Japanese primary insurance group Tokio Marine & Nichido Fire Insurance Co. Ltd. has returned to the catastrophe bond market for its latest issuance, a $200 million Kizuna Re II Ltd. (Series 2018-1) transaction that aims to secure a source of capital markets backed Japanese earthquake reinsurance protection for the sponsor.
Tokio Marine has been sponsoring catastrophe bonds since as long ago as 1997, when the firm brought the appropriately named Parametric Re Ltd. to market.
The focus has moved to indemnity cat bond reinsurance protection, but as a sponsor Tokio Marine & Nichido Fire continues to put the capital markets firmly within its reinsurance program.
With this new transaction Tokio Marine & Nichido Fire is looking to renew and replace the coverage provided by its four-year term 2014 Kizuna Re II Ltd. cat bond transaction.
This is the third cat bond to be issued through Bermuda domiciled special purpose insurer Kizuna Re II Ltd. as Tokio Marine & Nichido Fire seeks to expand its capital markets backed reinsurance protection for Japanese earthquake risks.
Sources said that Kizuna Re II will issue two tranches of Series 2018-1 cat bond notes, which will be sold to qualifying investors to collateralize underlying reinsurance agreements between the vehicle and the sponsoring insurer.
The reinsurance protection from the cat bond will cover Tokio Marine & Nichido Fire against losses from earthquakes in Japan, including shake, tsunami, fire, flooding and sprinkler leakage, over a five-year term.
That’s particularly long in the cat bond market and only a handful of deals have had such tenure so far.
The Kizuna Re II 2018 cat bond will feature a three-year aggregate indemnity trigger, meaning losses can accumulate over each of three, three-year risk periods that overlap over the full five-year term of the coverage.
This structure is particularly popular among Japanese sponsors of cat bonds and we understand the notes will be redeemed early if no qualifying loss event occurred in the first risk period, or if a qualifying event fails to trigger a reinsurance payout, which allows the sponsor to return to the market and issue a fresh transaction after three years, if appropriate to do so.
The first tranche is $150 million of Series 2018-1 Class A notes, which have a three-year initial attachment probability of 1.09%, or 0.36% on an annualised basis we’re told. These notes have a three-year expected loss of 0.35%, 0.12% annualised and we understand that expected losses would be capped at a maximum of 0.25% annualised under the terms of the cat bond. This Class A tranche of notes is being offered to investors with coupon price guidance in a range from 1.75% to 2%.
The second tranche is a $50 million Series 2018-1 Class B layer of notes, which are much riskier with a three-year initial attachment probability of 7.98%, or 2.66% on an annualised basis. This tranche has a three-year expected loss of 2.98%, 0.99% annualised and we’re told that expected losses would be capped at a maximum of 1.1% annualised under the terms of the deal. This Class B tranche of notes is being offered to investors with pricing guidance in a range from 2.5% to 3%.
We’re told this new Kizuna Re II 2018 catastrophe bond covers a portfolio of Tokio Marine & Nichido Fire’s business including commercial, personal and industrial policies, personal accident, automobile losses, and certain reinsurance assumption between the cedant and group companies.
So there are some clever features to this catastrophe bond, the three-year aggregate risk periods across a five-year term, with the ability to mature the bond after three if it doesn’t respond to losses in the first of the risk periods. This offers considerable flexibility to the sponsor in planning its reinsurance arrangements after the first three-year term.
This is the third cat bond from a Japanese sponsor in recent weeks, as these insurers work towards the April renewal of their property catastrophe reinsurance programs. It’s encouraging to see so much diversifying risk coming to market, although as ever much of it is very remote and so has a low return.
We understand that this Kizuna Re II 2018-1 cat bond will be issued during March, so falling into first-quarter 2018 cat bond issuance which already stands at $2.38 billion, according to Artemis data.
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