The California State Compensation Insurance Fund’s (SCIF) catastrophe bond renewal, Golden State Re II Ltd., has now been priced right at the low-end of initial coupon guidance, again showing investors continuing appetite for the ILS asset class.
The cat bond upsized during marketing, from a target minimum of $150m, to look set to secure the SCIF $250m of fully collateralized capital market reinsurance protection for workers compensation claim losses resulting from qualifying earthquakes events.
When it launched to the insurance-linked securities (ILS) market investment community the guidance price range was 2.2% to 2.7%. Sources told Artemis that this range narrowed and moved towards the lower-end of guidance, to 2.2% to 2.45%, as the cat bond size increased by two-thirds, thanks to investor demand.
Now, we understand from sources, the Golden State Re II cat bond has been priced right at the bottom of the initial and revised guidance ranges, to offer its investors a coupon of 2.2%. That’s a decrease in pricing of -10% from the mid-point of initial guidance, or as much as -18.5% from the top of that initially marketed range. The deals size hasn’t changed and remains at $250m.
Discussions on the topic of whether catastrophe bond pricing has reached a floor perhaps appear a little early, as investors once again show that they are willing and able to take on remote insurance risks such as this at very low coupon levels. Whether this is the floor is hard to say, however it is hard to believe it can be much lower.
But, even with a coupon set as low as 2.2% the multiple of expected loss (at 0.25%) to pricing is still 8.8x, which is much higher than most other cat bonds of 2014, showing the remoteness of this particular transactions risk.
As we wrote in our article on the upsizing yesterday, it is worth noting that at current available interest rates a 10-year Treasury investment might pay the same as this cat bond, with Treasury investments often considered ‘risk-free’. That does mean some ILS investors are clearly either valuing the diversification that this cat bond offers their portfolio, the lack of correlation with wider financial markets, or perhaps the fact it’s not as exposed to inflation risks as a treasury, enough to invest.
At this return level Golden State Re II, or any cat bond, is not for everyone however. A number of ILS investors told us that at this level of return they will not invest in cat bonds, no matter how remote the risk. Others told us that they will, but only in small allocations to complement their portfolios.
Perhaps the ability to get such remote and low-paying risks to market is a factor of the size and maturity of the cat bond investor space. That there are now enough investors who would buy a small allocation to a cat bond such as this, to augment their portfolio diversification, that such low returning deals remain viable even in a market like this.
Now priced, this transaction is expected to settle and complete next week. You can read all about Golden State Re II Ltd. (Series 2014-1) in our catastrophe bond Deal Directory. Once the transaction is completed and launched it will also be added to our ILS Market Dashboard and Statistics.
Read our other articles about this cat bond: