German insurer Hannover Re is coming to market to offload its exposure to catastrophic damage from earthquakes on the western coast of the United States, Canada and Mexico.
The as-yet unsized Acorn Re Ltd. Series 2015-1 will issue a single tranche of notes that will pay investors a variable rate over the next three years, unless an earthquake of a certain magnitude occurs within four specified locations. The amount of principal and interest that Hannover Re is entitled to keep depends on the magnitude of the earthquake.
Fitch expects to assign a BB’ rating to the notes.
The notes are exposed to earthquakes for an area that includes the California, Oregon, Washington, Idaho, Utah, Nevada and Arizona; the Province of British Columbia; and the States of Baja California, Baja California Sur and Sonora of Mexico.
The exact areas will be defined by 430 “box locations” that each measure 1 degree latitude (approximately 69 miles) by 1 degree longitude (approximately 53 miles) on the Earth’s surface. The area that comprises the group of Earthquake Box Locations is delineated by latitudes 26 degrees and 54 degrees and longitudes -132 degrees and -110 degrees.
The risk period ends in July 2018. Although the notes may be extended in monthly increments for another six months until January 2019, if certain qualifying events occur, or at the discretion of Hannover Ruck SE. However, the notes are not exposed to any further catastrophe events during this extension.
According to Fitch’s presale report, Hannover Re will also establish a “similar reinsurance agreement” with Oak Tree Assurance, Ltd., a wholly owned subsidiary of Kaiser Foundation Health Plan, Inc.
Fitch says that there has only been only one earthquake in recorded history, the 1906 San Francisco Earthquake (magnitude 7.7), that would have lead to a partial principal loss on the bonds (75%).
More recently, the Northridge Earthquake in 1994 generated a magnitude of 6.6, but the trigger level in that location box has a minimum magnitude of 8.0, and so there would not have been a loss of principal.