Pricing has now been finalised for Japanese insurance and reinsurance giant Sompo’s new $400 million sized Sakura Re Ltd. (Series 2021-1) catastrophe bond transaction, with both tranches of notes seeing their coupon fixed at the mid-point of guidance or lower.
Sompo returned to the catastrophe bond market for the first time in four years recently, with its first multi-peril catastrophe bond deal to provide the company with a source of multi-peril and also multi-region, first and second-event catastrophe reinsurance protection.
The offering size doubled from an initial $200 million, as Sompo looked to increase the amount of capital markets protection it receives from the notes, likely as a reaction to a positive response from cat bond investors.
Sompo will benefit from $400 million of Japanese and US multi-peril catastrophe reinsurance protection as soon as the Sakura Re Ltd. transaction is settled and comes on-risk.
While the pricing has now been fixed and at levels which reflect the middle of initial spread guidance or better, this Sakura Re cat bond actually includes the first tranche of notes issued in 2021 so far that has priced above the bottom of guidance.
So, with the deal now fixed, here’s how the two tranches of indemnity reinsurance cat bonds look.
Sakura Re Ltd. will issue a $200 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 remaining after a first loss, they will also cover Sompo for losses from US earthquakes on a second-event basis.
The $200 million of Class A notes, which have an initial expected loss of 0.99%, were first offered to cat bond funds and investors with spread guidance of 2.5% to 3%. As we explained in our last update, that pricing range was lowered to 2.25% to 2.5% and at final pricing we understand the coupon was fixed at the low-end of 2.25%.
Sakura Re Ltd. will also issue a $200 million tranche of Series 2021-1 Class B notes that are exposed to US earthquakes on a first-event basis and, if limit is remaining after a loss, will also cover certain Japanese typhoon and flood losses for Sompo on a second-event basis.
The $200 million of Class B notes are a little riskier, with an initial expected loss of 1.17% and were first offered to cat bond funds and investors with spread guidance of 3.75% to 4.25%. As we explained, this price guidance was reduced and fixed at the mid-point of 4%, which is where the coupon was finalised.
As a result, the Class B tranche of notes is the first 144a property cat bond tranche to be issued in 2021 where pricing settled at the middle of initial guidance, with all the others settling below the mid-point and many of these dropped below the bottom of the initial spread guidance range.
That reflects cat bond investors demands for a slightly higher rate of return, on certain risks and structures, demonstrating that this year is not all about price declines.
In fact, while almost all property catastrophe bond tranches have priced down in 2021 so far, the indication is, that on a multiple-at-market basis returns still remain up on last year.
For Sompo, this first visit to the catastrophe bond market in four years has clearly been a success, with the sponsor electing to double the size of the deal and its reinsurance protection from it, while still achieving attractive pricing on both tranches, especially in the current market environment.