Power Protective Re Ltd. (Series 2021-1)

Power Protective Re 2021-1 is the second wildfire catastrophe bond issuance to benefit the Los Angeles Department of Water and Power (LADWP), the largest municipal utility operating in the United States.

The Los Angeles Department of Water and Power (LADWP) entered the catastrophe bond market in search of wildfire insurance protection for the first time in 2020, with a successful $50 million Power Protective Re Ltd. (Series 2020-1) transaction.

That first Power Protective Re cat bond was a parametric structure, with a novel trigger based on reconstruction cost values within a wildfire perimeter.

This second Power Protective Re 2021-1 wildfire catastrophe bond sees the LADWP switching its coverage to be on an indemnity trigger basis.

With this second cat bond, the municipal utility is clearly 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 can also ignite wildfires, so there is an element of wildfire property liability protection embedded in this cat bond deal as well.

A covered event can be a wildfire related loss to the LADWP’s infrastructure and equipment and also losses to the LADWP where the utility is deemed liable for a wildfire.

Like the first Power Protective Re catastrophe bond, the LADWP will benefit from its insurance through an agreement with a protected cell of Aon’s Vermont-based White Rock cell captive vehicle, we’re told

The White Rock protected cell will insure the LADWP, while the cell will then be reinsured by global reinsurance company Hannover Re, the same as the first transaction.

Hannover Re will reinsure the wildfire risks for White Rock and theen interface with the capital markets vehicle, fronting the wildfire risks for the LA utility via a retrocessional reinsurance agreement with special purpose insurer (SPI) named Power Protective Re Ltd.

Power Protective Re Ltd. will issue a single tranche of Series 2021-1 Class A notes that will be sold to investors and the proceeds then used to collateralize the retrocessional reinsurance agreement, enabling the risk to flow from LADWP to the capital market investors.

At this time we do not know the size of this transaction, or proposed size, but we’d anticipate it being at least as big as the first LADWP cat bond, which was $50 million in size.

The notes will cover wildfire losses across the state of California for the LADWP, on an indemnity and per-occurrence basis, across a three-year term.

We understand that the notes would attach at $125 million of losses to the LADWP and cover a share up to an exhaustion point of $275 million. That suggests the maximum size of this cat bond would be $150 million, to cover the entire layer of the insurance tower.

The Series 2021-1 cat bond notes issued by Power Protective Re will have a modelled expected loss of 0.64%, on an average fire hazard basis, or 0.76% on a high fire hazard basis, we’re told.

The coupon looks high, for such a level of expected loss, with the unsized tranche of notes being marketed with a coupon range of 10.75% to 12%, sources said.

Update 1:

According to our sources, the marketing of this new wildfire cat bond has been challenging, given the season is ongoing in California.

We’re told that the issuance has been delayed, with the deal set to now complete in October.

At the same time, we’re told to expect that this Power Protective Re 2021-1 catastrophe bond will be relatively small in size.

The price guidance has been lifted considerably, we understand, with the notes now offered with a coupon of 15%, a sizeable uplift from the initial guidance and a reflection of ILS investors appetite to be paid commensurate with the risks they are taking on.

Update 2:

At final pricing the Power Protective Re 2021-1 catastrophe bond was fixed as a $30 million in size issuance and the notes were priced at the raised guidance level, with a coupon of 15%.