Tokio Marine & Nichido Fire Insurance Co. Ltd., the giant Japanese primary insurance group, is back in the insurance-linked securities (ILS) market seeking its fifth Kizuna Re catastrophe bond with a $150 million Kizuna Re III Pte. Ltd. (Series 2021-1) transaction that is being issued out of Singapore.
It will be the seventh catastrophe bond we have listed in our extensive Deal Directory that will benefit part of the Tokio Marine Holdings group of companies.
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.
With the Japanese insurance carrier electing to sponsor this new Kizuna Re catastrophe bond issuance out of Singapore, the company will become the second Asian cat bond sponsor to also domicile its transaction in the region.
Kizuna Re III Pte. Ltd. has been established as a special purpose reinsurance vehicle in Singapore, for the purpose of this catastrophe bond issue, we understand from sources.
Kizuna Re III Pte. Ltd. will seek to issue a single Class A tranche of Series 2021-1 notes, that will be sold to investors and the proceeds used to collateralize underlying reinsurance agreements between the issuer and Tokio Marine & Nichido Fire Insurance.
The target size is at least $150 million and the reinsurance coverage will be against losses from Japanese earthquakes, including losses from related impacts caused by shake, tsunami, fire, flooding and sprinkler leakage.
Coverage will be on a three-year aggregate and indemnity basis, across a five year term.
We’re told there is a franchise deductible per-earthquake event that qualifies under the terms of the deal of JPY 25 billion, while the attachment point for the first of the three-year risk periods is JLY 52.5bn (roughly US $491m).
This is the same as Tokio Marine’s other recent Kizuna cat bonds, where the transactions have three, three-year aggregate risk periods, that overlap across the full five-year term of the coverage. As a result, maturity is slated for sometime in late March or early April 2026.
The $150 million of Class A Series 2021-1 cat bond notes that Kizuna Re III Pte. Ltd. will issue have an initial expected loss of 1% on a three-year basis, we understand, which is 0.33% annualised.
The notes are being offered to catastrophe bond investors with pricing guidance of 2.25% to 2.5%.
Sources said that this new Kizuna Re III 2021 catastrophe bond covers a portfolio of Tokio Marine & Nichido Fire’s business including commercial, personal and industrial property policies, personal accident, automobile losses, and certain reinsurance assumption between the cedant and group companies.
As with the sponsors last Kizuna Re II Ltd. (Series 2018-1) catastrophe bond, the new cat bond can be matured early after three years, if the notes haven’t responded to losses in the first of the risk periods, providing considerable flexibility to the sponsor in planning its reinsurance arrangements after the first three-year term.
At this time the Kizuna Re II 2018 cat bond remains in-force, but if it is to be matured early that would likely happen soon and given how pricing has moved since that issuance, it would seem likely that it represents better value reinsurance coverage than could be achieved if the same issuance was attempted again in 2021.
Hence it seems likely this new Kizuna Re III 2021 catastrophe bond will be placed to augment the coverage provided by Tokio Marine’s in-force cat bond, rather than being designed to replace it.
For pricing comparison, the riskier Class B tranche of notes from the Kizuna Re II 2018 cat bond had an annualised initial expected loss of 0.99% and priced with a coupon of 2.5%, so it seems unlikely that pricing could be replicated today, given where the initial guidance for this new Kizuna cat bond sits.