Embarcadero Catastrophe Bond a ‘Negative’ for Reinsurance Industry: Moody’s

The newly minted $150 million catastrophe bond program structured by the California Earthquake Authority (CEA) could act as new shot across the bow of the reinsurance industry by taking business away from the traditional market, according to report issued by Moody’.

The new bond program — called Embarcadero Reinsurance, Ltd. — affords the CEA the ability to return to the market every four to six months, allowing the agency to make “frequent, repeat issuances” that will give it “negotiating leverage with reinsurers, and manage price shocks in the traditional reinsurance market,” the report explains.

“Given investor demand, we could see a wave of catastrophe bond issuance in the wake of another major catastrophe and capacity shortages in the reinsurance market, which we expect to temper reinsurers’ ability to raise prices,” the Moody’s says.

The report also points out that the CEA program offers a price closer to traditional reinsurance programs. Moody’s says that the CEA currently pays 8.15 cents for each dollar of reinsurance “for the riskiest tranche of its reinsurance program” while the catastrophe bond “only” pays investors an annual floating rate of 6.6 percentage points over one-year U.S. Treasury money-market funds

“Beyond expense savings, the bond provides fully secured collateral and multiple-year protection,” Moody’s added.“The new catastrophe bond comes at a time when reinsurers threaten to be stingier with capital while, in contrast, investors look to make more bets on catastrophe risks.

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