Cat bond to cover earthquake-related workers comp claims

SAN FRANCISCO—Standard & Poor's Corp. says a catastrophe bond being offered by the California State Compensation Insurance Fund could pave the way for more disaster-related workers compensation coverage.

A recent S&P report said 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, expected to close Dec. 9, would cover workers comp claims caused by earthquakes 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 bond.

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

“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.

For instance, Mr. Martucci said a significant earthquake outside of California could cause aftershocks in the state and could qualify for the coverage.

“It would need to be one very large earthquake,” he said.

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.

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 the RMS analysis, also noted that those quakes would have needed to occur during peak workday hours to trigger SCIF's bond coverage.