Innovative catastrophe bond type structure used to cover risks of lottery winnings for MyLotto24

by Artemis on September 17, 2011

Just when you think the insurance-linked securities market can’t get any more interesting and innovative, a deal comes along which breaks new ground and brings a new type of risk to insurance-linked securities investors. Artemis.bm can reveal a groundbreaking deal which has recently been completed providing the sponsor with cover for exceptional jackpot winnings in their lotteries.

The transaction is very similar to an annual aggregate catastrophe bond cover, except there’s no natural catastrophe being covered, just the risks of an online lottery company paying out more jackpots than they want to commit in a specified period.

The three-year deal provides MyLotto24 Ltd. with three years of aggregate cover against lottery jackpot risks. The transaction, worth €70.5m in total covers them against jackpot winnings exceeding a certain level over the three years, with a maximum annual cover of €45.5m. The three years ILS will therefore cover MyLotto24 Ltd’s payments to winners of jackpot prizes in two of their lottery products in excess of a € 22.5m annual deductible.

The transaction has been structured by inea GmbH, a German firm who structure and offer investment opportunities including insurance-linked securities. It was issued through a Bermuda domiciled special purpose entity, Hoplon Insurance Ltd. we understand, which was incorporated in June for this transaction and which is being managed by Horseshoe Management Ltd.

Risk modelling was undertaken using the MyLotto24’s own model and Milliman, Switzerland developed their own distinct model to verify the results.

The transaction was privately placed, following the recent trend for unrated private ILS transactions, with less than ten investors as a combination of collateralized reinsurance and bonds. The coupon investors received could not be disclosed, but we’d imagine it would be attractive given the risk.

The cover afforded to MyLotto24 is a 3 year aggregate cover based upon the actual jackpot winnings experienced. Similar to many cat bonds, there is an annual reset of the risk situation for investors, and also an exceptional reset during an annual period based upon certain risk parameters. The reset is performed by Milliman who acts as a calculation agent on the transaction.

“In this transaction investors benefit from straightforward statistics while the gaming company benefits from a collateralized multiyear cover. I therefore believe that these deals offer tremendous opportunities for both ILS investors and gaming companies”. Egidio Messito, MD of MyLotto24, commented.

Dr. Norbert Kranz and Tore Ellingsen, of inea GmbH, told us; “The idea behind the transaction is to enhance the hedging markets for the sponsors. In addition it brings a non-correlating risk to investors in non-correlating asset classes (ILS) with an attractive return. The 3-year price stability in combination with the aggregated covers brings further attractive elements to the Sponsor and investors/reinsurers.”

This transaction could encourage a new way of looking at the ILS and cat bond structure with regards to insurance coverage. The way ILS work is perfectly suited to covering many alternative risks outside of the normal catastrophe and life markets. Congratulations to inea GmbH on bringing this deal successfully to market, we hope to see many similarly innovative transactions in the future.

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