The first ever parametric solely wildfire exposed catastrophe bond to hit the market, the $50 million Power Protective Re Ltd. (Series 2020-1) transaction being sponsored on behalf of a municipal water utility operating in the Los Angeles area, has seen its pricing move up by around 9% before it closed.
The Power Protective Re catastrophe bond hit the market at the beginning of November, becoming the first cat bond issuance covering any peril designed to benefit a municipal utility with insurance protection.
It’s also the first ever parametric wildfire catastrophe bond, thanks to a trigger constructed around the fire extent and reconstruction cost values falling within it.
The Los Angeles Department of Water and Power (LADWP) is the ultimate beneficiary of the insurance coverage and the largest municipal utility operating in the United States.
The municipal utility entered the catastrophe bond market to secure insurance coverage against wildfire risks in the region of California where it operates, as its infrastructure is exposed to wildfires.
The insurance protection is delivered to the utility through an agreement with a protected cell of Aon’s Vermont-based White Rock cell captive vehicle.
While global reinsurance firm Hannover Re provides reinsurance for the risks White Rock assumes and interfaces with the capital markets on the ultimate cedents behalf, fronting the wildfire risks for the LA municipal water utility via a retrocessional reinsurance agreement with newly formed special purpose insurer (SPI) named Power Protective Re Ltd.
Power Protective Re Ltd. was aiming to issue a single $50 million tranche of Series 2020-1 notes, which have now been sold to cat bond investors and the proceeds will be used to collateralize the retro reinsurance agreement with Hannover Re.
As a result, the coverage capitalised by the cat bond issuance is cascaded back to the municipal water utility with the assistance of Hannover Re and the White Rock vehicle, enabling the Los Angeles Department of Water and Power (LADWP) to benefit from the capital markets appetite for catastrophe insurance risk.
The transaction remained at $50 million in size, but the pricing rose during the marketing of the notes to investors.
Having taken losses from California wildfire risks in recent years and with wildfires an increasing driver of insurance and reinsurance market losses, catastrophe bond market investors are demanding higher returns for covering the risk.
There’s also an element of climate risk awareness when it comes to wildfire exposure, as investors are generally attuned to the fact climate related factors may be driving more wildfire impacts in recent years.
The cat bond is parametric in nature, with a novel trigger construction based on reconstruction cost values within a wildfire perimeter using data from EQECAT’s RCV database for wildfire risk. It features a stepped payout mechanism, being able to payout 35%, 70% or 100% of its principal depending on the severity of the wildfire event.
While the term of coverage will be three years, with maturity slated for December 8th 2023.
The $50 million of notes issued by Power Protective Re come with two modelled expected loss numbers, of 0.63% annualised for average fire risk and 0.74% when modelled on a high fire risk basis.
These notes were at first offered to cat bond investors with coupon price guidance in a range from 9.5% to 10.25%.
But we’re now told that the pricing moved higher, by almost 9% and the notes eventually priced to offer investors a coupon of 10.75%.
As a result, the multiple at market is significant with this catastrophe bond, which is to be expected with a parametric wildfire cat bond, the first ever of this nature.
Positively, this Power Protective Re cat bond shows an effective way for the ILS market to support municipalities disaster risk financing needs, with the cascading of the coverage via a rented captive cell an efficient way that a municipal entity can access the capital markets for insurance.