California Earthquake Authority Bond Issue a ‘First Step’

Officials with the California Earthquake Authority said that their recent $150-million bond issue is just a first step in diversifying their risk so that they can expand earthquake coverage in the state.

“It is just a step and we need to keep at it,” said Glenn Pomeroy, CEO of the CEA.

Pomeroy said his major goal with the CEA is to expand the number of homes it covers. Currently, the CEA accounts for 70 percent of residential earthquake policies sold in California, but only 12 percent of households have earthquake insurance.

He would like the CEA to “develop more affordable insurance while remaining sustainable in the event of a big earthquake,” he said.

The CEA recently announced that it will institute a 12 percent rate reduction, starting Jan. 1, 2012.

The bond issue, the sale of which was completed last month, was not large in the scheme of the CEA plan, but it was an important first effort, Pomeroy said.

The issue was the first time the CEA has accessed the capital markets. Prior to this, the CEA went to the traditional, reinsurance markets when it needed to transfer some of its risk. But the CEA knew there was demand.

“We knew there was appetite out there for earthquake risk in the capital market,” Pomeroy said.

The bonds came from an arrangement CEA entered into with Embarcadero Reinsurance Ltd, a special purpose, reinsurance vehicle established in Bermuda for this bond sale, and for others with the CEA. The sale of the bonds — three-year catastrophe bonds, paying a floating rate of 6.6 points above one-year U.S. Treasury money-market funds — was led by Deutsche Bank Securities.

The CEA intends to have more, similar bond issues in the future, perhaps every four to six months, said Tim Richinson, chief financial officer of the CEA.