Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Acorn Re Ltd. (Series 2018-1)

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Acorn Re Ltd. (Series 2018-1) – At a glance:

  • Issuer: Acorn Re Ltd. (Series 2018-1)
  • Cedent / sponsor: Hannover Rück SE / Oak Tree Assurance, Ltd.
  • Placement / structuring agent/s: GC Securities is sole structuring agent and lead bookrunner
  • Risk modelling / calculation agents etc: RMS
  • Risks / perils covered: U.S. earthquake
  • Size: $400m
  • Trigger type: Parametric
  • Ratings: ?
  • Date of issue: Jul 2018

Acorn Re Ltd. (Series 2018-1) – Full details:

This new Acorn Re 2018-1 catastrophe bond is a renewal of the maturing 2015-1 transaction of the same name and again sees Hannover Re acting as the ceding reinsurer 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 coverage for the Kaiser workers compensation captive insured exposure to earthquake risks.

The Acorn Re 2018-1 cat bond will also provide some coverage for other Hannover Re reinsureds which have exposure within the parametric earthquake box, the same as the 2015 transaction.

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.

Update 1:

Sources said that the single tranche of notes had grown by a third to make this into a $400 million offering.

At the same time, we’re told that the coupon guidance range of 2.75% to 3.25% was dropped to the bottom of that range, to offer investors a 2.75% return for their investment in the notes. Even at this lowered level the notes will pay investors a multiple of almost 3.4 times the expected loss.

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