Nephila Capital, the world’s largest asset manager of insurance-linked securities (ILS) and other catastrophe or weather linked reinsurance instruments, was involved in work to help Australian agribusiness GrainCorp.
GrainCorp is among the largest agricultural businesses that has specialised in grain and other commodity receivership, storage and transportation.
As a result, the company hold significant exposure to the crop production volumes and any fluctuation in them, for which one of the main factors is of course the weather.
GrainCorp was the subject of a bid to acquire the firm in recent months, as investors under the name Long-Term Asset Partners sought to buy-out the company to control the eastern Australian grains industry.
However, the capital structure of GrainCorp was a concern, in particular the significant debt it held and that would be created through the acquisition which was supposed to be structured via a securitisation, so one way of improving that capital position would have been to reduce the agricultural exposure the company held.
Hedging the volumetric risk associated with grain production, through a clever instrument that would take out the risk of inclement weather affecting grain volumes, was seen as a way to achieve this.
At this point, enter Nephila Capital as the specialist in this area, alongside long-time partner in these kinds of transactions insurance giant Allianz.
The pair worked to create a structure that would effectively hedge grain volumetric risk through a weather hedge and the use of efficient reinsurance capital, we understand from a number of media and analyst sources as well as filings.
The idea was that by taking volatility out of GrainCorp’s earnings that was triggered by weather impacts on grain supplies it would help the company to meet its burgeoning debt load, making the investment transaction more feasible and attractive.
The investment by LTAP fell through it appears, but GrainCorp told its existing shareholders that it would look to replicate the volatility smoothing effects with a weather derivative type structure, although it’s not clear whether Nephila Capital is involved in any ongoing work with the firm.
GrainCorp explained, “Long-term East Coast Australia (ECA) grain production derivative instrument under negotiation, to reduce cash flow volatility linked to harvest volumes.”
The North Queensland Register also confirmed this week that GrainCorp continues to look at this weather based crop volume protection, according to a New South Wales grains committee chairman.
Putting efficient reinsurance capital to work alongside sophisticated financial structures, such as derivatives and securitisation, can make investments much more palatable by smoothing out expected returns and removing the volatility associated with the weather.
Here, Nephila Capital has become an expert, in its work alongside Allianz, applying these techniques to multiple sectors, from renewable energy, to agriculture and beyond.
With Australian agriculture increasingly seeing itself as at risk from climate change and weather variability, the expectation is that more companies like GrainCorp will look to weather risk hedging solutions as viable ways to smooth revenues over the longer-term.
Companies in the reinsurance, risk transfer and indeed insurance-linked securities (ILS) space are well-positioned to assist as climate and weather risk rise up the corporate agenda.
We’re returning to Singapore for our fourth annual ILS market conference for the Asia region. Please register today to secure the best prices. The last few Early Bird tickets are still available.