Japanese primary insurance giant Sompo Japan Nipponkoa Insurance is returning to the capital markets to sponsor a $270 million Aozora Re Ltd. (Series 2017-1) catastrophe bond, to secure additional collateralized reinsurance protection for Japanese typhoon risks.
The transaction, which sources said launched to ILS investors on Friday, sees Sompo Japan Nipponkoa Insurance (SJNK) sponsoring its third, and largest to-date, take-down under the Aozora Re Ltd. catastrophe bond program.
The Aozora Re 2017-1 catastrophe bond issuance is targeting $270 million of commitments from investors, we’re told, with the deal set to provide SJNK with a four-year source of collateralized Japanese typhoon reinsurance protection.
The transaction features an indemnity trigger and would pay out on a per-occurrence event basis, through a single Series 2017-1 tranche of Class A notes to be issued and sold to investors by Aozora Re. The proceeds from the sale of the notes, targeted at $270 million, will collateralize a reinsurance agreement between SJNK and Aozora Re.
We understand that the Japanese typhoon risks covered by the deal include losses caused by typhoon winds, flood, storm surge and also related perils of hail and tornado that can occur during a typhoon event. The loss event has to be designated a typhoon though, so typhoon strength winds are the largest contributor to expected losses for the Aozora Re 2017-1 notes, although we understand that flood contributes around a third.
We’re told that the Aozora Re 2017-1 Class A notes will have an initial attachment point of JPY 400 billion, with an exhaustion point at JPY 580 billion, which is a very wide layer of SJNK’s reinsurance program, so the notes will only provide a percentage of coverage across it.
This equates to an initial modelled attachment probability of 1.65%, an exhaustion probability of 0.78% and an expected loss of 1.14%.
The $270 million of Class A notes to be issued by Aozora Re in this 2017-1 cat bond deal are being offered to investors with coupon price guidance of between 2.15% to 2.65%, we understand.
Last year’s Aozora Re 2016-1 cat bond, which also covers Japan typhoon risks, priced at 2.2%, which with the notes having an initial expected loss of 0.9% saw a multiple to investors of 2.44 times EL.
This year’s Aozora Re 2017-1 then could have a multiple of 2.3 times the expected loss even at the top end of price guidance, or as low as 1.9 times if pricing settled at the lower end.
So this cat bond from SJNK could be a good test of investor appetite and it will be interesting to see where the pricing settles. We’d wager below the top-end of guidance, as most multiples have reduced slightly again in recent months, as evidenced by Artemis’ data on catastrophe bond multiples at issue.
We understand that this transaction from SJNK is set to complete by the end of March 2017, coming on risk for the 1st of April.
It’s encouraging to see SJNK back just one year after its last cat bond issue, suggesting the insurer is gaining increasing comfort with collateralized forms of reinsurance and the capital markets or ILS investor base.
SJNK’s previous catastrophe bond market experience came in the form of a $100 million Aozora Re Ltd. (Series 2014-1) in 2014 and a $220 million Aozora Re Ltd. (Series 2016-1) issued roughly a year ago.
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