Japanese insurance and reinsurance giant Sompo has returned to the catastrophe bond market to sponsor its first issuance in four years, as it seeks a $200 million source of Japanese and US multi-peril catastrophe reinsurance with a Sakura Re Ltd. (Series 2021-1) deal.
Sompo has sponsored a number of catastrophe bonds in the past, with three Aozora Re cat bonds issued in 2014, 2016 and 2017, all providing the insurer with a capital markets backed and multi-year source of reinsurance protection.
Now, the carrier returns with its first multi-peril catastrophe bond deal and its an innovative structure that will provide the globally active insurer with a source of multi-peril and also multi-region, first and second-event catastrophe reinsurance protection.
A new Bermuda based special purpose insurer named Sakura Re Ltd. has been registered recently for the purposes of issuing catastrophe bond programs and notes for Sompo, with this set to be its first issuance.
We’re told that Sompo Japan Insurance is the ceding company, but that this new catastrophe bond will also cover losses under its affiliates, including the Bermuda based underwriting unit Sompo International.
However, sitting between Sompo and the SPI Sakura Re Ltd. is Aon’s protected cell company White Rock Insurance, which will act as a ceding reinsurance entity for the purposes of this catastrophe bond.
Sakura Re Ltd. will look to issue two tranches of Series 2021-1 notes, that will be sold to cat bond investors and the proceeds used to collateralize reinsurance agreements to provide Sompo with the coverage.
We assume White Rock Insurance will enter into retrocession agreements with Sakura Re, while also entering into reinsurance agreements with Sompo Japan Insurance.
Both tranches of notes will provide their catastrophe reinsurance to Sompo across a four-year term and on an indemnity trigger and per-occurrence basis, we’re told.
However, the mechanics of the coverage is a little less typical, but functionally will enable Sompo to benefit from multi-peril and multi-regional reinsurance protection.
Sakura Re will issue a $100 million tranche of Series 2021-1 Class A notes that are exposed to Japanese typhoons and floods on a first-event basis and if limit is left would also cover US earthquakes on a second-event basis.
The $100 million of Class A notes will have an initial expected loss of 0.99% and are being offered to cat bond funds and investors with spread guidance of 2.5% to 3%, we understand.
Sakura Re will also issue a $100 million tranche of Series 2021-1 Class B notes, but in this case they will be that are exposed to US earthquakes on a first-event basis and if limit is left would also cover Japanese typhoons and floods on a second-event basis.
The $100 million of Class B notes are a bit riskier and will have an initial expected loss of 1.17%, with the notes offered to cat bond funds and investors with spread guidance of 3.75% to 4.25%.
It’s an interesting way of structuring the coverage, but makes sense from a practical point of view, as this Sakura Re catastrophe bond will be able to cover Sompo’s peak international risks, in a very flexible manner with this approach to securing reinsurance.