The California Earthquake Authority is returning to the catastrophe bond market with its latest issuance under a newly registered vehicle. The Ursa Re Ltd. (Series 2014-1) cat bond is targeting at least $350m of collateralized California quake reinsurance.
The California Earthquake Authority is the provider of homeowners earthquake cover in the state of California, one of the most earthquake exposed regions in the world. As a result it holds significant amounts of quake risk on its books and has become a regular user of catastrophe bonds as one of its forms of reinsurance protection.
The Authority had sponsored three cat bonds through its Embarcadero Re vehicle, the $150m Embarcadero Re Ltd. (Series 2011-1), the $150m Embarcadero Re Ltd. (Series 2012-1) and the $300m Embarcadero Re Ltd. (Series 2012-2). Prior to Embarcadero the Authority had been the beneficiary of a number of other cat bonds dating back at least as far as 2001 with Western Capital Ltd..
The Embarcadero Re 2012-1 and 2012-2 cat bonds both mature in 2015, having both been three year deals. The 2012-1 cat bond matures in February 2015 and the 2012-2 in August. This first Ursa Re issuance will go a long way towards replacing the two deals, which could see the CEA upsizing the cat bond if ILS investor appetite allows.
The Embarcadero Re special purpose insurer looks destined to not be used again and the California Earthquake Authority has set up a new Bermuda based SPI, called Ursa Re Ltd., which will be used for this issuance, we understand. The Authority is targeting $350m of fully-collateralized reinsurance cover from the capital markets with this deal, which would make this its largest cat bond to date.
Ursa Re Ltd. is seeking to issue two tranches of notes for the CEA in this deal, one Class A tranche and one Class B. The transaction is targeting an issuance of at least $350m which will be split between the two tranches as $150m of Class A notes and $200m of Class B.
The proceeds of the sale of the two tranches of notes will be used to collateralize reinsurance contracts for the CEA, to provide it with a source of fully-collateralized, capital markets backed California earthquake reinsurance protection.
We understand that both of the tranches of notes issued by Ursa Re Ltd. will be structured featuring an indemnity trigger and the protection they afford the CEA will be on an annual aggregate basis. The term of the cat bond will be three years, with maturity due in December 2017.
The $150m Class A tranche of notes feature an initial attachment probability of 1.29% and an initial expected loss of 1.2%. The $200m of Class B notes are a higher risk layer of protection, featuring an initial attachment probability of 2.9% and an initial expected loss of 2.62%. We’re told that each of the two tranches issued will cover a percentage of a corresponding layer of the CEA’s reinsurance program.
In terms of price guidance, we’re told that the Class A notes are being offered with a proposed coupon range of 3% to 3.75%, while the Class B notes have coupon guidance of 4.5% to 5.25%
One point worth noting is that both this Ursa Re cat bond and the other deal currently being marketed Kilimanjaro Re 2014-2 could see the multiple come in around 2X expected loss, which is lower than the current average multiple of 2014 issuance to date. That suggests that sponsors may be seeking to test where the bottom of the market really is, so it will be interesting to see how investors respond.
The transaction has been structured by Swiss Re Capital Markets who are also acting as the sole bookrunner for the cat bond. EQECAT is providing the earthquake risk modelling services for the deal.
The CEA is only an insurer of residential earthquake risks so as a result the covered business does not include any commercial properties in California.
The notes provide a variable reset feature which will allow the CEA to flex the coverage provided and move it, within pre-defined limits, up or down its reinsurance tower to a degree. The coupon will be adjusted accordingly as you’d expect.
We understand that the transaction is targeting completion for the beginning of December.
The California Earthquake Authority is becoming expert at diversification of its sources of risk transfer and financing, using traditional reinsurance, collateralized reinsurance, catastrophe bonds and also a recent debt issuance. The Ursa Re cat bond will help it to maintain that diversification of capital providers even after its two Embarcadero Re 2012 cat bonds mature.
That’s all the details we have on this new catastrophe bond from the California Earthquake Authority. As the Ursa Re Ltd. (Series 2014-1) cat bond comes to market we will update you and all the information will be added to our cat bond and ILS Deal Directory.
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