A perfect pairing

In April 2015, Lottoland placed a €100 million insurance-linked security (ILS). The deal was the first ILS to be issued from Gibraltar and one of only a small number to have transferred the risk of substantial or multiple pay-outs on lotteries using this structure.

The risk is transferred by means of an issuance vehicle, Euroguard Insurance Company, based in Gibraltar. The coverage is triggered at €5 million. Deals like this are unusual, although MyLotto24 has previously used a similar ILS structure to transfer this type of risk off its books.

The deal represents an innovative move for Lottoland and adds a new dimension to its portfolio of risk-transfer products, as the company’s CEO, Nigel Birrell, explains.

“We’re quite a young company; we were founded in 2013 and have been growing quickly since then,” he says. “When we first started we used the more traditional methods of insuring jackpots, covering a small amount and then using Lloyd’s syndicates and commercial reinsurers to insure it.

“As these jackpots grow and ILS becomes a more understood product, I think we will look to make more use of it.”

“But as we’ve grown, so have the jackpots that we’ve been covering, so we need to look at new ways to cover those. We cover everything from tiny payments to jackpots, but it’s down to the individual company to decide when to self-insure, and for us, this has grown over time.”

Typically complex and expensive, an ILS transaction hasn’t historically been a viable option for Lottoland. However, now with enough capital behind it, entry into the ILS market is allowing Lottoland to cover irregular, yet substantial jackpot payouts of €150 million and above.

“We put more money in as the jackpots get higher, but a large jackpot like €150 million doesn’t happen all the time. Adding ILS to our other Lloyd’s and reinsurance products allows us to be able to go beyond the €100 million of the ILS transaction, so when there is a €150 million jackpot, we can cover it. It’s also great to be able to diversify our risk,” explains Birrell.

Eager to invest

While Lottoland closed the ILS at €100 million, Birrell says that investor appetite was sufficient for them to have grown the transaction further had the company wished.

“As these jackpots grow and ILS becomes a more understood product, I think we will look to make more use of it. If we go a year or two and no-one is calling on it, people will be keen to invest further,” he says.

Birrell explains that the bigger the jackpot, the more business the company does, but he says that only highlights the need for adequate coverage further.

“While we cover a substantial amount ourselves, we’ve paid out over €30 million already. We had to establish a significant critical mass to attract the type of investors looking to the ILS market,” he explains.

“ILS gives us much greater security for that, so I think it’s going to be an integral part of our product mix going forward.”

“For us to have a diversity of products to drive our cover is a great strength and sets us apart from the competition. ILS gives us greater security and we will certainly remain in the space as long as pricing doesn’t go crazy.”

Birrell explains that the ILS transaction is also desirable because it offers security in the form of collateralised capital.

“If we relied solely on a reinsurer and they tried to be difficult about paying out, that wouldn’t help our reputation. ILS gives us much greater security for that, so I think it’s going to be an integral part of our product mix going forward,” he says.

A standard pay-out timeframe for a tier one jackpot win requires the lottery company to pay out within three months. The introduction of ILS means that this process can be substantially speeded up, with pay-out time equalling just a few days.

The domicile of choice

The Lottoland ILS was a significant deal within the market as it signified the first ILS transaction for Gibraltar, which declared its intent to become involved in the market at the end of 2013.

However, while being based in Gibraltar may have swayed Birrell’s intentions as to where to place the ILS, he say that the transaction was coincidental, but one that the company is very happy with.

“We were looking at doing an ILS deal as we felt that it was the right option for us at this time. While Bermuda and other jurisdictions seem to have the market share, Gibraltar had introduced the legislation to do this, so it made sense,” he says.

“We’re based in Gibraltar and regulated by the Gibraltar authorities, so it was natural for us to use Gibraltar as the domicile of this vehicle.”

Birrell says that the government has been very supportive of the deal and Lottoland’s intent to issue an ILS.

“For the government and for us, it was the perfect marriage between the two dominant industries of Gibraltar: financial services, in which insurance plays a large part, and gaming,” he says.

According to Birrell, the closing of the Lottoland deal may have been the first in a flurry of future ILS transactions for Gibraltar.

“I’ve heard that our announcement has spurred some interest in the market, so we’ll see what happens,” he says.