The California Earthquake Authority, a provider of residential earthquake insurance, is increasing its protection against losses through a planned sale of catastrophe bonds.
The offering will help CEA protect against cataclysmic losses from temblors in the state, Gary Martucci, an analyst at Standard & Poor’s, said in a telephone interview.
The Series 2012-II Class A notes may be rated BB+(sf) by S&P, according to a July 16 report from the ratings company. The debt will mature in three years with six, three-month extension options. Deutsche Bank AG is managing the sale.
The bonds would sustain principal losses if CEA’s claims- related losses exceed $6.23 billion in the first year, with the threshold varying in the second and third years, Martucci said. An AIR Worldwide Corp. analysis showed two episodes since 1769 that had the potential to cause principal losses on the notes: the 1906 San Francisco earthquake and the 1994 Northridge earthquake, the ratings company said.
Embarcadero’s outstanding catastrophe bonds, $150 million each of three-year securities, are a Series 2012-II issue sold in February at 725 basis points more than three-month U.S. Treasury bills and a Series 2011-I issue sold in August 2011 at a spread of 660 basis points, according to data compiled by Bloomberg. Those bonds have lower thresholds compared with the new bonds on principal losses, Martucci said.
The bonds are being sold by Embarcadero Reinsurance Ltd. on behalf of CEA under a reinsurance contract between the companies, according to the report.
Insurance companies and reinsurers sell cat bonds to help cover their most extreme risks, with the proceeds of the issues set aside and paid out in the event of a qualifying disaster. Buyers get a relatively high interest margin for holding the notes and risk forfeiting their entire investment if the securities are triggered before they mature.
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