California Earthquake Authority planning next catastrophe bond for January

by Artemis on November 13, 2011

Back in October the California Earthquake Authority (CEA) spoke to us about their use of catastrophe bonds as part of their overall reinsurance and risk transfer program and the value they have found in their most recent Embarcadero Re Ltd. cat bond transformer. In the article ‘How the California Earthquake Authority finds value in catastrophe bonds‘ we asked them when they would be using cat bonds again and now some details of this have emerged.

They told us in October that they expected to add to their transformer protection early in Q1 2012 and then again in Q2 2012. January see’s the CEA needing to renew a large amount of their risk transfer program including much of their reinsurance cover so it is a sensible time to switch some of that cover to cat bonds.

On the 27th October the CEA held a governing board meeting at which the structure and form of their risk transfer program for 2012 was discussed. At the meeting it was proposed that a $3.12 billion layer of risk transfer (traditional reinsurance and transformer) was put in place for 2012. As part of this risk transfer capacity the CEA’s financial team proposed up to $300m be dedicated to a cat bond transformer transaction and that this is put in place in early January 2012.

The details of the proposed January cat bond will be presented to the CEA governing board in December to seek approval to move ahead with it. It’s likely to be a second Embarcadero Re Ltd. transaction as the Bermudian vehicle was created so as to be reusable for multiple cat bond issuances.

So if approved by the governing board we will see as much as $300m of California earthquake cat bond notes available to the market in January which will be well received by investors. After that, the CEA has another tranche of its reinsurance program to renew in April 2012 so if the cat bond market proves price-competitive with traditional reinsurance in January and investor appetite is still strong in April, we could see the CEA issue a further cat bond tranche in April 2012.

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