Investors in the Hoplon II Insurance Ltd. lottery jackpot winning catastrophe bond or ILS style insurance coverage has escaped a loss after the sponsor MyLotto24 suffered a €37m jackpot win in a secondary lottery it held.
The jackpot win was covered by insurance however and MyLotto24 told Artemis that a claim made against a special risk insurance policy paid for over half of the jackpot payout, leaving the company facing just a forecast €17m hit to fiscal year 2016 performance (suggesting the insurers paid MyLotto24 around €20m).
MyLotto24 told Artemis that the insurance policy was a traditional coverage and the Hoplon II lottery jackpot linked ILS sat above it in the company’s protection.
ZEAL Network SE, of which MyLotto24 Limited is a fully consolidated minority shareholding, explained; “The majority of the prize is covered by a special insurance held by MyLotto24, which is independent of the ILS hedging structure of high jackpot pay-outs. Consequently, the pay-out will not affect the self-retention of the ILS hedging structure.”
The €50m Hoplon II bond was sponsored by MyLotto24 in 2014 as the company sought to leverage the capital markets, ILS investors and the catastrophe bond structure in order to source insurance cover for large lottery jackpot winning and tax shortfall risks.
Hoplon II provides €50m of lottery jackpot protection from two tranches of insurance-linked notes issued by Hoplon II Insurance, while an additional collateralized reinsurance layer was also placed at the time to extend the protection.
Both the Class A and Class B tranche of notes provide €25m each of cover, via the reinsurance and subsequent reinsurance agreements between the issuing SPI and sponsor.
The Class A notes cover losses from €85m to €110m, while Class B sit below covering qualifying jackpot losses from €60m to €85m.
Interestingly though, the additional collateralized reinsurance layer, which Hoplon II Insurance entered into privately alongside the ILS (or catastrophe bond) issuance in order to extend the protection to MyLotto24, covers losses below the two tranches of notes, from €35m to €60m of losses.
With that collateralized reinsurance layer attaching at €35m of losses, but the jackpot win being for €37m, you might think that the collateralized reinsurance layer of Hoplon II would have been hit for a €2m claim.
However, we can confirm thanks to a MyLotto24 representative that the ILS has not been touched and this jackpot payout was solely paid for by cash and the special risk insurance policy. The collateralized reinsurance layer was not affected.
Earlier this year, another lottery linked ILS transaction experienced a payout, when the Lottoland Group, a fast-growing Gibraltar licensed online lottery provider, revealed that a €14m lottery jackpot win had resulted in a payout from its collateralised reinsurance based ILS transaction.
Artemis understands however that one ILS fund reported two lottery payout related impacts to its NAV so far this year, one in February and one in March. These losses came from an aggregate and a per-occurrence contract which were both hit by the same lottery loss event, so it is assumed these were related to the Lottoland Fortuna collateralised reinsurance ILS deal.
ILS backed insurance and reinsurance protection for lottery jackpot risk has proved its worth in 2016, with claims made and now another loss affecting the insurance beneath the Hoplon II lottery jackpot-linked ILS bond.
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