CEA risk transfer shrinks 6% more to $7.99bn on non-renewals. To re-evaluate at 1/1

The California Earthquake Authority (CEA) did not come back to the reinsurance market at its typical October 1st renewal, allowing roughly $511 million of cover to expire and it now expects to re-evaluate its risk transfer need at the January renewals, meaning a $215 million catastrophe bond will likely mature without renewal later this month.

As we reported earlier this month, the California Earthquake Authority (CEA) has begun to shrink its reinsurance and catastrophe bond backed risk transfer resources, as its policy-count and overall exposure level declines.

Having grown the risk transfer tower to just over $9.15 billion of limit at June renewals, the CEA then reduced the size of the reinsurance portion of the program through non-renewals as it did not need as much protection, given the shrinking exposure base.

A significant amount of reinsurance was allowed to expire without renewal at July 31st, shrinking the tower 7% to roughly $8.5 billion.

As we said in our last article, the market was discussing additional non-renewals of reinsurance by the CEA at its October 1st renewal date.

It now transpires that $511 million more in traditional reinsurance was allowed to expire, reducing the overall size of the risk tower to just over $7.99 billion at November 1st, based on the latest disclosure from the earthquake insurer.

That’s a further 6% decline and now puts the tower more than a billion dollars smaller than it was just back at June this year.

At a board meeting of the CEA back in September, the dynamics that have affected its exposure were discussed.

The board heard that the CEA’s probable maximum loss at the 1-in-350 year level has been declining at a faster pace that its reinsurance contracts have been coming up for renewal.

After the October 1st non-renewal of $511 million of reinsurance, the CEA is now expecting to wait until the January 2025 renewal to reassess its risk transfer needs.

The hope is that, by that stage and given the significant non-renewals, the return period needs for risk transfer will have stabilised somewhat and a clearer picture of the go-forward reinsurance needs be available.

However, this brings into question the future of one catastrophe bond in the risk transfer tower as the CEA has a $215 million Ursa Re II Ltd. (Series 2021-1) cat bond that matures at the end of November. It now seems unlikely we’ll see any renewal for this, so that could be a further $215 million reduction in risk transfer tower size.

That would reduce the CEA’s risk transfer tower to approximately $7.78 billion from December 1st.

The next renewals, at the end of this year, sees the CEA with a significant amount of traditional reinsurance contracts set to expire.

In total, single and multi-year reinsurance contracts amounting to just over $2.48 billion will run off-risk after December 31st 2024 and it is now questionable just how much of that the CEA will need to renew.

For some history, the CEA’s risk transfer tower had been as large as $9.6 billion around mid 2021, but the last time it was below $8 billion (as it is now) was right back in 2017.

The insurer has been adjusting its policy coverage terms to reduce risk in recent years, while the private market has also taken earthquake insurance share in California.

For 2025, the risk transfer strategy remains unchanged at the CEA, with a target to have resources in place to cover between a 1-in-350 years to 1-in-500 years return period as its claims paying capacity target.

Once again, this will include traditional reinsurance and transformer risk transfer, or catastrophe bonds.

Right now, as of November 1st 2024, the CEA has just over $5.72 billion of traditional reinsurance in-force.

In addition, the CEA continues to have some $2.27 billion of outstanding catastrophe bond coverage still in-force at this time, putting the CEA in 3rd position in our cat bond sponsors leaderboard.

With the now expected maturity and likely non-renewal of the $215 million Ursa Re II Ltd. (Series 2021-1) catastrophe bond at the end of November, that will reduce its catastrophe bond backed reinsurance to $2.055 billion, so still making up 26% of the total nearly $7.78 billion at that time.

But, how this will change after the 1/1 renewals remains to be seen.

The next catastrophe bond maturities are due next June 2025, totalling $245 million. But, of course, the CEA could also opt to redeem cat bonds early, if further reductions in the risk transfer tower were necessary.

However, with cat bond coverage typically locked in for three-year terms or more, it seems more likely any further reductions for now will come at the 1/1 renewals, from its traditional and privately collateralized reinsurance arrangements.

As a result, 2025 will be an interesting year to watch the CEA’s risk transfer tower developments.

One other item of note from its upcoming board meeting in early December, the CEA is also looking to expand the role of reinsurance broker Gallagher Re to to authorise additional monthly loss modelling activities.

Currently, Gallagher Re, performs the modeling for the CEA’s risk transfer program on a quarterly basis, but given the exposure decline the insurer feels this decrease in the CEA’s claim-paying capacity requires “more focused and frequent monitoring.”

As a result, the shift to monthly loss modelling is expected to assist in equipping the CEA, “to fine-tune its risk transfer program to better respond to changing market conditions and follow the board approved risk transfer strategy, which could result in cost savings for the CEA and its policyholders by limiting any excess purchase of risk transfer,” the insurer believes.

Adjusting the service agreement with Gallagher Re to include the monthly running of loss modelling output is expected to cost an additional $400,000 per-year, taking aggregate annual fees paid to the reinsurance broker to no more than $4,600,000, the CEA’s board documents explain.

View details of every catastrophe bond sponsored by the CEA in the Artemis Deal Directory.