Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Hoplon II Insurance Ltd.

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Hoplon II Insurance Ltd. – At a glance:

  • Issuer: Hoplon II Insurance Ltd.
  • Cedent / sponsor: MyLotto24
  • Placement / structuring agent/s: Swiss Re Capital Markets are sole structuring agent and bookrunner
  • Risk modelling / calculation agents etc: Milliman Inc.
  • Risks / perils covered: Lottery jackpot risk
  • Size: $67m
  • Trigger type: Indemnity
  • Ratings: NA
  • Date of issue: Aug 2014

Hoplon II Insurance Ltd. – Full details:

Hoplon II Insurance, will provide €50m ($67 million) of lottery jackpot protection from the issuance of two tranches of insurance-linked notes, while an as yet unsized collateralized reinsurance layer will also be placed.

The insurance-linked notes will be issued, as well as the collateralized reinsurance placed, through Hoplon II Insurance Ltd., a Bermuda domiciled special purpose insurance vehicle.

The Hoplon deals provide MyLotto24 with a source of protection to help the company pay for exceptional jackpot winnings in their lotteries.

In the case of Hoplon II Insurance Ltd., the deal will provide MyLotto24 with three years of fully-collateralized protection for lottery jackpot risks on an annual aggregate and ultimate net loss basis. The transaction is targeting September for launch, when the Hoplon Insurance deal matures, and will run for just over the three years, until the end of 2017. The duration of the transaction is split into three aggregate risk periods.

The Hoplon II Insurance bond will protect MyLotto24 initially across three of its key lottery games, the German Lottery, the Eurojackpot and the Euromillones, we understand. Both jackpot winnings and also tax shortfalls on jackpot winnings are covered under the terms of the deal, both on an ultimate net loss basis.

Hoplon II Insurance features two tranches of notes linked to lottery jackpot risks. Both the Class A and Class B tranche of notes are sized at €25m each.

The Class A notes have an attachment point of €85m and an exhaustion point of €110m, we are told. The initial attachment probability is 3.95% and the initial expected loss is 2.32%. The Class B notes attach at €60m and exhaust at €85m of qualifying jackpot losses. The Class B attachment probability is 7.28% and the expected loss is 5.38%.

We’re told that the deal will likely complete in August and that the notes will pay investors a small coupon of 1.5% up until the beginning of the first risk period in September. This is a good strategy as it will allow MyLotto24 to lock in the cover, while keeping investors happy with a small return for no risk at all (until the risk period begins).

Once the risk periods begin, we understand that the Class A notes are being offered with price guidance of 6.5% to 7.5%, while the Class B notes are being offered with price guidance of 11.25% to 12.25%, so these notes will pay a reasonable coupon, although the Class B notes multiple is quite low.

We’re told that the collateralized reinsurance layer, which Hoplon II Insurance will enter into privately, will cover losses below the two tranches of notes, from €35m to €60m of losses. So the rate on-line for the reinsurance layer will no doubt be higher than the return on the insurance-linked notes issued by Hoplon II.

Once again Milliman Inc. features in the latest Hoplon deal as the reset agent. The Hoplon II Insurance structure allows for a number of different types of resets, we’re told, including the ability to opt for a variable reset to move the coverage limits and a reset to allow lottery games to be changed or added, amongst others.

Update 1:

The Class A notes launched with price guidance of 6.5% to 7.5% and we understand that the pricing has settled at the bottom end of that range, at 6.5%.

The Class B notes launched with guide pricing of 11.25% to 12.25%. That pricing has now settled towards the upper end of guidance, at 12%, we understand.

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