Kizuna Re II Ltd. (Series 2018-1)

Tokio Marine & Nichido Fire is returing to sponsor a third cat bond through its Bermuda domiciled special purpose insurer Kizuna Re II Ltd. as it 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.

Update 1:

We’re told that the transaction has not been upsized, as this stage, remaining as a $200 million cat bond for the sponsor. However the pricing guidance has now been updated and one tranche has dropped to the bottom of guidance, while the other looks like it will settle at the mid-point.

The $150 million Series 2018-1 tranche of Class A notes, which have a three-year expected loss of 0.35%, 0.12% annualised, and were initially offered to investors with coupon price guidance in a range from 1.75% to 2%, are now set to price at the mid-point with a coupon of 1.875%, we’re told.

With this tranche, which are relatively remote in terms of risk, it’s possible that there is simply a minimum return that investors are looking for from a cat bond investment, no matter how low risk it is.

The second $50 million Series 2018-1 Class B layer of notes, which are much riskier with a three-year expected loss of 2.98%, 0.99% annualised, and were offered to investors with pricing guidance in a range from 2.5% to 3%, are set to price at the low-end of that range, at 2.5%.

Update – April 2021:

As no qualifying loss events occurred during the first three-year aggregate risk period, sponsor Tokio Marine opted to redeem the full $200 million of notes from this catastrophe bond early, in April 2021.