CEA reinsurance program reached $8.132bn at end of 2018

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The California Earthquake Authority (CEA) has again lifted the size of its reinsurance program to a new record high at the end of 2018, with limit purchased reaching $8.132 billion.

california-earthquake-authority-logoThe CEA’s reinsurance program reached $8 billion a year ago after its January placements, but after a number of contracts matured last summer and some new contracts were secured in August and December, the growth of the reinsurance program continued through the year.

After the January renewal, the CEA added new reinsurance contracts in April, June, August and December 2018.

Among those layers of coverage, was one 18 month layer of $280 million and a three-year term layer of $93.75 million, while the rest of the coverage purchased was largely on a one-year basis.

In total, the CEA purchased or renewed almost $1.6 billion of reinsurance limit at its renewals through the rest of 2018, leaving it with the $8.132 billion of protection by year-end.

It’s particularly impressive when you consider that the CEA’s reinsurance program provided only $2.16 billion of protection way back in 1997, growing to just $4.6 billion in size almost two decades later by the end of 2015, then growing 20% to $5.4 billion by the end of 2016, followed by another 15% growth to reach $6.3 billion at January 1st 2017, then increasing in size by 27% in just one year, to reach its previous record size of $8.02 billion after January 1st 2018.

The cost of this reinsurance coverage was a premium of $366 million for the program as at the end of 2018, compared to $315 million for $7.3 billion of limit at the end of 2017.

While growth through the rest of 2018 was not significant really, it’s likely the CEA will have added more protection at 1/1 2019, figures which will likely become available in weeks to come.

Catastrophe bond, or transformer backed reinsurance coverage as the CEA terms it, remained at $2.075 billion as of the end of 2018 so just under 26% of the total program limit.

It will be interesting to see what the CEA thinks of cat bond market conditions in 2019 and whether it looks to bring a new transaction to market, it has done so in May in the past. Or whether its focus shifts more to traditional and collateralized reinsurance sources of protection.

A $500 million cat bond matures for the CEA in November 2019, so we’d hope to see that transaction replaced at some point in the year and it might make sense for the CEA to look to ILS markets earlier in the year, to capitalise on the fact it would be offering a source of diversification compared to other bonds likely to hit the market in the second-quarter of this year.

See where the California Earthquake Authority (CEA) sits in our interactive chart and leaderboard of catastrophe bond sponsors.

The CEA recently said that even based on a modest rate of projected growth, it could need to increase its claim-paying capacity from $17 billion to as much as $48 billion of financing and risk transfer.

Within that $48 billion there would be significant room for growth of the reinsurance tower and increased use of catastrophe bonds, hence it will be interesting to see how much growth has been recorded at the latest renewals.

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