GC Securities on the completion of the Kibou Ltd. Japanese earthquake cat bond

by Artemis on February 15, 2012

GC Securities, the capital markets arm of broker Guy Carpenter and a division of MMC Securities, have published a press release regarding the recent completion of the Kibou Ltd. Japanese earthquake catastrophe bond. The $300m transaction is the first pure Japan earthquake cat bond to come to market since the Tohoku earthquake of March 2011.

GC Securities acted as structuring agent, lead manager and bookrunner for the Kibou Ltd. cat bond transaction and successfully placed the $300m of cat bond notes issued through the newly set-up Kibou Ltd. shelf program.

The transaction ultimately benefits Zenkyoren, the Japanese National Mutual Insurance Federation of Agricultural Cooperatives, although it was issued via sponsoring reinsurer Hannover Re who have acted as a transformer for the transaction.

Kibou Ltd. provides Zenkyoren with a multi-year source of collateralized reinsurance on a parametric basis, using earthquake data measured at the Kyoshin-Net (K-Net) monitoring stations in Japan. Protection is triggered on a per-occurrence basis and has been specifically structured to be tailored to provide more remote earthquake protection initially.

Additionally, if a qualifying earthquake event happens, the protection will adjust with a higher risk profile. In return for this increased drop-down based cover, investors will receive an increased coupon post-drop-down relative to the initial coupon that the notes pay. The initial coupon paid is Treasury money market funds plus 5%, after a drop-down event that changes to plus 9%. That’s an interesting feature as it should keep investors interest in the bond high even if a first event qualifies.

James Nash, CEO of Asia Pacific Region, Guy Carpenter & Company, said; “The positive response by investors to the Kibou issuance soon after the Tohoku earthquake was an important test of the capital markets to be a viable and reliable supplement to the traditional risk management schemes for purchasers of major catastrophe programs.”

This was a particularly important test of the cat bond markets appetite for Japanese quake risk seeing as the last Zenkyoren sponsored cat bond, Muteki Ltd., became a total loss due to the Tohoku earthquake. It is also a vote of confidence for K-Net, the earthquake monitoring system, as there were some concerns about the data provided after Tohoku.

Cory Anger, Global Head of ILS Structuring, GC Securities, added; “The Kibou issuance adopted state-of-the-art catastrophe bond technology that carefully balanced the post-Tohoku needs of Zenkyoren while showing the strength of the global ILS investor base in evaluating and providing Japan earthquake capacity after being impacted by the Tohoku earthquake. The transparent structure allows faster payouts relative to traditional reinsurance for Zenkyoren and is expected to aid their recovery efforts if a significant earthquake event affects Japan during the next three years.”

Chi Hum, Global Head of ILS Distribution, GC Securities, said; “GC Securities is pleased to have been able to show the capital markets support for the Japanese earthquake risk market. The investors that subscribed for the deal appreciated the diversifying nature of the risk as well as the many structural refinements based on the knowledge of prior offerings in this peril. We are honored to have participated in securing $300 million of capacity that will ultimately benefit the policyholders exposed to the earthquake risk in the Japan region.”

More details can be found in our Deal Directory on the structure of the Kibou Ltd. cat bond transaction.

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