Aozora Re 2016 cat bond to grow 25% to $220m, pricing drops

The latest catastrophe bond to be sponsored by Sompo Japan and Nipponkoa Insurance Company, the Aozora Re Ltd. (Series 2016-1) Japan typhoon cat bond, is set to upsize by 25% to $220 million, while at the same time demand from investors has seen the price guidance reduced.

The Aozora Re 2016-1 catastrophe bond launched almost a fortnight ago and saw Sompo Japan Nipponkoa Insurance (SJNK) returning to the cat bond market, looking to upsize its reliance on the capital markets as a source of reinsurance coverage for losses from Japanese typhoons.

The 2016-1 Aozora Re began life at $175m, so larger than SJNK’s previous $100m Aozora Re Ltd. (Series 2014-1) (which matures in 2017). It also features a four-year term, so a year more protection than the first Aozora.

According to sources SJNK is set to succeed at upsizing the coverage it gets from ILS investors, with this Aozora Re 2016-1 cat bond set to grow by over 25% to provide it with $220m of per-occurrence fully-collateralised reinsurance protection on an indemnity basis.

As well as growing the coverage it will receive from this cat bond, SJNK looks set to benefit from keen pricing and the appetite for diversifying risks, with the price guidance dropping right to the low-end of the initial guidance.

When the Aozora Re 2016-1 cat bond was launched the single tranche of notes were being marketed with coupon guidance of 2.2% to 2.7%.

We’re told that at the latest deal update the price guidance has been reduced to the lower end at 2.2%, which with the notes having an initial expected loss of 0.9% would result in a multiple of 2.44 times.

The Aozora Re 2014 cat bond priced at a reduced 2% with an expected loss of 0.52%, so offered a much higher multiple. That suggests some further price decline in Japanese typhoon risk, in the ILS market, although it is not considerable as the multiple tends to rise quickly as the expected loss falls in all cat risks.

Most encouraging for SJNK will be the increased support it is receiving from the ILS investor community with this transaction, as it reflects the ILS market taking an increased share of its reinsurance program.

The upsizing of this transaction, which is the last catastrophe bond in the market in Q1, will take the issuance total for the first-quarter of 2016 very close to $2 billion again, a healthy quarter of cat bond issuance by anyone’s standards.

The Aozora Re Ltd. (Series 2016-1) catastrophe bond is scheduled to complete before the end of March. We’ll update you should any other details change as it comes to market and you can read about this and every other cat bond in the Artemis Deal Directory.