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British Aerospace

Financial Risk Insurance Program


As a leading manufacturer of commercial aircraft, British Aerospace plc (BAe) is exposed to aircraft lease income and residual value related contingent liabilities as part of its sale finance activity (the Portfolio). The lease income risk is experienced where the actual income from a defined portfolio of aircraft is below a desired value, giving rise to a loss. The residual value guarantee (RVG) risk is realized if aircraft are sold in the market or to BAe at a guaranteed (RVG) price which is higher than the then prevailing actual market price.

Client Need

BAe wished to protect up to 90% of its exposure ($3.8 billion worth) on a non-recourse basis for an up-front fee through an insurance solution. The Company retained the services of RISC to assist in developing a framework for evaluating and quantifying the risk in the Portfolio and a structure for transferring the risk, and to assist BAe and its execution agent in the placement of the transaction in the re/insurance market.

The Solution

RISC developed a Model in close cooperation with BAe that measured the size and likelihood of possible losses to the Portfolio. Based on the probability distribution generated from the Model, an Insurance Program was developed which tranched the risk into eight distinct risk layers. Through the Model, risk takers were able to understand the probable loss and risk / return characteristics of each risk layer (tranche).

The Result

The risk layers were underwritten by a number of risk takers in the international re/insurance market for a one-time, up-front premium. Lead underwriters on the deal were Allianz Risk Transfer (Zurich), Ambac Assurance Corp. (US), Munich Re (Am-Re Managers U.S.), Royal and SunAlliance (London), X.L. Insurance Co. Ltd. (Bermuda), MBIA Insurance Corp. (U.S.), Overseas Partners Ltd. (Bermuda), Swiss Re New Markets (Zurich) and Winterthur Insurance (Zurich). This unique, first-of-a-kind insurance program achieved all of the risk-transfer and price objectives established by BAe at the outset of the project, received a very favorable market reaction (the WSJ reported a 9.7% increase in the Companys share price on the announcement) and changed the landscape for ART.

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