Power Protective Re Ltd. (Series 2020-1)

Power Protective Re 2020-1 is the first wildfire catastrophe bond issuance to benefit a municipal utility.

The Los Angeles Department of Water and Power (LADWP) is the largest municipal utility operating in the United States.

The Los Angeles Department of Water and Power (LADWP) serves more than four million residents and has been in operation since 1902 to supply water to homeowners and businesses in Los Angeles and the surrounding communities, also supplying electricity since 1917.

The municipal utility is seeking to secure catastrophe insurance coverage against wildfire risks in the region of California where it operates, as its infrastructure is exposed to wildfires. But its infrastructure could also ignite wildfires, so presumably there is an element of wildfire liability protection as one of the driving motives for this visit to the capital markets.

The municipal utility is seeking to secure catastrophe insurance coverage against wildfire risks in the region of California where it operates, as its infrastructure is exposed to wildfires.

But its infrastructure could also ignite wildfires, so presumably there is an element of wildfire liability protection as one of the driving motives for this visit to the capital markets.

The utility will get its insurance through an agreement with a protected cell of Aon’s Vermont-based White Rock cell captive vehicle, we understand.

Global reinsurance firm Hannover Re will reinsure the risks for White Rock and is set to interface with the capital markets, fronting the wildfire risks for the LA municipal water and electricity utility via a retrocessional reinsurance agreement with newly formed special purpose insurer (SPI) named Power Protective Re Ltd. we understand.

Power Protective Re Ltd. will issue a single tranche of Series 2020-1 notes, targeting $50 million of protection, which will be sold to cat bond investors and the proceeds used to collateralize the retro agreement with Hannover Re.

Hence, the coverage capitalised by the cat bond issuance is cascaded back to the municipal water and electricity utility with the assistance of Hannover Re and the White Rock vehicle, enabling the Los Angeles Department of Water and Power (LADWP) to benefit from the capital markets appetite for catastrophe insurance risk.

The notes will cover wildfire risk in a covered area within a region of California where the utility operates.

Coverage is on a parametric trigger basis, with a novel trigger construction based on reconstruction cost values within a wildfire perimeter, using data from EQECAT’s RCV database for wildfire risk.

We understand that the cat bond will feature a stepped payout mechanism attached to this parametric trigger, being able to payout 35%, 70% or 100% of its principal depending on the severity of the wildfire event.

The term of coverage will be three years, with maturity slated for December 8th 2023, we’re told.

The risk has been modelled using two scenarios for wildfire risk, an average level of fire risk and a high level, which is to factor in drier years where California wildfire risk can be elevated.

As a result, the notes come with two modelled expected loss numbers, we understand, of 0.63% annualised for average fire risk and 0.74% when modelled on a high fire risk basis.

With a parametric trigger based on a specific covered area of California and able to be activated by covered events burn perimeter’s impacting a certain level of reconstruction cost values from the EQECAT database, it seems like this structure is one that investors should be able to analyse themselves and make informed assumptions regarding the pricing they would need to assume this risk in catastrophe bond form.

The currently $50 million of notes to be issued by Power Protective Re Ltd. are being offered to cat bond investors with coupon price guidance in a range from 9.5% to 10.25%, we understand.

Update 1:

This first Power Protective Re catastrophe bond remained at $50 million in size for its sponsor.

The pricing moved up considerably during marketing and settled a whole half a percent higher than the top-end of guidance, at 10.75%.