The California Earthquake Authority (CEA) has now completed its latest catastrophe bond transaction, with the $925 million Ursa Re Ltd. (Series 2017-1) becoming the insurers largest capital markets risk transfer deal to-date. CFO Tim Richison spoke to Artemis about the deal and told us that the combination of size and price made the deal particularly cost-effective.
The CEA has been sponsoring its own catastrophe bonds since 2011, when its first Embarcadero Re cat bond was issued. Since then the CEA has returned to the cat bond market regularly, sponsoring transactions every year except for 2013.
The not-for-profit, publicly managed-privately funded, provider of homeowner and renters residential earthquake insurance in California, has always said that it would utilise the cat bond market as and when pricing and market conditions were conducive and in 2017 that was particularly the case, as the insurer almost doubled the size of the Ursa Re 2017-1 cat bond before its completion.
At launch the deal was targeting $500 million of reinsurance coverage for the CEA, which would already have placed it as the equal largest cat bond sponsored by the CEA. But while being marketed to ILS investors, the CEA took advantage of demand to significantly upsize the cat bond to $925 million, its largest issuance to-date.
Tim Richison, CFO of the CEA, commented to Artemis; “CEA is very happy with the investor response to our URSA 2017 transaction. The over subscription of the original deal allowed us to expand the transaction size and take advantage of spreading the fixed costs over a larger transaction amount resulting in lower overall cost to CEA while meeting the investor demand.”
This is despite the fact that the cat bond’s coupon pricing settled at the upper end of guidance, which while perhaps seeming like the deal could have been expensive as a result, combined with the near doubling in size meant that the CEA could secure a much larger layer of reinsurance protection at terms that proved particularly efficient.
Securing the full $925 million in a single visit to the catastrophe bond market meant that the CEA only had to pay the fixed costs for a transaction the once, rather than issuing more than one cat bond. Hence its willingness to support investors desire a coupon at the higher end of guidance.
Richison discussed ILS investors’ response to the Ursa Re 2017-1 transaction and their willingness to help in the upsizing of the tranches, saying; “We think this is in response to CEA’s continued commitment to the ILS market where our California residential earthquake risk is transferred to the capital markets in a very efficient transaction in terms, conditions and transparency of the risk.”
“CEA has always had good investor interest from the beginning with our 2011 transaction and with every transaction since then,” he continued.
The Ursa Re 2017-1 cat bond will complement the CEA’s traditional reinsurance program, which typically consists of both reinsurer backed coverage and fully-collateralized reinsurance from ILS funds, many of which also invest in the cat bond notes as well.
Richison commented; “We find that this type of risk-transfer especially the three-year term fits quite nicely into our overall risk-transfer program.”
Suggesting that the CEA will continue to make catastrophe bonds a significant component of its risk transfer program when the market is conducive, Richison said; “We will always look to this market for capacity as long as the terms and conditions are favorable over traditional reinsurance.”
So by increasing the size of its latest catastrophe bond the CEA could capitalise on investor appetite and still achieve a cost-effective deal execution, while being able to support the investors desire for a coupon at the upper end of guidance.
That’s positive for both sides and will help to further cement the CEA’s relationship with catastrophe bond investors.
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