Swiss Re Insurance-Linked Fund Management

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Aozora Re Ltd. (Series 2016-1)

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Aozora Re Ltd. (Series 2016-1) – At a glance:

  • Issuer: Aozora Re Ltd. (Series 2016-1)
  • Cedent / sponsor: Sompo Japan and Nipponkoa Insurance Company
  • Placement / structuring agent/s: GC Securities is sole structuring agent and bookrunner.
  • Risk modelling / calculation agents etc: AIR Worldwide
  • Risks / perils covered: Japan typhoon
  • Size: $220m
  • Trigger type: Indemnity
  • Ratings: ?
  • Date of issue: Mar 2016

Aozora Re Ltd. (Series 2016-1) – Full details:

Sompo Japan Nipponkoa Insurance (SJNK) is looking to upsize its reliance on ILS market investors with this Aozora Re 2016-1 cat bond deal, with a larger size than the $100m Aozora Re Ltd. (Series 2014-1) (which matures in 2017) and also a longer term, as this new cat bond will be a four-year protection.

The Aozora Re 2016-1 cat bond will provide SJNK and subsidiaries with a source of fully-collateralised reinsurance protection over the four-year term for losses from typhoons affecting Japan. The reinsurance protection will be on a per-occurrence basis and the cat bond features an indemnity trigger, we understand.

The notes are slightly riskier than the existing Aozora Re 2014 cat bond, attaching at JPY 480 billion (approximately $4.26 billion) and exhausting at JPY 580 billion (approximately $5.15 billion). Those figures result in a modelled attachment probability of 1.07%, we understand, which is higher than the 0.57% initial attachment probability of the 2014 cat bond.

The single tranche of Series 2016-1 Class A notes to be issued by Aozora Re, preliminarily sized at $175m, have an initial expected loss of 0.9%. We’re told the notes are being offered to investors with coupon price guidance in a range of 2.2% to 2.7%, so suggesting a multiple of around 2.75 times the EL at the mid-point of pricing.

We understand that the subject business includes personal, commercial and industrial Japanese fire insurance policies, which is where typhoon risks and related flooding are covered in Japan. Only losses due to typhoon winds and flood are covered, we believe, meaning that typhoon induced rainfall appears covered under the flood component.

Update 1:

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.

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