Mariah Re Ltd. catastrophe bond rating could be affected by recent tornadoes

We were incorrect in our assessment earlier that the Mariah Re Ltd. catastrophe bond, which is exposed solely to severe thunderstorm risks (including tornado), was unlikely to be affected by the recent spell of severe convective weather in the U.S. It transpires that due to exposure in the state of Missouri losses have qualified as covered events under the terms of the cat bond notes of the Series 2010-1 issuance.

Mariah Re Ltd. issued the $100m Series 2010-1 notes in November last year for American Family Mutual Insurance to provide cover against severe thunderstorms. For a thunderstorm to qualify as a covered event it must have an event index equal to or greater than $10m. The initial attachment point for the first risk period is $825m with a maximum event index for a single event of $300m for the Series 2010-1 deal.

We assumed that Mariah Re would be safe as it doesn’t cover thunderstorms in most of the states worst affected by the recent spate of severe convective weather. However it does provide cover in Missouri which was also struck by thunderstorms, although not as severe as those experienced in states such as Alabama, Arkansas, Mississippi, North Carolina, Tennessee, and Virginia. It’s extremely unlikely that Mariah Re could be triggered by the recent spate of tornadoes, but it could accumulate losses at a rate which would raise its risk profile.

Standard & Poor’s have issued a bulletin commenting on the notes ratings. In it they explain that there have been three qualifying covered events so far this year, for which Property Claims Services (PCS) has issued reports detailing estimated losses: Catastrophe Series Numbers 38, 42, and 43. Total qualifying losses (under the terms of Mariah Re) from these three events amount to approximately $103.5m.

That’s within the expected loss rate that the transaction terms allow for at this point of the year, were the losses above the expected rate S&P would likely have taken action on the notes rating.

However, there were additional tornadoes and thunderstorms in Missouri which occurred on the 25th April that PCS have not yet issued loss estimates or reports for. S&P also say that there could be losses in other states in the covered area that may qualify too (Georgia, a covered state under the terms of this cat bond, experienced a number of tornadoes on the 27th and 28th April which are yet to have loss estimates reported). Should those reports show additional qualifying covered events have occurred then Mariah Re could experience a ratings review or downgrade.

Under the terms of the deal, on a modelled basis, S&P say that by the end of April approximately 19% of losses would be expected to have occurred. Using the attachment level of $825m that means that between 1st January and the end of April the deal allows for up to $157m of losses to occur, the maximum run-rate of losses allowed before the deal is considered more at risk. That means that should additional qualifying events result in loss estimates amounting to $53.5m or more, Mariah Re’s covered losses would have exceeded the expected run-rate.

S&P say that they will continue to monitor the events that could affect Mariah Re’s notes. Once they receive the loss estimate relating to the 25th April Missouri tornadoes they will update the covered loss amount and take a rating action if warranted. We’ll keep you updated whatever the outcome.