Lottery company MyLotto24 has leveraged the capital markets as a source of jackpot insurance and reinsurance again, with a new Hoplon III Insurance Ltd. transaction that again leverages both catastrophe bond and collateralized reinsurance technology in a structure that is more flexible for the company.
This is the third insurance-linked securities (ILS) transaction from MyLotto24, a UK-based lottery provider owned by the Zeal Group.
ILS and collateralized reinsurance has become a staple of the risk management arrangements for some large online lottery providers, as they find the contingent nature of the coverage provided and the risk appetite of the investors backing the deals a good match for their own risk profile.
In this latest transaction from MyLotto24, a recently established Bermuda special purpose insurer named Hoplon III Insurance Ltd. has been used to issue a syndicated securitisation of jackpot risks to a group of ILS investors.
The Hoplon III Insurance deal uses a catastrophe bond like arrangement to securitise and transfer the lottery owners risks to the ILS investors, with the underlying insurance fully collateralised by their investment capital.
For MyLotto24 this means a source of risk capital it can draw on should it or its affiliates suffer a large loss or series of losses due to jackpot wins on the games it offers.
This third Hoplon ILS transaction has been arranged to be more flexible for MyLotto24, featuring a reset facility that would allow the coverage to be expanded both in terms of size and to include more of its product offering.
The Hoplon III Insurance transaction provides MyLotto24 with two years of coverage and in addition to the ILS notes issued, we’re told it also includes a collateralised reinsurance layer that extends the protection afforded to the sponsor, similar to its previous Hoplon II deal.
MyLotto24 parent the Zeal Group said that the third collateralised arrangement has reduced its risk exposure by €20 million over the two-year term, while enabling it to free up €10 million of cash as well, which it said has effectively increased the capital efficiency of its hedging operations by 30%, compared to its previous structure.
Zeal also hailed the “greater flexibility of cover” achieved with the latest Hoplon deal, which it said means it can match the coverage with its international growth.
“The sophisticated hedging structure will provide cover during 2018 and 2019. It is backed by some of the world’s leading investors, and combines a number of risk management mechanisms including collateralised reinsurance and specialist jackpot insurance,” Zeal Group explained.
As a result of the Hoplon III coverage the Zeal Group has lowered its retention by €10 million per year. At the same time it said that the coverage was more efficient this year as it is “based on actual risk rather than modelled risks” which helped premiums to come down.
Zeal said that the new Hoplon III structure would give it a, “competitive advantage as it grows internationally, through its ability to add new partners and official lotteries from across the world, at any time.”
Jonas Mattsson, CFO of ZEAL Group, commented, “ZEAL continues to lead the way in lottery risk management. Our new structure gives us greater flexibility as we grow internationally, increases our capital efficiency and significantly lowers our risk exposure. This is good news for shareholders and is another step in our continued focus on operational excellence.”
MyLotto24’s use of ILS and collateralized reinsurance technology to secure lottery jackpot insurance from the capital markets shows the promise of insurance-linked securities and cat bonds as a hedging tool that can transfer risks away from sponsors, into liquid capital markets, with the coverage available contingent on specified losses occurring.