Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Aozora Re Ltd. (Series 2017-1)

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Aozora Re Ltd. (Series 2017-1) – At a glance:

  • Issuer: Aozora Re Ltd. (Series 2017-1)
  • Cedent / sponsor: Sompo Japan 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: $480m
  • Trigger type: Indemnity
  • Ratings: NR
  • Date of issue: Mar 2017

Aozora Re Ltd. (Series 2017-1) – Full details:

The third Aozora Re Ltd. catastrophe bond transaction from Sompo Japan Nipponkoa Insurance (SJNK).

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.

Update 1:

Sompo Japan Nipponkoa’s (SJNK) latest catastrophe bond issuance has increased in size while marketing by 48%, to now offer ILS investors a $400 million tranche of cat bond notes.

At the same time the price guidance was lowered, to 2% to 2.15%, so below the initially marketed range.

Update 2:

Aozora re 2017-1 has increased in size again during the marketing phase, reaching $480 million.

At the same time, the price guidance was fixed at the bottom of the reduced range, at 2%, which would result in a multiple of 1.75 times the expected loss of 1.14%.

Update 3:

The Aozora Re 2017-1 cat bond finally priced at the low end of the reduced guidance, to offer investors a coupon of 2%. That equates to a multiple of just 1.75 times the expected loss.

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