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Cal Phoenix Re Ltd. (Series 2018-1)

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Cal Phoenix Re Ltd. (Series 2018-1) – At a glance:

  • Issuer: Cal Phoenix Re Ltd. (Series 2018-1)
  • Cedent / sponsor: PG&E Corporation
  • Placement / structuring agent/s: GC Securities is sole structuring agent and lead bookrunner
  • Risk modelling / calculation agents etc: AIR Worldwide
  • Risks / perils covered: California wildfire
  • Size: $200m
  • Trigger type: Indemnity
  • Ratings: NR
  • Date of issue: Aug 2018

Cal Phoenix Re Ltd. (Series 2018-1) – Full details:

This new Cal Phoenix Re 2018-1 catastrophe bond is the first to cover pure wildfire risks. The sponsor is also a first to the market, being PG&E Corporation an electrical utility provider.

With the transaction, PG&E Corporation (the Pacific Gas and Electric Company) is seeking a $200 million or greater source of California wildfire insurance from the capital markets, helped by ceding reinsurance firm Tokio Millennium Re.

Being a corporate beneficiary of a property catastrophe bond exposed solely to California wildfire risks you might have thought that the PG&E cat bond would feature a parametric trigger, but it doesn’t as the risk is being ceded via Energy Insurance Mutual (of which PG&E is a member) as the insured and reinsurance firm Tokio Millennium Re AG.

Because of that layering of risk transfer the new Cal Phoenix Re Ltd. (Series 2018-1) catastrophe bond is an indemnity arrangement, with the sale of the notes issued by Cal Phoenix Re Ltd. set to collateralize the retrocessional reinsurance agreement with Tokio Millennium Re, which in turn provides the reinsurance protection to Energy Insurance Mutual, which then insures the PG&E Corporation risk.

It’s an interesting way to see the corporate risk of PG&E cascade through multiple layers of insurance, reinsurance and retrocession to the capital markets, allowing for an indemnity coverage arrangement to be put in place, backed by the efficiency of ILS capacity.

Bermuda special purpose insurer Cal Phoenix Re Ltd. will aim to sell a $200 million tranche of Series 2018-1 notes to investors, with the proceeds providing the capital to back the risk transfer for PG&E.

The cat bond will ultimately provide PG&E with a three-year source of insurance protection against property damages caused by wildfires in the state of California, but interestingly this appears to be third-party wildfire liability so the damage caused by wildfires for which PG&E is liable.

This seems to be a first in the catastrophe bond market, providing PG&E with a way to transfer a significant risk to its business to the capital markets.

It also appears that under loss adjustment expenses will be included certain litigation risks related to the third-party wildfire related property damages, which again appears to be a first in the cat bond marketplace.

The insured Energy Insurance Mutual Limited, actually its subsidiary Energy Insurance Services, Inc., is a provider of third-party liability insurance coverage to energy utility and related companies.

It appears that this new Cal Phoenix Re cat bond is a direct response to the recent severe California wildfire season, which had seen PG&E threatened with liability cases, according to news reports.

Cal Phoenix Re, as issuer, will issue the notes to be sold to ILS funds and ILS investors, with the proceeds backing a three-year annual aggregate and indemnity reinsurance arrangement with Tokio Millennium Re, the reinsured, although the coverage cascades back to PG&E.

The cover is for California wildfires that are caused by or due to infrastructure owned by the insured PG&E.

We’re told that the currently $200 million tranche of Series 2018-1 notes to be issued by Cal Phoenix Re will have an initial attachment point of $1.25 billion and cover a $500 million layer from there upwards, with a franchise deductible per event.

That equates to a modelled initial attachment probability of 1.35%, an initial expected loss of 1.01% and we understand that the notes are being offered to investors with coupon guidance of 6% to 6.5%.

That’s a significant multiple, which could be to ensure investors feel compensated for taking on potential unknowns with this catastrophe bond, such as the litigation risk that could be included under loss adjustment expenses.

Update 1:

The Cal Phoenix Re catastrophe bond looks set to increase in size to as much as $225 million, while the pricing has been lifted to 20% higher than the original mid-point at 7.5%.

Update 2:

The Cal Phoenix Re catastrophe bond did not upsize in the end, instead settling to provide PG&E with $200 million of protection through what is now the first corporate cat bond featuring an indemnity trigger, the first cat bond to provide protection solely against wildfire risks, and also the first cat bond to cover third-party liabilities of a corporate (rather than a re/insurer).

Update, May 16th 2019:

Investigators from the California Department of Forestry and Fire Protection (Cal Fire) have deemed the cause of the devastating Camp wildfire of 2018 to be electrical transmission lines owned and operated by Pacific Gas and Electricity (PG&E).

As a result the expectation is that the Cal Phoenix Re cat bond will be a total loss, paying out in full to PG&E as part of a reinsurance recovery made under the terms of its third-party property liability tower.

The notes have been considered at severe risk for some months now, with the notes having been marked down at first by brokers back in November 2018 right after the Camp wildfire occurred.

Hence cat bond investment funds had already largely accounted for a full loss from this cat bond.

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