Akibare 2016-1 cat bond priced for potential loss on typhoon claims

Mitsui Sumitomo Insurance Co. Ltd’s $200 million catastrophe bond Akibare Re Ltd. (Series 2016-1) has been priced down as cat bond investors suspect it faces a potential loss of some principal, as the sponsoring insurers claims from typhoons including Jebi keep rising.

The catastrophe bond provides Mitsui Sumitomo with a source of collateralized annual aggregate reinsurance, backed by the capital markets, covering certain losses from Japan typhoons including some flood risks.

With Japan having faced two major typhoon loss events in the last year, Jebi and Trami, Mitsui Sumitomo’s losses have been rising and typhoon Jebi in particular has resulted in rising loss creep, which it now appears has put the future of this catastrophe bond in some doubt.

As ever, the secondary catastrophe bond market provides a good marker for investor sentiment in any outstanding cat bond and where the $200 million Akibare Re 2016-1 transaction is concerned, brokers have marked the price of the notes down for a potential loss and this has also been reflected in recent secondary trading activity.

As we understand it, the $200 million of notes issued by Akibare Re in this Series 2016-1 cat bond transaction are now priced in the secondary markets for bids of around 65 to 70 cents on the dollar on some broker pricing sheets, suggesting that market sentiment anticipates as much as a 30% or so loss of principal. That would indicate the market forecasts a roughly $60 million loss of principal to these notes.

Trading activity reflects this, as we said, with the notes having changed hands on the secondary market at a price of 72 cents on the dollar most recently.

The fact the notes have traded suggests some cat bond investors were keen to offload their investment in this cat bond, believing that Mitsui Sumitomo will make a reinsurance claim against the coverage they provide it with.

Of course, on the other side of those trades, an investor was willing to accept that risk and believes that buying into the Akibare Re 2016 cat bond at a price offering an almost 30% discount was a worthwhile risk to take.

We understand that Mitsui Sumitomo’s aggregate typhoon incurred losses have risen to a point that triggering of this cat bond is now seen as inevitable by some. However the reinsurance coverage the cat bond provides is only for claims under the sponsors fire insurance portfolio of business, so not its broader loss from the typhoons under other lines it underwrites.

But we’re told the aggregate qualifying loss is nearing the attachment point for the Akibare Re 2016-1 cat bond notes, which was JPY 300 billion when the transaction launched.

With MS&AD having reported rising levels of gross incurred losses from typhoons and the extreme rainfall that hit Japan this summer, while some reinsurance firms and ILS funds have experienced loss creep due to typhoon Trami, this specific cat bond was always one that might prove to be at-risk of potential loss later in the annual risk period.

The current risk period runs through until April 2019, meaning that it included typhoons Jebi, Trami and also Prapiroon (that coincided with the extreme rainfall). Hence with the Akibare Re 2016 cat bond covering typhoon winds and some flood risks, there was always a chance it would end up considered at-risk.

We’ll update you as and when further information is available.