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Derivatives

Earthquake Authority Plans USD100 Million CAT Bond

The California Earthquake Authority is planning to issue a USD100-200 million catastrophe bond tied to earthquake risk. It will also be the first CAT bond it has issued in which it has not used a reinsurer. Market officials estimated this will save the authority USD5-6 million. A CAT bond analyst in New York said this is a natural progression for the authority as it has been issuing CAT bonds for some time and knows what to do. Tim Richison, cfo of the authority, referred calls to Stan Devereux, company spokesman. Devereux confirmed the plans. "We're looking to diversify our capacity to pay claims and we're exploring CAT bonds as a means of getting it done," he added, declining further comment.

The authority plans to bring the deal to market by the third quarter, according to a market official. The one-year notes are expected to price at LIBOR plus 400-500 basis points. Since entering the CAT bond market four years ago, CEA has settled on reinsurance agreements with the condition that the reinsurer lay off risk to the capital markets using an index to trigger bond payments. CEA has entered four of these arrangements, each averaging USD100 million, according to an official.

Swiss Re has served as CEA's reinsurer for previous CAT bond offerings. Traditionally, the authority has chosen a reinsurer to provide it with USD100 million worth of reinsurance coverage with the expectation that the reinsurer will arrange for a follow-on CAT bond issue. As part of the agreement, the reinsurer was required to find an investment bank to issue the bonds. Despite forgoing a reinsurer's assistance on this offering, the company would still need to employ the services of an investment firm to issue the CAT bonds. Lehman Brothers andGoldman Sachs reportedly lead the running for the issue, one CAT bond professional said. Officials at Swiss Re, Lehman Brothers and Goldman Sachs declined to comment.

 

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