Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Aozora Re Japan typhoon catastrophe bond prices at low-end


Japanese insurance group Sompo Japan Nipponkoa’s (SJNK) latest catastrophe bond Aozora Re Ltd. (Series 2014-1) priced at the lowest end of reduced guidance last week, showing investors appetite for this remote risk, JPY denominated bond.

The Aozora Re cat bond issuance dropped a USD denominated tranche of notes and the focus turned to the remaining Japanese Yen denominated tranche, as price guidance declined last week.

At pricing on Friday the cat bond set its size at JPY 10.125 billion, which is approximately $99.35m USD. The notes which had launched with price guidance of 2.3% to 2.7%, which subsequently dropped down to 2% to 2.25% last week, finally priced at the bottom end of the reduced guidance at 2%. This is the lowest ever coupon on a Japanese typhoon catastrophe bond, again demonstrating investors appetites for risk.

The Aozora Re cat bond will provide SJNK with a three-year $99.35m source of fully-collateralized reinsurance protection against qualifying Japanese typhoon losses, on an indemnity and per-occurrence basis. While the pricing dropped on this bond, where other recent cat bonds have priced at the mid or upper end of guidance, this is among the most remote risk Japanese peril cat bond tranches ever issued into the market.

It is encouraging to see the acceptance of the Japanese Yen denominated notes by ILS investors as well. There may be a hedging factor also taken into account, which could see the yield actually being under 2% if currency fluctuation affects the value of the coupon.

With this being a very remote layer of risk that investors have accepted a perhaps historically low-yield for it continues to confirm that investors are increasingly aware of their pricing limits and prepared to support risk transfer of remote layers at lower yields.

However it should also be noted that the Aozora Re cat bond contains a good deal of complexity, which investors have also readily accepted. Read our previous article on the Aozora Re cat bond with details on this complexity from S&P’s pre-sale report.

You can read all about the Aozora Re Ltd. (Series 2014-1) catastrophe bond in the Artemis Deal Directory.

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