CEA grows risk transfer by 20% to $5.4bn, $1.15bn of cat bonds help

As of December 1st 2016 the California Earthquake Authority (CEA) has grown the size of its reinsurance program to $5.4 billion, an increase of 20% since April 2016 when the program was $4.5 billion in size, and with catastrophe bonds now contributing over 21% of its risk transfer.

Earlier this year the CEA said that it found catastrophe bonds hard to justify, given the very competitive cost of traditional and collateralised reinsurance coverage. But the insurer returned to the cat bond market in November, bringing the $500 million Ursa Re Ltd. (Series 2016-1) catastrophe bond to market.

Insurance-linked investors and ILS funds now provide $1.15 billion of reinsurance risk transfer to the CEA through three separate in-force catastrophe bond issues, which places the CEA in 7th place on our leaderboard of catastrophe bond sponsors.

During 2016 the CEA has added a considerable amount of new coverage, which has helped to grow its overall risk transfer program by 20% since April, with traditional reinsurance purchases made in May, June, August and December on top of the $500m Ursa Re 2016-1 cat bond issue.

Looking at the CEA’s latest reinsurance program breakdown, it appears that the insurer has purchased around $437.5 million of reinsurance since the April renewal, on top of the $500m Ursa Re cat bond.

At September 1st the risk transfer program had reached $4.78 billion, so it’s impressive to see the further growth achieved over the next three months and testament to the appetite of the cat bond market with the Ursa Re deal helping to bulk up its risk transfer significantly.

As of December 1st, the CEA has an impressive just over $5.413 billion of risk transfer in-force, including the three cat bond issues (the $400m Ursa Re Ltd. (Series 2014-1), the $250m Ursa Re Ltd. (Series 2015-1) and the $500m Ursa Re Ltd. (Series 2016-1) cat bond) which are still providing the organisation with coverage.

At a board meeting today the CEA will approve further risk transfer purchases to be made for 2017, as long as they meet the stringent requirements.

CEA staff proposed a 2017 risk-transfer strategy to include both traditional and transformer reinsurance (catastrophe bonds), saying that purchases must contribute “appropriately and efficiently to CEA’s claim-paying capacity.”

In 2017 the CEA expects to transition to new earthquake risk model versions from RMS, AIR Worldwide and EQE, which mean it could see some changes in its calculations of exposure. But the CEA staff sought approval today for a 2017 risk transfer program that would maintain its capacity at no less than a 1-in-400-year level and no greater than a 1-in-550-year level.

The CEA staff said that it will seek to always secure the best pricing possible from the reinsurance or capital markets “that are providers of reliable risk transfer”, while leveraging multi-year coverage to lessen volatility and exposure to price rises.

As Artemis revealed just over a week ago, further catastrophe bonds from the CEA are on the cards for 2017, with CEO Glenn Pomeroy telling us that the “CEA may even explore additional catastrophe bond cover in 2017.”

As the insurer bulks up its risk transfer, taking advantage of efficient pricing in the reinsurance and capital markets, we can expect it to return to ILS and cat bonds as pricing is conducive and it suits its overall diversification needs.

Clearly pricing has moved down enough in the cat bond market to tempt the CEA back at the end of 2016. Will the traditional market be able to shut out ILS investors from the CEA’s program again next year, as was seen in early 2016 when it said cat bonds were hard to justify due to pricing, or have we now seen catastrophe bond pricing come down to a level where the CEA may look to push more of its risk transfer to the capital markets?

It will be interesting to see where the CEA’s focus on risk transfer capacity sources lies in 2017.

Join Artemis in New York on February 3rd 2017 for ILS NYC.