Embarcadero Re Ltd. (Series 2012-1) – Full details:
The California Earthquake Authority are returning to the catastrophe bond market to issue another cat bond using their dedicated SPV Embarcadero Re Ltd. which is domiciled in Bermuda.
The CEA are seeking another $150m of collateralized, multi-year (3) reinsurance cover through a single tranch of Embarcadero Re Ltd. Series 2012-1 cat bond notes.
This 2012-1 deal will use an indemnity trigger based on the CEA’s actual loss experience on an annual aggregate basis over three loss occurrence periods. This provides a source of indemnified risk transfer via a reinsurance agreement for a three year period.
The notes provide cover for first and subsequent qualifying earthquake events over three risk periods. To qualify, an earthquake does not actually have to be centered in California, rather it has to cause losses to the CEA in California, meaning quakes in neighboring States are covered.
The deal provides indemnified cover to the CEA via a reinsurance agreement with Embarcadero Reinsurance Ltd. to whom the CEA will cede the subject book of business. The book of business is purely residential property and no commercial property insurance portfolio is included.
The Series 2011-1 Class A notes which Embarcadero Re issued in August 2011, have an attachment point of $3.287 billion. This second cat bond provides cover beneath that, the first loss period has an attachment point of $2.91 billion and an exhaustion point of $3.21 billion.
Smaller quakes are covered as part of the aggregate and if one occurs and causes a smaller loss to the CEA the attachment point for the notes gets adjusted to maintain or increase the probability of attachment, depending on the size of the ultimate net loss. As an aggregate deal qualifying losses have to breach the attachment point of $2.91 billion before noteholders lose any principal, so smaller quakes could keep mounting up and the probability of attachment will be adjusted up to a maximum of 3.5% in any one loss period. The standard probability of attachment for the deal is 2.36%.
Collateral from the sale of the notes will be deposited in a collateral account and invested in U.S. Treasury money market funds.