Following an EUR 26.3 million jackpot prize won by one of its customers in a secondary lottery draw, lottery company MyLotto24 is set to benefit from the jackpot protection it has in place through its Hoplon III Insurance Ltd. insurance-linked securities (ILS) transaction.
The EUR 26.3 million jackpot is sufficient to erode the retention of the Hoplon III ILS arrangement, which is structured as collateralised reinsurance and so some losses are set to fall to ILS investors backing the transaction.
Zeal Group, which owns MyLotto24, explained that the, “self-retention specified in MyLotto24’s hedging instruments will be utilized after the pay-out, part of which will be covered by those instruments.”
Which means that after the retention has been accounted for, a small loss will fall to the investors backing the hedging instruments, which is the Hoplon III collateralised reinsurance arrangement.
MyLotto24 parent Zeal covered the secondary lottery specialist with a two-year Hoplon III collateralised reinsurance deal at the beginning of 2018, using Bermuda special purpose insurer Hoplon III Insurance Ltd., which issued a syndicated securitisation of jackpot risks to a group of ILS investors.
Zeal said that as a result of the jackpot win of EUR 26.3 million its operating earnings would be impacted by EUR 21.5 million, which accounts for the retention under the Hoplon III collateralised reinsurance deal.
Hence the difference between the two is the loss that ILS investors backing Hoplon III will now face, so EUR 4.8 million.
With the retention now fully eroded though, it means the remaining risk capital outstanding of the Hoplon III jackpot ILS deal is on-risk for any future jackpot payouts that qualify under the terms of the ILS deal.
However, it’s important to note that Zeal is adjusting its operating model with a switch further away from secondary lotteries, as it shifts to a brokerage model in Germany specifically.
That will lower the risk of the Hoplon III investors facing another jackpot related loss as a result. This business model change for Zeal is expected to take effect in October 2019.
This isn’t the first jackpot ILS loss and payout.
In 2016, MyLotto24’s jackpot insurance paid out for a win, but the collateralised reinsurance ILS arrangement did not trigger.
The protection that an ILS provides is akin to insurance, but backed by the capital markets which for these lottery jackpot risks has proven a competitively priced source of risk capital.