Hoplon Insurance Ltd.

This innovative €70.5m (US$101m) transaction provides lottery company MyLotto24 with protection against lottery winnings in their games exceeding a pre-set amount over a three year period.

Privately placed and using a Bermuda based SPV this deal put a cat bond type structure to work in a completely new risk arena.

Update August 2013:

The Hoplon ILS transaction, which was structured by inea GmbH, a German firm who structure and offer investment opportunities including insurance-linked securities, was originally issued in 2011 and consisted of a €33m catastrophe bond type layer and a collateralized reinsurance layer of €37.5m, over the deals three-year term.

The bond layer provides three-year, aggregate protection to MyLotto24 from the transactions inception in 2011. The collateralized reinsurance portion of the Hoplon structure is an annual reinsurance layer with a reinstatement feature.

We spoke with Dr. Norbert Kranz of inea GmBH, the firm responsible for the unique transaction, to get a better understanding of what has changed.

Dr. Kranz told us that the Hoplon deal had first changed in 2012, when MyLotto24 chose to expand the coverage of the transaction by including a new lottery and the risks of exceptional jackpot wins for this new lottery game within the deal. In 2013 some risk factors have changed and have been taken into account, these risk factors can include the volume of tickets potentially covered by the transaction and changes to lottery rules for example.

The transaction, which uses Milliman Inc. as a reset agent, features a typical reset mechanism which aims to ensure that the expected loss of the bond remains the same for the deals duration. However the deal allows for the expected loss to be increased should the investors give approval to this.

Dr. Norbert Kranz commented; “Investors like the reset feature, as although you need some time to re-adjust factors, you can ensure that the risk and reward to investors remains the same over the lifetime of the transaction.”

When the deal launched the collateralized reinsurance, of €37.5m over three years, equated to €12.5m per annual reinsurance contract. MyLotto24 has increased this layer considerably, bringing the total deal size to €84m, with the collateralized coverage equaling €25.5m per annual risk period with 15 months remaining on the deals term until maturity. The volume of notes issued remains €33m. So MyLotto24 has effectively doubled its annual collateralized reinsurance cover from the transaction.

The transaction has also seen changes to risk factors after agreement from noteholders the expected loss for Hoplon Insurance Ltd. has now been increased to 2.6% and as a result the coupon paid to investors has also been increased to European money market funds plus 12%. That’s a very healthy multiple for investors when you compare it to those on recent catastrophe bond transactions.

Dr. Kranz explained a little about MyLotto24′s motivations behind this deal, saying; “MyLotto24 is a strategic buyer of ILS as part of their hedging tools. In this context MyLotto24 is not acting as an oppportunistic buyer using the current market environment, but wants to build long term relationships with both existing investors and interested investors who might invest in this type of risk in the future. MyLotto24 is keen to see that both sides benefit from this type of transaction.”