CEA returns with $300m target for Sutter Re 2023-1 quake cat bond

The California Earthquake Authority (CEA) has returned to the catastrophe bond market in search of a further $300 million or more in collateralized California earthquake reinsurance protection from the capital markets, sponsoring a Sutter Re Ltd. (Series 2023-1) cat bond.

This is the second time that the California Earthquake Authority (CEA), the earthquake insurer of last resort for the state, has utilised the Sutter Re special purpose insurer in Bermuda for its cat bonds, having first done so back in 2020.

Since then the CEA has used versions of its Ursa Re named cat bond issuance vehicles. In total we now have 18 cat bonds directly sponsored by the CEA listed in our Deal Directory.

The quake insurer has been the beneficiary of others, both fronted and as a private cat bond cedent, we understand.

The earthquake insurer was most recently in the cat bond market in April this year, when it secured $200 million of reinsurance through an Ursa Re Ltd. (Series 2023-1) cat bond issuance.

Now, we’ve learned from sources that the CEA is back and seeking a larger $300 million cat bond issuance, which as is typical looks to secure a multi-year source of annual aggregate California earthquake reinsurance protection for the sponsor.

Sutter Re Ltd. will look to issue two tranches of notes that will be sold to investors and the proceeds used to collateralize retrocession agreements with global reinsurer Hannover Re who will front the capital markets for the CEA in this transaction, while Hannover Re will then enter into reinsurance agreements to provide the coverage to the CEA, we’ve learned.

It’s interesting to note that the last Ursa Re cat bond from the CEA in April saw Swiss Re acting as a fronting reinsurer to intermediate the coverage from the capital markets to the CEA, while in many of its previous cat bonds the CEA directly enters into reinsurance agreements with the SPI. As a sophisticated reinsurance buyer, it seems the CEA is seeking optimal ways to access its reinsurance capacity at all times.

The two tranches of Series 2023-1 notes issued by Sutter Re will provide the CEA with annual aggregate California earthquake reinsurance on an indemnity trigger basis across a three-year and three annual risk period term.

A $175 million tranche of Class B notes will attach above a retention of $5.651 billion of losses, we’re told, giving them an initial attachment probability of 1.94%, an initial expected loss of 1.86% and these notes are being offered to cat bond investors with price guidance in a range from 6.75% to 7.25%.

A $125 million tranche of Class E notes are riskier, attaching above a retention of $2.994 billion of losses, giving them an initial attachment probability of 3.51%, an initial expected loss of 3.28% and the price guidance on offer to cat bond investors in this case is from 9.75% to 10.5%, we understand.

We’re told each layer of notes will participate as a percentage in a $500 million layer of the CEA’s reinsurance tower, while for loss events to be reported on they will need to cause an ultimate net loss of at least $350 million each.

It’s good to see the CEA back in the catastrophe bond market for a second time in 2023, with this earthquake cat bond set to bring some diversification to the market at the time of year when the issuance pipeline can be particularly US wind heavy.