Sempra Energy seeks $75m SD Re 2020-1 cat bond to top up wildfire insurance

Electrical utility Sempra Energy has returned to the catastrophe bond market with a $75 million SD Re Ltd. (Series 2020-1) transaction, as it seeks to extend the California wildfire insurance protection it receives from capital markets investors.

This is the second wildfire catastrophe bond to be issued for Sempra Energy, following the $125 million SD Re Ltd. (Series 2018-1) cat bond transaction that was issued in 2018 and remains in-force until October 2021.

The SD Re Ltd. (Series 2020-1) catastrophe bond will benefit electrical utility firm Sempra Energy and its subsidiaries, providing them with an expanded source of efficient insurance capital to support certain third-party California wildfire property liability claims.

For launch, we’re told that the SD Re 2020-1 cat bond is only seeking $75 million of additional coverage for Sempra Energy and given the diversifying nature of California wildfire risks there is every chance investor demand is sufficient to help the utility expand the size of the transaction.

These SD Re cat bonds are also a good example of how the insurance-linked securities (ILS) market can bring corporate insurance clients coverage, with the support of a fronting partner which in this case is German reinsurance firm Hannover Re.

Hannover Re will act as the ceding reinsurance firm, facilitating Sempra Energy’s access to risk capital from the ILS market.

The transaction will provide Sempra Energy with coverage against certain financial losses it suffers due to wildfires that have been caused by its own infrastructure or facilities, so effectively third-party wildfire property liability insurance protection.

So, SD Re Ltd. will sell the currently $75 million of notes to investors, entering into a collateralised retrocessional reinsurance arrangement with Hannover Re, who will then in turn providing reinsurance to Energy Insurance Services, Inc., a subsidiary of Energy Insurance Mutual (of which Sempra Energy is a member), who ultimately provides the capital markets backed insurance protection to Sempra Energy.

The protection provided by the SD Re 2020-1 cat bond notes will use an indemnity trigger and be on an annual aggregate basis, after a $50 million franchise deductible we’re told. Coverage is for wildfire losses across California and over a three-year period and includes related perils that could be caused by any wildfire and result in third-party damages, such as mudslides.

We understand that the single tranche of Series 2020-1 notes being issued by Sempra Energy will cover a $100 million layer of Sempra’s insurance tower, attaching at $1 billion of losses.

These will sit lower down than the SD Re 2018 cat bond notes, which attached at $1.325 billion at launch.

The currently $75 million of notes will have an initial expected loss of 1.52% at an average hazard level, 1.8% at a high hazard level, and are being offered to cat bond investors with price guidance in a range from 9.5% to 10%, sources said.

As with previous catastrophe bonds covering California wildfire property liability, this is a significant multiple, likely to ensure investors feel well-compensated for taking on potential unknowns and third-party liability with this catastrophe bond, including the litigation risk that will be included under loss adjustment expenses.

It’s encouraging to see this wildfire property liability cat bond being re-issued and before the first deal from Sempra Energy has matured.

It suggests that Sempra sees the capital markets as a viable source of complementary insurance or reinsurance capital, to support its wildfire property insurance needs.

We will update you as the SD Re Ltd. (Series 2020-1) comes to market and you can read about this and every other catastrophe bond in the Artemis Deal Directory.