123 Lights Re Ltd. (Series 2025-1)

This 123 Lights Re Ltd. Series 2025-1 issuance will be the third catastrophe bond issuance to benefit the Los Angeles Department of Water and Power (LADWP), the largest municipal utility operating in the United States.

Like its previous catastrophe bonds, the 123 Lights Re issuance is designed to provide the Los Angeles Department of Water and Power (LADWP) with a multi-year source of California wildfire insurance protection from the capital markets.

The Los Angeles Department of Water and Power (LADWP) provides its services to millions of residents and has been in operation since 1902, supplying water to homeowners and businesses in Los Angeles and the surrounding communities, also supplying electricity since 1917.

As with its previous cat bonds, the municipal utility is again looking to secure catastrophe insurance for wildfire risks in the region of California where it operates, as its infrastructure is exposed to wildfires.

As we highlighted with its previous deals, the LADWP’s infrastructure could also ignite wildfires, so we assume there is an element of wildfire liability protection as one of the driving motives for this third visit to the cat bond market.

Like it’s previous cat bonds, the utility will source its capital markets backed insurance through arrangements with a White Rock captive cell and with global reinsurance company Hannover Re.

The utility will source insurance through an agreement with a protected cell of Aon’s Vermont-based White Rock cell captive vehicle, while Hannover Re will reinsure the risks for White Rock and interface with the capital markets, fronting the wildfire risks for the LA municipal utility via a retrocessional reinsurance agreement with a newly formed Bermuda based company named 123 Lights Ltd. we are told.

123 Lights Re Ltd. will issue a single tranche of Series 2025-1 notes, with a target to secure between $100 million and $150 million of protection.

These notes will be sold to cat bond investors and the proceeds used to collateralize the retro agreement with Hannover Re, with the coverage then cascading through the reinsurance agreement with the White Rock cell and back to the LADWP via an insurance agreement.

The notes will ultimately provide the LADWP with per-occurrence coverage on a county-weighted industry loss index basis for wildfire events in the state of California over a roughly three year term until the end of August 2028, sources said.

Given the utility has varying degrees of exposure by region of California, using a trigger mechanism calibrated to counties and weighted based on exposure to each is likely a cleaner way to provide more targeted protection for the LADWP, while keeping the notes exposed only where LADWP infrastructure exists.

The other benefit of using an insurance industry loss index, in this case from PCS we understand, is that it means insured losses must have occurred for an event to qualify and begin accumulating index points.

As we said, 123 Lights Re Ltd. will issue a single tranche of Series 2025-1 Class A cat bond notes, with a target to secure between $100 million and $150 million of protection for the LADWP.

We’re told the notes come with an initial modelled attachment point of 2.76%, an initial modelled expected loss of 2.02% and that they are being offered to cat bond investors with price guidance for an initial risk interest spread of between 11% and 12%.

Update 1:

We’re told that the target size for this 123 Lights Re Ltd. Series 2025-1 catastrophe bond for the LA DWP has been revised to just $100 million, while at the same time the price guidance has been updated at the low-end of guidance, at 11%.

This suggests the sponsor is prioritising cost of coverage over size at this stage.

Update 2:

We understand that the Los Angeles Department of Water and Power (LADWP) secured the $100 million target for wildfire insurance protection from this 123 Lights Re Ltd. Series 2025-1 catastrophe bond.

The Class A notes were priced to pay investors a spread of 11%, so at the low-end of the initial guidance range.