The California Earthquake Authority (CEA) has lowered its target for its latest catastrophe bond, with its target now for up to $255 million in collateralized California earthquake reinsurance protection through the Ursa Re II Ltd. (Series 2022-1) issuance.
Likely in response to more challenging and higher priced market conditions for catastrophe bonds and reinsurance, the initial target size of $275 million that the CEA’s latest catastrophe bond came to market with earlier this month looks set to be missed.
As a significant buyer of reinsurance, the CEA’s team will be balancing cost and availability of capacity in the traditional and catastrophe bond market’s and buying the cover that is most efficient to their needs, which in this case appears to mean a slightly smaller cat bond this time around.
The CEA was looking to secure $275 million or more of multi-year and fully-collateralized California earthquake reinsurance protection through two tranches of notes issued by its Ursa Re II Ltd. Bermuda based SPI.
We’re now told the target has dropped to between $210 million and $255 million across the two tranches of Series 2022-1 notes.
The notes will provide the CEA with a source of indemnity annual aggregate based reinsurance against California earthquake losses, across a roughly three-year term.
What was a $150 million tranche of Class A notes is now sized at up to $175 million, we’re told, so there’s a good chance the A’s will upsize.
The Class A notes will cover a percentage of a $500 million layer of the CEA’s reinsurance, attaching above just over $7 billion, giving them an initial expected loss of 1.33% and were first offered to cat bond investors with price guidance in a range from 4.25% to 4.75%.
We’re now told this price guidance for the Class A notes has been raised to above that initial range, at 5%.
What was a $125 million tranche of Class B notes are now sized at $60 million to $80 million, so look set to shrink below target.
The Class B notes will cover a percentage of another $500 million layer of the CEA’s reinsurance, attaching close to $2.85 billion (so riskier), giving them an initial expected loss of 3.28% and were first offered to cat bond investors with price guidance in a range from 6.75% to 7.5%.
The Class B notes pricing has also lifted, with them now offered with guidance of 7.5% to 7.75%, we understand.
It’s a clear reflection of the challenging cat bond and reinsurance market environment, with rates rising and appetites smaller, even for a diversifying quake bond at a time of peak US hurricane cat bond issuance.