The California Earthquake Authority is back in the catastrophe bond market, seeking at least $150m of fully collateralized, capital market-backed reinsurance protection, with the issuance of Ursa Re Ltd. (Series 2015-1).
The Ursa Re 2015-1 cat bond will be the California Earthquake Authority’s second under the Ursa special purpose insurer, after its $400m Ursa Re Ltd. (Series 2014-1) was issued last December. Prior to that the CEA has benefited from sponsoring three cat bonds through its previous vehicle, Embarcadero Re, with 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)
As the provider of homeowners earthquake cover in the state of California, one of the most earthquake exposed regions in the world, the CEA holds significant amounts of quake risk on its books and has become a regular user of catastrophe bonds, ILS and the capital markets as one of its forms of reinsurance protection.
The insurer has a long history of leveraging insurance-linked securities, catastrophe bonds and capital markets investors for reinsurance protection, with transactions such as Seismic Ltd. in March 2000 which supported a participant in the CEA’s reinsurance program and Western Capital Ltd. from 2001 which the CEA sponsored itself as its first direct cat bond.
So it’s always encouraging to see a long-term sponsor of cat bonds return once again. With this new Ursa Re 2015-1 issuance, the CEA is seeking to secure at least $150m of collateralized reinsurance protection for earthquake risks in California.
Artemis understands that Ursa Re, a Bermuda domiciled SPI, will seek to issue a single tranche of Series 2015-1 Class B notes. The target is to raise at least $150m of cover through the sale of the notes to ILS investors, to collateralize a reinsurance agreement between the SPI and the CEA.
The Ursa Re 2015-1 cat bond will feature an indemnity trigger, with reinsurance protection afforded on an annual aggregate basis to the CEA. The transaction will have a three-year term, running until mid-September 2018.
We’re told that the notes will cover losses on a $500m layer of the CEA’s reinsurance program, triggering at $2.581 billion of losses to the insurer and covering around 30% of the losses at the $150m tranche size. That leaves room for the CEA to upsize the deal if the market is conducive and investor appetite strong.
The Class B tranche of notes have an initial attachment probability of 2.89%, we understand, with an expected loss of 2.62% and an exhaustion probability of 2.39%.
The notes are being offered to investors with a coupon range of 4.75% to 5%, which at the 2.62% expected loss would result in a multiple of 1.81x at the lower end of the pricing range, 1.86x at the midpoint or 1.91x at the top end of price guidance.
The Ursa Re 2015-1 cat bond features a variable reset, as so many catastrophe bonds now do. We understand that this would allow the CEA to move the layer of coverage from as low as a $1.861 billion trigger point, up to as high as $3.045 billion, providing flexibility for its future reinsurance needs over the term of the cat bond.
The notes offered have a similar risk profile, in terms of attachment probability and expected loss, to the Class B notes issued by Ursa Re in 2014, which eventually priced at 5% which was the top end of guidance. It will be interesting to see how this 2015 deal prices by comparison.
Swiss Re Capital Markets is acting as the sole structuring agent and 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.
We understand that the Ursa Re 2015-1 cat bond transaction is targeting completion for mid-September.