Cal Phoenix Re wildfire cat bond may upsize, but at 20% higher pricing


The Cal Phoenix Re Ltd. (Series 2018-1) catastrophe bond transaction, which is the first pure wildfire exposed deal that will benefit California focused electrical utility PG&E Corporation (the Pacific Gas and Electric Company), may increase in size slightly, but at the same time the proposed coupon has risen 20%.

The cat bond will afford PG&E with three years of insurance protection against property damages caused by wildfires in the state of California, covering third-party wildfire liability, so the damages to property caused by wildfires for which PG&E is liable.

The underlying risk is being ceded via Energy Insurance Mutual (of which PG&E is a member) as the insured party, which is in turn provided with reinsurance by Tokio Millennium Re AG.

The proceeds of the sale of a single tranche of notes issued by Cal Phoenix Re Ltd. will collateralize a retrocessional reinsurance agreement with Tokio Millennium Re, which in turn will reinsure Energy Insurance Mutual, which then insures the PG&E Corporation wildfire related risk.

At launch the Bermuda special purpose insurer Cal Phoenix Re Ltd. was aiming to sell a $200 million tranche of Series 2018-1 notes to investors, with the proceeds providing the capital to back the reinsurance risk transfer to protect PG&E.

Now, we’re told that the targeted size for the single tranche has been lifted, to between the initial $200 million to as much as $225 million of notes, so a slight upsizing of the transaction.

So the transaction now may provide PG&E with up to $225 million of insurance protection across a a three-year term, covering third-party wildfire liability for property damages caused by wildfires in the state of California, so the damages caused by wildfires for which PG&E is liable.

As a result, this is the first catastrophe bond to provide a corporate cedant (PG&E) with risk transfer that includes loss adjustment expenses such as certain litigation risks related to the third-party wildfire related property damages.

Being a new type of risk for ILS investors to assume, the transaction seems to have been met with a demand for higher pricing than had originally been proposed.

The now up to $225 million tranche of Series 2018-1 notes to be issued by Cal Phoenix Re, which have an initial expected loss of 1.01%, were originally offered to investors with coupon guidance of 6% to 6.5%.

But after seeking investor feedback it appears the coupon has risen and we’re told that the notes are now being offered with a coupon priced at a higher level of 7.5%.

That’s quite a jump in pricing, 20% higher than the initial guidance mid-point, but understandable given the novel nature of the risks involved and the fact this is the first time ILS investors and ILS funds are being asked to back this type of third-party wildfire liability reinsurance risk.

It is rare for a coupon to jump quite this much during the marketing phase, but it signals ILS investors being prudent in demanding a return they feel is commensurate for the reinsurance related risks they are being invited to collateralize.

You can read all about the Cal Phoenix Re Ltd. (Series 2018-1) transaction and every other catastrophe bond transaction in the Artemis Deal Directory and we will update you as the deal moves towards completion, which is slated for the beginning of August.

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