Japanese primary insurance group Tokio Marine & Nichido Fire Insurance Co. Ltd. is back with another catastrophe bond, Kizuna Re II Ltd. (Series 2015-1), seeking a $205m (JPY25 billion) source of reinsurance protection from the capital markets for Japanese earthquake risks.
Last year Tokio Marine & Nichido Fire sponsored the $245m Kizuna Re II Ltd. Japanese earthquake bond successfully, securing the lowest spread for Japanese earthquake risk in the cat bond markets history. We understand that this Kizuna Re II 2015 issuance is even more remote risk than last year’s deal, meaning a lower coupon is to be expected.
We’re told that Tokio Marine & Nichido Fire is seeking to sponsor the issuance of a single tranche of cat bond notes through its Bermuda domiciled special purpose insurer Kizuna Re II Ltd. this year.
Kizuna Re II Ltd. will issue a single tranche of Series 2015-1 Class A notes with a preliminary deal size of JPY25 billion (approximately $205m) to secure a fully-collateralized source of reinsurance protection for earthquake exposures including fire following across the whole of Japan over a four-year term, with four annual risk periods.
Protection from the Class A notes will be on a per occurrence basis and the cat bond will feature an indemnity trigger. The notes will cover losses from Tokio Marine & Nichido Fire’s portfolio of personal, commercial and industrial property exposures across Japan.
We understand that the sponsor will retain a share of each loss of at least 10%, under the terms of the cat bond. The notes have an attachment point of JPY310 billion (approx. $2.5 billion) up to an exhaustion point of JPY350 billion (approx $2.9 billion), so covering a JPY40 billion (approx. $330m) reinsured layer of the sponsors programme.
This is a very remote risk Japan quake cat bond. The initial modelled attachment probability is said to be just 0.021%, while the exhaustion probability is 0.016% and the expected loss 0.018%.
The least risky layer of last years Kizuna Re II 2014-1 catastrophe bond had an attachment probability of 0.41% and an expected loss of 0.21%, so were considerably riskier than this new tranche which is being issued.
In terms of pricing guidance, we understand that the Kizuna Re II 2015-1 Class A notes are being offered to investors with coupon guidance of 2% above the return of the underlying investments. We’re told that there is no range being offered, which suggests that the deal will likely just close at a 2% coupon.
The 2014 Kizuna Re II deal priced the least risky tranche of notes at 2.25%. But if you compare the multiples, the 2015 deal will have a very high multiple, given the very low expected loss number, so investors are getting compensated more in terms of multiple to coupon.
This 2015 cat bond features a variable reset, we understand, but even if the sponsor chose to move the layer to the riskiest it is allowed under the terms of the deal it would still be a much more remote risk than its 2014 deal.
The collateral assets for this cat bond are being invested in Japanese Yen denominated investment funds, we understand, the first time this has been the case for a Tokio Marine & Nichido Fire cat bond we believe.
The cat bond is being brought to market by Aon Benfield Securities who take on the roles of sole structuring agent and bookrunner. AIR Worldwide is providing risk modelling services.
Given the remoteness of the risk in this cat bond and the potential for very low 2% pricing, it will be interesting to see whether the sponsor upsizes this transaction. It would make sense to upsize and lock-in such low-cost collateralized reinsurance protection for Japanese earthquake risks.
While the coupon is low, which is not what insurance-linked securities (ILS) investors are really looking for right now, the fact that this is a true diversifier away from U.S. perils and very remote risk should make it attractive to the ILS investor community.
The Kizuna Re II Ltd. (Series 2015-1) catastrophe bond is scheduled to complete in March and so will count towards first-quarter issuance figures, we understand. Full details on the transaction will be included in the Artemis Deal Directory and we will update you as it comes to market.