Electrical utility Sempra Energy looks set to secure its third slice of catastrophe bond backed wildfire insurance protection at the minimum targeted issuance size of $180 million, while pricing for its new SD Re Ltd. (Series 2021-1) transaction is on-track to settle at the mid-point of guidance.
Sempra Enery returned to the catastrophe bond market earlier this month aiming to secure $180 million or more of wildfire property liability protection from the capital markets through this new SD Re 2021-1 catastrophe bond.
As we explained in our previous article, Sempra had some minimum size terms for this deal, wanting to secure at least a $135 million riskier Class B layer of protection before the Class A notes would be guaranteed to be offered to investors.
Investor appetite has now met that minimum, but no more we understand, with the Class B tranche set to secure that level of coverage for Sempra.
At the same time, the minimum target size for the less risky Class A layer was $45 million and we understand that also looks set to be achieved, so the new SD Re 2021-1 catastrophe bond should provide the electrical utility with the minimum $180 million of coverage it wanted.
The good news is that this will more than replace Sempra Energy’s $125 million SD Re Ltd. (Series 2018-1) catastrophe bond transaction that is due to mature this month, in October 2021.
To summarise the deal, Sempra Energy is targeting 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.
As with the other two SD Re catastrophe bonds, Sempra is using a mutual insurer to cede the wildfire risk to, while Hannover Re will act as the ceding reinsurance firm, facilitating Sempra Energy’s access to risk capital from the ILS market.
So Bermuda based special purpose insurer SD Re Ltd. will issue two tranches of notes that will be sold to investors, simultaneously 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.
As a result, the way the 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.
As we said, both tranches of notes are set to secure their minimum size targets, $135 million for the lower down Class B layer and $45 million for the Class A notes.
The $45 million of Class A notes can 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.
The Class A notes were first offered to cat bond investors with price guidance in a range from 8.5% to 9%, but we’re told this is now fixed at the mid-point of 8.75%.
The $135 million of Class B notes can 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.
This tranche of notes were first offered to cat bond investors with price guidance in a range from 9% to 9.5%, but we’re now told pricing is expected to settle at the mid-point of guidance again, at 9.25%.
For comparison, the notes issued in the SD Re 2020 wildfire cat bond deal had a high-hazard expected loss of 1.8% and priced with a coupon of 9.75%, so a multiple-at-market of 5.4 times the expected loss (EL).
This new SD Re 2021-1 cat bond has multiples of 5.3 times EL for the Class A notes and 5 times EL for the riskier Class B notes, so on a risk-adjusted basis it looks like this new cat bond has priced a little more attractively for Sempra Energy.
It’s worth noting though that the SD Re 2020 wildfire cat bond was marketed to investors during June 2020, so right in the middle of COVID and at a time when capital costs were high in institutional markets.
Since then catastrophe bond rates have come down a little, so it’s perhaps a reflection of this that the multiples are slightly lower.
That said, wildfire insurance pricing continues to rise and we’re told by some cat bond fund sources that they chose not to invest in this issuance because they deem the pricing too low for the risk to be assumed.
Whatever your view on pricing, this looks like a successful third visit to the cat bond market for Sempra Energy, securing its largest issuance and at pricing a little lower than the prior year issuance.
We don’t expect the pricing to change now, as sources tell us it is locked in for issue later this week at this size and with these coupons. But should anything change we’ll update you.