Overview

Sompo Japan, the Japanese insurance arm of Sompo Holdings, has successfully obtained $150 million in reinsurance coverage through its latest catastrophe bond issuance, Sakura Re Ltd. (Series 2025-1). This move marks a significant step for the company as it aims to bolster its defenses against the rising risks of typhoons and floods in Japan.

Market Execution

Despite not increasing the original amount of protection offered, the bond's pricing was ultimately finalized at the low end of the initial guidance, signaling a favorable execution for Sompo Japan in a competitive market. This latest issuance comes as the company re-enters the catastrophe bond market for the first time since 2021, when it acquired $400 million in reinsurance through the inaugural Sakura Re 2021-1 catastrophe bond. That bond, set to mature shortly, provided crucial coverage against catastrophic events in Japan and the United States.

Portfolio Expansion

In December 2022, Sompo’s International division further expanded its portfolio by launching Sakura Re 2022-1, which secured an additional $150 million in US and Canada storm and earthquake reinsurance.

Strategic Importance

The latest Sakura Re issuance is particularly pertinent as it aims to replace the expiring coverage under the 2021 bond, showcasing Sompo Japan’s continued strategy to secure robust protection for its clients amid increasing climate-related risks. However, it is noteworthy that the catastrophe bond market still constitutes a small fraction of the overall reinsurance protection that Sompo Japan requires.

Market Conditions

Market analysts have pointed out that the appetite for catastrophe bonds may be limited, primarily due to narrow spreads from Japanese remote-risk diversifiers compared to other global investment opportunities. Traditional reinsurance pricing for Japanese catastrophes remains competitive, which impacts the appeal of catastrophe bonds.

Investment Appeal

Nevertheless, this move to diversify its reinsurance strategy is crucial, especially as many catastrophe bond funds seek varying assets to balance their portfolios. The confirmation of a $150 million tranche of Series 2025-1 Class A notes by Bermuda-based Sakura Re Ltd. means Sompo Japan will now receive four years of reinsurance coverage against typhoons and floods in Japan, effective from April 1st.

Coverage Details

Under this agreement, the notes will indemnify losses within a specific range of Sompo Japan’s reinsurance tower, activating at approximately JPY 500 billion and fully exhausting at JPY 600 billion. With an anticipated initial loss set at 1.58%, the notes were offered to investors with an attractive pricing range of 2.75% to 3%. Ultimately, the finalized pricing stands at 2.75%, reflecting strong investor interest.

Conclusion

With a market multiple of 1.7 times the expected loss, the new Sakura Re 2025-1 notes may seem modest compared to previous bond issuances. However, they still play an essential role in strengthening Sompo Japan's financial resilience amid evolving environmental challenges. As the frequency of natural disasters continues to rise, the importance of innovative financial instruments like catastrophe bonds becomes increasingly significant for insurers seeking to mitigate their risks effectively.