London restaurant buys weather derivatives

A London restaurant that sees fewer customers on cold days is using derivatives to protect against financial loss resulting from unfavourable weather.

The Rock Garden, which has a large dining area located outside on Covent Garden’s cobbled square, bought the contract to hedge against a loss of revenue on colder than normal days between the beginning of March and the end of June.

The restaurant purchased protection from Element Re, a provider of non-catastrophic weather risk management products and a subsidiary of Bermuda-based insurer XL Capital. The derivative is designed to pay out when the temperature is less than or equal to 8.5 degrees Celsius in March, 11 degrees Celsius in April, 14.5 degrees Celsius in May and 18 degrees Celsius in June.

Philip Mathews, owner of the Rock Garden, commented: “We have identified that if it’s cold we don’t have as many customers, so we definitely see a benefit in managing our exposure to inclement weather.”

Lynda Clemmons, chief operating officer of Element Re, said: “This deal shows the increased interest in weather risk management in Europe as well as the growing diversity of the market. Restaurants can be highly affected by weather, and this transaction demonstrates one of the many ways we can create a product to protect them.”

The deal was structured and brokered by London-based consultants Speedwell Weather Derivatives. Paul Watmough, a director at Speedwell and an adviser on the Rock Garden deal, said more companies outside the energy sector – traditionally the biggest user of weather derivatives – are now demanding weather risk-related strategies. “We’re seeing interest from the building sector now and from many other areas.”

The deal is similar in size and structure to one struck last year between Rock Garden and now-defunct energy trading company Enron. Speedwell also structured and brokered the deal with Enron.