Ursa Re Ltd. (Series 2017-2)

In its latest catastrophe bond, the California Earthquake Authority (CEA) returns with its Ursa Re Ltd. vehicle, which will be issuing two tranches of Series 2017-2 notes, we understand, in order to collateralize reinsurance agreements that will provide the CEA with a three-year source of reinsurance from the capital markets, to protect it against losses due to earthquakes in California.

The notes will provide annual aggregate reinsurance protection to the sponsor and feature an indemnity trigger, while the protection will run for a three-year term.

The first tranche of notes being marketed to catastrophe bond investors is a $200 million Class C layer, that will provide the CEA with protection for losses across a $400 million layer from $4.626 billion of losses up.

The Class C notes have an initial attachment probability of 1.39% and an expected loss of 1.32% and are being offered to investors with price guidance in a range from 3.5% to 4.25%, we’re told.

The second tranche is a $200 million Class D layer, which will cover a $500 million layer of risk for the CEA, from $2.195 billion and up. Hence these are the riskier of the two tranches, attaching first.

The Class D notes have an initial attachment probability of 3.05%, an expected loss of 2.79% and are offered to investors with price guidance of 5% to 5.75%, we understand.

These two tranches are the C and D notes from the Ursa Re Program Notes, a set of six cat bond tranches, that were modelled in advance of the issuance of its 2017-1 transaction in May 2017. We understand that by having pre-modelled and structured these six tranches, the CEA has had a structure it can compare with traditional reinsurance and fit better into its program at the right point in the year.

With both the C and D tranches of notes covering a layer at least twice their current size, it looks like there is a significant chance that the CEA will increase the size of the issuance if investor demand allows it to. The pricing looks roughly aligned with its most recent issuance, likely also a benefit of having modelled these notes in advance.

Update 1:

Both tranches remain sized at $200 million, we understand, despite each covering a larger layer of risk ($400m for the Class C layer and $500m for the Class D) meaning there was plenty of room to upsize.

But price guidance has now been fixed for the notes, with the Class C pricing put at 4%, so towards the upper end, and the Class D at 5.25%, so nearer the lower end.

Looking back at pricing data from other Ursa Re cat bonds sponsored by the CEA in recent years and it is clear there is little pricing uplift in this catastrophe bond, despite it being one of the first after the recent major losses.

The multiples are aligned with other transactions of the last few years. The Class C notes, with their multiple of 3 times expected loss, are very closely aligned with two other lower-risk tranches from 2016 and 2014, in terms of risk adjusted price. The Class D notes, which have a multiple of 1.88 times the expected loss, are priced below 2014 and 2015 tranches which have the closest risk profile.