Regular catastrophe bond sponsor Zenkyoren has returned to the ILS market looking for at least $250 million of three-year aggregate reinsurance protection against Japanese earthquake risks, through a Nakama Re Ltd. (Series 2016-1) issuance.
Nakama Re 2016-1 is the second three-year aggregate Japanese earthquake cat bond, after Zenkyoren’s Nakama Re 2015 deal brought a single tranche of three-year aggregate Japanese quake linked notes to the capital markets.
That tranche saw pricing rise during market, so it will be intriguing to see how this new transaction is received by investors. The three-year aggregate nature of the deal’s trigger, means that losses could accumulate across three calendar years towards the attachment point.
Artemis understands from investor sources that Zenkyoren, the Japanese National Mutual Insurance Federation of Agricultural Cooperatives to give its full name, is seeking to sponsor the issuance of two tranches of notes through its Nakama Re Ltd. special purpose reinsurance vehicle.
Proceeds from the sale of the two Series 2016-1 tranches issued by Nakama Re would be used to collateralise reinsurance agreements to provide protection to Zenkyoren for losses caused by earthquakes hitting Japan. The coverage will also include earthquake induced tsunami, fire, flood and sprinkler related water damage, we’re told.)
A $200m Class 1 tranche and a $50m Class 2 tranche of cat bond notes are currently slated to be issued by Nakama Re, with both exposed to earthquakes and providing protection on a three-year aggregate and indemnity trigger basis.
The Class 1 tranche would cover losses from JPY 2.15 trillion and cover losses up to JPY 2.5 trillion, while the Class 2 notes would cover a riskier layer, attaching at JPY 1.2 trillion and covering losses to JPY 1.5 trillion. Both tranches have JPY 270 billion franchise deductible.
The less risky $200m of Class 1 notes have an annualised expected loss of 0.49% and are being offered to investors with coupon price guidance of 2.2% to 2.5%, while the Class 2 have an annualised expected loss of 1.47% and price guidance of 3.25% to 3.5%, we’re told.
In terms of multiples, the riskier tranche has a much lower multiple than last year’s three-year aggregate issue, while the larger lower risk tranche has a higher multiple. Hence it looks like Zenkyoren is ready to compensate investors for supporting its reinsurance needs, as was seen from the 2015 Nakama Re cat bond transaction.
We understand that Aon Securities is acting as sole structuring agent and bookrunner for the Nakama Re 2016-1 cat bond issuance and that AIR Worldwide is providing risk modelling expertise.
These three-year aggregate covers make a lot of sense for the ceding re/insurer, providing reinsurance akin to many traditional market protections. If well structured to be palatable to investors and compensate them for the risk they are taking on, they will likely become a more widely used feature of the cat bond market.
However, aggregate reinsurance coverages are also a feature increasingly seen in the ILS sector during this soft market and it will be interesting to see where the pricing settles for this one and how strong investor appetite is for each of the two tranches offered.