Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

Embarcadero Re Ltd., the California Earthquake Authority catastrophe bond comes to market


The expected catastrophe bond issued to benefit the California Earthquake Authority (CEA) is now marketing as Embarcadero Re Ltd. which will bring another welcome diversification opportunity for insurance-linked security investors after a quarter of limited supply. It’s the first time that the California Earthquake Authority have been a cat bond beneficiary since the last Redwood deal in 2009 which provided cover for some of their reinsurance through Swiss Re.

The transaction will be issued through Bermuda based special purpose insurer Embarcadero Reinsurance Ltd. which has been set up specifically for this transaction and was incorporated in Bermuda on the 22nd June. It’s being marketed as a single tranche cat bond deal with a preliminary size of $150m. We wouldn’t be surprised to see that size increase as this deal is likely to be well received by investors which could allow the CEA to secure additional cover by upsizing the transaction.

Embarcadero Re Ltd. is designed to provide the CEA with indemnified risk transfer for a layer of their state of California earthquake risks via a reinsurance agreement on an annual aggregate basis over a three-year risk period. It covers only earthquake shake risks, not other perils often associated with quakes such as tsunami or fire following. Only residential property is covered through this deal as the CEA does not provide commercial insurance. The deal is expected to close in August and mature in August 2014.

Covered losses are based on the ultimate net loss of the CEA, based on the claims payments they made after a quake event. The attachment point for the first loss period will be $3.287 billion and investor principal will only begin to be eroded once that point is passed. The actual epicentre of an earthquake does not have to be within the California state bounds for it to qualify as the CEA covers losses for earthquake shaking within the state, no matter where the epicentre occurs.

The deal is reset annually but the losses from a previous year can be carried over to count to the aggregate amount in certain cases, for example if more than $350m of losses occur in year one then the attachment point for the second loss occurrence period will be reduced by the amount of the ultimate net loss. This aggregate qualifying losses can continue to affect the attachment point for each year of the deals lifetime which is a useful feature for the CEA as smaller quakes which happen more regularly will make the likelihood of a payment increase slightly.

The proceeds of the sale of the notes will be deposited in a collateral account and invested in U.S. Treasury money market funds. Interest will be paid quarterly at a rate equal to the investment yield on U.S. money market funds plus an interest spread which is equal to the premium payment from the CEA. The rate of interest may change based on any change in the probability of attachment due to covered events.

Deutsche Bank Securities are acting as sole structuring agent and bookrunner for the transaction and AIR Worldwide are providing risk modelling services.

Standard & Poor’s have assigned a preliminary rating of ‘BB-‘ to the single tranche of $150m Series 2011-1 class A to be issued by Embarcadero Re Ltd.

The details of this transaction will be added to our catastrophe bond deal directory and we’ll continue to update you as the deal progresses to market.

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