It appears that investor appetite for the new Golden State Re II Ltd. (Series 2018-1) catastrophe bond, that provides reinsurance protection for workers compensation claims caused by earthquakes, has not been as high as expected, as the deal has shrunk slightly to $210 million in size, while the pricing has been fixed at the top-end of guidance.
It’s perhaps a sign of current sentiment in the catastrophe bond and insurance-linked securities (ILS) investor community after the consecutive years of losses, that this transaction has not achieved the targeted size and that investors have demanded the high-end of the marketed spread range.
This is the third cat bond transaction to benefit sponsor the California State Compensation Insurance Fund (SCIF), following its 2011 Golden State Re Ltd. deal and 2014 Golden State Re II Ltd. 2014-1 transaction.
At launch, this Golden State Re II 2018 cat bond issuance was targeting issuance of a single tranche of Series 2018-1 notes sized at $225 million, but according to our sources the transaction is now set to complete at just $210 million in size.
The now $210 million of cat bond notes are being sold to investors, with the $210 million of capital raised set to collateralize reinsurance agreements between the special purpose insurer Golden State Re II 2018 and the sponsor SCIF.
As a result, this cat bond will provide the California State Compensation Insurance Fund (SCIF) with a $210 million 4 year source of reinsurance protection, covering losses to its workers compensation insurance portfolio that are caused by qualifying earthquake events.
The reinsurance protection can be triggered on a per-occurrence basis, using a modelled loss trigger designed and calculated by catastrophe risk modelling specialists RMS, in the same fashion as the previous Golden State cat bond issues.
The Golden State Re II 2018 cat bond notes have an initial expected loss of 0.14% and were marketed to the ILS investor base with coupon price guidance in a range from 1.9% to 2.2%. But we’re told that this has now been fixed at the top-end of guidance, at the 2.2% spread.
Interestingly, that is the same coupon that the 2014 Golden State Re cat bond paid to its investors, but that deal had a much higher expected loss at 0.25%.
This shows investors being unwilling to support a new cat bond at any cost and perhaps even demanding better returns, which is encouraging given the losses that have been faced in the last year or so.
Whether that is a trend that will continue remains to be seen and we’ll need to see higher risk transactions pricing, focused on more traditional areas of property catastrophe risk to see whether the market has truly increased its return requirements and cat bond prices are really hardening, or whether this is specific to just this one bond.