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Swiss Re Structures Weather Derivative

Swiss Re Financial Products has structured a bespoke forward-starting weather derivative for Petro, the heating oil subsidiary of Star Gas Partners. Bill Windle, senior v.p., weather derivatives at Swiss Re in New York, said Swiss Re is able to offer rolling strikes and a longer duration than normal, in this case for four years, because as an insurance company it is better able to mitigate and warehouse risk.

In the USD50 million (notional) structure, which kicks in next winter, Petro will get paid if the temperature drops below the rolling strikes, which are determined in part from the previous year's data. For instance, in an 11-year span, Windle said the oldest data would be replaced by the most recent data. Windle said the longer tenor and delayed start date provided attractive pricing for Petro. He added that Swiss Re targeted the long-term business because as a new player in the field, it felt it would be more competitive on a longer-term project.

Petro is vulnerable to warm winters that will translate into lower heating needs for its retail customers. Its parent is North America's largest retail distributor of heating oil. Rich Ambury, v.p. and treasurer at Star Gas in Stamford, Conn., did not return calls.

"The only boundary on the transaction is the limit on our annual payout, which is capped at USD12.5 million per year. If it gets too warm, we will all have more serious problems," he said. The structure will determine strikes based on trailing 10-year data, and not 30-year information, because the shorter tenor allows Swiss Re to better offset its own risks, Windle said.

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