The Los Angeles Department of Water and Power (LADWP), the largest municipal utility operating in the United States, has returned to the catastrophe bond market for its third time, seeking up to $150 million of wildfire protection from a 123 Lights Re Ltd. (Series 2025-1) issuance, Artemis has learned.
Previously, the Los Angeles Department of Water and Power (LADWP) sponsored two catastrophe bonds to secure California wildfire insurance protection.
The LADWP first ventured into the cat bond market in 2020 to secure $50 million of cover from a Power Protective Re Ltd. (Series 2020-1) deal, a transaction that utilised a parametric trigger.
The utility returned in 2021, securing $30 million of wildfire protection with a Power Protective Re Ltd. (Series 2021-1) issuance, with this transaction utilising an indemnity trigger.
Now, for its third catastrophe bond sponsorship, the LADWP’s new 123 Lights Re Ltd. transaction will feature another different trigger arrangement, this time using a county-weighted industry loss index trigger.
Read about all of the LADWP’s catastrophe bonds in our extensive Deal Directory.
The Los Angeles Department of Water and Power (LADWP) provides its services to millions of residents and has been in operation since 1902, supplying water to homeowners and businesses in Los Angeles and the surrounding communities, also supplying electricity since 1917.
As with its previous cat bonds, the municipal utility is again looking to secure catastrophe insurance for wildfire risks in the region of California where it operates, as its infrastructure is exposed to wildfires.
As we highlighted with its previous deals, the LADWP’s infrastructure could also ignite wildfires, so we assume there is an element of wildfire liability protection as one of the driving motives for this third visit to the cat bond market.
Like it’s previous cat bonds, the utility will source its capital markets backed insurance through arrangements with a White Rock captive cell and with global reinsurance company Hannover Re.
The utility will source insurance through an agreement with a protected cell of Aon’s Vermont-based White Rock cell captive vehicle, while Hannover Re will reinsure the risks for White Rock and interface with the capital markets, fronting the wildfire risks for the LA municipal utility via a retrocessional reinsurance agreement with a newly formed Bermuda based company named 123 Lights Ltd. we are told.
123 Lights Re Ltd. will issue a single tranche of Series 2025-1 notes, with a target to secure between $100 million and $150 million of protection.
These notes will be sold to cat bond investors and the proceeds used to collateralize the retro agreement with Hannover Re, with the coverage then cascading through the reinsurance agreement with the White Rock cell and back to the LADWP via an insurance agreement.
The notes will ultimately provide the LADWP with coverage on a county-weighted industry loss index basis for wildfire events in the state of California over a roughly three year term until the end of August 2028, sources said.
Given the utility has varying degrees of exposure by region of California, using a trigger mechanism calibrated to counties and weighted based on exposure to each is likely a cleaner way to provide more targeted protection for the LADWP, while keeping the notes exposed only where LADWP infrastructure exists.
The other benefit of using an insurance industry loss index, in this case from PCS we understand, is that it means insured losses must have occurred for an event to qualify and begin accumulating index points.
As we said, 123 Lights Re Ltd. will issue a single tranche of Series 2025-1 Class A cat bond notes, with a target to secure between $100 million and $150 million of protection for the LADWP.
We’re told the notes come with an initial modelled attachment point of 2.76%, an initial modelled expected loss of 2.02% and that they are being offered to cat bond investors with price guidance for an initial risk interest spread of between 11% and 12%.
It’s encouraging to see the LADWP return and for another California wildfire catastrophe bond to come to market in 2025.
Since the major fires in the Los Angeles region earlier this year, the catastrophe bond market has responded and supported a number of sponsors with their wildfire reinsurance needs, some of which have been California focused deals.
That’s good to see, as the cat bond market has demonstrated it remains open for business for wildfire risks that are well structured and appropriately priced.
You can read all about this 123 Lights Re Ltd. (Series 2025-1) catastrophe bond and every other cat bond deal in the extensive Artemis Deal Directory.
