Swiss Re Corporate Solutions. Financial Risk Solutions in a changing Energy Market Juerg Trueb, 3. April 2017

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1 Swiss Re Corporate Solutions Financial Risk Solutions in a changing Energy Market Juerg Trueb, 3. April 2017

2 Swiss Re at a glance Group results in USD billions Over 150 years of experience in providing wholesale re/insurance and risk management solutions We deliver both traditional and innovative offerings in Property & casualty and Life & Health that meet our clients needs A pioneer in insurance-based capital market solutions, we combine financial strength and unparalleled expertise for the benefit of our clients Our financial strength is currently rated: Standard & Poor s: AA-/stable; Moody s: Aa3/stable; A+/stable in USD billions FY 2015 FY 2016 Premiums earned: Net income : Comm. shareholder equity: Return on equity: 13.7% 10.6% Return on investments: 3.5% 3.4% Group combined ratio: 87.4% 94.8% P&C combined ratio: 86.4% 93.5% L&H operating margin: 9.9% 10.4% Corporate Solutions combined ratio: 93.8% 101.1% 1 Excluding contingent capital instruments (USD 1 102m, of which USD 352m in P&C Re, USD 750m in L&H Re); basis for ROE and BVPS calculations Premiums and fee income earned 2016 (USD 33.2 bn) Corporate Solutions 10.5% Life Capital 3.6% L&H Re 34.7% P&C Re 51.2%

3 Weather & Energy: Business footprint New York Team size Full complement of underwriters and originators 2 weather product traders London Team size Demand for all weather underlyings Strong weather/ gas or power price appetite Shanghai Team size Rainfall hedges used by hydro producers Wind and solar energy actively hedged Growing market in consumer weather products Houston Team size Demand for all weather underlyings Strong weather / gas or power price appetite Winter and summer demand Active ELPRO market Zürich Team size 5 Corporate solutions global head office Home for management and underwriting team Sao Paulo Team size 1 Sydney 1998 Team size Coverage for Latin American business Rainfall / fuel price hedges for hydro producers Growing wind activity Strong summer temperature / power price hedging product demand ELPRO avtively used to manage price exposure Growing wind activity CorSo Footprint ECM Origination&Underwritingteams

4 Market insight: Who hedges weather and why? Company Location Products & application Volume of business Motivation Big three European utilities Global, primarily Europe Temperature index hedging, e.g: Demand management in winter Managing volume-driven price uncertainty Estimated at 25% of total sales Board-mandated view that stakeholders are not in the stock as weather play In general, hedging is closer to expected outcomes than tail risk Investor-owned utilities in US Texas, Northeastern US, West Coast, MidWest Temperature index hedging: A/C demand load in summer in Tex, MW Mild winter demand hedging in MidWest Both cold and warm winter hedging in northeast Varies- some hedge nearly 100% of their anticipated volumes Maintaining access to financial markets at attractive terms Retail gas suppliers US and Europe Temperature index hedging Varies by client Demand uncertainty disrupts supply chain Cash flow volatility impedes access to finance Municipally-owned utilities in Europe Primarily Germany, some Italy Temperature index hedging Small, but growing Preserving cash flow needed to support other municipal services Nordic utilities Sweden, Finland Temperature index hedging, largely for tail risk of severe winter power costs Small, but growing Cash flow volatility signals management imprudence Australian power producers and integrated gentailers Eastern Australian states power pool markets Temperature/ electricity price hedging to hedge tail risk associated with A7C load in hot spells Extensive weather hedging is commonplace among big Three in Australia Severe volatility in price markets threatens financial stability Power traders in Europe Throughout Europe Wind index products Small, but will open up soon with traded contracts Manage exposure to wind impact on power prices

5 Weather & Energy Products

6 Rainfall protection Exposure and application Hydropower producers have less revenue when there is inadequate rainfall in the river basin. About half of the listed hydropower companies in China suffered losses because of drought in the last 15 years. The listed hydropower companies face the risk of being de-listed if it has three consecutive loss years The hydropower companies with PPA have to purchase external power to fulfil its contract obligations and thus incur additional costs The correlation between power generation and rainfall Product: Location: Index (X) : Strike (k): Payout: Tick or notional (N): Term: Client: Problem: Solution: Location: Result: Notional terms Hydropower generation hedge with rainfall put/ insurance Yunnan Province, China The accumulated rainfall in the river basin of the hydropower producer during the insured period 1400 mm rainfall MAX (0,(k-X))* Notional USD 50,000 Case study January to December Rainfall protection for Guangdong Meiyan Jixiang Hydropower Co., Ltd. The consecutive drought years from 2009 to 2011 in the region of Guangdong caused significant revenue losses for Meiyan Swiss Re CorSo structured the first rainfall index insurance solution for Meiyan in 2012 The insurance policy would pay out up to RMB 80 million if the average accumulated rainfall in the specified ares is lower than the predefined trigger Meiyan Hydropower would have received an insurance payout of RMB 17 million if the insurance policy had been in place in 2011

