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Menlo Park, CA (November 1, 1999) – Risk Management
Solutions (RMS) announced today that it provided the risk analysis
to support Koch Energy Trading, a subsidiary of Koch Industries, in
a $50 million securitization of weather risk. The 3-year transaction
transfers to investors the risk associated with certain levels of
annual losses across a fixed portfolio of 28 weather derivative
contracts, each of which is based on temperature experience at one
of 19 weather stations throughout the U.S. Securities were offered
to investors in two tranches – First Event Senior Notes and Second
Event Senior Notes – by special-purpose Cayman Islands company
Kelvin Ltd.
As the first-ever securitization of weather risk, the Kelvin
transaction is a major landmark in the development of the rapidly
growing weather risk market, in which Koch has been one of the most
active participants. Jeff Porter, Director of the Weather
Derivatives Group at Koch, commented, "In addition to assisting us
in managing the weather risk embedded in our energy and trading
businesses, this transaction has accomplished another important
objective of advancing the transparency and sophistication of risk
analysis in the weather market. The involvement of RMS as an
independent expert has for the first time defined a robust
methodology for analyzing weather risk which should have positive
impacts on price discovery and market growth."
RMS’ role in the transaction involved conducting a thorough analysis
of the weather risk embedded in the securities and communicating
that risk and the RMS analytical methodology to rating agencies and
potential investors. As with a number of recent securitizations of
catastrophe risk for insurers and reinsurers in which RMS has played
a similar role, the returns that investors will receive are closely
tied to the calculated level of risk. Investors will be receiving
fixed annual coupons of 15.7% and 8.7% for the First Event Senior
Notes and the Second Event Senior Notes, respectively, reflecting
the distinct difference in risk between the two tranches as
quantified by the RMS risk analysis.
To assess the risk for investors in the securities, RMS performed
stochastic modeling of the behavior of the individual weather
derivatives in the portfolio. The analysis included a detailed
review of historical temperature data for the 19 underlying
stations, assessment of trends and other relevant climate issues,
and modeling of the correlations between the individual weather
derivative contracts.
Paul VanderMarck, Vice President of Risk Applications at RMS, noted,
"We have been developing a suite of data and modeling tools for
analyzing weather risk for the past 18 months and are pleased to
have been able to support Koch in successfully introducing this new
class of risk to the capital markets. As the first-ever transfer of
non-financial risk directly to the capital markets by a U.S.
non-insurance corporation, the Kelvin transaction is also a major
step forward in the development of the overall risk securitization
market."
Goldman, Sachs & Co. was the sole placement agent for the
transaction.
Standard & Poor’s, Fitch IBCA, and Duff & Phelps Credit Rating Co.
all reviewed the transaction and assigned ratings to the Second
Event Senior Notes. Duff & Phelps also rated the First Event Senior
Notes.
In a first for securitizations of this type, RMS will be providing
daily updates of recorded temperatures and related statistics for
the transaction on its web site at www.riskinc.com/weather to assist
investors in tracking the performance of the securities over the
three year term. As Calculation Agent for the deal, RMS will also be
calculating annual settlement values for the portfolio based on
temperature data reported by the National Climatic Data Center (NCDC).
About RMS
Risk Management Solutions is the world's leading provider of
products and services for catastrophe, weather, and enterprise risk
management. More than 400 leading insurers, reinsurers, trading
companies, and other financial institutions rely on RMS models to
quantify, manage, and transfer risk. Founded at Stanford University
in 1988, RMS serves clients today from offices in the U.S., Europe,
and Japan. For more information, visit our web site at
www.rms.com.
Climetrix, RMS, and the RMS
logo are trademarks of Risk Management Solutions, Inc. All other
trademarks are property of their respective
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