-13, Denver, Colorado. Presented by: David B. Powell, Western Regional Director Swiss Re New Markets April 1999. MOTIVATORS & MARKET FORCES. Mergers & Acquisitions Company Demutualization

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Swiss Re America

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  1. Swiss Re America Financial Risk Management CAS Special Interest Seminar April 12-13, Denver, Colorado Presented by: David B. Powell, Western Regional Director Swiss Re New Markets April 1999

  2. MOTIVATORS & MARKET FORCES • Mergers & Acquisitions • Company Demutualization • Marketplace Competition • Other Business Needs

  3. OVERVIEWAlternative Risk Products • Aggregate XS, LPT, ADC’s • Finite Risk/Financial Reinsurance • Integrated/Blended Programs • Credit Enhancements • Operational Exposures

  4. LOSS PORTFOLIO COVERAGES $2M OCC XS OCC $500K AGG XS $10M $5M AGG Expected/Retained Excess

  5. Financial Statement EnhancementLoss Portfolio Transfer $15M $10M $5M 92 93 94 95 96 Policy Years IBNR Case Reserves Cost = Discounted Ultimate + Margin

  6. INTEGRATED PROGRAM W/ FINITE FEATURE $25M • Risks • Underwriting • Credit • Timing • Return Risk Transfer LIMITS “Funding” $5M 5 1 2 3 4 YRS Can Include “Traditional “ & “Financial”

  7. FINANCIAL EXPOSURES • Interest Rates • Foreign Currency • Raw Materials/Commodity • Weather Anomalies • Others (Environmental/Political)

  8. Basket/Agg. Retention Some Funding Sufficient Risk Transfer Good UW Data Good Credit Profile Ready Capital Market TYPICAL FEATURES/REQUIREMENTS

  9. EFFECT OF PORTFOLIO Ave Loss $20M 35M 30M 25M 20M 15M 10M 25% 50% 75% Loss Distribution Multiple Lines/Multiple Treatments Note: Like Multi-Year Retro Portfolio Loss Distribution

  10. BASKET PORTFOLIO ADVANTAGES • Minimize Administration • Efficiency: Markets & Techniques • Stabilizes Cost Volatility • Improved Tax Treatment? • Can Simplify Hedge Accounting

  11. SOME EXAMPLES • Paper Co. Inc. • Construction Corporation • Power Suppliers LTD. • Tax Scheme LLP.

  12. PAPER CO. INC. Cumm. Profit Constant P Rising P Declining P Time Profits P is Pulp Price

  13. PAPER CO. INC.Call Option(Risk or Counterparty Credit Enhancement) Cost Per Ton 275 250 225 200 50 0 K Time Actual Price K: Strike at $250 Call Value

  14. CONSTRUCTION CORP. Cov A: Credit Enhancement (Assures Repayment $100M) Cov B: Renewal Guarantee (Tenant Default, Toll $) Cov C: Course of Construction, Regular P&C Cov D: Residual Value Policy

  15. POWER SUPPLIERS LTD.Financial Solution - Indexed Retention Example Average temperature for period is 3° or more below the median temperature of 30°, exceeding the one standard deviation boundary. This triggers an increase in the aggregate and per occurrence retention. $1,000 “Cold Weather” Occurrence Retention $500 “Baseline” Average temperature for period is 3° or more over the median temperature of 30°. This triggers a reduction in the per occurrence and aggregate retention. $250 “Warm Weather” 2,600 2,900 1,000 2,000 Aggregate Retention (number in thousands) Business Interruption losses or profit/loss change as a function of temperature.

  16. POWER SUPPLIERS LTD.Financial Products/SolutionsAn Example to Consider Your book of business consists of leveraged Aggibusiness cooperatives concerned that two events will happen concurrently: (1) there will be large number of bad weather days interfering with harvests and (2) interest rates will rise increasing the cost of debt financing. The coverage period is six months, from April 1 to October 1. Example Payout Triggered Interest Rate = $ Claim $ and time Number of “bad” weather days exceeds maximum Interest rates rise above pre-determined levels No Payout Interest Rate or = No Claim time Number of “bad” weather days remains below maximum Interest rates stay below pre-determined threshold Event Triggers (1) Inches of rain exceeds strike point “K”. (2) Interest rates on short-term commercial paper increases by 50 basis points.

  17. TAX SCAM LLP Fund Source Loan TS Repayment Payee Loss Buy Tax Policy Premium Assets Insurer Coverage: * Tax Code Repeal * Credit? * Asset Disqualification * Prop/BI?

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