7 Hedging temperature and gas prices Exposure and application Gas retailers face both temperature and commodity price risk: temperature drives demand and gas prices drive margins Since temperature is unpredictable, risk managers must guess when they put price hedging in place most hedge to a normal level of demand Even modest fluctuations around those normal volumes play havoc with gas price hedges Financial index products compete very effectively with other ways to manage this risk (active delta hedging, storage, flex in gas contracts) Structure Product: Location: Index (X) : Strike (k): Payout: Notional terms Tick or notional (N): Term: Case study Temperature / gas swap London Heathrow Airport (LHR) Heating Degree Days (HDDs): daily, the difference between that day's average temperature and 18 C, if negative. Gas Index (Price) = NBP day-ahead price Set by client according to hedging strategy Daily Payout = (HDDActual HDDStrike) x (PriceActual PriceStrike) x Notional Volume Can be fixed or shaped by gas demand November to March HDDs Swap payout mechanics SRCS receives Client receives Client receives SRCS receives HDDs Option payout mechanics No payout Payout to Client Payout to Client No payout Client: Problem: Solution: Location: Result: UK household gas retail cooperative Delta hedging strategy was not effective in smoothing margins, and carried high transaction costs Gas / temperature swap to offset variability in underlying operating profits 12 locations weighted to match load and service area Operating profits were protected, giving business unit much more earnings stability

8 $600 $500 $400 $300 $200 $100 Electricity PRice and Outage Protection Generator owners and unit-contingent off-takers face two kinds of risk during an outage or derate: Volume Risk (unknown duration) Price Risk (exposure to higher spot market) Simultaneous management of price and volume risk is difficult and extremely expensive to dynamically hedge Generators with firm delivery or load serving obligations risk cost of higher priced replacement power from spot market Outages often cause or exacerbate high price events Merchant generators risk opportunity costs when potentially profitable power cannot be generated Using CorSo Outage Contingent Options / Insurance (ELPRO) provider Discount to traditional Client: New England based generator hedges Problem: $0 Exposure and application Matching Volume and Price risk exposure transferred to insurance Unplanned outage Losses hedged Strike Price Automatic / perfect look-back settlement against transparent price indices Structures are tailormade to ensure matching risk transfer Written in either derivative or insurance form Covered Facility: Notional terms Case study Single power plant or fleet of plants Term: November 1, 2015 March 31, 2016 Covered Capacity: Covered Events: 500MW or percentage of plant Unplanned outages and unplanned derates Event Duration Limit: 90 consecutive calendar days Electricity Index: ISO-NE Mass Hub RT for up to the first 48 Hours Electricity Call Strike:Fixed or floating (can also be heat rate based) Settlement: For each hour, Max[ 0, (Electricity Index Electricity Call Strike) * Covered Capacity ] Solution: Result: Potential revenue impact if an outage or derate coincides with extremely high prices during an excessively cold winter (polar vortex winter conditions of 2014) ELPRO for full capacity of plant covering all hours during the winter with a MW- deductible (portion of plant remains self-insured) 3-day outage in 2014 winter due to valve leak that resulted in purchase of replacement power at USD 300/MWh which ELPRO covered for

9 Reference stories

10 Reference stories Location Client Motivation Trigger Algeria Shariket Kahraba Hadjret Insuring outage risk for debt requirements Australia Infigen Energy Reducing cash flow volatility to improve debt performance China Guadien Energy Group Eliminate downside wind production risk Forced generation outage MWh of power production Windspeed Protection structure Risk Period Currency Limit ELPRO Cal 16 USD 33,000,000 Collar Apr 15 Mar 16 AUD 5,000,000 Wind Generation Index put Cal 15 RMB 30,000,000 Colombia Empresas Publicas de Medellin Manage price risk when drought affects hydro production Rainfall in two locations Drought-triggered price protection May 16 Apr 20 USD 250,000,000 Finland Undisclosed Manage risk of short power position when demand is high Cold temperature Weathercontingent power price call Dec Feb EUR 700,000 Multiple US Undisclosed Reducing winter earnings volatility Temperature and gas prices Temperature/Gas swap Nov 15 Mar 16 USD 15,000,000 Texas Undisclosed Lower price exposure from generation outage Uruguay UTE Manage price risk when drought affects hydro production US NEPOOL Nuclear generator Manage price exposure in unplanned outage Forced generation outage Rainfall in 36 locations Forced generation outage ELPRO Summer 2012 USD Undisclosed Rainfall/crude oil production index Jan 14 Jun 15 USD 450,000,000 ELPRO Q1 14 USD 50,000,000

11 UTE drought protection Exposure Drought creates hydroelectric power shortages In 2012, Uruguay s national energy company faced financial distress when hydropower shortages had to be replaced with expensive oil-fired generation Working with the World Bank, management wanted to avoid a repeat of the perfect storm of low production and high oil prices Product: Structure Risk period: Jan 14- Jun 15 Data source: Index: Drought triggered oil price call option Existing ground weather stations, as audited by a third party Uruguay Potential Hydropower Energy Index (UPHEI), based on cumulative rainfall in 36 locations and front month in ICE Brent Futures price/ bbl Strike: Various levels of rainfall shortage, differing season by season Limit: USD Solution Drought-triggered oil price protection Protection is triggered by prolonged period of low rainfall Settlement is based on crude oil prices at the time of the drought Payout: Premium Min(Max(Strike Index,0)* Payout Volume in GWh, Limit) Not disclosed

12 Legal notice 2017 Swiss Re. All rights reserved. You are not permitted to create any modifications or derivative works of this presentation or to use it for commercial or other public purposes without the prior written permission of Swiss Re. The information and opinions contained in the presentation are provided as at the date of the presentation and are subject to change without notice. Although the information used was taken from reliable sources, Swiss Re does not accept any responsibility for the accuracy or comprehensiveness of the details given. All liability for the accuracy and completeness thereof or for any damage or loss resulting from the use of the information contained in this presentation is expressly excluded. Under no circumstances shall Swiss Re or its Group companies be liable for any financial or consequential loss relating to this presentation.