Japanese cat bonds trade up as Jebi & Hagibis loss outlooks improve

Three tranches of catastrophe bonds exposed to Japanese typhoon wind damage have traded up around 10% in recent weeks, as the market’s view of how large the eventual industry losses from typhoon Jebi and Hagibis will be has moderated somewhat.

Both tranches of the $320 million Akibare Re Ltd. (Series 2018-1) catastrophe bond, which provides reinsurance to Japanese carrier subsidiaries of MS&AD Holdings (Mitsui Sumitomo Insurance Co. Ltd. and Aioi Nissay Dowa Insurance Co., Ltd.) had seen their secondary market pricing fall on the back of the ongoing loss creep impacts from 2018’s typhoon Jebi, but sank further after Hagibis struck in October 2019.

The secondary market saw both tranches trade at around 84 cents on the dollar in recent weeks, an almost 16% discount.

But in December a small recovery was seen, which has continued for one tranche in a recent trade, as both sets of notes recovered around 9% to trade at closer to 92 cents on the dollar.

The other Japanese cat bond in question is the $480 million single tranche Aozora Re Ltd. (Series 2017-1), that provides reinsurance for typhoon losses to Sompo Japan Nipponkoa Insurance Company.

This tranche of notes had also declined on the back of ongoing typhoon Jebi loss creep, as ILS investors feared that this might be sufficient to cause SJNK to claim on its cat bond reinsurance coverage.

The notes then dipped further to trade at 80.75 cents on the dollar on the back of typhoon Hagibis as well, as that storm drove fresh concerns among catastrophe bond fund managers and investors.

But, like the Akibare 2018 cat bond notes, the Aozora Re 2017 bond has also seen more than 10% of mark-to-market recovery, as it traded up at 93 cents in the secondary market this week.

It’s too early to know for sure that these Japanese typhoon exposed cat bonds won’t face any loss at all, but the outlook has certainly improved with a number of reports and estimates suggesting that loss creep from typhoon Jebi may be at an end, while both it and typhoon Hagibis are now thought unlikely to reach the very top-end of insurance and reinsurance industry loss estimates.

These three tranches of Japan typhoon cat bond notes all provide per-occurrence reinsurance protection to their sponsors, therefore it is the ultimate size of the loss from single typhoon events that can trigger them.

As a result, as the market’s view on Jebi and Hagibis moderates, these Japanese cat bonds begin to look less risky overall, helping sentiment on them improve among cat bond funds and investors, resulting in these secondary market pricing recoveries.

The market is becoming increasingly confident that industry losses from both 2018’s typhoon Jebi and more recent Japanese typhoon Hagibis will ultimately stabilise below the top-end of estimates.

It’s also noteworthy that some ILS funds adjusted their Hagibis loss expectation downwards recently.

Further supporting evidence is available with reinsurance firm Swiss Re recently estimating typhoon Hagibis as only an $8 billion industry loss, while fellow reinsurer Munich Re said it expected Hagibis would cost the sector $10 billion.

It had been thought that the Jebi loss would settle closer to $15 billion or $16 billion and that Hagibis could get close to that too. But now Jebi is seen by many as being closer to the $12 billion to $14 billion range and Hagibis lower at $10 billion to $12 billion, at which levels these Japan typhoon catastrophe bonds could escape losses completely.