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Calif. SCIF cat bond to cover earthquake-related workers comp claims

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SAN FRANCISCO—The California State Compensation Insurance Fund is expected to close a new catastrophe bond next week that would cover earthquake-related workers compensation claims—a move that an analyst says could be followed by other workers comp insurers.

A recent report from Standard & Poor's Corp. said that an undefined amount of three-year, Class A senior notes are to be issued on behalf of SCIF by Golden State Re Ltd., a newly incorporated special-purpose insurer based in Bermuda.

Willis Capital Markets & Advisory is brokering the deal, according to S&P. The bond is tentatively expected to close Dec. 9 and would cover earthquake risks through December 2014.

Details, such as the bond's principal amount and interest rate, were not available in the report.

San Francisco-based SCIF is California's largest workers comp insurer. In a statement, SCIF said it “is in the process of evaluating our reinsurance and will have more to say on this issue after we are done.”

Willis declined to comment about the reported bond.

First S&P rating on cat bond for comp claims

S&P said this is the first cat bond that it has rated “related to reinsuring workers compensation claims.” Analyst Gary Martucci, who co-authored the report, said Monday that the SCIF bond could prompt other workers comp insurers to look at ways to transfer disaster-related losses.

“Those other state comp funds that have earthquake risk or hurricane risks…might consider this as well,” Mr. Martucci said. “It expands the supply of potential reinsurance, which could lower the cost.”

The cat bond will cover earthquakes across the United States, though 99.99% of the risk exposure is expected to come from California, according to the S&P report. Mr. Martucci said this provision would allow SCIF to cover claims if a major earthquake struck out of state but caused workers comp-related injuries in California.

The S&P report said the bond will cover losses exceeding an “initial index attachment point of 1,000 up to the initial index exhaustion point of 1,447.” The report did not define that index.

Risk ‘relatively remote'

The bond has an annual attachment probability of about 0.55%.

“It is a relatively remote risk,” Mr. Martucci said. “It's not working layer coverage.”

S&P gave the bond a ‘BB+' rating, which means the notes would have “quality and protective characteristics (that) may be outweighed by large uncertainties or major exposures to adverse conditions.” The rating agency said the bond's risk exposure is lowered by extensive U.S. earthquake data.

An analysis by Newark, Calif.-based RMS showed that only three major earthquakes in U.S. history—including the 1994 Northridge quake—could have generated losses that exceeded the bond's attachment point.

S&P, citing RMS analysis, also noted that those quakes would have needed to occur during peak workday hours to trigger SCIF's bond coverage, according to the rating report.