Photo from: Mkaldani at interfacelift.com http://interfacelift.com/wallpaper/D1b115b8/02876_bluehour_1280x1024.jpg
Here is a Tree List of the different types of Reinsurance the two main ones are Treaty and Facultative. I will go more in-depth with the differences of these 2 types in another post. Reinsurance allows risk management for various types of projects and gives investors and insurance companies a less likely chance of experiencing massive losses.
Why do they matter?
Because they are in almost everything you use like computers, lighting, cars, cell phones, TVs, and so on. Most of earth’s rare metals come from China, about 97%. In a previous blog post I talked about Mongolia and the mining that is going to happen there. One of the main buyers of Mongolia’s earth metals will be China.
I figured to talk about rare earth metals, because there is a lot of debate about them. One, mainly in the computer industry, because China has so many and there are only a limited number. Two, in most places the mining of them does more damage than good to the local people.
List of all the Rare Earth Metals:
21. Sc – Scandium – used in aerospace
39. Y – Yttrium – Microwave filters and colors in TV
57. La – Lanthanum – Hydrogen storage
58. Ce – Cerium – Polishing powder
59. Pr – Praseodymium – Flint products
60. Nd – Neodymium – Violet colors in glass and ceramics
61. Pm – Promethium – Nuclear batteries
62. Sm – Samarium – neutron capture
63. Eu – Europium – mercury vapor lamps
64. Gd – Gadolinium – Computer memories
65. Tb – Terbium – Fluorescent Lamps
66. Dy – Dysprosium – Rare earth magnets
67. Ho – Holmium – Lasers
68. Er – Erbium – Vanadium steel
69. Tm – Thulium – X-ray machines
70. Yb – Ytterbium – Infrared lasers
71. Lu – Lutetium – PET scan detectors
Now let’s look at Project Finance from a different point of view, from the insurance companies. As you can image there are all sorts of catastrophic losses involved with Project Finance whether it is a space station, nuclear power plant, water utility, and so on. About a year ago Japan was hit by a massive earth quack that destroyed a lot of projects like nuclear power plants. Imagine that one insurance company covered all of these nuclear power plants in Japan. The company would go bankrupt and investors in the project will lose everything they have put in. One way to prevent this is with reinsurance.
Reinsurance is a way for insurance companies to protect themselves from massive losses by selling their policies. Their are companies that deal with reinsurance such as Willis Re, Towers Watson has a massive department, TOA Re, and so on. These companies buy insurance policies after analyzing them.
There are six principal functions of reinsurance:
- Increase large line capacity – A max amount that an insurance company can accept in polices.
- Provide catastrophic loss – If a loss, like in Japan, happens then the loss is spread over the primary insurance company and the reinsurance or multiple reinsurance companies.
- Stabilize loss experience – protects companies from losing stock value or losing their credit rating.
- Provide surplus relief – during periods of rapid growth some insurance companies may be forced to slow down because they cannot cover all of their polices. Reinsurance allows them to grow by selling off some of their policies.
- Facilitate withdrawal from a market segment – If a market becomes too risky, like Japan, an insurance company can sell all of its policies.
- Provide underwriting guidance – insurance and reinsurance companies working together to value risks.
I will talk more about types of reinsurance in other blog posts. Its good to understand how risk is managed behind the scenes.
Picture from: http://www.flickr.com/photos/martini_dk/369891979/
This is a water utility plant sponsored by Latinaguas in the country of Argentina. Latinagues is a pioneer in the private management of public water and sanitation. They serve over 130 locations in Latina America. This company is very big in Latina America and Aguas de la Rioja is just on of its projects. Aguas de la Rioja was start in April 2002 and its termination year is in 2032. This project will require funding until its end in 2032. The investment commitments in physical assets are 67 million dollars US. This is not including upkeep and so on. Latinagues owns 100% of the utility and is responsible to damages and moving the project forward. Aguas de la Rioja gives clean water to over 280,000 people in 2005 and is in an area where water is very scarce.
This project is very helpful to the people in the region of Rioja by providing fresh water and sewerage services. This project is an example of how important Project Finance is for people of less fortunate areas. This project should make the area more stable and prevent the spreading of disease.
It is always important to understand who is creating projects and why they are being created. Sometimes you have to read in between the lines to understand why some projects are in place. This project is an example of something positive that is for the elevation of mankind.
If you are interested in the company Latinagues I have attached a link to their website at the bottom. I have also attached another link to a question and answer with Raul Martinez Aguas de la Rioja general manager.
Picture From: http://www.flickr.com/photos/thejourney1972/3474219882/
This video explains how to create a Project Finance model.
Key ingredients in a Project Finance Model are the following: 1. Assumptions 2. Construction related assumptions 3. Operations 4. Financing 5. Cash flow. This video also provides some Excel tips can be very useful down the road.
These video should make it easier to understand some of the planning and understanding involved in Project Finance. This is a very basic financial model.
Videos from: http://www.youtube.com/watch?v=FnFmO2dPqDQ
Milbank a leading international law firm founded in New York in 1866. This is where some of the main players in Project Finance go to for laws around the world. This law firm has offices all over the world from the New York to Tokyo Japan. One of the most difficult tasks in Project Finance is understanding the law, especially international laws. Failure to understand international laws can result in a loss of the whole project and will hurt every party involved. These laws can be very complex and require multiple teams of lawyers to tackle.
As you can see on Milbank’s website (link below) here are some of the issues that they deal with:
- Oil and Gas – including multiple stages of production and supply
- Power and Energy – including as many types of energy and people anyone can think of
- Infrastructure and Water – including the stages in the process
- Telecommunications – including any form
- Space and Satellite – for any type of company involved in broadcast, communications, and so on
- Waste Disposal and Recycling – all stages involved
- Mining and Metals – all processes involved
- Natural Resources – all processes involved
- Pulp and Paper
- Transportation – air, land, or sea
It can be seen that this law firm is deeply involved in project finance. The law entity is very confusing because every project, location, and propose are different.
http://www.milbank.com/ (main page)
http://www.milbank.com/practices/areas/finance/project-finance.html (project finance page)
Picture From: http://www.flickr.com/photos/59937401@N07/5857192202/
Convexity is the relationship between the prices of bonds and interest rates. Convexity shows how a bond or portfolio of bonds prices change as interest rates change. In my previous blog post about bonds when interest rates rise bond prices drop and vice-verse. Convexity is a hard concept to understand. Below Is a video that explains convexity more in depth.
Duration is the bonds sensitivity to the number of years that the investor plans to hold it. The longer the bond is held the more of chance that interest rates will affect it. A bond held for 30 years has a higher duration than one held for 5 years. Below is a video that explains bond duration more in depth.
Bond Convexity and Duration go hand in hand and are important to understand for fixed income risk management.
Videos From: http://www.youtube.com/watch?v=yOwRgWhIn_g