CEA Cat Bond, Collateralized Reinsurance Push Gains Steam

The California Earthquake Authority (CEA) has upped its collateralized reinsurance contract with Nephila Capital by $100 million — and is back the market for a third catastrophe bond issue — in what documents reveal is a focused effort move away from the traditional reinsurance market.

The CEA signed a $100 million contract with Poseidon Re, the Nephila Capital-backed collateralized reinsurer. The contract term began May 1, 2012, and lasts one year at annual premium $4.5 million, according to CEA documents from its June 21st board meeting.

In addition, the earthquake authority is jumping back into the catastrophe bond market. The CEA scored a BB+ rating from Standard & Poor’s for a third — and yet-to-be issued — catastrophe bond structured through its Bermuda-based special purpose vehicle (SPV) Embarcadero Re Ltd.

The CEA has already issued two other catastrophe bonds — both for $150 million — as part of the Embarcadero Re program and has given staff the green light to issue an additional $300 million more by the end of the year.

Both the catastrophe bond push and the Nephila commitment are part of a broader push by the CEA to diversify the fund’s risk-transfer program away from the traditional reinsurance market and stagger contract renewals in order to gain price advantage, documents say.

The goal of the Embarcadero program is to “[a] move to access markets other than traditional reinsurance (the capital markets),” the documents state, adding that “ The cat-bond market is growing; it’s important to the CEA’s risk-transfer program in diversifying the capital sources needed to support and pay policyholder claims.”

The collateralized reinsurance contract with Nephila — executed outside of the CEA’s traditional renewal dates, allows the earthquake authority to take advantage of pricing by “[spreading] the effective (and renewal) dates.”

“Staff has determined the CEA should contract its risk-transfer program into variably commencing contract terms, to allow renewals to come due at different points,” the documents stay “Staff feels this will result in more efficient pricing and availability of capacity.”

The push into alternatives is also being fueled by an earlier decision by the CEA’s board to give staff “discretion” to issue bonds and sign contracts without prior approval approved earlier this year.

Interestingly, the CEA meeting minutes add that while board endorses the move towards alternatives, the governor’s appointee to the board — Pedro Reyes — wanted to make sure the staff did not move ahead too quickly.

“Mr. Reyes added that the Board should be willing to give staff flexibility to conduct transactions as noted but not a “blank check,” the documents state.

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