Ursa Re Ltd. (Series 2014-1)

The California Earthquake Authority has established a new Bermuda based SPI, named Ursa Re Ltd., which will be used for this cat bond issuance.

The Authority is targeting $350m of fully-collateralized reinsurance cover from the capital markets with this deal, which would make this its largest cat bond to date.

Ursa Re Ltd. is seeking to issue two tranches of notes for the CEA in this deal, one Class A tranche and one Class B. The transaction is targeting an issuance of at least $350m which will be split between the two tranches as $150m of Class A notes and $200m of Class B.

The proceeds of the sale of the two tranches of notes will be used to collateralize reinsurance contracts for the CEA, to provide it with a source of fully-collateralized, capital markets backed California earthquake reinsurance protection.

Both of the tranches of notes issued by Ursa Re Ltd. will be structured featuring an indemnity trigger and the protection they afford the CEA will be on an annual aggregate basis. The term of the cat bond will be three years, with maturity due in December 2017.

The $150m Class A tranche of notes feature an initial attachment probability of 1.29% and an initial expected loss of 1.2%. The $200m of Class B notes are a higher risk layer of protection, featuring an initial attachment probability of 2.9% and an initial expected loss of 2.62%. We’re told that each of the two tranches issued will cover a percentage of a corresponding layer of the CEA’s reinsurance program.

In terms of price guidance, we’re told that the Class A notes are being offered with a proposed coupon range of 3% to 3.75%, while the Class B notes have coupon guidance of 4.5% to 5.25%

The CEA is only an insurer of residential earthquake risks so as a result the covered business does not include any commercial properties in California.

The notes provide a variable reset feature which will allow the CEA to flex the coverage provided and move it, within pre-defined limits, up or down its reinsurance tower to a degree. The coupon will be adjusted accordingly as you’d expect.

We understand that the transaction is targeting completion for the beginning of December.

Update 1:

The Class A tranche, which is the less risky of the two, has now increased in size to $200m, taking the total deal size to $400m.

At the same time price guidance has been narrowed, with both tranches seeing guidance moving towards the middle of the launch range.

The Class A notes were initially offered with a proposed coupon range of 3% to 3.75%, which has now been narrowed to 3.25% to 3.5% we understand. Meanwhile the Class B notes, which launched with coupon guidance of 4.5% to 5.25%, have seen that narrow to 4.75% to 5%.

Update 2:

The Class A notes have now been priced at the top of that revised range, so above the initial mid-point of guidance, at 3.5%. Interestingly that gives this tranche a multiple of the expected loss of 1.2% to coupon of 2.9X, which is aligned with the average seen this year.

The Class B notes also priced at the top end of revised guidance, at 5%, again above the initial mid-point. These notes, with an expected loss of 2.62% have a much lower multiple, coming in at 1.91X, suggesting investors perhaps had greater appetite for the higher coupon.