The California State Compensation Insurance Fund’s (SCIF) catastrophe bond renewal, Golden State Re II Ltd., looks set to secure the fund additional protection compared to its maturing deal as the cat bond has upsized by two-thirds to $250m.
According to sources the cat bond has grown by 66%, from the $150m suggested minimum size it was launched at, to now offer the SCIF $250m of fully collateralized capital market reinsurance protection for workers compensation claims caused by earthquakes.
That’s $50m more than the SCIF had from its soon to mature $200m Golden State Re Ltd. cat bond, perhaps continuing to demonstrate the buyers-market conditions which are available in the cat bond market right now.
Perhaps more telling about reinsurance and capital market conditions generally is the latest price guidance. When it launched, Golden State Re II offered price or coupon guidance in a range of 2.2% to 2.7%. We understand that during marketing this range has been narrowed and moved towards the lower-end of guidance, to now sit at 2.2% to 2.45%.
Now, that is only a small movement of approximately -5%, if you take the mid-range of the launch and latest price guidance. However it is worth noting that at current available rates a 10-year Treasury investment might pay the same as this cat bond. With Treasury investments often considered risk-free, producing cat bonds with such low coupons may begin to be questioned by some investors we would imagine and it may also lead to questions about where (in the reinsurance tower) this market should really be pitching the reinsurance coverage it offers.
Of course this is an extremely low, or remote, risk catastrophe bond, with an initial expected loss of just 0.25%, meaning that even if it priced at the lowest-end of guidance, at 2.2%, it would still have a very high multiple of 8.8 times the expected loss. That multiple is much higher than most catastrophe bonds issued this year, the average expected loss of 2014 issued cat bonds is just 1.55%, while the average multiple is only 2.88x.
For some investors, of course, the need to invest and to acquire diversification for their cat bond portfolios will drive the investment decision to a degree, meaning that Golden State Re II will provide a useful investment or capital deployment opportunity for some insurance-linked securities investors at this quiet time of the year. For other fixed income focused investors, the low expected loss means that this will be considered ‘virtually’ risk-free, driving the investment decision as well. However, we suspect that this and other cat bonds with such low coupons will no longer be for everyone as ILS managers begin to protect their returns.
The transaction is expected to reach final pricing this week and will complete next week. We’ll keep you updated as the deal comes to market and you can read all about Golden State Re II Ltd. (Series 2014-1) in our catastrophe bond Deal Directory. Once the transaction is completed it will also be added to our ILS Market Dashboard and Statistics.
Read our other articles on this cat bond: