Electrical utility Sempra Energy is back in the catastrophe bond market with what will be its third issuance and this time it is seeking a larger, perhaps $180 million or bigger, SD Re Ltd. (Series 2021-1) transaction.
Sempra, a North American energy infrastructure company based in San Diego, California, first came to the insurance-linked securities (ILS) market in 2018, sponsoring a $125 million SD Re Ltd. (Series 2018-1) catastrophe bond transaction that is due to mature this month, in October 2021.
Sempra then returned around the middle of 2020 and secured a $90 million SD Re Ltd. (Series 2020-1) cat bond, that expanded its capital market backed source of California wildfire insurance protection.
Now, the utility is back in the market we understand, seeking a larger cat bond issuance, with two tranches of Series 2021-1 notes to be issued by its SD Re Ltd. special purpose insurer (SPI).
As with the other two SD Re catastrophe bonds, Sempra is again using a mutual insurer to cede the wildfire risk to and global reinsurance firm Hannover Re will front or interface with the capital markets vehicle.
Hannover Re will act as the ceding reinsurance firm, facilitating Sempra Energy’s access to risk capital from the ILS marke again.
As with the other SD Re cat bonds, Sempra Energy is looking to secure more insurance protection against certain financial losses it could suffer due to wildfires that have been caused by its own infrastructure or facilities in California, so effectively third-party wildfire property liability insurance protection, 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 over $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 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, 1.64% at a high hazard level, 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 $1.2 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%.
The insurance coverage from this cat bond will be on an indemnity basis for Sempra and we’re told cover a three-year term.
As we’ve explained before, the way these SD Re cat bonds are structured, with the coverage cascading from the capital markets, via a reinsurance firm, to a mutual insurer and back to a corporate sponsor, are a good example of how large corporates can access the ILS market for insurance protection.
It will be interesting to see how investor demand is for this new catastrophe bond exposed to California wildfire risks.
The recently priced Power Protective Re 2021-1 cat bond only managed to secure a sliver of coverage compared to its original target, but that deal covered both the third-party liability aspects of a utilities wildfire exposure as well as providing it with pure property damage insurance cover as well.
Given this is only covering damages due to wildfires that Sempra is deemed liable for its infrastructure causing, its reception by cat bond funds and investors may be a little different.
The riskier, lower layer of this new SD Re 2021-1 cat bond would sit at a similar level in Sempra’s insurance tower to its 2020-1 issuance.
The notes issued in last year’s SD Re deal had a high-hazard expected loss of 1.8% and priced with a coupon of 9.75%.
With this years SD Re cat bond notes lower layer having a high-hazard expected loss of 1.85%, but price guidance of 9% to 9.5%, we’d expect to see the pricing settle towards the upper-end or even higher than that range, based on how wildfire risk has been pricing lately.
However large this cat bond ends up being, it seems Sempra will look to at least replace the maturing 2018 cat bond.