OREANDA-NEWS. Fitch Ratings expects to rate the principal at-risk variable rate notes issued by Acorn Re Ltd., an exempted special purpose insurer in Bermuda, as follows:

--Series 2015-1 class A principal at-risk variable rate notes expected maturity July, 2018; 'BBsf'; Outlook Stable.

The outstanding principal amount and interest spread will be determined at closing.

Fitch's expected rating is based on a review of several preliminary documents, most notably, drafts of a Confidential Offering Circular (dated June 8, 2015), a Rating Agency Presentation (dated June 1, 2015) and RMS Risk Analysis and Results (dated June 2, 2015). The final rating is contingent upon receipt of signed legal documents pertinent to this transaction that do not materially change what has been reviewed. Any changes could lead Fitch to an alternative rating or inability to rate the note.

The notes provide reinsurance protection to Hannover Ruck SE (rated 'AA-'/Outlook Stable by Fitch). The notes are exposed to Earthquakes for an area that includes the States of California, Oregon, Washington, Idaho, Utah, Nevada and Arizona of the United States, the Province of British Columbia province of Canada, and the States of Baja California, Baja California Sur and Sonora of Mexico. Hannover Ruck SE will also establish a similar reinsurance agreement with Oak Tree Assurance, Ltd., (unrated by Fitch) a wholly owned subsidiary of Kaiser Foundation Health Plan, Inc. (rated 'A+' IFS, Outlook Stable).

The trigger is per occurrence based on a parametric 'cat-in-a-box' structure utilizing up to 430 predetermined Earthquake Box Locations which are each a square box of size 1 degree by 1 degree on the Earth's surface (1 degree latitude is approximately 69 miles; 1 degree of longitude gradually shrinks from the equator to the poles, and at 40 degrees, one degree is approximately 53 miles). 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.

A covered event will have occurred if the reporting agency (initially the United States Geological Survey) reports an earthquake during the risk period that has a location within one of the respective earthquake box locations with a magnitude higher than the minimum magnitude of the box and with a depth that is less than or equal to 50 kilometers.

For each respective earthquake location box, there is an established minimum magnitude for each progressive trigger level, which is used to determine the applicable event percentage should a covered event occur within. The event percentage is a step-function that corresponds to each trigger level: Trigger Level One - 25%, Trigger Level Two - 50%, Trigger Level Three - 75%, Trigger Level Four - 100%. Event payments for the transaction are calculated by multiplying the event percentage by the original principal amount on the notes.

The minimum magnitude for some of the earthquake location boxes remains constant for each of the four associated trigger levels. For example, the earthquake location box that is bounded by a minimum longitude of -123 degrees and minimum latitude of 37 degrees (this box covers an area in and around the San Francisco Bay area) has a minimum magnitude of 7.5 for each trigger level (one through four). That implies a covered event within that box would automatically reach Trigger Level Four and a 100% loss of outstanding principal amount.

The earthquake location box that is bounded by a minimum longitude of -125 degrees and minimum latitude of 44 degrees (this box covers an area along the coast west of Eugene, Oregon) has progressively larger minimum magnitudes for each trigger level - 8.2, 8.5, 8.7 and 8.9 for Trigger Level One, Two, Three, and Four, respectively. Thus, in a scenario in which a covered event within this box had a reported magnitude of 8.6, Trigger Level Two would be the highest level reached and would result in a 50% loss of outstanding principal amount.

The risk period is around 3.1 years and ends in July 2018. The notes may be extended in monthly increments for another six months to the final extended redemption date in 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. The notes may be redeemed at any time under eight defined early redemption events, which include the failure of Hannover Ruck SE to make a retrocession premium payment. The repayment of the notes to the noteholders occurs subsequent to any qualified payments to Hannover Ruck SE for Covered Events. Noteholders have no recourse to Hannover Ruck SE.

KEY RATING DRIVERS
The rating is based on the evaluation of the natural catastrophe risk, the counterparty risk of Hannover Ruck SE, the credit risk of the collateral assets and the structural soundness of the transaction. The natural catastrophe risk represents the weakest link and currently drives the rating of the notes.

