Zenkyoren returns with Nakama Re 2015-1 Japan quake cat bond


Zenkyoren, or the Japanese National Mutual Insurance Federation of Agricultural Cooperatives, is back in the capital markets looking for at least $200 million of reinsurance protection from a Japanese earthquake catastrophe bond issue, Nakama Re Ltd. (Series 2015-1).

As the largest single buyer of catastrophe reinsurance protection globally, Zenkyoren has become a familiar sponsor in the catastrophe bond market, with typically one or more issue each year.

This is the Japanese mutual insurance groups fourth deal through Nakama Re Ltd. since 2013, but its first cat bond of 2015 and again sees Zenkyoren pushing the envelope a little in terms of length and structure of the reinsurance coverage it wants to receive, according to sources.

For this cat bond, we understand that Zenkyoren’s Bermuda domiciled special purpose insurance vehicle Nakama Re Ltd. will issue two tranches of Series 2015-1 notes to cat bond investors, to collateralize two reinsurance agreements between itself and Zenkyoren.

Both tranches of notes will be exposed to losses from earthquakes in Japan, covering damage and losses caused by shaking, tidal wave, fire following, flood and sprinklers, across Japan and its islands. The cat bond will feature an indemnity trigger for both tranches.

Nakame Re Ltd. will issue a Class 1 tranche of notes, which has a preliminary size of $100 million and will provide Zenkyoren with per-occurrence reinsurance protection across five risk periods over a five-year term.

A Class 2 tranche of notes, also sized at $100 million currently, is structured to provide its protection on a three-year aggregate basis, across each of three overlapping risk periods, over a five-year term in total.

The tranches are similar in structure to Zenkyoren’s last catastrophe bond, Nakama Re Ltd. (Series 2014-2), except in that deal the per-occurrence tranche covered a four-year term, so this deal sees Zenkyoren looking for five years of reinsurance protection from each tranche.

We’re told the Series 2015-1 Class 1 tranche of per-occurrence notes to be issued by Nakama Re will have an initial attachment probability of 1.31% and an expected loss of 1.16%. The notes will attach at JPY 1.4 trillion and cover losses up to JPY 1.6 trillion. This $100 million tranche are being offered to investors with coupon guidance of 2.75% to 2.875%.

The $100 million Series 2015-1 Class 2 tranche of notes are the three-year aggregate tranche and have an attachment probability of 2.81% across the first three-year risk period, 0.94% on a yearly basis. This tranche has an initial expected loss of 2.59% over a three-year period, 0.86% annually. Losses will be covered from JPY 1.7 trillion up to JPY 1.85 trillion, after a franchise deductible of JPY 270 billion. This tranche is being marketed with price guidance of 2.875% to 3.25%.

The attachment levels of both tranches in this cat bond are lower than the 2014-2 Nakama Re issuance, making it more risky, but still these are remote risks which would only be triggered by very major earthquake events striking Japan, at which point you’d expect significant impact to insurance, reinsurance and cat bonds anyway.

The price guidance looks relatively aligned with the 2014-2 transaction as well, with multiples in the range of that cat bond from last December.

For investors this cat bond offers another chance to acquire some diversification, which should mean support is abundant from both ILS fund managers and direct investors in cat bonds.

Aon Securities is sole structuring agent and bookrunner for this transaction, while AIR Worldwide is providing the risk modelling services.

We’re told that historical modelling showed that the 2011 Tohoku earthquake event would not have caused a loss from this cat bond, demonstrating just how remote the risk is. It would take a major quake much nearer to Tokyo or another major city to create a trigger event it seems.

Interestingly, once this cat bond is completed Zenkyoren will benefit from some catastrophe bond protection covering a percentage of losses from JPY 1.4 trillion right up to JPY 2.15 trillion, which demonstrates the major role that ILS and the capital markets are set to play in Zenkyoren’s reinsurance program.

We’ll update you as Zenkyoren’s new Nakama Re Ltd. (Series 2015-1) catastrophe bond comes to market. The deal is set to complete and issue before the end of December, with the first risk period beginning on 1st January 2016.

You can read about this and every other catastrophe bond sponsored by Zenkyoren in the Artemis Deal Directory.

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