Sempra Energy’s SD Re 2020-1 wildfire cat bond may upsize to $90m

Electrical utility Sempra Energy is seeking to upsize its second catastrophe bond, with the SD Re Ltd. (Series 2020-1) transaction now targeting a $90 million source of California wildfire insurance protection from the capital markets for the company.

Sempra Energy returned to the catastrophe bond market in June, with an SD Re Ltd. (Series 2020-1) transaction that sought to provide the company and its subsidiaries, with $75 million of efficient insurance capital to support certain third-party California wildfire property liability claims.

We’re now told the SD Re 2020-1 cat bond is likely to upsize by 20% to $90 million, as investor demand looks set to be sufficient to help the utility expand the size of the transaction.

The SD Re cat bond is an example of how the insurance-linked securities (ILS) market can bring corporate insurance clients more direct capital markets 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 and its investors.

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.

SD Re will sell the now targeted at $90 million tranche of notes to investors, using the capital to entering into a collateralised retrocessional reinsurance arrangement with Hannover Re, who in turn provides reinsurance to Energy Insurance Services, Inc., a subsidiary of Energy Insurance Mutual (of which Sempra Energy is a member), who then provides the capital markets backed insurance protection to Sempra.

The SD Re 2020-1 cat bond notes will protect Sempra using an indemnity trigger and on an annual aggregate basis, after a $50 million franchise deductible.

The insurance is against certain 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.

The now targeted at $90 million single tranche of Series 2020-1 notes will cover a $100 million layer of Sempra’s insurance tower, attaching at $1 billion of losses.

They will sit lower down than the $125 million SD Re Ltd. (Series 2018-1) cat bond notes, which attached at $1.325 billion at launch.

The now $90 million of notes have an initial expected loss of 1.52% at an average hazard level, 1.8% at a high hazard level, and were initially offered to cat bond investors with price guidance in a range from 9.5% to 10%.

Now, the price guidance has been narrowed towards the upper-end, with the notes offered at 9.75% to 10%, we’re told.

The latest information looks encouraging for the deal to complete successfully and Sempra to secure an expanded capital markets backed source of wildfire property liability insurance.

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.