Montana Re catastrophe bond was activated by Tohoku, Japan earthquake

by Artemis on June 2, 2011

Finally it has been confirmed that Bermuda reinsurer Flagstone Re’s catastrophe bond Montana Re Ltd. Series 2010-1, issued in December 2010, has been activated by the Tohoku, Japan earthquake on the 11th March. The $60m tranche of Class E notes issued by Montana Re have been tipped to be activated since late March but now it has been confirmed.

Flagstone Re themselves suggested that the tranche would be activated when their CEO David Brown said that “protection is now effectively on a ‘next event’ basis” and market participants have been pricing in the suspected activation but confirmation of its fate has taken time. Now Reuters have said here that a report from the deals calculation agent Risk Management Solutions says that the earthquake qualified as a covered event under the terms of Montana Re and produced an index value of $322.2m, enough to activate the second event cat bond.

This means that Montana Re is now exposed to the possibility of losses should any further events qualify under the terms of the deal over the remainder of the current yearly risk period. The deal resets on an annual basis, so for an event to qualify it would have to occur before the end of 2011. After that the deal will reset and return to become a second event cat bond again.

Standard & Poor’s placed Montana Re’s notes on CreditWatch negative at the end of March saying that if the Japanese earthquake activated the cat bond then they would downgrade the rating on Montana Re’s Class E notes to ‘CCC-’. No report from S&P has emerged today but we’d expect to hear how they react soon (and we’ll update you when we do).

Montana Re’s Class E notes are now exposed to any qualifying event from the range of perils covered which are U.S. hurricane and earthquake, European windstorm, and Japan earthquake and typhoon.

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