Press
P.O. Box 391, Palm Beach, FL 33480 | 1-888 8HuRLOs | www.HuRLOs.com
2009 Press Release
ISE and WRS Announce Strategic Agreement
HuRLOs relaunch for the 2009 hurricane season; provide new hedging platform
Hurricane Risk Landfall Option (HuRLOTM) Contracts Now Available to Eligible Institutional Investors, Businesses and High Net Worth Individuals
A simple product to supplement windstorm and business interruption insurance
August 4, 2009 - PALM BEACH, Fla. -- Weather Risk Solutions (WRS) announces the opening of trading for the 2009 hurricane season in Hurricane Risk Landfall Options, or HuRLOs, which are designed to allow eligible investors and businesses alike to hedge against the financial risks of hurricane landfalls. HuRLOs are structured as call options on whether and where a hurricane will make first landfall on the U.S. Atlantic and Gulf coasts and will trade on an innovative, user friendly Internet-based electronic trading platform operated by WRS. All HuRLO transactions are cleared by CME Clearing, a federally-regulated Derivatives Clearing Organization. Every HuRLO's premium is paid fully on execution of each trade and is then aggregated by CME Clearing House into mutualized risk pools. At settlement, those who hold HuRLOs for the location of first hurricane landfall (or "No Landfall" by season's end) receive a pro rata share of the mutualized risk pool (which for 2009 is guaranteed to be at least $500 per HuRLO). All other HuRLOs expire worthless at settlement. HuRLO prices are based on the interplay of an index of historical probability data, supplemented by real time weather information and the buying decisions of market participants.
"Hurricanes can be financially devastating and no one is fully protected from the financial harm storms may cause even with insurance. HuRLOs are designed to complement insurance by providing participants with a simple method of hedging against the financial risks from hurricanes," commented Mr. Kenneth A. Horowitz, founder of WRS. "HuRLOs are different from other products in that prospective purchasers do not need to find a seller to take the other side of the option purchase. And for businesses, HuRLO s may complement any business interruption insurance. Insurance and re-insurance companies may also use HuRLOs to hedge exposure."
Mr. Horowitz developed HuRLOs in collaboration with leaders of the financial and academic communities including, Leo Melamed, Chairman Emeritus of CME Group Inc., Robert Meyer, Professor and Co-Director of the Center for Risk at the Wharton School of Pennsylvania, Dan S. Wilks, Director of Atmospheric Sciences Graduate Studies at Cornell University, and Philip E. Protter, Professor of Applied Probability and Financial Engineering (former Director of Financial Engineering) at Cornell University.
Mr. Melamed of CME Group commented, "HuRLOs represent a brand new innovation in the management of environmental risk as a consequence of hurricanes."
Dennis D. Dammerman, former Chairman and CEO of GE Capital and Vice Chairman of GE, who was involved in developing HuRLOs stated, "HuRLOs are not insurance and will not replace insurance. Rather, HuRLOs will help eligible investors, businesses, fill in gaps in their insurance coverage, including deductibles, by creating a new form of hedge against the risk that a hurricane will make landfall first in a certain area, which would be expected to cause some uninsured damage or financial harm. In the HuRLO market the risk of hurricane landfall in one area is mutualized and underwritten by market participants who buy HuRLOs for other hurricane landfall areas."
WRS recently announced that the International Securities Exchange (ISE) received a minority interest the company. In return, WRS will license ISE's Longitude technology in order to complement its existing technical infrastructure. Thomas Ascher, ISE's Chief Strategy Officer, said, "ISE is excited to partner with such an innovative organization. WRS has found an untapped segment of the commodity options market and we look forward to working with WRS and supporting its continued growth."
Initially, HuRLOs will trade on an exempt board of trade operated by CME Alternative Marketplace Inc., a subsidiary of Chicago Mercantile Exchange, Inc. via WRS's Internet-based electronic trading platform and will be available for purchase only by qualifying eligible contract participants such as institutional investors, financial institutions, hedge funds, businesses and certain high net worth individuals. WRS is working to make HuRLOs available to retail market participants.
At launch, seventy-nine different HuRLO s will be available in two options series. Seventy-eight HuRLOs in each series correspond to a hurricane making first landfall in a specified coastal county or region and one HuRLO in each series, called the "No Landfall" HuRLO, represents the event that no next hurricane makes first landfall in the enumerated coastal counties or regions for the rest of this hurricane season. Each series corresponds to a different first landfall event and utilizes a separate mutualized risk pool. For example, if hurricane Danny were the first storm to make landfall on the U.S. coast this year, series 1 HuRLOs for the county or region where Danny made landfall would exercise automatically and the remaining HuRLOs in series 1 would expire worthless. If no other hurricanes made landfall on the U.S. coast this year, the series 2 No Landfall HuRLOs would exercise automatically at the end of the season and all other HuRLOs in series 2 would expire worthless. Determination as to whether a hurricane made landfall and the location of a first landfall is made based on data provided by the National Hurricane Center. Options corresponding to the correct outcome are automatically exercised and settlement is made promptly by CME Clearing after a hurricane makes landfall (or if no next hurricane makes landfall, the No Landfall HuRLOs exercise automatically on December 15, 2009).
