U.S. insurer State Farm’s latest catastrophe bond, the $300m Merna Re Ltd. (Series 2015-1), is set to price at the top end of initial guidance Artemis understands, as investors again showed they are not prepared to take on a risk at any price.
When it launched ten days ago the Merna Re 2015-1 cat bond looked set to break records for the lowest coupon for U.S. earthquake risks, perhaps even becoming the lowest priced U.S. quake cat bond ever.
The cat bond remains a $300m deal, no sign of it upsizing so far we hear, which will provide State Farm with a fully-collateralized source of reinsurance protection on an indemnity and per-occurrence basis for New Madrid earthquake risks, one of the peak U.S. quake risk zones.
The transaction was launched with aggressive price guidance of 1.75% to 2%, which at a base expected loss of 0.41% provided a multiple that may have been acceptable to some investors, but could have been the lowest priced quake risk in the cat bond market ever had the pricing settled towards the lower end.
In fact, the Merna Re V Ltd. cat bond that State Farm sponsored in 2014 covers the same layer of its programme with a 2% coupon and was the lowest priced U.S. quake risk. Interestingly the Merna Re 2015-1 cat bond looks set to price at the same coupon of 2%, perhaps once again demonstrating that investors are keen to establish a floor in pricing of U.S. perils.
Is 2% the minimum coupon that ILS investors will accept for taking on catastrophe risks? Perhaps. Even the much more remote risk Kizuna Re II Ltd. (Series 2015-1) cat bond that launched this week is offering 2%, with no range in the marketing information. Is 2% a floor for risks below a 0.5% expected loss or could investors drive the pricing any lower in future? It will be interesting to watch this market dynamic over coming months.
State Farm’s Merna Re Ltd. (Series 2015-1) catastrophe bond prices next week, we understand and is set to complete before the end of March. You can read all about it and every other cat bond in the Artemis Deal Directory.