The Aozora Re Ltd. (Series 2017-1) catastrophe bond issuance, sponsored by Sompo Japan Nipponkoa (SJNK), has increased in size again with the target raised to $480 million and at the same time the pricing lowered to the bottom of already reduced guidance.
The 2017 Aozora Re cat bond issue was first marketed to ILS investors as a $270 million deal targeting a four-year source of collateralized Japanese typhoon reinsurance protection for Sompo, with coverage structured on an indemnity trigger and per-occurrence basis.
Investor demand first lifted the target size of the issuance to $400 million at the start of this week, while the initial price guidance range of 2.25% to 2.7% was reduced and tightened to 2% to 2.15%.
Now the cat bond has grown again to $480 million, while the price guidance has been fixed at the bottom of the reduced range at 2%.
It’s yet another indicator of ILS investor appetite and where the catastrophe bond community feels the pricing floor is for these remote layers of property catastrophe risk, whether that could pressure future reinsurance renewals, as ILS markets increase their appetite for risk, remains to be seen.
For SJNK this will be its largest catastrophe bond, more than double the size of its $220 million Aozora Re Ltd. (Series 2016-1) transaction.
But size aside, it’s the pricing which is the greatest indicator of risk appetite in the ILS investment community, with this transaction set to price at a level well below Sompo’s previous cat bonds.
The 2016 deal, being the most recent, offered investors a coupon of 2.2% for a 0.9% expected loss, so a multiple of 2.44 times.
This 2017 Aozora Re cat bond, with its pricing of 2% and an expected loss of 1.14% (so higher risk than the prior deals), looks set to complete paying investors a coupon multiple of just 1.75 times the EL.
This is aligned with other remote risk transactions, but on a risk basis the coverage in the 2017 transaction is significantly cheaper for SJNK, so no wonder it has upsized the transaction so much since its launch.
Sponsors are taking advantage of cat bond and ILS investor appetite to push deal sizes higher, while securing lower pricing. This has driven first-quarter 2017 issuance towards what is now set to be yet another record start to the year, with $2.46 billion of issuance according to Artemis’ data (as long as everything completes on time and in good order).
For SJNK, this 2017 visit to the catastrophe bond market will be its most cost-efficient yet, with pricing that will give the major reinsurance firms a run for their money even on this diversifying peril. It’s going to be interesting to see whether there is a response at renewals.