California Earthquake Authority Inks Risk Deal Sans Reinsurance

September 30, 2011

The California Earthquake Authority (CEA) has completed what it called a “first-of-its-kind transaction,” taking reinsurance out of the equation and opening “a more direct path” to transfer financial risks posed by earthquakes, the authority said.

Embarcadero Re, a Bermuda-based special purpose reinsurance vehicle, will provide Sacramento-based CEA with collateralized reinsurance protection against earthquake risk.

In a deal led by Deutsche Bank Securities, Embarcadero sold $150 million in three-year catastrophe bonds to investors at a floating rate of 6.6 percentage points above one-year U.S. Treasury money-market funds, and investor demand for the catastrophe bonds significantly exceeded the $150 million issuance, the authority said.

The $150 million in deal proceeds was placed in a collateral trust account, from which the CEA can draw to fund its actual insured losses and loss-related expenses covered by the reinsurance contract.

The three-year deal allows CEA to obtain reinsurance from the capital markets rather than solely from reinsurers.

According to CEA, it’s the first earthquake-only catastrophe bond issued without involvement of traditional reinsurers, a deal that will be used as a benchmark for similar follow-on deals by the authority.

Authority CEO Glenn Pomeroy said traditional reinsurance will continue to be valuable for the CEA going forward, but “the CEA must diversify and expand its claimpaying resources. A diverse set of risk-transfer tools, which includes not only reinsurance and catastrophe bonds but also post-earthquake federal loan guarantees, will help us make earthquake insurance more affordable and more widely used.”

Reinsurance provides $3.1 billion out of the CEA’s $9.4 billion claim-paying capability, according to the authority.

New York-based Citigroup’s Agency and Trust Services business has been named Indenture Trustee on the $150 million Embarcadero Reinsurance Ltd. catastrophe bond transaction with the CEA as ceding insurer.

“The California Earthquake Authority bond issue is a first-to-market transaction for the Insurance-Linked Securities (ILS) market and Citi is pleased to have been named Indenture Trustee,” Alan Smith, global head of issuer services for Citi, said in a statement.

Topics California Catastrophe Natural Disasters Reinsurance Earthquake

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