"The ability to purchase HuRLOs for one or several coastal counties in the most hurricane prone areas could lead to both more tailored hedging opportunities for eligible businesses as well as increased trading opportunities for those seeking to assume risk," commented Professor Protter. "HuRLOs will also provide an alternative means to address the needs of the insurance and reinsurance industry with respect to hedging potential casualty losses from hurricanes."
Eligible participants may purchase HuRLOs on a primary market where prices are based on the buying decisions of market participants. In the primary market, eligible participants do not need to find counterparties. In the secondary market, eligible participants may sell HuRLOs they already own to other eligible participants. All purchases are subject to an aggregate authorized purchase limit that is imposed by a participant's clearing member. Market participants may not short or trade HuRLOs on margin.
Marc Nagel, COO of Dorman Trading, one of the futures commission merchants that currently offer HuRLOs, added that "Dorman customers can, as an alternative to trading HuRLOs using funds in a futures account, simply deposit funds into our custodian bank account. Our custodian bank account will function like a debit account when the customer purchases HuRLOs. We are proud to offer HuRLOs and delighted by the opportunity to further serve our customers."
Professor Meyer, who oversaw approximately 160 Wharton students testing the platform by participating in mock HuRLO trading sessions using simulated storms added, "It was clear from our testing that the platform developed by WRS is simple and intuitive. Also, the market behaved quite efficiently, both by producing a large initial investment pool and by investments in specific counties closely tracking the objective probability of landfall at various points in time."
More information may be found at www.HuRLOs.com or at www.WeatherRiskSolutions.com. The HuRLO s Frequently Asked Questions Guide may be accessed by clicking on the "Learn More Here" link.
About Weather Risk Solutions, LLC
Founded in 2002, Kenneth A. Horowitz, along with a group of experts in atmospheric sciences, including former staff of the National Hurricane Center and leading financial and economic mathematicians, developed Hurricane Risk Landfall Options - HuRLOsTM - which allow market participants to hedge against or speculate on the risk that a selected coastal county or region will be the first hit by a hurricane. HuRLOs are traded through the WRS Electronic Trading PlatformTM (www.HuRLOs.com), an innovative Internet-based electronic trading platform that provides pricing for individual HuRLOs based on the buying decisions of market participants. The dynamic and comprehensive site also offers weather information from the National Hurricane Center, Weather.com, AccuWeather, and Weather Underground.
International Securities Exchange and Weather Risk Solutions Announce Strategic Agreement
NEW YORK, August 4, 2009 - The International Securities Exchange (ISE) and Weather Risk Solutions, LLC (WRS), the developer of Hurricane Risk Landfall Options (HuRLOTM), today announced that they have entered into a strategic agreement. ISE will receive a minority interest in WRS in return for granting WRS the right to use ISE's proprietary Longitude technology.
WRS's trading platform and ISE's Longitude technology use mutualized risk-sharing principles to aggregate liquidity and produce fair and efficient market-driven prices to enable commodity options trading in events and occurrences that do not have an underlying cash market. WRS's HuRLOs are commodity options that enable individuals and businesses to hedge against financial risks resulting from hurricane landfalls in an open, dynamic and transparent financial market. HuRLOs are available to eligible contract participants and are traded through WRS's Internet-based electronic trading platform and cleared by CME Clearing House, a subsidiary of Chicago Mercantile Exchange, Inc.
Kenneth Horowitz, founder of WRS, said, "Our new strategic relationship with ISE will support the next phase of WRS's growth and we look forward to leveraging ISE's innovative Longitude technology. We are very pleased that ISE has recognized the potential of our unique offering which provides a simple way for market participants to hedge against or speculate on the risk that a hurricane will first make landfall on a selected county or region on the U.S. Atlantic and Gulf coasts."
Thomas Ascher, ISE's Chief Strategy Officer, said, "ISE is excited to partner with WRS and to gain a minority stake in such an innovative organization. Through this agreement, we are well poised to benefit from future growth in this untapped segment of the commodity options market."
