Zenkyoren, the Japanese National Mutual Insurance Federation of Agricultural Cooperatives, is once again returning to the catastrophe bond market to expand its reinsurance protection for Japanese earthquake risks, with a new cat bond called Nakama Re Ltd. (Series 2013-1), we understand.
Zenkyoren is no stranger to catastrophe bond protection for its earthquake risks across Japan. The mutual insurer has been the ultimate beneficiary of a number of cat bonds, including Kibou Ltd. (Series 2012-1) from 2012 where it was the ultimate beneficiary although reinsurer Hannover Re was cedent and Muteki Ltd. from 2008 which was triggered by the earthquake and tsunami in 2011.
With Nakama Re Ltd., a Bermuda domiciled SPV, Zenkyoren is looking to expand the reinsurance protection it receives from the capital markets. Zenkyoren is sponsor and cedent to this transaction, directly reinsuring itself through a contract with Namaka Re which will be collateralized through the sale of cat bond notes to investors.
Nakama Re is the first catastrophe bond providing indemnity protection in the series of deals Zenkyoren has benefitted from. The Series 2013-1 issuance will seek to secure Zenkyoren at least $150m of cover for earthquakes across Japan and its islands and the protection will also cover it for tidal wave, fire, flood and sprinkler damage caused by earthquakes.
This first issuance of $150m of notes will provide Zenkyoren with protection on a per occurrence basis and the trigger is an indemnity arrangement based on ultimate net loss suffered by Zenkyoren. The term of the Nakama Re cat bond is said to be for a three-year risk period.
The transaction has a very high attachment point, according to our sources, which in turn equates into a relatively low risk cat bond which will protect Zenkyoren against the most severe earthquakes hitting Japan. The cat bond attachment point is at 1,650,000,000,000 JPY of losses to Zenkyoren (which is just over $16.9 billion) and the exhaustion point is at 1,750,000,000,000 JPY (or just under $17.93 billion). This does mean that Zenkyoren has a lot of room to upsize this cat bond if it wanted it to cover more of this layer of its reinsurance programme.
The attachment probability is said to be 0.94% and the expected loss is 0.9%. We’re told that Nakama Re will be marketed with an expected coupon in the range of 2.5% to 3%, which reflects the remote risk associated with this deal.
Given the high attachment point for this transaction it would take the most severe earthquakes to cause a loss to the holders of notes in Nakama Re. Even the 2011 Tohoku earthquake would have been unlikely to cause sufficient losses to affect this cat bond, had it been in place at the time.
The cat bond is being structured and marketed by Aon Benfield Securities and AIR Worldwide are providing risk modelling services.