Willis, the global insurance broker, has closed what is being called a ground-breaking index-based hedge for U.S. electric generation and retail company NRG Energy Inc.
The transaction offsets the potential financial impact to NRG if a hurricane were to affect its business in the Houston, Texas area. The risk management vehicle used is known as Willis Hurricane Load-Protection. It allows NRG to lower it’s hurricane risk hedging costs by embedding two additional energy variables into the payout formula. It’s said that any payout will not require a long claims handling process, we assume due to fact this is index-based and there must be a defined trigger point on that index.
NRG and Willis have partnered to access an unusually wide range of markets to complete this deal; insurance, reinsurance, retrocession, banking, hedge funds and OTC derivatives. The deal is set to run through October 2009.
Given the impact to energy infrastructure caused by last years hurricane season, and the lack of capacity in the energy sector in the Texas area this is a shrewd move by NRG. Utilising a capital and traditional markets mix they will have overcome the lack of traditional insurance available and given themselves a financial buffer which could be crucial should a hurricane strike the area during the rest of this years season.
Other key information about the transaction has at this time not been published, however we’d love to more about this deal and how it has been structured and if/when we hear more we will let our readers know.
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