With the recent focus across the reinsurance market on alternative capital, insurance-linked securities and collateralized reinsurance, it’s interesting to discover that the California Earthquake Authority (CEA) has slightly reduced its use of fully-collateralized protection at recent renewals.
The California Earthquake Authority (CEA) has one of the largest reinsurance programs in the U.S. and has been a heavy user of fully-collateralized forms of reinsurance protection, particularly in the last two years. It has benefitted from catastrophe bond sourced reinsurance protection either via a reinsurer sponsor, or through a transformer, since the very early days of the market and also utilises other forms of fully-collateralized protection within its reinsurance program.
So with recent discussion in the reinsurance market focusing on inflows of alternative capital, the appetite of capital markets investors for catastrophe reinsurance risk and the resulting decline in pricing of ILS and property catastrophe reinsurance, it is interesting to see how the CEA’s program changed at July 1st.
Overall the CEA actually reduced the amount of reinsurance limit it has at the mid-year renewals. At June 30th the CEA had $3,375,595,270 of reinsurance protection, which dropped down to $3,115,494,200 by August once its July renewals were completed. The CEA had $950m of reinsurance limit from three contracts which had seven month terms and incepted in January. These three contracts expired at the July 2013 renewals and the CEA did not renew all of this protection.
The transformer, or catastrophe bond protection, that the CEA benefits from did not change. It still has the three Embarcadero Re issuances, from August 2011 (Embarcadero Re Ltd. (Series 2011-1)), January 2012 (Embarcadero Re Ltd. (Series 2012-1)) and July 2012 (Embarcadero Re Ltd. (Series 2012-2)) in place, which between them provide $600m of limit.
What did change is the CEA’s fully-collateralized reinsurance limit, which declined from about $340m down to about $271m after July 1st. Conversely, the traditional reinsurance protection that the CEA benefits from has increased, we understand, by just $50m, to around $1.695 billion of limit.
Also at the mid-year renewals, the CEA has roughly doubled the amount of reinsurance limit backed with letters of credit, from around $101m to roughly $206m. The changes in the program at mid-year also saw the use of parental guarantees in the CEA’s reinsurance program decrease by about half.
It is perhaps the case that the expiring seven month duration reinsurance contracts had a proportion of the fully-collateralized cover within them and the CEA didn’t need to renew them in the same way. We understand that the CEA replaced the three expired contracts with four new one-year traditional reinsurance contracts at the renewals, replacing the $950m of expired limit with approximately $704m of new protection. Overall we’re told that the CEA slightly reduced its average rate on-line across the entire risk transfer program at the mid-year renewals.
So on large reinsurance programs such as the CEA there is still room for traditional reinsurance protection to increase, or at least maintain its percentage participation, even at the most recent renewals. We may find that the CEA is gearing up for another catastrophe bond issuance towards the end of the year, which would increase its use of fully-colateralized protection once again, or it may choose to increase cover using other collateralized sources at that time. The Embarcadero Re 2011 cat bond matures in August 2014, so targeting a January issuance, would seem a sensible move for the CEA, especially with cat bond pricing so attractive right now.
At the January renewals it will be telling to watch where large reinsurance program limits, such as the CEA’s, get placed, whether collateralized, traditional or into the ILS market via catastrophe bonds. The CEA will no doubt continue to look to whatever solution is most appropriate for its risk transfer program, being agnostic about sources of capital, providing it with the right cover at the right price and helping it to maintain its claims paying ability targets.