About ISE
The International Securities Exchange (ISE) operates the world's largest equity options exchange and offers options trading on over 2,000 underlying equity, ETF, index, and FX products. As the first all-electronic options exchange in the U.S., ISE transformed the options industry by creating efficient markets through innovative market structure and technology. Regulated by the Securities and Exchange Commission (SEC) and a member-owner of The Options Clearing Corporation (OCC), ISE provides investors with a transparent marketplace for price and liquidity discovery on centrally cleared options products. ISE continues to expand its marketplace through the ongoing development of enhanced trading functionality, new products, and market data services. As a complement to its options business, ISE has expanded its reach into multiple asset classes through strategic investments in financial marketplaces that foster technology innovation and market efficiency. Through minority investments, ISE participates in the securities lending and equities markets.
ISE is a wholly owned subsidiary of Eurex, a leading global derivatives exchange. Eurex itself is jointly owned by Deutsche Börse AG (Ticker: DB1) and SIX Swiss Exchange AG. Together, Eurex and ISE are the global market leader in individual equity and equity index derivatives. For more information, visit www.ise.com.
About Weather Risk Solutions, LLC
Founded in 2002, Kenneth A. Horowitz, along with a group of experts in atmospheric sciences, including former staff of the National Hurricane Center and leading financial and economic mathematicians, developed Hurricane Risk Landfall Options - HuRLOTM - which allow market participants to hedge against or speculate on the financial risk that a selected coastal county or region on the U.S. coast will be the first hit by a hurricane. HuRLOs are traded through the WRS Electronic Trading PlatformTM (www.HuRLOs.com), an innovative Internet-based electronic trading platform that provides pricing for
individual HuRLOs, which are based on the buying decisions of market participants. The dynamic and comprehensive site also offers weather information from the National Hurricane Center, the Weather Channel, AccuWeather and Weather Underground.
HuRLOs relaunch for the 2009 hurricane season; provide new hedging platform
Today saw the relaunch of the much anticipated Hurricane Risk Landfall Options (HuRLOTM) from Weather Risk Solutions, LLC. We wrote about HuRLOs when they launched as a pilot back in October 2008 with much anticipation of the full launch as they offer an easily accessible method to hedge against landfalling hurricanes.
Trading opens today on these products with clearing handled by the CME Clearing division. They are designed to allow investors or businesses to hedge against the financial risk of hurricanes. Structured as call options on whether or where a landfalling hurricane may hit the U.S. Atlantic or Gulf coasts, they trade on an internet based platform run by Weather Risk Solutions.
An interesting difference between HuRLOs and other hurricane financial contracts is that they require no counterparty. Premiums are paid at the time of trading, then aggregated by the CME Clearing House into mutualized pools of risk. Come settlement time, those who hold HuRLOs for the location of a hurricanes landfall (or 'No Landfall' at the end of the season) receive a pro rata share of the pool (all other HuRLOs expire worthless at settlement). Prices are based on a combination of market movements and an index of historical weather risk data supplemented by real time data on hurricanes in motion.
HuRLOs are not designed to be an insurance replacement. Rather we'd see them as an instrument that could complement insurance coverage for businesses, fill the gaps in an insurance companies reinsurance policy or top up coverage in over exposed areas. They can also provide a method for anyone brave enough to bet on the outcome of hurricanes to play the market as an investment opportunity.
Contracts can be purchased which correspond to a hurricane making landfall in a specified coastal county or region, should a hurricane hit a county or region where you have purchased a contract then you'll be eligible for a payout. Particularly of note is the fact that the risk pool (made up of market participants funds) pays out, therefore making the market responsible for it's own losses. Also novel is the fact that for every hurricane there is a 'No Landfall HuRLO' which can be bought and in essence is a bet that the hurricane won't reach the coast. It's a similar model to some prediction markets but with official clearing backing it has the potential to be a highly liquid marketplace.
At launch 79 different HuRLOs are available for trade in two option series. 78 make reference to a geographical location where a hurricane could make landfall with the 79th being the 'no landfall' HuRLO. Each series will correspond to a different landfall event and has it's own pool. Weather Risk Solutions say 'For example, if hurricane Danny were the first storm to make landfall on the U.S. coast this year, series 1 HuRLOs for the county or region where Danny made landfall would exercise automatically and the remaining HuRLOs in series 1 would expire worthless. If no other hurricanes made landfall on the U.S. coast this year, the series 2 No Landfall HuRLOs would exercise automatically at the end of the season and all other HuRLOs in series 2 would expire worthless.'
It'll be interesting to see how wide adoption of these new instruments becomes. There are many other ways to hedge your hurricane landfall risks, but this one seems a particularly easy to access method which removes some of the barriers to entry that currently put off potential market participants. It will also be interesting to see who in the world of institutional investment is brave enough to bet on them.