Swiss Re Insurance-Linked Fund Management

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Acorn Re Ltd. (Series 2021-1)

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Acorn Re Ltd. (Series 2021-1) – At a glance:

  • Issuer: Acorn Re Ltd.
  • Cedent / sponsor: Hannover Rück SE / Oak Tree Assurance, Ltd.
  • Placement / structuring agent/s: GC Securities is sole structuring agent and bookrunner
  • Risk modelling / calculation agents etc: RMS
  • Risks / perils covered: U.S. earthquake
  • Size: $475m
  • Trigger type: Parametric
  • Ratings: NR
  • Date of issue: Oct 2021

Acorn Re Ltd. (Series 2021-1) – Full details:

This will be the third parametric earthquake catastrophe bond transaction in the Acorn Re Ltd. series of deals, with a renewal of the full $400 million of maturing cover from a 2018 issuance being sought.

As with the previous two Acorn Re catastrophe bond deals, Hannover Re is acting as the ceding reinsurer and sitting in front of a singal named ceding insurer, Oak Tree Assurance Ltd.

Oak Tree Assurance is a Vermont domiciled workers compensation captive owned by the Kaiser Permanente group of health plan companies.

So this now second renewal of the Acorn Re U.S. west coast parametric earthquake catastrophe bond will ultimately provide coverage for the Kaiser workers compensation captives insured exposure to earthquake risks.

The Acorn Re 2021-1 cat bond will also provide some protection to other Hannover Re reinsureds, which also have exposure within the parametric earthquake box, the same as the 2015 and 2018 transactions.

Acorn Re Ltd., the Bermuda domiciled special purpose insurance vehicle, will seek to issue a single $400 million or larger tranche of Series 2021-1 Class A notes.

The notes issued will be sold to cat bond investors and the proceeds used to collateralize the underlying retrocessional reinsurance agreements between Acorn Re and Hannover Re, which in turn will enter into reinsurance agreements with the Kaiser Permanente captive, Oak Tree Assurance, and also some of Hannover Re’s other reinsureds that have exposure in the parametric box.

As a result, the $400 million or more of Acorn Re 2021-1 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 a capital markets source of per-occurrence parametric reinsurance protection against earthquakes that strike the U.S. west coast region.

The covered area appears similar to the 2015 and 2018 Acorn Re cat bonds, so focused on California and the surrounding states of Oregon, Washington, Nevada, Utah, Idaho, Arizona, British Columbia in Canada, as well as Baja California and Sonora states in Mexico and some offshore areas of the Pacific.

Which reflects the fact that California makes up just over 95% of the expected loss for the Acorn Re 2021-1 catastrophe bond notes, we understand, so the coverage is really focused on that state, but quakes hitting the surrounding area are encapsulated by the parametric box extending more widely.

The new Acorn Re cat bond transaction will provide its beneficiaries with three years of protection, with the maturity of the Acorn Re 2021-1 cat bond slated for the end of October 2024.

It appears the trigger has been re-designed for the 2021 cat bond issuance, with more payout percentages available, between a 25% loss of principle and 100%, depending on the event parameters, so the magnitude and location of an earthquake event.

But looking at historical loss modelling, we’re told that the only earthquake event in history that would have caused a 100% payout of these notes would have been the 1906 San Francisco quake.

The $400 million of Series 2021-1 notes on offer from Acorn Re Ltd. have an annualised attachment probability of 1.2% and an annualised expected loss of 0.89%, we’re told, which is a little higher risk than the maturing cat bonds risk factors we believe.

The $400 million of notes are being offered to investors with coupon guidance in a range of 2.5% to 3%, sources said.

So at the mid-point, of 2.75%, this would indicate an annualised multiple-at-market of almost 3.1 times the expected loss.

For comparison, the Acorn Re 2018-1 cat bond priced at 2.75% with an expected loss a little lower, around 0.81%, so had a multiple of roughly 3.4 times the EL.

The Acorn Re 2015-1 cat bond notes paid a 3.4% coupon on an expected loss of 0.74%, so offering an almost 4.6 times EL multiple.

Update 1:

The offering size was increased to $475 million and the pricing was fixed at the low-end of guidance, at 2.5%. That would pay investors a multiple-at-market of 2.8 times the expected loss.

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