S&P raises concerns over Golden State Re II

Rating agency Standard & Poor’s (S&P) has raised concerns about elements of the structure of Golden State Re II, the latest cat bond to be issued by the California State Compensation Insurance Fund (SCIF).

This is the second time SCIF has accessed the cat-bond market to obtain reinsurance coverage. In December 2011, the SCIF sponsored its first catastrophe bond Golden State Re which provided the SCIF with $200 million of protection against workers’ compensation claims as a result of US earthquakes.

A new special purpose vehicle in Bermuda, Golden State Re II, has been established for the renewal issue.

Standard & Poor’s (S&P) has issued a pre-sale report on the transaction, in which it assigned its preliminary ‘BB+(sf)’ rating to the series 2014-1 Class A notes to be issued. The preliminary rating is based on the lowest of the natural-catastrophe (nat-cat) risk factor ('bb+'), the rating on the assets in the reinsurance trust account ('AAAm'), and the creditworthiness of the ceding insurer.

The 'bb+' nat-cat risk factor was derived by S&P using the RMS US Earthquake Casualty Model, updated in 2014, which was used to structure the transaction.

S&P also noted its concerns about the transaction. Firstly, there may be triggering events not captured in the model.

Secondly, the modelling results assume events are evenly distributed throughout a day. Since the timing of an event will have an impact on the loss amount, S&P reviewed two sensitivity tests.

Thirdly, it added that there is an investment risk related to the Treasury money-market funds held in the reinsurance trust account.