Bermuda-based Aquila Re of Bermuda yesterday announced a new strategic alliance to expand global markets for weather derivatives and weather risk management products.

The alliance, unveiled at the RIMS conference, has been formed between Aquila Re, Aquila Inc., one of North America's leading wholesalers of electric power and natural gas, and Kemper Insurance Companies of Illinois.

Weather risk products are used to offset the adverse affects of abnormal weather on the revenues or expenses of business.

Launching the alliance Brian O'Hearne, president of Aquila Re, said: "Through this alliance we intend to build a diversified, global weather risk portfolio.

This will allow us to counter balance unusual weather conditions around the world and provide attractive pricing to customers.'' Industry segments that can benefit from this type of coverage include energy, agriculture, construction, entertainment, beverage manufacturers and distributors and any other organisation whose bottom line results can be affected by weather.

Aquila's family of weather derivative products is marketed in North America and Europe under the GuaranteedWeather brand. Kemper will market similar weather risk products in the United States, but in an insurance form. Aquila is a pioneer in the weather marketplace, having provided the energy industry's first weather hedge in the summer of 1996. Kemper entered the weather business in 1999.

The Kemper-Aquila relationship is a powerful alliance joining two leading players in their respective industries. Combined risk taking increases the capacity needed to expand the market and the blend of actuarial and trading market perspectives improves risk taking capabilities. Flexibility will be improved through access to derivative or insurance alternatives for clients and the complimentary distribution will facilitate customer access.

The companies also plan to create an insurance oriented version of Aquila's recently launched web site GuaranteedWeather.com. This will allow users to structure and price customised weather coverage for more than 300 locations globally.

Weather risk products can benefit customers by stabilising bottom line results by mitigating the impact of unusual weather and improve financing terms or facilitate debt covenant compliance. They can also improve sales through marketing promotions or more effective inventory management. The potential market for these products is very large as an estimated $1 trillion of the US economy is impacted by weather.

Transactions can be structured to address temperature, rainfall, sunlight, snowfall and wind speed. Other parameters may be included depending on the data available. Structures can be designed to address cumulative results over a season or year, maximum or minimum results for a given period or other thresholds that fit the customer's needs.

The notional amount for weather derivative transactions has averaged around $2 million historically. The alliance will be able to offer substantially higher limits through the increased risk taking capacity and its ability to warehouse more risk.

Normally similar coverage can be constructed using either a derivative or an insurance form. Historically derivative transactions have tended to include more standardised terms to facilitate risk matching for portfolio management and insurance transactions have tended to be more customised. Derivative transactions are typically used for hedging but can also be used for trading or speculative purposes. Insurance transactions are available only to indemnify customers for an underlying risk exposure.

BUSINESS BUC