Sompo Japan Nipponkoa’s (SJNK) latest catastrophe bond issuance, the Japan typhoon exposed Aozora Re Ltd. (Series 2017-1), has increased in size while marketing by 48%, to now offer ILS investors a $400 million tranche of cat bond notes we’re told.
The Japanese primary insurance group returned to the catastrophe bond market in late February with a new Aozora Re 2017 cat bond targeting an expansion to Sompo’s capital market backed collateralised reinsurance provisions.
With insurance-linked securities (ILS) and catastrophe bond investors showing a strong appetite for new issues, this is helping to drive prices down again and this Aozora Re cat bond is a clear marker of the value sponsors can gain from a cat bond issue right now.
This Aozora Re 2017-1 cat bond began life as a $270 million single tranche bond, aiming to secure SJNK a four-year source of collateralized Japanese typhoon reinsurance protection, on an indemnity trigger and per-occurrence basis.
So with a 48% upsizing set to take this cat bond to $400 million, which will make it the largest catastrophe bond ever issued by Sompo Japan Nipponkoa Insurance, it’s really the pricing that shows how cost-effective this reinsurance coverage will be for the insurer.
SJNK’s first cat bond, the roughly $100 million Aozora Re Ltd. (Series 2014-1), saw its lowest risk Class B tranche price with a 2% coupon for a 0.52% expected loss.
Then the insurers $220 million Aozora Re Ltd. (Series 2016-1) achieved even more attractive pricing, settling to offer its investors a coupon of 2.2% for a 0.9% expected loss.
Now, with its Aozora Re 2017-1 cat bond, Sompo is set to reach a new low in terms of cost, and a high in terms of efficiency and value of the reinsurance coverage this deal offers.
This cat bond was first marketed to investors with coupon price guidance of between 2.15% to 2.65%, for an expected loss of 1.14%. We understand from sources that the price guidance has now been lowered to 2% to 2.15%, so below the initial range.
That will make this the most cost-efficient cat bond coverage that SJNK has secured to-date, on a multiple of expected loss to coupon basis, signalling the appetite of ILS investors to acquire new risk and their understanding of where their limits now lie.
It also looks like the coupon cost of issuance has more than halved since Sompo’s 2014 issuance, which is a quite stunning marker of how the ILS markets maturity and demand have developed over the last four years.
As sponsors experience these continued price declines in the catastrophe bond market, it suggests that new sponsors may be attracted to the market, while repeat sponsors may return. It also suggests that pressure on reinsurance pricing will continue and that collateralised reinsurance rates are likely to drop further at renewals to come.