SD Re Ltd. (Series 2021-1)

This is the third SD Re Ltd. catastrophe bond to be issued for electrical utility Sempra Energy.

It sees the electrical utility returning to the insurance-linked securities (ILS) market for an expanded slice of California wildfire insurance protection.

Like Sempra’s previous two SD Re cat bond deals, the transaction will provide the utility with an efficient source of insurance capital to support certain third-party California wildfire property liability claims, on an indemnity basis.

SD Re Ltd. will issue the two tranches of notes that will be sold to investors, entering into a collateralised retrocessional reinsurance arrangement with Hannover Re, which will then in turn provide reinsurance to Energy Insurance Services, Inc., a subsidiary of Energy Insurance Mutual (of which Sempra is a member), which ultimately provides the capital markets backed insurance protection to the utility.

We’re told that the SD Re 2021-1 cat bond is targeting at least $180 million of protection for Sempra Energy, but one tranche is only going to be issued if the first, lower layer, is fully subscribed to.

The protection features an indemnity trigger and is structured on an annual aggregate basis and will run for three years, to October 2024.

The Class A tranche, which is the less risky, targets at least $45 million of protection, up to $135 million we understand, but this layer won’t be offered unless the riskier Class B layer beneath is fully-subscribed to, we’re told.

The Class B layer is targeted as a $135 million issuance, with no chance to upsize as the Class A notes would attach above it.

So it looks like the minimum size of this cat bond issuance will be the $135 million Class B layer, but if the Class A layer is also issued at its minimum size then the issuance would overall hit $180 million, or if the Class A notes see higher investor demand it could reach to as large as $270 million overall.

Market conditions and investor appetite will define just how successful this issuance is in reaching those targets.

The Class A notes would attach at $1.36 billion of losses to Sempra and have an expected loss of 1.33% at an average hazard level and minimum layer size, 1.64% at a high hazard level with maximum layer size, and are being offered to cat bond investors with price guidance in a range from 8.5% to 9%.

The Class B notes would attach at $1.21 billion of losses and have an expected loss of 1.56% at an average hazard level, 1.85% at a high hazard level, and are being offered to cat bond investors with price guidance in a range from 9% to 9.5%.

There is a franchise deductible of $50m per event for each layer of coverage.

Update 1:

Sources told us this catastrophe bond is likely to achieve its minimum target size, of $180 million, but no more.

The Class A tranche is expected to settle at the minimum target of $45 million in size, with pricing at the mid-point of 8.75%.

The Class B tranche is expected to settle at the minimum target of $135 million in size, with pricing at the mid-point of 9.25%.