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Financial Risk Insurance Program Supporting Asset Value Guarantees


Rolls-Royce Plc (Rolls-Royce) is a major manufacturer of engines for commercial aircraft, ranked number two in the world behind General Electric in terms of the number and dollar value of engines sold. Like all commercial aviation-sector manufacturers (e.g., Boeing and Airbus), Rolls-Royce offers sales finance support to the buyers of aircraft in order to facilitate sales. To encourage engine sales, Rolls-Royce guarantees the future value of its products through contracts called asset value guarantees ("AVGs"). AVG contracts expose Rolls-Royce to asset value risk when AVGs are exercised at a time when aircraft market values are below the respective exercise values.

Client Need

Rolls-Royce was seeking to mitigate its exposure to AVG risk on a portfolio of aircraft (the "Portfolio") through the development of a financial risk insurance program. The company retained the services of The RISConsulting Group LLC ("RISC") to assist in developing a framework for evaluating and quantifying the risk in the Portfolio, structuring a risk transfer solution, and in placing the transaction in the re/insurance market.

The Solution

RISC developed a Model in close cooperation with Rolls-Royce that measured the size and likelihood of possible losses to the Portfolio. Based on the probability distribution, RISC assisted Rolls-Royce in structuring the transaction and transferring the risk.

The Result

The transaction was underwritten by XL Financial Solutions Ltd, a subsidiary of XL Capital Ltd and provides Rolls-Royce with 12 years of coverage. Paul Heiden, Finance Director at Rolls-Royce said, "we regard this transaction as a prudent step, which is consistent with the increasing focus we are placing on operational risk management. It will strengthen the company's capability to provide competitive financing solutions for customers in the future."

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