Storm_Exchange_GIC_Presentation

Hedging Weather and Climate Risk

Presented to the Global Interdependence Center

June 18, 2008

introduction and overview 

Introduction



Climate and Weather Risk



Weather Risk Management



Weather Derivatives and the Weather Markets



Storm Exchange/CME Benchmark Study Summary Results



Questions

storm exchange, inc. overview 

Storm Exchange, Inc. (“Storm”) is a financial services company focused exclusively on weather related risk.



We provide clients with: ―

analysis necessary to identify the financial impact of adverse weather on income and expenses

―

financial capacity to offset the loss due to weather

―

ability to accelerate demand for seasonal goods and services

weather is one of the most important drivers of human activity

33% of GDP $4 Trillion

exposed to weather

U.S. Commerce Dept.

economic impact factoids noaa economic analysis 

10% of GDP DIRECTLY impacted by weather



4.5% of the variation (volatility) in mean state economic output is explained by weather alone ―

ranges from 21% (agriculture) to 1.4% wholesale trade

―

fire/casualty insurance largest weather related variability: $51B

climate and weather risk

Source: The New York Times June 16, 2008

climate change a real issue Global Warming

Increasing Volatility

Northern Hemisphere

Rain Delay Index

1000 Year Observed: Data from thermometers (red) and from tree rings, corals, ice cores and historical records (blue)

Historical Volatility: Accumulated June/July Rain Days 1976-2007

25 0.5

20

0.0

15

-.05 10 -1.0 5

-1.0 1000

1200

1400

1600

1800

2000

Departures in Temperature (ÂşC) From the 1961 to 1990 Average

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

# of days with > .1� of precipitation

2007

international panel on climate change (IPCC)  Some of the Predicted long-term trends: ― VIRTUALLY CERTAIN: warmer and fewer cold days … warmer and more frequent hot days and nights ― VERY LIKELY: increased frequency of heavy precipitation events in some areas ― VERY LIKELY: increased frequency of heat waves  Net/Net: increasingly volatile and increasing impactful climate/weather events are VERY LIKELY  Weather Risk: a big/expensive problem; VERY LIKELY will be getting bigger and (potentially) more expensive Source: Climate Change 2007: Synthesis Report Summary for Policy Makers International Panel on Climate Change (IPCC).

•Hear the latest assessment of Storm scientists and analysts on how recent flooding will impact the corn, soy and other crops.

Recent Stories from StormWire (www.stormexchange.com)

end-user weather risk exposure scenarios

weather risk a manageable problem Three components: 1. Understanding value at risk 2. Operational management (managing the knowable)

― Real-time ― Tactical ― Seasonal ― Very long-lead (decades) Scenario Planning 3. Financial management (hedging the unknowable) ― Weather Derivative Hedging Solutions

weather risk measurable volatility

Increased heat stress = decreased corn production Increased Heat

weather risk predictable volatility Barron’s, May 19, 2008

• “Storm Exchange … is predicting corn yields this year will fall 7% below trend and plunge 14% from last year’s record harvest.”

NY Times, June 16, 2008

weather derivatives  Companies use derivatives to manage uncertainty  Weather risk management solutions are a form of financial protection designed to reduce revenue volatility caused by changes in temperature, precipitation or wind

‒ protection is triggered based on government (NOAA) weather data ‒ no proof of loss necessary. Applicable payments typically made within 3 days of end of period. ‒ protection can be tailored for a specific location or multiple locations ‒ financially guaranteed, then syndicated in global weather market

crop yield how it works Planting

Growing

Late April/Early May

June-July

Maturity/Harvest

Yield

Sept/Oct

typical yield

normal amount of rain fall

crop yield how it works Planting

Growing

Late April/Early May

June-July

Call option payout on too much rain

Maturity/Harvest

Yield

Sept/Oct

typical yield

$$$ normal amount of rain fall

crop yield how it works Planting

Growing

Late April/Early May

June-July

Put option payout on too little rain

Maturity/Harvest

Yield

Sept/Oct

typical yield

$$$ normal amount of rain fall

2008 So Far

10.2 Inches

1993 Comparison 3.4 Inches Blue Shaded Area = Normal Range

2008 So Far 10.2 Inches Theoretical Payout (Strike Point): 6 Inches

Blue Shaded Area = Normal Range

hypothetical hedge des moines flood hedge  City of Des Moines conducts an analysis to determine costs associated with heavy rain in June  Determines that every inch over 6 inches leads to flooding that results in up to $20M in unbudgeted costs

 Puts in place a weather option that is structured to pay out $5M for every inch of rain accumulated above 6 inches during the month of June  Limit is set at $20M (10 inches) based on the historical rainfall records back to 1950.  2008: option already triggered based on rainfall to date; $20M paid out within 5 days of the end of June. No claims process or proof of loss.

weather will be one of the big financial markets of this century $440 Trillion Derivatives

Weather-based OTC

$45.2 Billion

$8.4 Billion

$0

1972

2007

2005

2006

weather will be one of the big financial markets of this century

$200

Billion

Weather-based OTC

$45.2 Billion

2% Transportation 4% Construction 5% Retail

$8.4 Billion

7% Agriculture 13% Other 69% Energy

2005

2006

2011

summary thoughts  Climate and weather a significant driver of economic volatility and uncertainty  Climate change potentially increasing both the volatility and economic impact of the weather  Comprehensive weather risk management efforts – both in the private and public sector – key to pragmatically dealing with the problem  Use of weather derivative products likely to significantly grow in use as new originators come into the market and data/basis risk issues are resolved

contact

Paul Walsh Chief Strategy Office Storm Exchange, Inc.

paul.walsh@stormexchange.com 646.237.5370