Swiss Re Insurance-Linked Fund Management

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SD Re Ltd. (Series 2018-1)

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

  • Issuer: SD Re Ltd. (Series 2018-1)
  • Cedent / sponsor: Sempra Energy
  • 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: $125m
  • Trigger type: Indemnity
  • Ratings: NR
  • Date of issue: Oct 2018

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

This new SD Re 2018-1 catastrophe bond becomes the second such transaction to cover pure wildfire risks. The beneficiary of the coverage is Sempra Energy, an electricity utility provider, and certain subsidiaries of the company. It’s a very similar transaction to the recent Cal Phoenix Re cat bond, for PG&E Corporation.

With the transaction, Sempra Energy is seeking a $125 million or greater source of California wildfire insurance from the capital markets, with Hannover Re acting as the ceding reinsurance firm for the transaction.

Like the Cal Phoenix Re cat bond, the SD Re Ltd. transaction will cover the beneficiary against losses it suffers due to wildfires that have been caused by its own infrastructure. As a result the coverage should be considered wildfire property liability protection for Sempra.

In the SD Re Ltd. transaction, the wildfire property liability risk is being ceded using Energy Insurance Services, Inc., a subsidiary of Energy Insurance Mutual (of which Sempra Energy is a member) as the reinsured party and reinsurance firm Hannover Re as the ceding reinsurer. Energy Insurance Services then provides the capital markets backed insurance protection to Sempra.

As a result, this new SD Re Ltd. (Series 2018-1) catastrophe bond is an indemnity trigger arrangement, with the sale of the $125 million or more notes issued by SD Re Ltd. set to collateralize the retrocessional reinsurance agreement between SD Re Ltd. and Hannover Re, which in turn provides the reinsurance protection to Energy Insurance Mutual, which then insures the Sempra Energy wildfire property liability risk.

So, Sempra Energy’s corporate risk exposure to wildfires that its own infrastructure, facilities, operations or equipment could cause, travels through multiple layers of insurance, reinsurance and retrocession to the capital markets, allowing for an indemnity coverage arrangement to be put in place for Sempra, backed by the efficiency of ILS market capacity.

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

Bermuda special purpose insurance vehicle SD Re Ltd. will aim to sell at least $125 million tranche of Series 2018-1 notes to investors, with the proceeds providing the capital to back the risk transfer for Sempra Energy.

The SD Re Ltd. wildfire cat bond will afford Sempra Energy a three-year source of insurance protection against property damages caused by wildfires in the state of California,on a third-party wildfire liability basis, so the damage caused by wildfires for which Sempra is liable.

As with the previous Cal Phoenix Re cat bond for PG&E, this cat bond also features litigation risks related to the third-party wildfire related property damages, which are categorised under loss adjustment expenses.

SD Re, as issuer, will issue the notes to be sold to ILS funds and ILS investors, with the proceeds providing the collateral to back a three-year annual aggregate and indemnity reinsurance arrangement with Hannover Re, the ceding reinsurer, and the coverage cascading back via Energy Insurance Services as the reinsured, to Sempra Energy as the insured party.

The cover is for California wildfires that are caused by or due to infrastructure, facilities and operations owned by or of the insured Sempra Energy.

We’re told that the currently $125 million tranche of Series 2018-1 notes to be issued by SD Re will have an initial attachment point of $1.325 billion and cover losses up to $1.465 billion, with a $50m franchise deductible per event. While that’s a $140 million layer, it seems Sempra will retain the difference between the $125 million of notes and the layer size.

According to our sources, that equates to a modelled initial attachment probability of 0.21%, an initial expected loss of 0.21% and we the notes to be issued by SD Re are being offered to investors with coupon pricing guidance of 3.5% to 4.5%.

As with the Cal Phoenix cat bond this is a significant multiple, likely to ensure investors feel well-compensated for taking on potential unknowns and third-party liability with this catastrophe bond, including the litigation risk that will be included under loss adjustment expenses.

Update 1:

The SD Re Ltd. catastrophe bond did not upsize, remaining at $125 million as was expected due to Sempra Energy’s retention of the additional risk in the covered layer.

The coupon settled at the mid-point of initial guidance, at 4%.

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