Details emerge on Zenkyoren’s Kibou Ltd. catastrophe bond

More details have emerged on the new catastrophe bond which is being marketed by sponsor Hannover Re to provide protection to their reinsured, Japanese National Mutual Insurance Federation of Agricultural Cooperatives, Zenkyoren. The Kibou Ltd. catastrophe bond is the first which aims to cover Japanese earthquake risks alone since the quake and tsunami struck last March. It’s also the first to cover Zenkyoren, one of the largest purchasers of reinsurance in the world, since their Muteki cat bond defaulted after that earthquake.

Kibou Ltd. has been established by Hannover Re as a program to allow for future cat bond issuances. In this first issuance Kibou Ltd. is seeking to issue $150m of Series 2012-1 Class A notes which will be exposed to Japanese earthquakes from February 2012 to February 2015. The notes will use a parametric index trigger based on data provided by Japanese earthquake monitoring network K-Net.

The resulting risk transfer achieved through the Kibou Ltd. issuance is designed to provide Hannover Re, and ultimately Zenkyoren through their reinsurance arrangement, with fully collateralized multiyear protection on a per-occurrence basis against Japan earthquake until February 2015.

The notes provide protection for losses above an event index value of 1050 and below an event index value of 1150. The deal also features a dropdown feature which means that if a first event reaches an index value of 270 or greater then the notes will provide coverage for any subsequent events in excess of an event index value of 490 and below a value of 590. This provides some protection for a smaller event which is then followed by a more severe one, perhaps an aftershock, S&P said in their rating analysis that the notes could be downgraded if a dropdown event occurred. The deal also allows for a new risk model to be used after a reset if the new model increases the expected loss by more than 10%. An event index value will be calculated using peak ground acceleration data from the Kyoshin K-Net network of earthquake monitoring stations. Tsunami losses are not covered under the terms of the deal.

There were some concerns after the March 2011 Japan quake about lack of reporting from certain K-Net stations which may have been damaged by the event. This deal provides for this eventuality by allowing for the use of USGS data if any of the 1,000 K-Net reporting stations fail to report peak ground acceleration data after an event.

AIR Worldwide provided risk analysis for the transaction. GC Securities are arranging the deal and acting as bookrunner.

Proceeds from the sale of the notes will be deposited in a collateral account and invested in U.S. Treasury money market funds.

Standard & Poor’s have given the single tranche of Class A notes a preliminary rating of ‘BB+’.