Modeled Catastrophe Risk: The rating analysis in support of the evaluation of the natural catastrophe risk is highly model-driven. As with any model of complex physical systems, particularly those with low frequencies of occurrence and potentially high severity outcomes, the actual losses from catastrophic events may differ from the results of simulation analyses which may or may not be detrimental to noteholders. Fitch is neutral to any of the major catastrophe modeling firms that is selected by the issuer to provide this analysis, and Fitch did not include any explicit margins or qualitative haircuts to the probability of loss metric.

Risk Management Solutions (RMS) provided the risk analysis using their proprietary software and risk model RMS North America Earthquake Model Version 9.0, last updated in 2009 and implemented in RiskLink v15.0 and MIU Version 2.9. The RMS North America Earthquake Models include time dependency for many fault sources in California, for the Wasatch faults in Utah, for the mega-thrust and faults sources in Alaska, and single-segment subduction interface sources in Mexico.

Fitch considers the risk maturity as three years since there is no scheduled annual rate reset in this transaction (in other deals, Fitch has used a one-year risk maturity when there has been annual rate resets). The cumulative attachment probability over a three-year risk period was initially estimated at 2.89% by RMS. This indicates an implied rating of 'BB' using Fitch's ILS Calibration Matrix with a three year time to risk maturity assumption (the crossover point between 'BB' and 'BB-' is 3.012%). The cumulative modeled expected loss was 2.21%. Results from other third-party modeling firms were not provided that could indicate different levels of attachment probability.

RMS estimates 47.3% of the modeled expected loss was attributed to the Northern California region, 36.6% to Southern California, and 16.1% to the remaining area. The lowest magnitude associated with any of the Earthquake Location Boxes that could trigger the notes is 7.5. RMS estimates that 53.6% of the modeled expected loss is from earthquakes with a magnitude of 7.5 to 7.9. Earthquakes with a measurement reading between 8.0 and 8.9 and above 9.0 contributed 36.1% and 10.2%, respectively, to the Modeled expected loss.

Within the record of actual historical events, only one earthquake (1906 San Francisco Earthquake, 7.7 Magnitude) would lead to a partial principal loss (the earthquake location box bounded by a minimum longitude of -123 degrees and minimum latitude of 38 degrees). Minimum magnitude of 7.7 for Trigger Level Three in that box was reached and would cause a 75% loss of principal. The Northridge Earthquake in 1994 generated a magnitude of 6.6. The Trigger Level One for that earthquake location box has a minimum magnitude of 8.0, thus not generating a loss of principal.

Counterparty Risk: Proceeds from this issuance will be held in a Retrocession Trust Account for the benefit of Hannover Ruck SE and will be invested in International Bank for Reconstruction and Development notes (IBRD; IDR 'AAA'). The interest rate on the IBRD note will be Libor less a fixed spread but will not be less than zero. The IBRD note contains a put feature that may eliminate any market risk upon redemption. The IBRD note may be redeemed early under certain events, such as an IRBD downgrade. If that should happen, the proceeds will be invested in high quality U.S. treasury money market funds or cash. Noteholders are exposed to possible market value risk if the net asset value of a money market fund falls below \$1.00.

Structural Soundness: Fitch believes there is structural soundness based on the preliminary documents that have been reviewed. A final determination will be made once all transaction documents and legal opinions have been forwarded to Fitch.

RATING SENSITIVITIES
This rating is sensitive to the occurrence of covered event(s), a potential model reset event, the counterparty risk of Hannover Ruck SE and the rating on, and performance of, the assets held in the retrocession trust account.

In the case of a covered event, fitch will downgrade the notes reflecting an effective loss of principal and impairment of the notes, and issue a Recovery Rating.

To a lesser extent, the notes may be downgraded if Hannover Ruck SE is significantly downgraded or fails to perform its obligations under the retrocession agreement to Acorn Re Ltd. Likewise, the ratings on the notes may be affected if the IBRD notes should suffer a serious downgrade, or the terms of the IBRD notes are altered or if the subsequent assets held in the retrocession trust account perform significantly worse than expectations for high quality, short-term investments.

A model reset event may occur if RMS makes an updated version of its North America Earthquake Models available for commercial use prior to the commencement of any accrual period. Fitch believes RMS intends to update its model in 2017 (although it is not certain). Under this reset event, RMS would calculate an updated expected loss, which has no specified range or limits, and an updated interest spread for the notes. This model risk may have an adverse or beneficial effect on the rating of the notes.

DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.