CEA returns with $400m Sutter Re 2020 catastrophe bond

The California Earthquake Authority (CEA) has returned to the catastrophe bond market for the first time this year, seeking to add at least $400 million of earthquake reinsurance protection with a Sutter Re Ltd. (Series 20201- & 2020-2) issuance.

The CEA is the not-for-profit residential earthquake insurance provider in the state and uses a significant amount of reinsurance capital to help it absorb any potential losses from earthquakes that occur.

Within the CEA’s reinsurance tower, which grew to a new high in terms of size at $8.6 billion at the January 2020 renewals, the use of catastrophe bonds, collateralised reinsurance and insurance-linked securities (ILS) is key.

At January 1st 2020, the CEA’s reinsurance program consisted of $6.618 billion of traditional reinsurance, both collateralized and on balance-sheet vehicles, as well as $1.975 billion of outstanding catastrophe bonds from its Ursa Re Ltd. program.

Now the CEA has returned with a new special purpose insurer in Bermuda registered Sutter Re Ltd., as it seeks to add more capital markets backed protection to its reinsurance tower.

For its first issuance we’re told that Sutter Re Ltd. will seek to issue four tranches of cat bond notes across two series, seeking upwards of $400 million of California earthquake reinsurance protection across the issuance.

With the Sutter Re catastrophe bonds, the CEA will benefit from multi-year, fully collateralised reinsurance protection against earthquakes in California on an annual aggregate and indemnity trigger basis, we understand from our sources.

Two tranches of notes will provide coverage across a two-year term (the Series 2020-2 notes) and two tranches across three years (the Series 2020-1 notes) it seems, with each featuring annual loss occurrence periods for the purpose of aggregation.

Each of the Series of catastrophe bond notes to be issued by Sutter Re Ltd. have Class A and Class F tranches, with Classes A and F having the same risk metrics and pricing, but the differences being the term of two or three years depending on the Series.

The CEA is targeting at least $200 million from each Series of this issuance, but it seems likely that if investor appetite was strong enough for the longer term three-year notes under the 2020-1 tranches, then we could see those upsized the most.

The reason for issuing two and three year notes at the same time could be so the CEA can stagger its renewals of catastrophe bonds, but also a way to see how investors respond to the pricing of an annual aggregate deal over the different durations.

The Series 2020-1 Class A Notes will provide three years of cover, attaching above a $6.472 billion retention and covering a $500 million layer of the CEA’s reinsurance program, giving them an initial expected loss of 1.21% and price guidance of 4.5% to 5%.

The Series 2020-1 Class F Notes will provide three years of cover, attaching above a $2.1 billion retention and covering a $500 million layer of the CEA’s reinsurance program, giving them an initial expected loss of 3.69% and price guidance of 8% to 8.5%.

The Series 2020-2 Class A Notes will provide two years of cover, attaching above a $6.472 billion retention and covering a $500 million layer of the CEA’s reinsurance program, giving them an initial expected loss of 1.21% and price guidance of 4.5% to 5%.

The Series 2020-2 Class F Notes will provide two years of cover, attaching above a $2.1 billion retention and covering a $500 million layer of the CEA’s reinsurance program, giving them an initial expected loss of 3.69% and price guidance of 8% to 8.5%.

So as you can see from the above, the difference is only in duration of coverage between the identical risk bearing tranches of notes, suggesting the desire to stagger renewals may be the stronger motivator.

One other key difference between this new catastrophe bond issuance from the CEA and its previous deals, is that while they all provided annual aggregate earthquake reinsurance protection, this new transaction also has an hours clause factor that would allow losses from strong aftershocks to qualify.

We’re told the cat bond notes will provide the CEA with reinsurance for the first earthquake loss and then also any subsequent quake losses within a 360 hour period after the initial qualifying event.

Not only does that cover the CEA for aftershocks, it also means the CEA would be covered where a foreshock causes a loss and the main quake occurred later, within that 360 hour period.

As a result this seems a sensible addition to the insurers reinsurance program.

We’ll keep you updated as this new Sutter Re Ltd. (Series 20201- & 2020-2) catastrophe bond issuance from the California Earthquake Authority (CEA) comes to market.

You can read about this and every other catastrophe bond transaction in the Artemis Deal Directory.