The California Earthquake Authority (CEA) is back once again in the catastrophe bond market with the second issuance it has sponsored so far this year, seeking a $250 million or larger source of collateralised earthquake reinsurance from this Ursa Re II Ltd. (Series 2020-1) deal.
Earlier this year, the CEA, which is a not-for-profit residential earthquake insurer for California, secured $700 million of earthquake reinsurance through a Sutter Re Ltd. (Series 20201- & 2020-2) issuance.
But for its next catastrophe bond deal, the CEA has reverted back to the Ursa Re moniker, registering a new Bermuda-based special purpose insurer named Ursa Re II Ltd. for the purpose of its latest capital markets foray.
For the CEA, the use of catastrophe bonds, collateralised reinsurance and insurance-linked securities (ILS) is key within its reinsurance program arrangements.
The CEA’s reinsurance tower grew to a new high, in terms of size, at $8.6 billion at the January 2020 renewals.
At that time the CEA had roughly $1.975 billion of catastrophe bond backed earthquake reinsurance in-force, but $925 million of that matured in May, around the time it added the $700 million Sutter Re cat bond, meaning cat bonds have actually become a slightly smaller component of the CEA’s reinsurance tower during 2020.
Now, another $400 million of outstanding Ursa Re cat bonds are due to mature in the fourth-quarter, meaning this new Ursa Re II cat bond issue has every chance of upsizing to at least replace that.
But, of course, market conditions and pricing or terms of coverage will be key, as the CEA looks to optimise its reinsurance program across both traditional and capital market sources. So the efficiency of different capital sources will likely be a key driver for the CEA as it defines its mix of risk transfer instruments through the rest of 2020 and into the January 2021 renewals.
The newly registered Ursa Re II Ltd. vehicle will issue two tranches of notes in this Series 2020-1 issuance, sources told us.
Ursa Re II will issue a Class AA tranche of notes of $150 million or greater in size and a Class D tranche of notes of $100 million or greater, we are told.
Each of these tranches of notes will be sold to third-party ILS investors and funds, with the proceeds used to collateralised underlying earthquake reinsurance agreements between Ursa Re II and the CEA.
The notes will provide the CEA with at least $250 million of California earthquake reinsurance protection across a three-year term, on an annual aggregate and indemnity trigger basis.
We understand that the $150 million of Class AA notes are the less risky layer from this Ursa Re II 2020-1 cat bond issuance, having an initial expected loss of 0.9% and being marketed to ILS investors with price guidance in a range from 3.5% to 4%.
Meanwhile, the $100 million of Class D notes are higher risk, having an initial expected loss of 2.53% and being offered to ILS investors with coupon guidance of 5.75% to 6.25%.
The coupon ranges are relatively close to prior year deals, but depending on where they settle in the marketed ranges it does look like this deal may offer a slight uptick in risk adjusted pricing for investors, which would be aligned with reinsurance market conditions.
We’ll keep you updated as this new Ursa Re II Ltd. (Series 2020-1) catastrophe bond issuance from the California Earthquake Authority (CEA) comes to market.
You can read all about this new transaction and every other catastrophe bond issued in the Artemis Deal Directory.