- Munich Re transfers cover for earthquake risks in Japan to the capital market
- Heavy demand from investors in spite of uncertainty on the financial markets
Munich Re has transferred earthquake risks in Japan to the capital market for the East Japan Railway Company by way of securitisation. The catastrophe bond with a volume of US$ 260m issued by a special purpose vehicle has a spread of 2.75 percentage points above the three-month Libor and was placed with international institutional investors.
The securitisation gives the East Japan Railway Company, which was advised by Nomura Securities, cover against losses in the event of a major earthquake in Greater Tokyo. In this way, the East Japan Railway Company receives, in addition to cover against property losses, protection against business interruption losses, which is otherwise very difficult to obtain in the Japanese insurance market. The catastrophe bond was structured by Munich Re's Risk Trading Unit and serves to transfer the risk completely to the capital market.
It has been given a BB+ rating by Standard & Poor’s, the standard rating for bonds of this kind. The bond was issued by MIDORI Ltd., a special purpose vehicle domiciled on the Cayman Islands, and has a term of five years. Demand for the bond far surpassed the volume on offer.
Dr. Thomas Blunck, the member of the Board of Management responsible for the Risk Trading Unit said: "The response to the issue shows that the market for insurance-linked securities has not on the whole been impaired by the uncertainty on the credit markets but continues to be attractive. Munich Re will increasingly realise capital market solutions for its clients and continue to transfer risks from its own book onto the capital market if this is appropriate in financial terms."
The trigger for paying out the bond is based on magnitude values defined by the Japan Meteorological Agency (JMA) and recorded within a 70-km radius of a central point in Tokyo during a loss event. In addition to the earthquake cover, Munich Re has also transferred the currency risk between the Japanese yen and the US dollar to the capital market by way of financial derivatives, which makes the overall transaction even more efficient and cost-effective for the client.
Dr. Ludger Arnoldussen, whose responsibilities on the Munich Re Board of Management include the region of Asia, said: "We are very pleased that with our risk expertise and securitisation know-how we have been able to give the Japanese market additional cover for a conceivable event with an enormously high loss potential." Greater Tokyo, with its population of some 40 million, is classed as very exposed to earthquakes, this being where the Pacific, Philippine, and Eurasian Plates collide with each other. The earthquake risk is comparatively high in Japan, which means that the insurance industry can only provide cover on the basis of strict limits. The last extreme earthquake to hit Greater Tokyo was in 1923 with an intensity of 7.9 on the JMA Scale. This was the Great Kanto Earthquake, in which large parts of Tokyo were more or less destroyed and some 143,000 people killed.
In this current transaction, the Risk Trading Unit worked closely with Aon Capital Markets in connection with structuring and placement. It is also the first time that the Munich Financial Group, a new Munich Re unit with a requisite banking licence, has been involved in the marketing and placing of a bond.
signed Dr. Blunck signed Dr. Lawrence
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