December 12, 2011 — Chadbourne & Parke represented the California State Compensation Insurance Fund (“State Fund”), a workers’ compensation fund for California employers, in establishing a first-of-its-kind catastrophe bond program aimed at hedging the fund’s earthquake risk, as well as an issuance of notes under the program in a Rule 144A offering to qualified institutional investors.
Working on the deal for Chadbourne were insurance and reinsurance practice partners John Sarchio and Carey Child, corporate partner Dan Rabinowitz and insurance and reinsurance special counsel Richard Liskov. The program was established and the initial class of notes was issued on December 8, 2011.
The issuer of the notes is Golden State Re Ltd., a special-purpose Bermuda insurer. The program has an unlimited capacity and supports “Cat” bonds issued from time to time that carry protection against losses arising from earthquakes having a magnitude over a defined threshold. The initial class of notes issued by Golden State Re under the program consisted of $200 million aggregate principal amount of Series 2011-1 Class A Principal-At-Risk Variable Rate Notes due in January 2015. Standard & Poor’s rated the Class A notes at BB-plus. The Class A notes cover specified earthquake risks over the period December 9, 2011 — December 31, 2014, subject to early redemption provisions.
“Cat” bonds permit an insurer to transfer defined insurance risks to capital-market investors. Under the structure of the bond, if an earthquake is large enough to trigger a payout, the State Fund is entitled to recover losses from Golden State Re under a reinsurance agreement relating to the Class A notes. Golden State Re, in turn, would be entitled to reduce the outstanding principal amount of the Class A notes by a corresponding amount, resulting in a loss to investors. The trigger for the payout to the State Fund and the principal reduction is based on a design by the U.S. Geological Survey, which calculates losses using severity and length of the quake.
Willis Capital Markets & Advisory acted as sole structuring agent and book runner for the Class A notes.