More details have been published on the second California Earthquake Authority catastrophe bond to be issued through the dedicated Bermuda domiciled Embarcadero Re Ltd. SPV. The CEA is issuing another cat bond (as we revealed yesterday) to secure an increased level of cover for earthquakes impacting California on a three year, fully collateralized basis. The Embarcadero Re Ltd. Series 2012-1 $150m single tranche of Class A notes are indemnity based and provide coverage for first and subsequent earthquakes on an annual aggregate basis over three loss occurrence periods.
The transaction uses an indemnity trigger based on the CEA’s ultimate net loss experience from a qualifying earthquake. The deal is structured to provide the indemnified cover to the CEA via a reinsurance agreement with Embarcadero Reinsurance Ltd. to whom the CEA will cede the subject book of business. The book of business is purely residential property and no commercial property insurance portfolio is included.
The CEA’s 2011 Embarcadero Re cat bond, which they issued in August, had an attachment point of $3.287 billion. This new cat bond will provide cover beneath that and the first loss period has an attachment point of $2.91 billion and an exhaustion point of $3.21 billion. This is a sensible approach by the CEA, they have already secured the top layer of cover for extreme events, now they will likely move down their reinsurance programme picking off appropriate segments of the total exposure and transferring them to the capital markets.
This Embarcadero Re cat bond provides cover for earthquakes which cause the CEA losses in California but the actual epicentre of a quake could be in a neighbouring state and still be a covered event. The deal allows for smaller quakes and if one occurs and causes a lower level of losses to the CEA the attachment point will be adjusted to maintain or increase the probability of attachment, depending on the size of the ultimate net loss. As an aggregate deal qualifying losses have to breach the attachment point of $2.91 billion before noteholders lose any of their principal, so smaller quakes could keep mounting up and the probability of attachment will be adjusted up to a maximum of 3.5% in any one loss period. The standard probability of attachment for the deal is 2.36%.
Collateral from the sale of the notes will be deposited in a trust account and invested in highly rated U.S. Treasury money market funds.
Risk modelling is being provided by AIR Worldwide and Deutsche Bank Securities are sole structuring agent and bookrunner.
Standard & Poor’s have given the single tranche of Embarcadero Re Ltd. Series 2012-1 Class A notes a preliminary rating of ‘BB-‘.
As we said in our article on this deal yesterday there is a good chance that this cat bond could grow in size as the CEA had been discussing issuing as much as $300m in a cat bond this quarter. We’ll update you as the deal comes to market.