1. WEATHER RISK MANAGEMENT ISDA Annual General Meeting
ELEMENT RE
ISDA Annual General Meeting
Washington D.C.
April 5, 2001

2. THE WEATHER MARKET – SOME FLAVOR

3. WEATHER RISK IS EVERYWHERE!
“70% of US Companies are affected by weather”
-US Department of Commerce
“An era is coming when businesses will be required to manage weather-linked risks as a matter of common sense”
-official at Industrial Bank of Japan

4. TWO DISTINCT TYPES OF WEATHER RISK
NON-CATASTROPHIC
CATASTROPHIC
COMMON VARIABLES
TEMPERATURE PRECIPITATION
HURRICANES EARTHQUAKES
TARGET
PROFITS
PROPERTY
FREQUENCY
REGULAR
RARE
IMPACT
INCREMENTAL
IMMEDIATE
EFFECT
0% TO 30%
HUGE
TRADITIONAL MANAGEMENT
RETAIN
INSURE
MARKET PERSPECTIVE
NORMAL
EXTRAORDINARY
MARKET REACTION
PUNISH
FORGIVE

5. NON-CAT WEATHER IMPACTS VOLUMES
PRICE x
VOLUME =
REVENUE
PRICE RISK MANAGEMENT
WEATHER RISK MANAGEMENT
LOWER EARNINGS VOLATILITY +

6. MARKET DIMENSIONS
Since 1997, an estimated $10B in limit has been transferred
Average Rate On Line of 20% = $2.0B in premium
Average US utility end-user deal is ~$50,000/HDD with a limit of $20MM per season
Average secondary market deal is $5,000/$1MM
There is a need for greater capacity

7. MARKET MAKERS, SHAPERS AND SOURCES OF GROWTH

8. DISTINCT MARKET PHASE I: 1997 TO 1998
Geographic Risk Spread
US only
End Users
Few, predominantly energy
Market Makers
Few, mostly energy (Enron, Koch, Aquila, Southern, Castlebridge)
Capacity Providers
None

9. DISTINCT MARKET PHASE II: 1999 TO 2000
Geographic Risk Spread
US, Canada, some Europe, Japan and Australia
End Users
Still mostly energy - add retailers, transportation, entertainment
Market Makers
… plus CME, Tempest Re, El Paso, Enron OnLine
Capacity Providers
Insurance - Swiss Re, AIG, St Paul, PX Re, WWWeather
Capital Markets - Kelvin (Koch), Barep, Mercury AM
WRMA
Industry trade group formed

10. CUT TO: CURRENT MARKET 2001 Geographic Risk Spread End Users
US, Canada, growing Europe, Japan and Australia, discussion of South America
End Users
… Energy, Beverage companies, Agriculture, Municipals
Market Makers
… plus Element Re, Hetco, Dynegy, BNPParibas, Reliant, Louis Dreyfus, Chubb, Commercial Risk
Originating Banks
Royal Bank of Scotland, HypoVereinsBank, Industrial Bank of Japan, Bank of Tokyo-Mitsubishi

11. CUT TO: CURRENT MARKET 2001 Capacity Providers Fallen Providers
2nd Wave - AXA, AGF, Sorema, Hannover, Tokyo Marine & Fire, Mitsui Marine, Lloyd’s syndicates
Capital Markets - Barep, Merrill Lynch Investment Mgrs, Societe Generale SPVs
Fallen Providers
Castlebridge (American Re), AIG, Palladium, WorldWide Weather, TransAtlantic, PXRe
Work Slowdown
CME, Swiss Re, Duke

12. WHAT THE FUTURE HOLDS Geographic Risk Spread End Users Market Makers
Fully global market
End Users
Comprehensive - All exposed industries reporting
Market Makers
Energy, Banks, Insurance
Originating Banks
Originating deals from strong corporate lending and project finance relationships
Capacity Providers
Full access to insurance and reinsurance capacity
Active pension and hedge fund involvement

13. CHALLENGES TO FUTURE GROWTH
Availability of reliable global data
No data, no deal!
Ability to quantify end-user exposures
Must define the risk in order to define the solution
Management of end-user pricing expectations
Often unrealistic: expect non-catastrophic protection at catastrophic prices
Expansion of market risk-taking capacity
(Re)insurers need renewed comfort with weather risk
Weather (alternative risk) must be included in traditional capital markets investment indices

14. PRODUCTS AND APPLICATIONS

15. NON-CAT RISKS COVERED Degree Days Temperature Rainfall Snowfall
Heating, Cooling, Specialized
Temperature
Minimum, Maximum, Average, Heat Index
Rainfall
Snowfall
Wind Speed
Hurricanes
Frequency, Storm Track
Streamflow

16. TYPES OF INDICES Aggregate Events Average
Indices that are additive, i.e. degree days
Events
Sum of events over a period
Events defined by criteria being satisfied, i.e. days with more than two inches of rain
Average
Indices that are not generally additive, i.e. temperature

17. FINANCIAL RISK MANAGEMENT GOALS
Reduce earnings volatility due to the weather
Minimize premium outlay
Risk retention, symmetry of protection
Optimize for taxes
Insurance vs. Derivatives
Consider timing of payment/recovery
Quarter-end, Year-end

18. PRICING CONSTRUCTS “Burn” Analysis aka Actuarial Analysis
Historical financial performance
Portfolio Analysis
Valuation of deal with entire book
Stochastic Analysis
Monte Carlo simulations
Meteorological Forecasts
Both short- and long-term
Implied Market Pricing
Active swap and option markets

19. SUMMARY The weather market is coming into its own
More players, traders, end-users
Respect and understanding of the risk
Weather risk management is multi-faceted
Applications exist for defensive risk management, aggressive marketing or innovative financing
Weather will no longer be tolerated as an excuse for diminished earnings
Equity analysts, investors and creditors are aware of weather risk management products
A less volatile company is a more valuable company!

20. Coming soon: www.elementre.com
CONTACT INFO
Lynda R. Clemmons
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