Tokio Marine & Nichido Fire’s latest catastrophe bond transaction, Kizuna Re II Ltd. has 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.
The Kizuna Re II Ltd. catastrophe bond provides Tokio Marine with a fully-collateralized source of reinsurance protection against Japanese earthquake risks over a four-year term on an indemnity trigger and per-occurrence basis.
The transaction closed successfully for Tokio Marine on Friday 14th March when the $245m of notes issued in two tranches and the Kizuna Re II Ltd. variable rate note program were admitted for listing on the Bermuda Stock Exchange.
Tokio Marine took advantage of attractive insurance linked securities market issuance conditions to grow the size of its latest catastrophe bond. Kizuna Re II launched at $200m in size, but before it completed had upsized to $245m as investors oversubscribed to the issuance.
The completed cat bond features two tranches of notes, a $200m (up from $160m at launch) tranche of Series 2014-1 Class A notes, which are the lower risk of the two with an attachment probability of 0.41%, an expected loss of 0.21% and a probability of exhaustion of 0.06%, and a $45m (up from $40m at launch) tranche of Series 2014-1 Class B notes which have an attachment probability of 0.85%, an expected loss of 0.57% and a probability of exhaustion of 0.41%.
The Class A notes priced with an investment yield of 2.25% to be paid as coupon to investors, down from the price guidance of 2.25% to 2.5%. The Kizuna Re II Class A notes have the lowest coupon Artemis has ever seen for a Japanese earthquake cat bond and the second lowest for a cat bond exposed to earthquake risk from any region of the world, after Merna Re V dropped in pricing as we wrote earlier.
The Class B notes priced at 2.5%, down from the price guidance range of 2.75% to 3.25%. Again this is a low coupon for Japanese earthquake risk.
However, while the pricing for the Kizuna Re II Japanese quake cat bond is at record lows for this peril, the high multiple suggests a lower risk investment which likely attracted investors, helping the deal to upsize.
The Class A notes, with their coupon of 2.25%, have a multiple of approximately 10.7 times the expected loss of 0.21%, which is one of the highest multiples seen in any recent cat bond transaction. It is the highest multiple on any pure quake cat bonds issued in recent years.
The Class B notes meanwhile, with a coupon of 2.5%, have a multiple of approximately 4.4 times the expected loss of 0.57%, which is much more typical of recent deals.
If you look at the multiple on other earthquake cat bonds, the Class A notes from Kizuna Re II have a particularly high multiple it seems. Merna Re V looks set to complete with a multiple of around 4.9 times its expected loss, but Tramline Re II Ltd closed with a multiple of 2.7 times and Bosphorus 1 Re Ltd at just 2.5 times its expected losses.
The particularly high multiple on Kizuna Re II’s Class A notes could suggest that catastrophe bond pricing has reached a floor below which investors are just not prepared to go. It’s very unusual to have a multiple as high as this, more typical would be something around the 5 times expected losses mark, but that would have required the pricing to drop down to between 1% to 1.5%.
In the case of Kizuna Re II, while the yield to investors is low the high multiple shows that the level of risk they are assuming is extremely low compared to the return. Investors we’ve spoken with today agree that this may be a sign that pricing will not drop below 2% on a natural catastrophe bond, no matter how low the expected loss for the risk is.