An interesting $200m catastrophe bond named Acorn Re Ltd. (Series 2015-1) has launched to the market Artemis understands, bringing U.S. earthquake risks focused on the west coast and featuring a parametric trigger.
The Acorn Re 2015-1 catastrophe bond sees Hannover Re acting as ceding reinsurer in front of one named ceding insurer, Oak Tree Assurance Ltd., which is a Vermont domiciled captive insurance vehicle. The cat bond also seems to provide some protection for losses Hannover Re suffers from reinsurance agreements with other unnamed ceding insurance companies.
Interestingly, from the information we can trace on the captive Oak Tree Assurance, it appears to be a workers compensation captive owned by the Kaiser Permanente group of health plan companies. So this U.S. west coast earthquake cat bond looks to be providing cover for the Kaiser workers compensation captive insured exposure to earthquake risks, as well as the other insureds. Note, we can’t confirm this yet.
Acorn Re Ltd. will issue a single tranche of Series 2015-1 Class A notes, with a current size of $200m, to provide the cedants with collateralized reinsurance protection against U.S. earthquakes located around the west coast.
The coverage area is focused around California, Oregan, Washington, Nevada, Utah, Idaho, Arizona, British Columbia in Canada, as well as Baja California, Baja California Sur and Sonora states in Mexico. The exposure we understand is most concentrated in California.
It would seem the reason for B.C. and Mexican states being included is to cover earthquakes occurring around the region which could cause major damage in California. If this is indeed covering Kaiser Permanente then that would make sense as Kaiser’s operations are U.S. based.
The coverage afforded by the notes will be on a parametric trigger and per-occurrence basis, across a three-year risk period.
The parametric trigger specifies that qualifying earthquakes must occur within a 1 degree times 1 degree earthquake box within the overall covered area. The trigger has four levels of severity which can cause different levels of event percentage and loss.
We understand that a repeat of the 1906 San Francisco earthquake could result in 75% event percentage, according to the models used.
As is important with parametric triggers for catastrophe bonds this one seems reasonably simple for investors to understand and model.
The $200m of notes issued by Acorn Re Ltd. have an initial attachment probability of 0.97%, an exhaustion probability of 0.52% and an expected loss of 0.74%, Artemis understands.
The notes are being marketed to investors with coupon guidance in a range of 3.15% to 3.65%, which should be deemed as providing a reasonable multiple to expected loss, being almost 4.3 times at the mid-point of that guidance.
The cat bond is being brought to market by GC Securities, acting as sole structuring agent and lead bookrunner, while Citigroup is a joint bookrunner. RMS is providing risk modelling services.
This is another interesting cat bond transaction to see come to market and encouraging to see the use of a parametric trigger making a come back in recent weeks.
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