Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

SJNK back with $175m Aozora Re 2016 Japan typhoon cat bond


Japanese primary insurance group Sompo Japan Nipponkoa Insurance is returning to the capital market in search of an expanded source of reinsurance protection for losses caused by Japan typhoons with a $175m Aozora Re Ltd. (Series 2016-1) catastrophe bond.

According to sources, 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 580 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.

That pricing guidance is aligned with that seen for the Aozora Re 2014 cat bond, but that deal priced at the lowest end of the range. It will be interesting to see where this 2016 cat bond prices, given the expected loss is higher.

So this cat bond will provide a good test of just how in demand Japanese typhoon risk is as a diversifier. As readers are no doubt aware, Japanese perils have been pricing very cheaply in the traditional reinsurance market, as reinsurers seek out diversifiers and to maintain share of the market.

So any cat bond should price relatively cheaply, as otherwise the sponsor would surely turn to traditional reinsurance instead. Add to that the fact that ILS managers also require diversification, in some cases, and we could see this deal keenly priced.

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.

Reinsurance broker Guy Carpenter’s investment banking unit GC Securities is said to be bringing this cat bond to market, as sole structuring agent and bookrunner, while AIR Worldwide is risk modelling agent.

The Aozora Re Ltd. (Series 2016-1) catastrophe bond is expected to complete this month, timed for the Japan reinsurance renewal on 1st April. We’ll update you as the transaction comes to market and you can read about this and every other cat bond in the Artemis Deal Directory.

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