The Long and Short
A liquidity discount in ENH reinsurance bonds
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
Bonds originally issued by reinsurer Endurance (ENH: A3/A-), later acquired by Japanese conglomerate Sompo Holdings, look attractive against the broad property and casualty sector. The remaining issue, originally issued as 30-year debt in 2004, trades with a big liquidity discount as its stands just below index-eligibility with roughly $295 million outstanding. The bonds trade wide to ‘A’ or higher P&C peers in the 10-year part of the curve. More than eight years after acquisition, Sompo International has been fully assimilated Endurance into its large, highly diversified balance sheet.
Sompo International has been a subsidiary of the Sompo Holdings since its purchase of Endurance Specialty Holdings Ltd in 2017. The parent company is one of Japan’s three largest non-life insurance conglomerates. Explicit and implicit support to the subsidiary is considered “core” by the rating agencies, elevated from its initial level of “strategic,” which puts them in-line with parent Sompo’s support of domestic P&C operating company Sompo Japan Insurance, Inc. Ratings of Sompo International are likely capped as ratings of the parent are unlikely to surpass Japan sovereign debt rating ‘A1/A+’.
The legacy bonds are the only outstanding issue associated with the Bermuda-based operations of Sompo Holdings. They maintain ‘A1/A+’ insurance financial strength ratings at the operating companies, while the ‘A3/A-‘ unsecured rating of the debt is effectively backstopped by explicit and implicit support from the Sompo parent. They receive one notch rating uplift from the rating agencies. There have been previous attempts to tender for these notes with the last one coming in June 2019, so they could potentially be a target for early redemption at some point in the future prior to scheduled maturity, which could come at an attractive premium to market valuation.
Exhibit 1. ENH vs Reinsurance Credit Curve (full investment grade peer group)
Source: Santander US Capital Markets LLC, Bloomberg/TRACE g-spread indications
While Sompo International primarily operates in North America via Bermuda, the company has diversified through additional international exposure explicit to ENH and not just parent Sompo. Since 2017, it has expanded operations in Turkey, Brazil, Indonesia, Singapore, Hong Kong, Thailand and the Philippines. By total premiums they are about 49% North America, 29% in AgriSompo (multi-peril crop insurance, MPCI, also mostly North America) and 22% in global markets outside of North America.
Exhibit 2. ENH attractively valued versus broad P&C sector (A-rated and higher only)
Source: Santander US Capital Markets LLC, Bloomberg/TRACE G-spread indications
For Sompo International, the breakdown of insurance operations is about 65% insurance, 29% reinsurance, and 6% consumer. There is tail-risk inherent to both the P&C and reinsurance coverage and related catastrophe losses – casualty, catastrophe, property and specialty. The company maintains emphasis on specialty lines including agriculture, professional lines, property, marine, energy, casualty and other specialty lines of insurance.
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