Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Are Flagstone Re suggesting that the Montana Re cat bond has been activated?


A press release issued today by Bermuda based reinsurer Flagstone Re seems to suggest that they believe it likely that the earthquake in Japan on the 11th March will count as an activation event for their Montana Re Ltd. catastrophe bond.

Ratings agency Standard & Poor’s put the $60m Class E tranche of Montana Re on CreditWatch negative after the issuer asked their calculation agent Risk Management Solutions to determine whether the Japanese earthquake qualified as an event under the terms of the deal. If the event activates the tranche it is then exposed to any subsequent qualifying losses which occur before 31st December 2011.

At the moment we’re unsure whether Montana Re will be triggered by the quake, but reading between the lines of the Flagstone Re press release it seems they might believe that it will.

The press release comments on Flagstone Re’s capital position and a ‘reduced risk profile’. David Brown, Flagstone CEO, states in the press release, “Flagstone’s retrocession strategy has been to buy protection for both extreme single events and for an accumulation of events during an underwriting year. As a result of this strategy, Flagstone has existing retrocessional protection that is effective in reducing our net exposure to both the Japanese and New Zealand losses, particularly at the higher end of our ranges. In addition, that protection is now effectively on a ‘next event’ basis, providing Flagstone with substantial protection against further events in 2011.”

We’ve highlighted the text in bold where David Brown suggests that their retrocessional protection is now active on a next event basis. Surely that can only suggest that they believe that the Japan quake qualifies as a triggering event for the Montana Re catastrophe bond? If not in reference to Montana Re then they must have other retro covers which are now exposed to subsequent loss events.

We can’t be sure until the report comes back from RMS to say whether they calculate the event as an activation, that won’t be for some days yet. However, the comments from Flagstone Re are bound to make investors in the tranche nervous as they await the outcome.

The other cat bonds which are potentially exposed to the Japan quake are all listed here.

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