Giant Japanese reinsurance buyer Zenkyoren is returning to the catastrophe bond market for another opportunity to tap the capital markets for a source of collateralized earthquake reinsurance protection, with a currently $250 million Nakama Re Ltd. (Series 2018-1) transaction, sources said.
We’re told this transaction launched yesterday and sees Zenkyoren sponsoring what will be its sixth Nakama Re cat bond since 2013 and the eleventh cat bond transaction we have the Japanese mutual insurer listed as sponsor of in our Deal Directory.
Zenkyoren, or the Japanese National Mutual Insurance Federation of Agricultural Cooperatives as it is known, is looking to secure at least $250 million of three-year aggregate reinsurance coverage against Japanese earthquake risks through the issuance of two tranches of Series 2018-1 cat bond notes through its Nakama Re Ltd. special purpose reinsurance vehicle.
This is the third of the Nakama Re cat bonds that has been structured to provide three-year aggregate indemnity coverage for Zenkyoren, which means that losses can accumulate and aggregate across three calendar years towards the trigger attachment point.
Nakama Re will aim to issue and sell two tranches of notes to ILS investors, the proceeds of which will be used to collateralise underlying reinsurance agreements that afford Zenkyoren with coverage against losses caused by earthquakes striking Japan, with the peril covered also including earthquake induced shaking, tsunami, fire, flood and sprinkler related water damage, we understand.
The two tranches of notes seek very different levels of coverage, with one sitting at the lower-end of Zenkyoren’s reinsurance tower and the other nearer the top-end.
While a three-year aggregate trigger, the transaction actually provides coverage until 2023, so across five years, with three overlapping risk periods of three years in length each.
The first tranche to be issued is a $200 million sized Series 2018-1 Class 1, which is the lower risk layer and will cover Zenkyoren’s losses from JPY 2.15 trillion up to JPY 2.5 trillion. The riskier currently $50 million Class 2 tranche will cover losses from JPY 1.2 trillion up to JLY 1.5 trillion. Both tranches feature a JPY 270 billion franchise deductible, we’re told.
The $200 million of Class 1 notes have an initial annualised attachment probability of 0.56%, an expected loss of 0.48% and are being offered to cat bond investors with pricing guidance of 2% to 2.2%, which is a little lower than the pricing of the 2016 Nakama Re Class 1 notes that cover a similar risk layer.
The $50 million of Class 2 notes have an attachment probability of 1.79%, an expected loss of 1.44% and are being offered with spread guidance of 3% to 3.25%, which is again lower than their 2016 equivalent, the Nakama Re 2016 Class 2 notes.
As a result the multiples are lower than the previous Nakama Re transaction and once completed it looks like this new deal will offer the most efficient pricing of any Zenkyoren catastrophe bond to date.
It will be interesting to see whether the deal upsizes, which if the execution points towards pricing on guidance, there is a good chance it will. Investor appetite will be interesting to watch on this one, given the diversification it offers to investor portfolios at a time of high appetite for new risks.
The three-year aggregate earthquake coverage these cat bonds provide to Zenkyoren dovetail well into the mutual insurers reinsurance program, diversifying its sources of risk capital and allowing it to benefit from capital market efficiencies.