$300m Acorn Re parametric U.S. quake cat bond renewal launches

by Artemis on June 26, 2018

A renewal catastrophe bond transaction has been launched for a novel parametric deal that ultimately provides workers compensation protection to an insured, with a $300 million Acorn Re Ltd. (Series 2018-1) transaction that seeks parametric earthquake cover that will benefit the Kaiser Permanente health group.

This Acorn Re 2018-1 parametric earthquake cat bond will fully replace the soon to mature $300 million Acorn Re Ltd. (Series 2015-1), with the proposed coverage from the renewal cat bond very similar to the outgoing deal.

Hannover Re is again acting as the ceding reinsurer for this Acorn Re 2018-1 transaction, we’re told, sitting in front of one named ceding insurer, Oak Tree Assurance Ltd., which is a Vermont domiciled workers compensation captive owned by the Kaiser Permanente group of health plan companies.

So this renewal of the Acorn Re U.S. west coast earthquake parametric cat bond will ultimately provide insurance coverage for the Kaiser Permanente workers compensation captive insured exposure to earthquake risks and similar to the 2015 deal it will also provide some coverage for other Hannover Re reinsureds which have exposure within the parametric earthquake box.

Acorn Re Ltd., the special purpose insurance vehicle, will look to issue a single $300 million or greater tranche of Series 2018-1 Class A notes, which will be sold to investors to collateralize the underlying retrocessional reinsurance agreements with Hannover Re, who in turn enters into reinsurance agreements with the Kaiser Permanente captive and its other reinsureds.

The $300 million of Acorn Re 2018-1 cat bond notes will provide the covered parties, Kaiser Permanente via the Oak Tree Assurance Ltd. workers compensation captive and other reinsureds of Hannover Re, with per-occurrence parametric protection against earthquakes that strike the U.S. west coast region.

Covered states are the same as for the 2015 Acorn Re cat bond, so the coverage area is focused on California and surrounding states of Oregan, Washington, Nevada, Utah, Idaho, Arizona, British Columbia in Canada, as well as Baja California, Baja California Sur and Sonora states in Mexico and some offshore areas of the Pacific.

The exposure, we understand, is most concentrated on California itself and the way the parametric trigger has been designed means losses occurring in California from earthquakes that are actually located in surrounding states are protected against, with the actual exposure in California the main target for coverage.

The transaction will provide just over three years of coverage with the maturity of the Acorn Re 2018-1 cat bond slated for the end of October 2021.

Just like the 2015 cat bond, the parametric trigger has been designed with four levels of earthquake severity, each of which can cause different levels of event percentage and loss, ranging from a 25% payout up to 100%.

The $300m of Series 2018-1 notes to be issued by Acorn Re Ltd. have an initial attachment probability of 1.06% and an initial expected loss of 0.81%, we understand, which is very slightly higher risk than the maturing cat bond.

The notes are being offered to investors with coupon guidance in a range of 2.75% to 3.25%, which is lower than the 3.4% paid to investors in the 2015 Acorn Re. However at the mid-point of 3% that would still provide a very reasonable multiple of 3.7 times the expected loss.

It’s critical that parametric triggers for catastrophe bonds are reasonably simple for investors to understand and model, hence it’s unsurprising that there has been little changed from the 2015 deal, which was received well by the investor base, we understand.

These Acorn Re cat bonds provide a really valuable example of how capital markets backed reinsurance capacity can offer a way for a corporate entity to cover a difficult risk like workers compensation.

It shows how a parametric trigger can be used to cover financial exposures to earthquakes, which also demonstrates that this type of structure could be used for finding coverage for other less tangible or obvious risks, such as business interruption or loss of revenue.

We understand that this Acorn Re Ltd. (Series 2018-1) catastrophe bond transaction is expected to complete by mid-July and you can read all about this and every other cat bond in the Artemis Deal Directory.

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