Nakama Re Ltd. (Series 2015-1)

For this cat bond, we understand that Zenkyoren’s Bermuda domiciled special purpose insurance vehicle Nakama Re Ltd. will issue two tranches of Series 2015-1 notes to cat bond investors, to collateralize two reinsurance agreements between itself and Zenkyoren.

Both tranches of notes will be exposed to losses from earthquakes in Japan, covering damage and losses caused by shaking, tidal wave, fire following, flood and sprinklers, across Japan and its islands. The cat bond will feature an indemnity trigger for both tranches.

Nakame Re Ltd. will issue a Class 1 tranche of notes, which has a preliminary size of $100 million and will provide Zenkyoren with per-occurrence reinsurance protection across five risk periods over a five-year term.

A Class 2 tranche of notes, also sized at $100 million currently, is structured to provide its protection on a three-year aggregate basis, across each of three overlapping risk periods, over a five-year term in total.

The tranches are similar in structure to Zenkyoren’s last catastrophe bond, Nakama Re Ltd. (Series 2014-2), except in that deal the per-occurrence tranche covered a four-year term, so this deal sees Zenkyoren looking for five years of reinsurance protection from each tranche.

We’re told the Series 2015-1 Class 1 tranche of per-occurrence notes to be issued by Nakama Re will have an initial attachment probability of 1.31% and an expected loss of 1.16%. The notes will attach at JPY 1.4 trillion and cover losses up to JPY 1.6 trillion. This $100 million tranche are being offered to investors with coupon guidance of 2.75% to 2.875%.

The $100 million Series 2015-1 Class 2 tranche of notes are the three-year aggregate tranche and have an attachment probability of 2.81% across the first three-year risk period, 0.94% on a yearly basis. This tranche has an initial expected loss of 2.59% over a three-year period, 0.86% annually. Losses will be covered from JPY 1.7 trillion up to JPY 1.85 trillion, after a franchise deductible of JPY 270 billion. This tranche is being marketed with price guidance of 2.875% to 3.25%.

The attachment levels of both tranches in this cat bond are lower than the 2014-2 Nakama Re issuance, making it more risky, but still these are remote risks which would only be triggered by very major earthquake events striking Japan, at which point you’d expect significant impact to insurance, reinsurance and cat bonds anyway.

The price guidance looks relatively aligned with the 2014-2 transaction as well, with multiples in the range of that cat bond from last December.

Update 1:

This cat bond upsized by 50% to $300m while marketing, thanks to investor demand.

The Class 1 tranche remains at $100 million in size, sources told Artemis, but the pricing has moved to the top end of initial guidance at the same time. This tranche launched with coupon guidance of 2.75% to 2.875%. It is now being offered at the top-end at 2.875%.

Meanwhile the Nakama Re 2015-1 Class 2 tranche of notes has doubled in size, to $200 million. The pricing on these notes has also hardened and moved to the top of the initial range, which was 2.875% to 3.25%, to now offer investors a coupon at 3.25%.

The Class 1 tranche, with pricing likely at a coupon of 2.875%, will now provide a multiple of 2.48 times the initial expected loss of 1.16% to investors. The Class 2 tranche, if it prices at the 3.25% coupon, would provide investors a multiple of 3.78 times the annualised expected loss of 0.86%. Investors are clearly being compensated for the multi-year aggregate structure of this tranche, which could go some way to explaining the upsizing.