A new parametric earthquake catastrophe bond transaction with a $100 million initial target, named Acorn Re Ltd. (Series 2023-1), will be the first in this series where its coverage will overlap with an existing issuance, presumably reflecting a desire to stagger maturity of catastrophe reinsurance coverage for the beneficiaries.
All of the Acorn Re parametric catastrophe bond deals have been brought to market with Hannover Re acting as the ceding reinsurance company, sitting in front of a single named ceding insurer, Oak Tree Assurance Ltd.
Oak Tree Assurance is a Vermont based workers compensation captive insurer that is owned by the Kaiser Permanente group of health plan companies.
Meaning that these Acorn Re, U.S. west coast focused parametric earthquake catastrophe bonds, ultimately provide reinsurance coverage to the Kaiser Permanente workers compensation captive, covering its insured exposure to earthquake risks across that region (largely centred on California).
This new currently $100 million Acorn Re 2023-1 cat bond will, like the other Acorn Re deals, also provide some additional protection to other Hannover Re reinsureds, which have exposure within the parametric earthquake box as well, should a major quake event occur.
The previous three Acorn Re deals have always seen one approaching maturity as a new cat bond has been issued.
But the still in-force $400 million Acorn Re Ltd. (Series 2021-1) cat bond deal remains on-risk and providing coverage through to the end of October 2024, meaning this will be the first time coverage overlaps and therefore maturities are staggered, providing continuity of protection from the capital markets.
Acorn Re Ltd. is seeking to issue a single Class A tranche of notes, currently sized at $100 million.
These notes will be sold to cat bond investors and the proceeds used to collateralize an underlying retrocessional reinsurance agreements between Acorn Re and Hannover Re, which in turn enters into a reinsurance agreement with the Kaiser Permanente captive, Oak Tree Assurance, while also with some of Hannover Re’s other reinsureds that have exposure in the parametric box.
As a result, this $100 million or greater of Acorn Re 2023-1 cat bond notes will provide the covered parties, Kaiser Permanente via the Oak Tree Assurance Ltd. workers compensation captive, and the other reinsureds of Hannover Re, with a source of per-occurrence parametric reinsurance protection against earthquakes that strike the U.S. west coast region, backed by the capital markets.
The covered area appears similar to previous Acorn Re cat bonds, so focused on California where most of the expected loss is located, but also covering events that occur in 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 more than 85% of the expected loss for the Acorn Re 2023-1 catastrophe bond notes, we understand, while 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 more than three years of protection, with the maturity of the Acorn Re 2023-1 cat bond notes scheduled for the end of October 2026.
A sliding scale parametric trigger is again used, so different payout percentages are possible dependent on the magnitude and location of earthquake loss events.
The $100 million of Series 2023-1 cat bond that Acorn Re Ltd. is issuing come with an annualised initial attachment probability of 1.17% and an annualised initial expected loss of 0.91%, we’re told.
The $100 million of notes are being offered to investors with coupon guidance in a range of 4.75% to 5.5%, sources told Artemis.
The still in-force 2021 Acorn Re notes had an initial expected loss of 0.89% and paid investors a spread of just 2.5%, so it’s clear the pricing is much higher with this new parametric cat bond deal.
It’s good to see this new parametric US earthquake catastrophe bond coming to market and the staggering of maturities indicates a desire to make this a core coverage, with longer-term benefits for the ceding entities involved, both Hannover Re itself and the workers comp captive.