Swiss Re Insurance-Linked Fund Management

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Acorn Re Ltd. (Series 2015-1)

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Acorn Re Ltd. (Series 2015-1) – At a glance:

  • Issuer: Acorn Re Ltd. (Series 2015-1)
  • Cedent / sponsor: Hannover Rück SE / Oak Tree Assurance, Ltd.
  • Placement / structuring agent/s: GC Securities is sole structuring agent and lead bookrunner. Citigroup is joint bookrunner.
  • Risk modelling / calculation agents etc: RMS
  • Risks / perils covered: U.S. earthquake
  • Size: $300m
  • Trigger type: Parametric
  • Ratings: Fitch: 'BBsf'
  • Date of issue: Jul 2015

Acorn Re Ltd. (Series 2015-1) – Full details:

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.

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 a 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.

Fitch Ratings explained more about the parametric trigger for this cat bond:

The trigger is per occurrence based on a parametric ‘cat-in-a-box’ structure utilizing up to 430 predetermined Earthquake Box Locations which are each a square box of size one degree by one degree on the Earth’s surface (one degree latitude is approximately 69 miles; one degree of longitude gradually shrinks from the equator to the poles, and at 40, one degree is approximately 53 miles). The area that comprises the group of Earthquake Box Locations is delineated by latitudes 26 and 54 and longitudes -132 and -110.

A Covered Event will have occurred if the Reporting Agency (initially the United States Geological Survey) reports an Earthquake during the Risk Period that has a location within one of the respective Earthquake Box Locations with a magnitude higher than the Minimum Magnitude of the box and with a Depth that is less than or equal to 50 kilometers.

For each respective Earthquake Box Location, there is an established Minimum Magnitude for each progressive Trigger Level, which is used to determine the applicable Event Percentage should a Covered Event occur within. The Event Percentage is a step-function that corresponds to each Trigger Level: Trigger Level One – 25%, Trigger Level Two – 50%, Trigger Level Three – 75%, Trigger Level Four – 100%. Event Payments for the transaction are calculated by multiplying the Event Percentage by the Original Principal Amount on the notes.

The Minimum Magnitude for some of the Earthquake Box Locations remain constant for each of the four associated Trigger Levels. For example, the Earthquake Box Location that is bounded by a Minimum Longitude of -123 degrees and Minimum Latitude of 37 degrees (this box covers an area in and around the San Francisco Bay area) has a Minimum Magnitude of 7.5 for each Trigger Level, One through Four. That implies a Covered Event within that box would automatically reach Trigger Level Four and a 100% loss of Outstanding Principal Amount.

The Earthquake Box Location that is bounded by a Minimum Longitude of -125 degrees and Minimum Latitude of 44 degrees (this box covers an area along the coast west of Eugene, Oregon) has progressively larger Minimum Magnitudes for each Trigger Level – 8.2, 8.5, 8.7 and 8.9 for Trigger Level One, Two, Three, and Four, respectively. Thus, in a scenario in which a Covered Event within this box had a reported Magnitude of 8.6, Trigger Level Two would be the highest Level reached and would result in a 50% loss of Outstanding Principal Amount.

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.

Update 1:

The Acorn Re 2015-1 cat bond was upsized by 50% to $300m before close, as investors demonstrated their demand for new issuance.

At the same time the price guidance was shifted to the midpoint at 3.4% where pricing settled before the deal completed.

Update 2:

On completion Fitch Ratings assigned a ‘BBsf’ rating to the $300m of notes.

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