Zenkyoren sponsors new Nakama Re 2014-2 Japan quake cat bond

Zenkyoren, as the largest single buyer of catastrophe reinsurance protection globally is known, is back with a new Japanese earthquake catastrophe bond, Nakama Re Ltd. (Series 2014-2), seeing the insurer looking for as much as five years of protection.

We understand that the Japanese National Mutual Insurance Federation of Agricultural Cooperatives, more typically known as Zenkyoren, is seeking at least $200m of reinsurance protection from this its third issuance under the Nakama Re special purpose insurance vehicle.

The deal launched yesterday, we’re told, seeing Nakama Re Ltd. set to issue $200m of Series 2014-2 notes in the second cat bond from Zenkyoren this year, as the Japanese insurer looks set to make the capital markets an increasing component of its reinsurance program. This is positive for the insurance-linked securities (ILS) market, as Zenkyoren is a key player in Japan and its clear commitment to cat bonds will help to educate more potential Japanese insurer sponsors of ILS.

So, we understand that the deal is structured in two tranches which are currently both targeting $100m of protection each. As is typical, Nakama Re Ltd. will issue the two tranches of Series 2014-2 notes to fully-collateralize two underlying reinsurance contracts with Zenkyoren. Both tranches provide reinsurance protection on an ultimate net loss, or indemnity, triggered basis and coverage is for losses from earthquake shaking, tidal wave, flood, fire following and also sprinkler damage, we hear.

A Class 1 tranche of notes will provide Zenkyoren with earthquake reinsurance protection in Japan on a per-occurrence basis across a four year period. This tranche provides protection over a JPY 200 billion layer of Zenkyoren’s reinsurance program, from an attachment point of JPY 1.95 trillion to an exhaustion point at JPY 2.15 trillion of losses. That equates to an attachment probability of 0.63% and expected loss of 0.58%.

The other Class 2 tranche will provide protection on a three-year aggregate basis, across each of three overlapping risk periods over five full years in total. The Class 2 tranche is unusual for that reason, as it effectively has three three-year risk periods that each overlap, meaning that it effectively offers nine years of protection if each risk period is considered discreet of the others, although running in tandem at times.

The more complicated Class 2 tranche attaches at JPY 1.85 trillion to an exhaustion point at JPY 2.05 trillion, so again covering a JPY 200 billion layer. With protection being on a three-year aggregate basis, this tranche has a three-year attachment probability of 2.35%, which on an annual basis equates to 0.78%. The three-year expected loss is 2.09%, which is 0.70% on an annual basis. This tranche’s layer also features a franchise deductible of JPY 270 billion.

In terms of pricing, the per-occurence Class 1 notes are marketed with guidance  of 2% to 2.25%, we understand, while the three-year aggregate Class 2 notes are marketed with guidance of 2.75% to 3%.

While those figures are low in terms of ultimate coupon, when you compare them to the expected loss as a multiple they seem aligned with recent market pricing. Given where both tranches attach, it would take really major earthquakes to trigger the Class 1 per-occurrence tranche and a three-year period featuring a number of also very severe earthquake events to trouble the aggregate Class 2 notes, so they are remote in terms of risk.

With multiples of above three for both tranches of notes very likely, even at the low-end of guidance, these coupons are in-line with market experience for these types of Japan earthquake cat bonds. In fact, the two other Nakama Re earthquake cat bonds, Nakama Re Ltd. (Series 2013-1) and Nakama Re Ltd. (Series 2014-1) both have multiples nearer to three, suggesting that Zenkyoren is not pushing pricing particularly hard on this issue.

It will be interesting to see how investors receive the interesting aggregate structure of the Class 2 notes. From a sponsor point of view these make a great deal of sense, providing valuable protection against a number of earthquakes happening within three three-year risk periods, effectively across nine years of duration if the risk periods were laid end-to-end instead of overlapping.

We understand that Aon Benfield Securities is sole structuring agent and bookrunner for this new cat bond from Zenkyoren. AIR Worldwide is providing the risk analysis and modelling services.

It’s worth noting that one of Zenkyoren’s other cat bonds, from a different issuing vehicle, Kibou Ltd. (Series 2012-1) is schedule to mature in mid-February 2015. Kibou is a $300m parametric Japanese quake cat bond, so it will be interesting to see whether Zenkyoren chooses to upsize this latest Nakama Re deal to fully replace that protection.

Finally, we’re told that the Nakama Re 2014-2 cat bond will be completed in December, so will add to the now growing full-year 2014 issuance total, a figure which is already approaching $8.3 billion with a number of deals yet to price and with time left to upsize too.

That’s all we have on the Nakama Re Ltd. (Series 2014-2) Japanese earthquake catastrophe bond from Zenkyoren. You can read all our information on this deal and every other cat bond in the Artemis Deal Directory.