Zenkyoren (the Japanese National Mutual Insurance Federation of Agricultural Cooperatives), which is one of the world’s largest buyers of reinsurance protection, has returned to the insurance-linked securities (ILS) market with Nakama Re Ltd. (Series 2020-1), seeking another slice of catastrophe bond backed coverage from the capital markets.
Zenkyoren has been steadily filling out an increasing share of its reinsurance tower using the capital markets and catastrophe bonds, with currently three different series of notes still in-force, from its 2015, 2016 and 2018 issuances.
But with $200 million of cat bond backed reinsurance coverage having matured last week and another $300 million slated for maturity in early 2021, Zenkyoren has returned to cat bonds to refill some of its reinsurance protection using insurance-linked securities (ILS) market sources.
For its latest catastrophe bond deal, Zenkyoren is again seeking a three-year aggregate, indemnity triggered source of Japanese earthquake reinsurance protection, as has been seen in its recent cat bonds, with the coverage set to run across almost five years to the end of 2024 resulting in three annual aggregate risk periods, each three-years in length, that overlap.
Special purpose insurer Nakama Re Ltd. is set to issue a single tranche of Series 2020-1 cat bond notes that will be sold to capital market investors and ILS funds, with the proceeds used to collateralize a reinsurance agreement between Nakama Re and Zenkyoren.
This cat bond transaction has come to market seeking to secure at least $150 million of Japanese earthquake reinsurance protection for Zenkyoren, but there is a good chance the issuance gets upsized if ILS investors have the appetite to support it, as Zenkyoren’s previous cat bonds issuances have tended to do and given the maturities the sponsor is set to see.
The mooted $150 million of Series 2020-1 Class 1 notes to be issued by Nakama Re Ltd. will be exposed to losses from Japanese earthquakes, including losses from related perils such as tsunami’s, flooding and sprinkler leakage, we understand.
We’re told that the notes are designed to sit in a high layer of Zenkyoren’s catastrophe reinsurance tower, alongside some of the coverage from the 2016 and 2018 Nakama Re catastrophe bonds.
Being high up the risk is relatively remote, with the three-year expected loss 1.43% initially and the annualised version just 0.48%, while the notes would attach once Zenkyoren’s aggregate losses under the reinsurance reached JPY 2.15 trillion (around US $19.5bn).
The layer covered is wide at almost US $3.2 billion, providing plenty of opportunity for upsizing should the economics of this catastrophe bond coverage prove attractive to the sponsor. There is a franchise deductible per-event of JPY 270 billion (around US $2.45bn).
We understand that the $150 million or greater of Nakama Re 2020-1 Class 1 notes will be offered to cat bond investors with a narrow range of 2% to 2.2%, sources said.
These notes will sit exactly alongside the $500 million of Class 1 notes from the most recent Nakama Re Ltd. (Series 2018-1) catastrophe bond, which were eventually priced at 2%, so it will be interesting to see where this fresh issuance settles.
It will be interesting to see where the Nakama Re 2020 cat bond prices and whether it is upsize. Investor appetite for this deal will be interesting to watch, given the diversification the earthquake peril can offer to investor portfolios at a time of reasonably high issuance.
The three-year aggregate earthquake reinsurance protection that these cat bonds provide to Zenkyoren sit well alongside its giant traditional program, diversifying its sources of risk capital and allowing it to benefit from capital market efficiencies.