NU Online News Service, Aug. 8, 3:04 p.m.EDT

The California Earthquake Authority (CEA) last week turned tothe capital markets and tapped a new special-purpose vehicle tosecuritize its risk, a move which is credit-negative for thereinsurance industry, according to Moody's Investors Service.

In its Weekly Credit Outlook, Moody's says the transaction iscredit-positive for the CEA, as the bonds were issued at a lowercost than the CEA's comparable protection from the traditionalreinsurance market. Moody's notes that the CEA is "one of thebiggest buyers of earthquake reinsurance in the world."

Last Tuesday, the CEA entered into a reinsurance contract withEmbarcadero Reinsurance, Ltd., which sold $150 million inthree-year catastrophe bonds to investors, Moody's explains. "Thedeal transferred CEA earthquake risk to the capital markets for thefirst time without the involvement of a traditional reinsurer,"Moody's says. "As a result, the CEA will rely less on reinsurerswhose products come at a high cost to the CEA. The CEA currentlybuys $2.9 billion in reinsurance protection."

Noting the impact on the reinsurance industry, Moody's says thatwhile catastrophe reinsurers are looking to raise prices, investors"have pent-up demand for cat bonds, particularly those thatdiversify away from U.S. hurricane exposure, the underlying risk inthe majority of cat bonds."

Moody's says that, given this demand, "we could see a wave ofcatastrophe-bond issuance in the wake of another major catastropheand capacity shortages in the reinsurance market, which we expectto temper reinsurers' ability to raise prices."

For the CEA, Moody's says that, depending on investor interest,the authority may be able to tap the capital markets every four tosix months. "Frequent, repeat issuances will help the CE diversifyits claims-paying resources, increase negotiating leverage withreinsurers and manage price shocks in the traditional reinsurancemarket," Moody's says.