Tokio Marine: Issuing Japan quake indemnity cat bond a challenge

Japanese insurer Tokio Marine & Nichido Fire’s reinsurance buyer expressed his pleasure at the completion of Kizuna Re II Ltd., but also acknowledged the difficulty faced in issuing commercial Japanese earthquake risk as an indemnity catastrophe bond.

Aon Benfield Securities, the investment banking and capital markets advisory division of reinsurance broker Aon Benfield, announced the successful private placement of the $245m of principal at-risk variable rate notes for Kizuna Re II Ltd. today.

As Artemis wrote here yesterday, the Kizuna Re II catastrophe bond successfully secured Tokio Marine & Nichido Fire a $245m fully-collateralized source of reinsurance protection against losses from Japanese earthquakes over a four-year term on an indemnity trigger and per-occurrence basis.

The Kizuna Re II cat bond completed with the lowest coupon Artemis has seen for a Japanese quake cat bond, but with a particularly high multiple compared to the expected loss on its Class A notes. Tokio Marine & Nichido Fire benefitted from the cat bond upsizing and the pricing declining as the transaction came to market in a process managed by Aon Benfield Securities as sole book runner and sole placement agent for the Rule 144A cat bond transaction.

Kizuna Re II is the second cat bond sponsored by Tokio Marine & Nichido Fire with an indemnity trigger, after the successful issuance of Kizuna Re Ltd. in August 2011, also arranged by Aon Benfield Securities, which provides the firm with three years of Japanese typhoon reinsurance protection (it will be interesting to see if that gets renewed at some point this year).

Catastrophe bonds featuring Japanese perils had tended to use parametric triggers or modelled loss triggers until the Kizuna Re cat bond was issued. That transaction was, Artemis understands, not broadly marketed instead the issuance was worked on with a selected group of investors to get buy-in on the use of an indemnity trigger.

Kizuna Re II saw Tokio Marine & Nichido Fire seek to strengthen its relationship with ILS and capital markets investors, as well as reach out to a broader group and Artemis understands the deal was marketed more widely. Sponsoring Japanese indemnity catastrophe bonds remains a challenge though which Tokio Marine & Nichido Fire acknowledged.

Takashi Oka, Head of Reinsurance of Tokio Marine & Nichido Fire, commented; “We are proud to announce the successful catastrophe bond issuance under Kizuna Re II. It was quite a challenge to become the precursor of issuing the first earthquake indemnity catastrophe bond covering commercial and industrial exposures in Japan.”

That’s an important point. The only previous Japanese earthquake indemnity catastrophe bond was Nakama Re Ltd. (Series 2013-1), sponsored by Zenkyoren the Japanese agricultural mutual insurer, again arranged by Aon Benfield Securities. Nakama Re covers a very different book of business to Kizuna Re II and historically concerns over commercial and industrial exposures has hindered cat bond issuance so it is encouraging to see this deal be so readily accepted by investors.

Educating investors in Japanese exposure and risks to give them the confidence to invest in indemnity cat bonds in the region is likely to help expand the market there. Aon Benfield Securities and Tokio Marine & Nichido Fire have been performing a valuable exercise for the wider cat bond market by getting these deals to market successfully.

Oka continued; “We are pleased that through this issuance we were able to broaden and deepen relationships with the capital market investors, which we have been cultivating since the issuance under Kizuna Re Ltd.”

Paul Schultz, Chief Executive Officer of Aon Benfield Securities, added; “After the proven success of Kizuna Re Ltd. in 2011, we are pleased to have successfully placed Kizuna Re II Ltd. on terms attractive to Tokio Marine & Nichido Fire Insurance.  Investors were very supportive of the transaction, demonstrating both the high quality of the sponsor as well as the attractiveness of Japan earthquake risk as a diversifying peril in the ILS market.”

You can read all about the Kizuna Re II Ltd. catastrophe bond in the Artemis Deal Directory.