Fast-growing Gibraltar licensed online lottery provider the Lottoland Group has renewed its Fortuna collateralized reinsurance or insurance-linked securities (ILS) transaction at an upsized EUR 120 million, increasing the size of its capital markets-backed jackpot insurance coverage.
Lottoland has placed collateralized reinsurance structures and the ILS market at the heart of its expansion, leveraging the capital markets-backed risk transfer capacity in a series of deals dubbed Fortuna as lottery winngings or jackpot payout security and helping the firm to grow.
Lottoland first tapped the ILS market for insurance protection in 2015, with the first lottery winning risk collateralized reinsurance transaction, Fortuna 1.
Dubbed the Fortuna transaction, the EUR 100 million deal had a two-year term but was renewed early in 2016, providing an ongoing €100m of annual coverage (Fortuna 2), including reinstatements, as Lottoland’s rapid growth triggered a renewal clause for the collateralized reinsurance layer.
Now, Lottoland has returned to issue further insurance-linked securities (ILS) in its scheduled renewal of the first Fortuna deal, and has increased the size of the transaction to support the growth the lottery provider has been experiencing.
The ILS transactions have become an integral part of the lottery providers funding, offering the protection in case of major jackpot payouts in an efficient, securitised ILS form. This protection is essential to Lottoland and securing the same coverage from traditional insurance or reinsurance markets is not always possible, or cost-effective.
The Fortuna 3 collateralized reinsurance deal has again been transacted in the offshore domicile of Gibraltar and represents the largest single reinsurance deal in the gambling industry, according to Lottoland.
The transaction saw all of the investors in the previous ILS deal investing again, as well as a number of new specialist ILS investors coming onboard for this Fortuna 3 deal.
Lottoland sees the Fortuna ILS transactions as a “Cornerstone of Lottoland’s advanced risk management system which is now providing total cover in the hundreds of millions and over 50% more than last year,” the company explained.
Lottoland CEO, Nigel Birrell, commented; “Our innovative approach to this market is really paying off. The ILS provides a fully reliable way to reinsure against big wins and we’re delighted to have this second two year agreement in place which we have taken to the next level – the only solution in the industry which has proven fast and reliable pay-out of winnings.”
Once again the Fortuna renewal has been brought to market with the assistance of inea GmbH, the German company that structures and offers investment opportunities including insurance- or reinsurance-linked securities (ILS).
This is the fifth lottery ILS or collateralised reinsurance transaction structured and assisted by inea GmbH, placing the firm in a unique position with significant experience in bringing these jackpot risks to the ILS market.
The EUR 120 million Fortuna 3 ILS deal has again been structure in four layers, like the previous deal, and provides its protection to Lottoland across a two-year term, with two annual risk periods, inea told Artemis.
The four layers of lottery jackpot risk feature expected losses in a range from 2% and 14%, while the pricing multiples range from 1.6 to 2.1 times the expected loss.
With such a range of risk and return profiles available, the transaction offers investors a lot of choice, so inea worked closely with the ILS investors to derive the appropriate layer risk profiles to meet investors appetites and their ILS fund’s needs.
With this third Lottoland ILS the Fortuna transaction is now covering more lotteries than ever before, with over 25 now benefitting from this jackpot protection.
The Lottoland ILS transaction features a number of instruments to ensure that investors are only exposed to a certain level of risk throughout the lifetime of the transaction, no matter how quickly Lottoland continues to grow.
Dr. Norbert Kranz of inea told Artemis that this enables the ILS transaction to be reset to maintain a certain risk profile, with regular monthly calculations of premiums due and the risk to investors, so the ILS transaction can be reset as frequently as required to account for Lottoland’s growth.
This innovative approach perhaps provides some insight for where other ILS and collateralized reinsurance transactions could shift to, as resets are more typically seen on a yearly basis, but being able to effect a reset on a monthly basis makes ILS coverage much more useful to a fast growing sponsor like Lottoland, while also providing investors with much greater certainty in the risk they are assuming through their investments in the ILS deal.
So this deal offers investors much lower volatility than some ILS transactions, given the monthly reporting of premiums and risk and ability to reset it regularly. This makes sure that investors are only ever exposed to the level of risk they signed on for.
Discussing the investors backing the Lottoland ILS transaction, Dr. Norbert Kranz of inea explained; “The good communication and transparency that Lottoland is providing to investors is clearly one of the key success factors.
“Not only the old investors have increased their stakes, but also we have new investors onboard now.
“It can be considered the cream of the ILS market now investing in this transaction, a result of the sustained work in the market by Lottoland and ourselves.”
Lottoland’s use of ILS as insurance coverage has already paid dividends, with its ILS having made a EUR 22 million payout to a lottery player from Berlin in 2016.
But the scale of Lottoland’s total payouts mae to date, at EUR 838 million across its business portfolio, shows that the ILS protection also has the potential to become an increasingly vital piece of the risk management puzzle.
Going forwards inea expects to see increased demand for ILS markets to back jackpot protection insurance products.
“The market is clearly growing and the demand is growing, we see that clearly in the traditional market. Lottery companies normally enter the traditional market first, but what we can see is that demand is increasing at the moment,” Kranz said.
Given the size of the Fortuna ILS deal is growing and that Lottoland remains among the fastest growing lottery providers, there is a chance that a full catastrophe bond like issue could be on the cards in years to come.
“Lottoland might think of issuing a bond at a certain time, using the other ILS instruments available to them,” according to Kranz, which would be seen as a way to access an even broader investor base, by tapping into ILS markets which only want to invest in securitised notes, and for who the collateralised reinsurance structure of the current Fortuna does not meet their mandates.
As lottery providers and other gambling entities find their jackpots and winnings payouts growing, or their risk of making payouts increasing due to growth, the need for insurance and risk transfer is clear.
At a certain scale the capital markets and ILS structures become appropriate, as lottery providers seek to diversify their sources of risk transfer while also benefitting from fully collateralized coverage and the efficiencies of the ILS market.
Gibraltar’s Minster for Commerce, Albert Isola MP, also commented on the Lottoland ILS renewal, saying; “Let me congratulate Lottoland and its investors for leading the way with the launch of their third successive ILS transaction. Their success to date and their future plans for innovative ILS structures that will be offered to other participants in the gaming community are very exciting.
“The investors’ confidence in both the Lottoland transactions and Gibraltar as the domicile of choice is very gratifying.”
Lottoland said that the Fortuna 3 ILS transaction provides it with “Even more flexibility to innovate and offer new games to players.”
As the company continues to grow we should expect to see Fortuna and any lottery jackpot bond it sponsors increase in size.
The companies new B2B arm, Lottoland Solutions, is backing all of its partnerships with the collateralized reinsurance capacity, which likely means growth will accelerate making risk transfer even more important.