A.M. Best have joined Standard & Poor’s and put the ratings of catastrophe bonds which utilise the Risk Management Solutions (RMS) U.S. hurricane model under review due to the changes in the latest version of the risk model. The model which was used to assess the cat bonds at the time of issue has undergone significant change which led to a different wind risk profile for many U.S. States.
As a result the ratings agencies have been asking RMS to run the cat bond transactions through the new model to see if it changes any of the risk factors associated with a catastrophe bond transaction (such as attachment points and expected loss).
A.M. Best only rate two cat bond tranches with U.S. hurricane exposure which use the RMS model, Montana Re Ltd. (Series 2009-1), they’ve announced that they are putting both the $100m Class A and $75m Class B notes under review with negative implications.
A.M. Best have requested that RMS calculate new attachment and exhaustion probabilities and expected loss percentage associated with the notes using the new version of their RiskLink U.S. hurricane model. Depending on the outcome of this review A.M. Best may take further action on the ratings of Montana Re such as downgrading them if the risk profile has risen significantly enough.
On the 18th of April S&P put the ratings of a number of U.S. hurricane exposed cat bonds on CreditWatch negative until RMS have analysed the deals risk with the new model.
The RMS model change has caused some nervousness in the market and combined with continued uncertainty after the events in Japan is contributing to slower issuance at the moment. Once the reassessment of all the affected cat bonds is complete we hope to have a better picture of how the model change affects cat bond risk profiles and the market will come to terms with how best to issue deals under the new model landscape.