$400m renewal of Acorn Re parametric US quake cat bond targeted

A second extension transaction for the novel parametric catastrophe bond deal, which ultimately offers an insured person an earthquake-related employee compensation protection, has been launched by the Kaiser Permanente health group.

This Acorn Re 2021-1 catastrophe bond aims at at least a full renewal of Acorn Re Ltd.’s soon-maturing $ 400 million transaction. (2018-1 series) from maturing business.

As in the two previous Acorn Re catastrophe bond transactions, Hannover Re is once again acting as a ceding reinsurance company and sits in front of a single ceding insurer, Oak Tree Assurance Ltd.

Oak Tree Assurance is a Vermont-based employee compensation company owned by the Kaiser Permanente group of health insurance companies.

This second extension of the parametric earthquake disaster bond from Acorn Re on the US west coast will ultimately cover the insured earthquake risks of Kaiser workers’ accident captives.

The Acorn Re 2021-1 cat bond will also offer other Hannover Re reinsured persons who are also exposed within the parametric earthquake box additional protection, which corresponds to the transactions in 2015 and 2018.

Acorn Re Ltd., the Bermuda-based special purpose vehicle, will attempt to issue a single tranche of the 2021-1 Class A series of $ 400 million or more.

The bonds issued will be sold to Cat Bond investors and the proceeds will be used to secure the underlying retrocessive reinsurance contracts between Acorn Re and Hannover Re, which in turn are reinsurance contracts with the captive Kaiser Permanente, Oak Tree Assurance and also some of Hannover’s other reinsurers Back exposed in the parametric box.

As a result, Acorn Re 2021-1 Cat Bond Notes of $ 400 million or more will be paid to the covered parties, Kaiser Permanente through Oak Tree Assurance Ltd. and other Hannover Re reinsurers a capital market source of parametric reinsurance coverage per event against earthquakes that hit the US west coast region.

The area covered is similar to Acorn Re’s 2015 and 2018 Cat Bonds, so it is concentrated in California and the surrounding states of Oregon, Washington, Nevada, Utah, Idaho, Arizona, British Columbia in Canada and the states of Baja California and Sonora in Mexico and some offshore areas in the Pacific.

Reflecting the fact that California is just over 95% of the expected loss for the Acorn Re 2021-1 Catastrophe Bonds, we understand that coverage is really focused on that state, but tremors hitting the area are being driven by the parametric box that continues to expand.

Acorn Re’s new cat bond transaction offers its beneficiaries three years of protection, with Acorn Re 2021-1’s cat bond maturing in late October 2024.

It appears that the trigger for the 2021 cat bond issue has been redesigned, with more payout percentages available, between 25% of the principle and 100%, depending on the event parameters, i.e. the strength and location of an earthquake event.

But if you look at the historical loss modeling we are told that the only earthquake event in history that would have caused a 100% payout of these banknotes would have been the 1906 San Francisco quake.

Acorn Re Ltd. The $ 400 million series 2021-1 bonds on offer have an annualized bond probability of 1.2% and an annualized expected loss of 0.89%, which is a little higher risk than the due cat bond risk factors that we believe.

The $ 400 million bond will be offered to investors with a coupon requirement in a range of 2.5% to 3%, sources said.

In the middle of 2.75% this would mean an annualized multiplier on the market of almost 3.1 times the expected loss.

For comparison: Acorn Re 2018-1’s cat bond was 2.75% with a slightly lower expected loss of around 0.81%, i.e. a multiple of around 3.4 times the EL.

Acorn Re 2015-1’s cat bond bonds paid a coupon of 3.4% with an expected loss of 0.74%, offering a nearly 4.6 times EL multiple.

A multiple of over three times El is consistent with other quake emissions from last year, but it will be interesting to see where this levels off, as if the demand is high and the price goes down during marketing, the multiple for this Cat Bond continue to decline.

It is encouraging to see this Acorn Re cat bond up for renewal again as it is a valuable example of how capital market-backed reinsurance capacity can provide coverage to a company, especially when faced with a difficult risk such as employee compensation related to earthquake risks.

You read all about this new transaction from Acorn Re Ltd. (Series 2021-1) and any other catastrophe bond in the Artemis Deal Directory.