JAPAN QUAKE REINSURER HEDGES INVESTMENTS AGAINST QUAKE IMPACT

Japan Earthquake Reinsurance (JER) has invested in a newly developed debt security that will protect against a depreciation of its assets in the event of a major earthquake in the Tokyo area, reports Nihon Keizai Shimbun . JER invests about 40% of its assets in Japanese government bonds. However, it fears a positive correlation between a major earthquake in Japan, which would result in payments to primary insurers coinciding with a drop in the value of those bonds. As a result it has developed a new security in association with Goldman Sachs, under which bondholders will have the equivalent amount of 10-year government bonds redeemed at face value within 20 business days if an earthquake of 6.9 or more hits anywhere in Tokyo or the three adjacent prefectures of Kanagawa, Saitama and Chiba. Goldman Sachs will issue the bond, which will have a lower yield than the standard 10-year government bond. The report claimed that JER had bought ¥5bn of the bond in July and plans to invest a total of ¥20bn before the end of the year. JER and the Japanese government offer earthquake back-up to the country’s primary insurers. JER cedes part of the portfolio back to the original insurers, plus excess of loss business to Toa Re. The rest of the portfolio is guaranteed by the government under an excess of loss agreement with JER.