On April 24, Axa launched the largest sub-investment grade deal in the history of the mortality bond market and the largest excess mortality bond since 2007. The €285 million ($310 million) note issuance by special-purpose vehicle Benu Capital provided Axa with fully collateralised five-year protection against catastrophic mortality events in France, Japan and the US.
The deal was win-win for Axa and its investors. The insurer has been able to shift a large chunk of mortality tail risk from its balance sheet, making the company more resilient to extreme mortality events such as pandemics or terrorist attacks.
Because the notes use index triggers for each country covered, weighted by age and gender, any basis risk between Axa’s policyholders and that of the indexed population is likely to be small. This was also the first bond to include Japanese mortality since the 2011 Tohoku Earthquake’s tsunami caused upwards of 15,000 deaths in the country.
For investors, the bond offers an opportunity to diversify portfolios and a good return despite low interest rates. Investor appetite in recent years has allowed more and larger sub-investment grade transfers of mortality risk in a market that has moved away from being exclusively investment grade. On Benu, for example, a recurrence of the 1918 flu pandemic would lead to 100% losses on both the Class A and Class B tranches of the sub-investment grade deal.
Some of the structural innovations could be the shape of things to come in the insurance-linked market. The Class B notes, which made up €150 million ($163 million) of the deal, represent the highest risk ever transferred to the capital markets on a mortality bond. This tranche had an initial expected loss of 1.33%, with an investment return of 3.35%.
BNP Paribas is one of the few banks to have maintained a team of knowledgeable professionals who have a good understanding of the market structures and dynamics
“For the Class B tranche in particular, we were in uncharted territory in terms of the risk profile and concentration of sub-investment grade risk being transferred. This was a big win for us to get something that was not only a great deal for Axa, but also welcomed by the investor community,” says Rishi Naik, head of ILS sales and trading at BNP Paribas in London.
The bonds also include an innovative trigger mechanism. Traditionally a bond can only be triggered after a two-year average of mortality rates has been calculated, meaning sponsors cannot claim compensation in the first year of the protection period. Axa’s bond, though, can be triggered after the first year if there is a large peak in mortality.
Furthermore, on the class A notes, a new type of trigger allows Axa to maintain hedging protection in the final year of the protection period, with a drop-down feature increasing the trigger’s sensitivity.
“The dropdown reduces the attachment point of the trigger to ensure the economics make sense for Axa, which might otherwise be incentivised to call the bond rather than issue until maturity. Axa wanted the same level of protection throughout the full five years and this is effectively what the drop-down feature achieves,” says Guillaume Autier, insurance solutions originator at BNP Paribas in London.
Alongside Axa and BNP Paribas, other parties on the transaction were risk modeller RMS, which provided third-party risk assessment and modelling; Swiss Re, which was lead structuring agent and joint bookrunner; Aon Benfield as joint book-runner; and Natixis as co-structuring agent and joint book-runner.
Best bank for ILS
In addition to the Benu Capital deal, ILS award winner BNP Paribas also closed a landmark embedded value (EV) securitisation for reinsurer Aurigen Capital. The securitisation covers a closed block of Canadian life insurance policies reinsured by Aurigen between 2008 and 2013 and provides capital relief for Aurigen under the Canadian Capital Regulation (MCCSR).
Aurigen writes life insurance business in Canada but reinsures a large majority of this back into Bermuda where the firm is domiciled. That reduces the burden of Canadian capital and reserving regulation, but Canadian authorities still require the offshore entity to put up collateral and therefore pledge assets back to the Canadian entity, cutting into the capital left to fund new business. This deal provided Aurigen with $210 million Canadian dollars ($159 million) using the firm’s future cashflows as collateral and allowed the firm to redeem an existing securitisation as well as fund new business acquisition.
The Aurigen deal includes an innovative annual exchange mechanism. As Aurigen reinsures more business it is able to propose further ILS protection to existing investors in the securitisation and therefore avoid the work and cost of structuring another bond.
“By being able to increase the deal each year, instead of doing new financing, Aurigen now has the flexibility to propose increases without the insecurity of a new public offering. If investors agree privately, they can put up more money and extend the maturity of the deal,” says Graham Clark, managing director, insurance solutions, at BNP Paribas in New York.
"BNP Paribas is one of the few banks to have maintained a team of knowledgeable professionals who have a good understanding of the market structures and dynamics," says Nicolas Benhamou-Rondeau, head of funding and capital markets at Axa in Paris.