S&P clarifies rating framework for natural catastrophe bonds

by Artemis on November 26, 2008

Post failure of Lehman Brothers (a total return swap counterparty for cat bonds) the market for natural catastrophe bonds has slowed considerably with investors seeking reassurance before participating in the market. As a follow up to the downgrading of four catastrophe bonds, Standard & Poor’s have felt the need to further clarify their rating methodology for natural catastrophe bonds involving total return swap counterparties who get downgraded.

You can read the report here if you have a log-in to the S&P website.

The last section is interesting as it looks at the future of the catastrophe bond market. S&P says that market participants are looking to find new ways to structure total return swaps which are more acceptable from a counterparty risk point of view. S&P also say that they have yet to see a catastrophe bond structure which has effectively removed counterparty and market value risk. That’s something for market participants to aim for going forwards!

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Jean-Claude November 27, 2008 at 10:55 am

Morton Lane from Lane Financial LLC has published an easy-to-read analysis on this. You can find it on http://www.lanefinancialllc.com/ (free registration)
Here is a summary :
“What Were We Thinking?” is a brief look at the effect of Lehman Brothers’ bankruptcy on the Insurance Linked Securities Market through their position as Total Return Swap counterparty for four ILS and what it may mean for the ILS market in the future.

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