Contract Concluded for an Earthquake Derivative
~Earthquake Risk Securitized Through Tailored Catastrophe Bond (Cat Bond) Scheme~
East Japan Railway Company
October 17, 2007
- JR East has entered into a five-year contract for an earthquake derivative arranged by Nomura Securities Co., Ltd., with Munich Re, one of the world's largest reinsurance companies. The contract provides for payment to JR East in the event of an earthquake in the Tokyo metropolitan region, the amount to vary according to the earthquake's location and magnitude.
- JR East will make annual payments of set amounts to Munich Re in yen. If an earthquake occurs that meets certain conditions, JR East will receive a payout of up to 260 million dollars.
- The risk of the earthquake derivative has been securitized through catastrophe bonds (cat bonds) issued by a special-purpose company. The bonds have been placed principally with institutional investors located in Europe and North America.
- This is the first time for a business enterprise in Japan to enter into a tailored third-party cat bond scheme of this kind, and the arrangement for payment of premiums in yen is also a first.
Main substance of the earthquake derivative contract
JR East is committed to anti-earthquake measures, including reinforcement against the eventuality of a major earthquake, while also seeking insurance against possible losses through earthquake insurance. The contract described here is an additional measure to further mitigate the financial impact of a powerful earthquake occurring directly below the Tokyo metropolitan area.
A description of the scheme
- JR East concluded a contract with Munich Re for an earthquake derivative, whereby JR East will pay Munich Re premiums in yen. Munich Re established a special-purpose company to sell cat bonds to institutional investors. This is the first time a Japanese domestic enterprise has sought to have cat bonds issued under such an arrangement through a third party.
- In the event that an earthquake meeting specific conditions occurs, JR East is to be paid a certain amount according to the location and magnitude of the earthquake hypocenter. This payment is to take place promptly and regardless of the damage suffered directly or indirectly by JR East.
Substance of the contract
(1) Contract amount: 260 million dollars (approximately 30 billion yen) (2) Maturity: 5 years (3) Earthquakes covered: Earthquakes of a certain magnitude or greater with the hypocenter within a radius of 70 km from Tokyo Station (4)
Payment to be received if earthquake occurs: Certain amounts are to be paid according to the location and magnitude of the earthquake, up to 260 million dollars, during the term of the contract. The payment to JR East increases in proportion to the magnitude of the earthquake.