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

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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

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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%

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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.

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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

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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

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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

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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

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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

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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)

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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

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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

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Thank you very much

Bernard BelkBernard Belk

Director

Global Agro Corporate Business

TEL： +41 43 285 7464

Mob.: +41 79 401 8023

Email: Bernard_Belk@swissre.com

"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.

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