The California Earthquake Authority (CEA) shrank its risk transfer tower through the January renewals, as its traditional reinsurance placements saw further contracts expire, resulting in its catastrophe bonds making up a larger share of the overall at now more than 31%.
When we last reported on the CEA’s risk transfer tower, made up of reinsurance and cat bonds, it totalled $7.99 billion as of Nov 1st 2024.
The risk transfer tower had sat at just over $9.15 billion of limit as recently as after the June 2024 reinsurance renewal period, but has been steadily shrinking since.
The reason for a raft of non-renewals in the reinsurance and risk transfer tower has been the fact that the CEA’s probable maximum loss at the 1-in-350 year loss event level has been declining at a faster pace that its reinsurance contracts have been coming up for renewal.
This trend continued at the January 2025 reinsurance renewals, as renewed contracts were secured in lower volumes than those that expired.
The CEA had single and multi-year reinsurance contracts amounting to just over $2.48 billion that were scheduled to run off-risk after December 31st 2024.
At the January 2025 renewals just over $2.15 billion of traditional reinsurance was renewed.
As a result, the traditional reinsurance component of the reinsurance tower shrank from roughly $5.72 billion at November 1st 2024, to just over $5.39 billion as of January 31st 2025, the latest data reported.
At that time, the CEA’s transformer program of catastrophe bonds amounted to $2.055 billion, but since then the earthquake insurer had sponsored an additional $400 million Ursa Re Ltd. (Series 2025-1) cat bond as well.
Taking the cat bond component of the California Earthquake Authority (CEA) risk transfer tower to $2.455 billion at this time, which now contributes some 31% of its total private market protection of roughly $7.85 billion.
Cat bonds have become a growing component of the CEA’s risk transfer arrangements, having made up just 25% as recently as June 30th 2024, which then grew to 28% at November 1st, stayed flat around the 28% mark at January 31st 2025 and has now jumped to 31% on the latest cat bond issuance.
The multi-year nature of catastrophe bonds and the way maturities stagger through the different vintages sponsored, has helped the CEA maintain a strong risk transfer tower even while going through the changes to its PML and resulting shrinking of overall reinsurance protection needs.
A further $1.2 billion of traditional reinsurance limit matures on March 31st this year, so it will be interesting to see how much is renewed at April 1st and whether the share of the tower contributed by the catastrophe bond market grows further after that date.
View details of every catastrophe bond sponsored by the CEA in the Artemis Deal Directory.
As we reported in January this year, the California Earthquake Authority (CEA) has been discussing the need for either a pre-funded subsequent or second-event funding tower (with risk transfer and reinsurance perhaps a part of it), or the infrastructure for one, that would support its functions after a significant earthquake loss that depletes its claims paying ability.
