The Los Angeles Department of Water and Power (LADWP) has returned to the catastrophe bond market in search of its second cat bond to provide it with wildfire insurance protection, with an as yet unsized Power Protective Re Ltd. (Series 2021-1) being offered to insurance-linked securities (ILS) funds and investors.
The Los Angeles Department of Water and Power (LADWP) is the largest municipal utility operating in the United States and serves more than four million residents.
The utility has been in operation since 1902 to supply water to homeowners and businesses in Los Angeles and the surrounding communities, also supplying electricity to them since 1917.
The LADWP benefits from a $50 million Power Protective Re Ltd. (Series 2020-1) catastrophe bond transaction that was successfully issued on its behalf last year.
That first issuance for the LADWP was the first ever parametric wildfire catastrophe bond.
But, interestingly, for its second visit to the ILS market in search of wildfire insurance protection, the LADWP’s new Power Protective Re cat bond will feature an indemnity trigger.
With this second cat bond, the municipal utility is clearly seeking to secure catastrophe insurance coverage against wildfire risks in the region of California where it operates, as its infrastructure is exposed to wildfires. But its infrastructure can also ignite wildfires, so there is an element of wildfire property liability protection embedded in this cat bond deal as well.
A covered event can be a wildfire related loss to the LADWP’s infrastructure and equipment and also losses to the LADWP where the utility is deemed liable for a wildfire.
Like the first Power Protective Re catastrophe bond, the LADWP will benefit from its insurance through an agreement with a protected cell of Aon’s Vermont-based White Rock cell captive vehicle, we’re told
The White Rock protected cell will insure the LADWP, while the cell will then be reinsured by global reinsurance company Hannover Re, the same as the first transaction.
Hannover Re will reinsure the wildfire risks for White Rock and theen interface with the capital markets vehicle, fronting the wildfire risks for the LA utility via a retrocessional reinsurance agreement with special purpose insurer (SPI) named Power Protective Re Ltd.
Power Protective Re Ltd. will issue a single tranche of Series 2021-1 Class A notes that will be sold to investors and the proceeds then used to collateralize the retrocessional reinsurance agreement, enabling the risk to flow from LADWP to the capital market investors.
At this time we do not know the size of this transaction, or proposed size, but we’d anticipate it being at least as big as the first LADWP cat bond, which was $50 million in size.
The notes will cover wildfire losses across the state of California for the LADWP, on an indemnity and per-occurrence basis, across a three-year term.
We understand that the notes would attach at $125 million of losses to the LADWP and cover a share up to an exhaustion point of $275 million. That suggests the maximum size of this cat bond would be $150 million, to cover the entire layer of the insurance tower.
The Series 2021-1 cat bond notes issued by Power Protective Re will have a modelled expected loss of 0.64%, on an average fire hazard basis, or 0.76% on a high fire hazard basis, we’re told.
The coupon looks high, for such a level of expected loss, with the unsized tranche of notes being marketed with a coupon range of 10.75% to 12%, sources said.
Wildfire property liability insurance is particularly costly in California after the recent severe wildfire years.
2021 is already another damaging wildfire season in California, with months still to run. So it’s no surprise this new wildfire cat bond comes with a particularly high multiple.
It may be that the LADWP cannot secure the traditional insurance and reinsurance market support for its protection needs at a reasonable pricing level, but the capital markets can.
It will be interesting to see how this cat bond settles and if it completes successfully this could encourage other utilities to look to the catastrophe bond market in 2021. For example SoCal Edison, who as we explained recently has just been approved to try the cat bond market for insurance protection if it wants to.