CEA’s new cat bond prices at top-end, reflects rising spread expectations

In a further sign of the increased return expectations of investors in catastrophe bonds, the pricing for the latest catastrophe bond from the California Earthquake Authority has now been fixed at the top-end of initial guidance, we’re told.

The California Earthquake Authority (CEA), the not-for-profit residential earthquake insurance provider in the state, returned to the capital markets with its first catastrophe bond of 2019 just a fortnight ago.

The CEA was targeting around $400 million of capital markets backed earthquake reinsurance protection with an Ursa Re Ltd. (Series 2019-1) issuance.

We understand that this has been successful, with the transaction achieving the investor and ILS fund support to fulfil this $400 million goal for the CEA.

But in a further sign of the ambition to achieve higher pricing by loss-hit ILS funds and investors, the pricing has moved to the top-end of the initial spread guidance for the notes.

To recap, the $400 million of Series 2019-1 Class C cat bond notes issued by Ursa Re Ltd. will provide the CEA with collateralised California earthquake reinsurance protection, on an indemnity trigger and annual aggregate basis across a three-year term.

The layer of the CEA’s reinsurance tower covered by these notes sits with an attachment at roughly $4 billion, giving the notes an initial attachment probability of 2.25% and an expected loss of 2.11%.

The notes were offered to cat bond funds and investors with price guidance in a range from a coupon of 5.25% to 5.75%.

We’re now told that the $400 million of notes have been priced at the top-end of that guidance, so will pay cat bond investors a coupon of 5.75%.

At a multiple of roughly 2.72 times the expected loss, that is a relatively high return for what is effectively a loss-free peril in the cat bond market, as no California quake cat bonds have ever been triggered.

The CEA’s Ursa Re Ltd. (Series 2016-1) cat bond is scheduled to mature later this month, meaning the new 2019 issuance can be considered a replacement of sorts and this provides a valuable indicator of the rising spreads in the catastrophe bond market.

The Ursa Re 2016-1 notes, which for reference also priced at the top-end of their guidance, had an initial expected loss of 2.18% but priced with a coupon of just 4%, resulting in a multiple of just 1.83 times EL.

Fast-forward three years and the multiple has jumped to 2.72 times EL, a significant difference for a peril which has not faced losses over recent years.

Of course the multiple at market isn’t the whole picture on price, as terms and conditions need to be considered as well, but in this case the increase does seem significant enough to imply a price shift in the cat bond market.

The maturing 2016 cat bond had provided $500 million of protection to the CEA, so this renewal bond has fallen slightly short despite the layer it covers also being $500 million, which could be down to the price.

Still, it’s encouraging to see the CEA continuing to value the diversification it can achieve in its risk capital, by leveraging the catastrophe bond market.

We understand this Ursa Re Ltd. (Series 2019-1) catastrophe bond transaction will complete next week and our can rad about it in our comprehensive Deal Directory, where you can view details on almost every other cat bond deal since the market began.