The recently completed $925 million Ursa Re Ltd. (Series 2017-1) catastrophe bond, which is the largest transaction to-date sponsored by the California Earthquake Authority (CEA), had a novel structural feature that will help the insurer tap ILS investor demand in a more timely and cost-efficient manner, according to reinsurer Swiss Re.
Swiss Re Capital Markets, the reinsurance firms dedicated investment banking and insurance-linked securities (ILS) focused unit, acted as the sole structuring agent and joint bookrunner for the CEA’s latest cat bond, helping the insurer to what is one of the largest indemnity, annual aggregate catastrophe bonds ever placed.
Swiss Re Capital Markets structured and placed the issuance of $925 million of insurance-linked securities by Ursa Re Ltd., underwriting the transaction through the placement of the two classes of notes issued.
The CEA entered into two reinsurance agreements with Ursa Re, providing it with three years of California earthquake reinsurance protection against losses to its book of residential property insurance. Ursa Re Ltd. in turn fully collateralised the reinsurance agreements through the issuance of $425 million of Class B Notes and $500 million if Class E Notes, which were placed with capital markets investors by Swiss Re.
“Swiss Re is pleased to provide continued support to the CEA on its largest catastrophe bond issuance to date. The transaction was well received by investors, as demonstrated by, among other factors, the final issuance size,” commented Judy Klugman, Co-Head of ILS at Swiss Re Capital Markets.
One of the interesting facts about this deal was that there were actually six tranches of notes, Class A to F, that were modelled and prepared for issuance, even though only the two (B and E) classes of notes were finally issued at this time.
This approach, of preparing a number of tranches of so-called ‘Program Notes’ enabled the appetite of ILS and catastrophe bond investors to be assessed, before the tranches to be issued were selected.
This will have allowed the CEA to establish what level of risk would be best to transfer to the capital markets at this time, in order to make the execution as smooth and efficient as possible.
Cleverly, the transaction documentation allows the remaining four tranches of Program Notes to be issued to investors at any time before the end of the third loss occurrence period of the initial issuance. Any future notes issued would also be exposed to California earthquakes on the same indemnity and annual aggregate basis.
A Class A tranche of notes would be the lowest risk of the six, with Class B next risky, followed by Classes C, D, E and F, we understand.
“We were also glad to be able to support the CEA in its desire to make future issuances more efficient by introducing pre-modeled Program Notes. Such Program Notes are intended to allow the CEA to tap investor demand on a more timely and cost efficient basis,” Klugman said, explaining the benefits of the Program Notes to the sponsor the CEA.
The use of these Program Notes is an intelligent way to make future note issuances under the same program even more efficient, by having ready-made classes of cat bond notes that can be offered to investors in subsequent issues.
This would enable the CEA to broaden the coverage from the capital markets across more of its reinsurance tower at any time during the term of this deal in a much quicker and lower-cost manner.
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