Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

SD Re Ltd. California wildfire cat bond to price at middle of guidance


The SD Re Ltd. (Series 2018-1) catastrophe bond transaction, which will be the second California wildfire cat bond covering third-party liability costs, has not grown in size while being marketed, remaining at $125 million while the pricing is expected to settle today at the middle of initial guidance.

The SD Re cat bond will benefit electrical utility firm Sempra Energy and subsidiaries, providing them with a source of efficient insurance capital to back their third-party California wildfire property liability risks.

The deal is very similar to the recent Cal Phoenix Re Ltd. (Series 2018-1) catastrophe bond, which set a first for the market being the first to provide pure California wildfire protection and on a third-party liability basis.

The SD Re Ltd. cat bond is the latest to bring a new corporate energy client to the ILS market in search of efficient risk transfer coverage, as the ILS market continues to look to expanded definitions as one way to bring new sponsors to market.

The SD Re Ltd. cat bond transaction launched with Sempra Energy seeking a $125 million source of California wildfire insurance from the capital markets, with Hannover Re acting as the ceding reinsurance firm to facilitate this access to risk capital.

The transaction has not increased in size, which is not surprising as the sale of the $125 million of notes issued by SD Re Ltd. covers a layer of risk from $1.325 billion of losses up to $1.465 billion for Sempra Energy, with a $50m franchise deductible per event. While that’s a $140 million layer, we understand Sempra had planned to retain the difference between the $125 million of notes and the layer size.

SD Re Ltd. will issue the $125 million of notes that will 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.

As a result, Sempra Energy will benefit from $125 million of capital markets backed insurance protection against losses due to California wildfires which were caused by or due to the firms infrastructure, facilities and operations, helping the firm finance any claims that come through during wildfire season, should a blaze be sparked any assets that Sempra Energy owns.

The notes that SD Re will issue have an initial modelled expected loss of 0.21% and were initially offered to investors with coupon pricing guidance of 3.5% to 4.5%.

We’re told that the price guidance has now been fixed at the mid-point of that range, with the notes set to pay their investors a coupon of 4%.

We will continue to update you as the SD Re Ltd. (Series 2018-1) wildfire property liability catastrophe bond comes to market and you can read about this and every other catastrophe bond in the Artemis Deal Directory.

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