Kizuna Re II Ltd. – Full details:
Kizuna Re II Ltd. is a Bermuda domiciled special purpose insurance vehicle, registered in January for the purpose of issuing series of catastrophe bond notes. In this issuance two tranches of Series 2014-1 notes are being marketed to investors, both being sold to collateralize reinsurance agreements to provide Tokio Marine with a source of Japanese earthquake protection.
Both of the tranches of notes will provide Tokio Marine with a source of indemnity based reinsurance protection, Artemis understands, with a Class A tranche of notes being marketed at a size of $160m and a Class B tranche at $40m.
Given the diversifying nature of a Japanese quake cat bond it would not be surprising to see this transaction grow in size, as investors are likely to show strong support for a true opportunity to add diversification to their cat bond portfolios.
The earthquake cover afforded to Tokio Marine by the Kizuna Re II cat bond will cover all Japanese territories, be on a per-occurrence basis and the indemnity trigger will be based on the insurers ultimate net losses from earthquake events. The Kizuna Re II cat bond will run for a four-year term.
The $160m tranche of Series 2014-1 Class A notes have an attachment probability of 0.41%, an expected loss of 0.21% and a probability of exhaustion of 0.06%. The attachment point for these notes is set at JPY 180 billion, which is around $1.77 billion and the exhaustion point is JPY 310 billion.
The $40m tranche of Series 2014-1 Class B notes have an attachment probability of 0.85%, an expected loss of 0.57% and a probability of exhaustion of 0.41%, making these notes the more risky of the two layers. The attachment point for these notes is set at JPY 120 billion, which is around $1.18 billion and the exhaustion point is JPY 180 billion.
The transaction features an initial short loss period, which we understand is being termed a stub period, running until the 31st March 2014, where the attachment point for the Class A notes is much higher, at JPY 310 billion. The Class B notes do not have this stub period.
The cat bond transaction features a flexible reset mechanism, allowing the deal to be reset within a range of expected loss, with the maximum expected loss that each class of notes can be reset to fixed at 0.3% for the Class A notes and 0.7% for Class B. This gives some flexibility in terms of where the cover sits within Tokio Marine’s reinsurance tower.
The Class A notes are being marketed to investors with a price guide of 2.25% to 2.5% and the Class B notes have price guidance of 2.75% to 3.25%.
Pricing guidance was lowered and narrowed as the Kizuna Re II cat bond came to market.
The latest price guidance shows the Class A tranche now offered with a coupon of 2.25% and the Class B tranche of notes now offered with a coupon range of 2.5% to 2.75%.
Artemis understand that the Class A tranche has now been increased in size to $200m, while the Class B tranche has been upsized by just $5m to $45m in size. That’s an increase in deal size of almost 23%.
The Class A tranche, now $200m in size, launched with price guidance of 2.25% to 2.5%. The price guidance was reduced to the bottom of the range, with the Class A tranche offered with a coupon of 2.25% last week. The final pricing has settled at that low end of a 2.25% interest coupon to be paid to investors, possibly the lowest spread for Japanese earthquake risk in the cat bond markets history.
Meanwhile the Class B tranche of notes, now $45m in size, which launched with a price guide range of 2.75% to 3.25% which was then lowered to below the bottom end of that range, with the notes offered with a coupon range of 2.5% to 2.75% las week. These notes have now priced at the low end of the reduced range with an interest coupon of 2.5%, again very low for Japanese quake risk.