Both tranches of notes from the Calypso Capital II Ltd. (Series 2013-1) catastrophe bond issuance, which was sponsored by insurance and reinsurance firm AXA Global P&C in October 2013, have been upgraded by rating agency Standard & Poor’s.
Upgrades to the ratings of catastrophe bond notes is a relatively rare occurrence. In this case it is due to the notes no longer having to be assessed with their maximum possible attachment probability as a starting point, due to them entering the final risk period and so no further resets being applicable to them.
Each year, as part of the annual reset process, rating agencies analyse catastrophe bonds to ensure that the reset variables result in a risk profile that still fits with the existing rating that was applied.
In the case of the Calypso Capital II cat bond the notes have reached their final annual risk period, meaning that the potential for another variable reset raising or lowering the risk profile has disappeared and hence the rating upgrade.
The Calypso Capital II catastrophe bond provides sponsor AXA Global P&C with reinsurance protection against European windstorm losses in key European countries on a per-occurrence basis.
Typically, S&P would stress test the cat bond notes using the highest possible attachment probability that could be applied during a variable reset.
But as Calypso Capital II has entered its final year, S&P explains; “Because the class A notes are in their final risk period and the class B notes are entering their final risk period, the variable reset is no longer applicable and we base the nat-cat risk factor on the results from the most recent reset report.”
As a result of this and with just one year to go on the cat bond term, S&P said that it is raising the rating on the Class A notes to ‘BB (sf)’ from ‘BB-(sf)’ and on the Class B notes to ‘BB- (sf)’ from ‘B+ (sf)’.
The rating on the Class A Calypso Capital II cat bond notes should actually have been upgraded a year ago it transpires and S&P said an error led it to miss that in the last annual reset review.
For the Class A Calypso Capital II notes the one-year attachment probability was reset to 1.73%, which
became effective on 1st January 2016. This tranche of notes risk period ends on 31st Dec 2016, and matures on 9th January 2017.
Meanwhile the Class B cat bond notes issued by Calypso Capital II have a year left to run, as they provided four years of reinsurance cover, while the Class A notes just three.
S&P said that based on the latest reset report, these notes have an updated one-year attachment probability of 2.21% (down from the current 2.61%), effective on 1st January 2017. As a result, the risk interest spread for the upcoming risk period will equal 3.66%, which is higher than the coupon these notes paid at time of issuance.
S&P explains; “The latest reset report confirms that we do not need to use the maximum possible probability of attachment as the base case for our analysis. We are therefore able to raise the rating for the remaining risk period as well.”
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