Swiss Re Insurance-Linked Fund Management

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SD Re Ltd. (Series 2020-1)

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SD Re Ltd. (Series 2020-1) – At a glance:

  • Issuer: SD Re Ltd.
  • Cedent / sponsor: Sempra Energy
  • Placement / structuring agent/s: GC Securities is sole structuring agent and lead bookrunner
  • Risk modelling / calculation agents etc: EQECAT Inc.
  • Risks / perils covered: California wildfire
  • Size: $90m
  • Trigger type: Indemnity
  • Ratings: NR
  • Date of issue: Jul 2020

SD Re Ltd. (Series 2020-1) – Full details:

This is the second catastrophe bond to be issued for electrical utility Sempra Energy.

The SD Re Ltd. (Series 2020-1) catastrophe bond will benefit electrical utility firm Sempra Energy and its subsidiaries, providing them with a source of efficient insurance capital to support certain third-party California wildfire property liability claims.

For launch, we’re told that the SD Re 2020-1 cat bond is only seeking $75 million of additional coverage for Sempra Energy and given the diversifying nature of California wildfire risks there is every chance investor demand is sufficient to help the utility expand the size of the transaction.

These SD Re cat bonds are also a good example of how the insurance-linked securities (ILS) market can bring corporate insurance clients coverage, with the support of a fronting partner which in this case is German reinsurance firm Hannover Re.

Hannover Re will act as the ceding reinsurance firm, facilitating Sempra Energy’s access to risk capital from the ILS market.

The transaction will provide Sempra Energy with coverage against certain financial losses it suffers due to wildfires that have been caused by its own infrastructure or facilities, so effectively third-party wildfire property liability insurance protection.

So, SD Re Ltd. will sell the currently $75 million of notes to investors, entering into a collateralised retrocessional reinsurance arrangement with Hannover Re, who will then in turn providing reinsurance to Energy Insurance Services, Inc., a subsidiary of Energy Insurance Mutual (of which Sempra Energy is a member), who ultimately provides the capital markets backed insurance protection to Sempra Energy.

The protection provided by the SD Re 2020-1 cat bond notes will use an indemnity trigger and be on an annual aggregate basis, after a $50 million franchise deductible we’re told. Coverage is for wildfire losses across California and over a three-year period and includes related perils that could be caused by any wildfire and result in third-party damages, such as mudslides.

We understand that the single tranche of Series 2020-1 notes being issued by Sempra Energy will cover a $100 million layer of Sempra’s insurance tower, attaching at $1 billion of losses.

These will sit lower down than the SD Re 2018 cat bond notes, which attached at $1.325 billion at launch.

The currently $75 million of notes will have an initial expected loss of 1.52% at an average hazard level, 1.8% at a high hazard level, and are being offered to cat bond investors with price guidance in a range from 9.5% to 10%.

Update 1:

We’re now told the SD Re 2020-1 cat bond is likely to upsize by 20% to $90 million, as investor demand looks set to be sufficient to help the utility expand the size of the transaction.

The price guidance for the notes has been narrowed towards the upper-end, with the notes offered at 9.75% to 10%.

Update 2:

Sempra Energy successfully secured its second catastrophe bond at the upsized target of $90m, while the notes priced inside the upper-end of original guidance at 9.75%.

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