The latest catastrophe bond to be sponsored by Zenkyoren (the Japanese National Mutual Insurance Federation of Agricultural Cooperatives), one of the world’s largest reinsurance buyers, looks set to upsize by 33% to provide the insurer $200 million of protection, but pricing has been fixed at the top-end of guidance.
Zenkyoren returned to the insurance-linked securities (ILS) market just over a week ago with a $150 million Nakama Re Ltd. (Series 2020-1), seeking another slice of catastrophe bond backed reinsurance coverage from the capital markets.
The mutual has been filling its reinsurance tower with cat bond coverage from the capital markets in recent years, with currently three different series of notes still in-force, from its 2015, 2016 and 2018 issuances.
$200 million of its cat bond backed reinsurance coverage having matured earlier in January and it now looks like Zenkyoren will successfully replace all of that, as the Nakama Re 2020-1 cat bond is set to upsize.
We understand that the issuance will now be 33% larger in size, as Nakama Re Ltd. will issue a $200 million tranche of Series 2020-1 notes to provide Zenkyoren with an expanded source of three-year aggregate, indemnity triggered Japanese earthquake reinsurance protection.
The $200 million tranche 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.
The notes will sit high in Zenkyoren’s reinsurance tower, with the initial three-year expected loss being 1.43% and the annualised version 0.48%, while the notes will only attach and face losses once Zenkyoren’s aggregate losses under the reinsurance reached JPY 2.15 trillion (around US $19.5bn).
The Nakama Re 2020-1 Class 1 notes were at first offered to cat bond investors with a narrow pricing range of 2% to 2.2%.
We now understand that the upsized $200 million of notes are likely to price at the higher end of that range, offering cat bond investors a coupon of 2.2%.
As we explained in our previous article on this cat bond deal, the 2020-1 notes will sit alongside the $500 million of Class 1 notes from Zenkyoren’s most recent Nakama Re Ltd. (Series 2018-1) catastrophe bond.
Those 2018 cat bond notes were priced at 2%, so seeing the 2020 issuance price above that is perhaps a reflection of ILS investor demand for a slightly higher multiple on new issues.
It could also reflect the fact that Japanese reinsurance markets have faced significant losses in the last few years, and for a pure earthquake exposure to price up is perhaps a sign of just how much pressure the Japanese renewals in April may face.
This three-year aggregate structured earthquake reinsurance from the Nakama Re cat bonds provides Zenkyoren with coverage that sits neatly against its giant traditional program, diversifying its sources of risk capital and allowing it to benefit from capital market efficiencies.