Zenkyoren, the Japanese National Mutual Insurance Federation of Agricultural Cooperatives and one of the world’s largest buyers of catastrophe reinsurance protection, is back in the insurance-linked securities (ILS) market, targeting a $500 million Nakama Re Pte. Ltd. (Series 2021-1) catastrophe bond issuance to transfer more of its earthquake exposure to the capital markets.
This will be the twelfth catastrophe bond directly sponsored by Zenkyoren that we have listed in our extensive Deal Directory.
This is also set to be one of the largest cat bonds sponsored by Zenkyoren, as the mutual insurer is targeting at least $500 million of multi-year reinsurance protection across the two tranches of Japanese earthquake risk linked notes that will be issued and sold to investors.
For its latest catastrophe bond issuance, Zenkyoren has followed a number of other Japanese sponsors in electing to use a Singapore domiciles special purpose reinsurance vehicle (SPRV) as the issuer, we understand from sources.
Nakama Re Pte. Ltd. has been registered in Singapore and will seek to issue and sell two tranches of Series 2021-1 notes to cat bond funds and investors.
The two tranche issuance is set to secure Zenkyoren at least $500 million of multi-year Japanese earthquake reinsurance protection.
The $700 million Nakama Re Ltd. (Series 2016-1) cat bond is scheduled for maturity in October, so it would not be surprising to see this 2021-1 issuance upsizing to at least replace that coverage, as long as cat bond market pricing is deemed competitive with other sources of reinsurance.
Each of the tranches of Series 2021-1 notes will be sold to investors and the proceeds used to collateralise underlying reinsurance agreements between the SPRV issuer, Nakama Re Pte. Ltd., and the National Mutual Insurance Federation of Agricultural Cooperatives, or Zenkyoren as it is better known in the reinsurance market.
As with its other recent catastrophe bond deals, Zenkyoren is again seeking protection on a three-year aggregate, indemnity triggered basis, to cover it against Japanese earthquake risks.
The coverage set to run across almost five years to October 2026, with three annual aggregate risk periods, each three-years in length, that overlap across the term.
The targeted $500 million or more of Series 2021-1 notes to be issued by Nakama Re Pte. Ltd. will be exposed to losses from Japanese earthquakes, including losses from shake and related perils including tsunami’s, fire, flooding and sprinkler leakage, we’re told.
It’s said that a Class 1 tranche of notes will sit in a high layer of Zenkyoren’s catastrophe reinsurance tower, alongside some of the coverage from the 2016, 2018 and 2020 Nakama Re catastrophe bond deals.
A Class 2 tranche will sit much lower down in the reinsurance tower, alongside 2018 and 2016 vintage Nakama Re cat bond notes, so will be a riskier investment layer.
Nakama Re Pte. Ltd. will seek to issue an at least $400 million Series 2021-1 Class 1 tranche of notes, that will have an initial three-year attachment probability of 2.32%, or 0.77% on an annualised basis and a three-year expected loss of 2.2%, or 0.73% annualised.
The attachment point for the Class 1 notes is roughly US $19.6 billion and the exhaustion point is roughly US $22.8 billion.
The Class 1 layer, which are the less risky tranche, are being marketed to cat bond investors with price guidance in a range from 1.75% to 2.2%, we are told.
Meanwhile, the $100 million Class 2 tranche of Series 2021-1 notes will have an initial three-year attachment probability of 4.26%, or 1.42% on an annualised basis and a three-year expected loss of 3.77%, or 1.26% annualised.
The attachment point for the Class 2 notes is roughly US $11 billion and the exhaustion point is roughly US $13.7 billion.
The Class 2 notes are offered to cat bond investors with price guidance in a range from 2.5% to 3%, we understand.
Both tranches feature a franchise deductible per-event of around US $2.46 billion.
It will be interesting to watch how investors respond to this latest cat bond to hit the market, given the diversification that the earthquake peril can offer to investor portfolios and the fact it is coming to market during a quieter period of the year for issuance, but when fund managers have plenty of capital to put to work from maturities and inflows earlier in the year.
For Zenkyoren, the three-year aggregate earthquake reinsurance protection it will secure from these cat bonds will complement its reinsurance tower, sitting well alongside its giant traditional program, diversifying its sources of risk capital and allowing it to benefit from capital market efficiencies as well.