Golden State Re II Ltd. (Series 2018-1)

This is the California State Compensation Insurance Fund’s third catastrophe bond transaction and is very similar to the SCIF’s 2011 Golden State Re Ltd. deal and 2014 Golden State Re II Ltd. 2014-1 transaction.

This cat bond marks the second issuance to use the Golden State Re II Ltd. special purpose insurer, which is incorporated in Bermuda.

This Golden State Re II 2018 cat bond issue will see a single tranche of Series 2018-1 notes marketed to investors, with the capital raised from the sale of the notes set to collateralize reinsurance agreements between the SPI and the sponsor SCIF.

The deal is expected to be sized at $225m or over, depending on ILS investor appetite for the transaction.

This cat bond will provide the California State Compensation Insurance Fund (SCIF) with a 4 year source of reinsurance protection covering losses to its workers compensation portfolio of risk that are caused by earthquake events.

The reinsurance protection will be afforded on a per-occurrence basis using a modelled loss trigger calculated by catastrophe risk modelling specialists RMS, in the same fashion as the previous Golden State cat bond issues.

The covered area is for earthquake events that strike anywhere across the entire U.S., but as with the previous cat bonds more than 95% of the SCIF’s insurance portfolio is focused on California, as its name gives away. Hence the risk associated with this cat bond is primarily focused on California or neighbouring area earthquakes.

The modelled loss trigger uses a variety of inputs and a calculation process to derive whether an event has triggered the cat bond. The trigger is of similar construct to the previous deals, using the exposures of a notional portfolio of workers compensation risks in the SCIF’s portfolio, earthquake severity factors (ground motion etc), geographic distribution of the covered portfolio, types of buildings covered, time of day and the day of week an event occurs, as some of the weighting factors that will be used to determine whether the cat bond is triggered and a payout due.

After a qualifying event, which has to be an earthquake of magnitude 5.5 or greater, losses will be modelled deterministically, so not related to actual injuries and fatalities, using the earthquake event parameters and this will be modelled against the notional portfolio using day/time weighting to determine an index value and notional modelled loss or payout amount.

The calculation process that runs after a qualifying earthquake event will derive an index value which will be compared against the transactions attachment point. The attachment point is at 1,000, and the exhaustion at 4,323.5 which is a larger layer of the SCIF’s reinsurance programme than the previous deals. This suggests the SCIF is using the cat bond to sit alongside its traditional protection, which is a shrewd move as the fixed cost of a cat bond can sit there across the four-year term allowing the Fund to measure effectiveness of traditional protection against it.

The initial attachment probability for the notes will be 0.49% which is almost the same as the 2014 deal’s 0.5%, while the initial exhaustion probability will be 0.03% (lower than the previous deal’s 0.11% due to the much larger layer covered) and initial expected loss is 0.14% (roughly half the 0.25% EL of the 2014 Golden State Re cat bond).

As a result the coupon guidance is very low for this cat bond, we understand, being marketed with a spread in a range from 1.9% to 2.2%. Again, for comparison, the coupon of the 2014 Golden State Re cat bond was 2.2%.

Update 1:

This catastrophe bond transaction shrank slightly during marketing to $210 million.

At the same time the coupon pricing was fixed at the top-end of the marketed range, at 2.2%.

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.