A new catastrophe bond has launched bringing some rare Japanese typhoon risk to the insurance-linked securities (ILS) market. Aozora Re Ltd. (Series 2014-1) looks set to bring at least $100m of this peril to market on behalf of two Japanese primary insurer sponsors.
The Aozora Re catastrophe bond is sponsored by primary insurers Sompo Japan and Nipponkoa Insurance Company, Artemis understands from market sources. The two insurers, which are both part of the NKSJ Holdings group, are set to merge to become a single entity named Sompo Japan Nipponkoa Insurance later this year. Both are first time catastrophe bond sponsors and it is encouraging to see even more new participants coming to the ILS market in this year of brisk issuance, particularly from the Japanese market.
Aozora Re will seek to issue two tranches of Series 2014-1 notes in this transaction, with one tranche denominated in USD and the other JPY. Artemis understands that whether both tranches are issued will ultimately depend on demand and appetite from investors. The different currencies used may suggest that the JPY tranche will be marketed to Japanese ILS investors, although some ILS managers do have JPY denominated funds now which could make this tranche targeted at them.
Both tranches will be exposed to Japanese typhoon events and the resulting losses from wind, flood, surge, rain, hail or tornado damage. Both tranches will use an indemnity trigger and the reinsurance protection they provide will be on a per-occurrence basis over a slightly less than three-year period, until April 2017.
Interestingly, sources told Artemis that both tranches of notes have the same risk profile, attaching at the same level and exhausting at the same level, so the main differences between them would appear to be the currency and also that the collateral of the USD tranche will be invested in U.S. treasury money market funds while the JPY tranche will be invested in Japanese Yen denominated money market funds. Again, that suggests the tranches will be marketed to different groups of investors.
Both tranches of notes offered in this Aozora Re cat bond have an attachment probability of 0.57%, an exhaustion probability of 0.49% and the expected loss is 0.52%. The notes will attach at JPY 513,500,000,000 and the exhaustion is at 536,000,000,000, which is a layer of the sponsors reinsurance program sized around $230m.
The Aozora Re cat bond will allow the sponsors to elect to perform a variable reset if they choose, where the expected loss has to be kept within certain predefined bounds and the coupon will be adjusted accordingly for investors.
A Class A tranche of notes will be USD denominated and is marketed with price guidance of 2.25% to 2.65%. A Class B tranche of notes will be JPY denominated and features price guidance slightly higher at 2.3% to 2.7%. The JPY coupon may be higher purely for currency exchange reasons.
GC Securities is the sole structuring agent and bookrunner for this transaction, we understand, while AIR Worldwide is the risk modelling agent.