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Financial Risk Insurance Program


Saab is an established manufacturer of regional commercial aircraft and has delivered numerous turboprops to operators worldwide since 1983. As part of Saabs sales finance activities, the company has entered into leasing contracts with aircraft lessors and residual value guarantee (RVG) contracts with purchasers of its aircraft which expose the company to financial risks. Under lease contracts, Saab is exposed to lease income risk when lease payments are less than a desired or expected value. With RVGs, Saab is exposed to asset value risk when RVGs are exercised at a time when aircraft market values are below the respective exercise values.

Client Need

Saab wished to protect up to 90% of its gross nominal exposure (i.e., $1.3 billion) on a non-recourse basis for an up-front fee through an insurance solution. The company retained the services of The RISConsulting Group LLC (RISC) to assist in developing a framework for evaluating and quantifying the financial risk in the aircraft portfolio and to assist Saab and its execution agents BAE SYSTEMS and MMC Enterprise Risk, an operating entity of Marsh & McLennan Companies, in the placement of the transaction in the re/insurance market.

The Solution

RISC developed a Model in close cooperation with Saab, which measures the size and likelihood of possible losses to the aircraft portfolio. The output from the model was used by MMC Enterprise Risk to structure the financial risk insurance program into four tranches and to place the risk in the re/insurance markets. The model enabled the risk takers in the re/insurance markets to better understand the risk characteristics of each tranche. BAE SYSTEMS, which owns 35 percent of Saab, managed the transaction on Saabs behalf.

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 were Winterthur International Strategic Risk Solutions, Swiss Re New Markets, Mitsui Marine International and AMBAC. The market in turn responded favorably with Saab recognizing an 18% increase in its stock price over the two-week period following the announcement of the transaction.

Peter Sandehed, Senior Vice President Corporate Treasury at Saab, said: - "This strengthens Saabs financial position by virtually eliminating the downside risk from the fleet of regional aircraft, and takes away the uncertainties around the valuation of the leasing portfolio."