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CEA brings $400m Ursa Re 2017-2 California quake cat bond to market


The California Earthquake Authority (CEA) is returning to the catastrophe bond market once again with a $400 million Ursa Re Ltd. (Series 2017-2) transaction, which will be its fifth cat bond using the Ursa Re vehicle and its ninth where we have the CEA listed as sponsor in our Deal Directory.

The CEA currently has just over $2 billion of catastrophe bond risk capital outstanding (according to Artemis’ data), making the Authority one of the largest users of the capital markets for its reinsurance protection, in a securitised and 144A form.

Now, the provider of homeowners earthquake insurance cover in the state of California is coming back to the capital markets in order to secure a new layer of collateralized and multi-year reinsurance protection, with the help of the ILS market and its investors.

This latest catastrophe bond sees the California Earthquake Authority (CEA) returning with its Ursa Re Ltd. special purpose insurance vehicle, which will be issuing two tranches of Series 2017-2 notes, we understand.

The sale of the two tranches of notes will be used to collateralize underlying 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 protection to the sponsor and feature an indemnity trigger, while the protection will run to late November 2020.

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.

The CEA is targeting completion of its latest catastrophe bond by the end of this month.

We’ll keep you updates as this Ursa Re Ltd. (Series 2017-2) transaction comes to market and you can read about this and every other catastrophe bond since the market began in the Artemis Deal Directory.

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