CEA’s risk transfer shrinks slightly, as cat bond cover declines

The California Earthquake Authority’s (CEA) reinsurance and catastrophe bond based risk transfer program has shrunk back to just slightly under $9.3 billion in size, as the insurer also experiences challenges in the market due to harder pricing.

Overall, the California Earthquake Authority’s (CEA) total capacity has declined from $19.6 billion at December 31st 2021, down to $19 billion at May 31st 2022.

The CEA’s available capital and capital from revenue bonds have both shrunk by around $100 million each, while its risk transfer arrangements are down by almost $400 million over that same period.

At May 31st, the CEA reported a risk transfer program that features just over $7.32 billion of traditional reinsurance, some of which could be via the insurance-linked securities (ILS) market through fronted means, we imagine.

That’s down slightly from almost $7.35 billion of reinsurance in-force as of December 31st 2021.

Alongside this, the CEA had $1.725 billion of catastrophe bonds still in-force, as of May 31st, which was down from $2.09 billion at the end of December.

To that, we need to add the $245 million of multi-year and fully-collateralized reinsurance the CEA secured from a visit to the catastrophe bond market, with a Ursa Re II Ltd. (Series 2022-1) that completed in June, so after these latest figures on the risk transfer program.

So that would take the cat bond component of the CEA’s risk transfer tower to $1.97 billion and its overall reinsurance and transformer risk transfer tower to slightly under $9.3 billion, so still smaller than it was at December 31st of last year.

The CEA’s original target for its Ursa Re II cat bond had been for $275 million of cover at least, so the figure could have been slightly higher had market conditions been more settled for new cat bond issues at that time.

The CEA has three additional layers of reinsurance in its tower that mature at July 31st, so we’d imagine the insurer is out in the market at this time to arrange renewals for at least some of these.

Those layers amount to almost $480 million of reinsurance limit that the CEA will want to replace at least part of.

Coming after the mid-year renewals are largely completed and the catastrophe bond market has seemingly seen its spread widening stabilise, perhaps there could be an opportunity for some of this to be placed in the ILS market, given any funds or investors with additional capital to deploy will be keen to have access to their placement.