Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Atlas VI Capital catastrophe bond downgraded on Japan earthquake exposure


Another series of catastrophe bond notes, Atlas VI Capital Ltd. 2009-1 Class A, has had its rating downgraded due to exposure to the earthquake event in Japan, however in this case it’s not due to exposure to the 11th March M9.0 earthquake, rather it is due to exposure to two aftershocks which occurred in early April that have both been classified as covered events.

SCOR’s Atlas VI Capital 2009 cat bond, which was issued in December of that year, provides them with cover for Japanese earthquakes and European windstorms. It wasn’t directly impacted by the major quake on 11th May in Japan as we believe that event failed to meet the terms of the trigger (possibly due to the location of the earthquake being so far from Tokyo). However, Standard & Poor’s report that two aftershocks, on the 7th and 11th April, have qualified as covered events under the terms of the cat bond and as such contribute to the deals aggregate losses.

The issuer (Atlas VI Capital) submitted two event notices to risk modeller Risk Management Solutions (RMS) concerning the aftershocks, asking them to go through the necessary analysis to discover whether they qualified as covered events. RMS determined that they were indeed qualifying covered events under the terms of the cat bond and that the index values for the aftershocks were 57.05 for the 7th April quake and 46.53 for the 11th April quake.

The single tranche of Class A notes issued by Atlas VI Capital in 2009 run on an annual aggregate loss basis until April 2013. They cover losses above an index value of 668.2 and below a value of 767 on an aggregate basis for each year loss period. For an event to qualify it has to have an index value of at least 20.

As these two events have qualified as covered events the deals noteholders are now at a greater risk of loss for the remainder of this years risk period (until 31st March 2012). Interestingly, at the last reset RMS’ model suggested that 80% of losses for this transaction were likely to come from European windstorm, and that season has not started yet.

As a result of this S&P have downgraded the single tranche of €75m of Class A notes to ‘B’ from ‘BB-‘. Should the value of the aggregate losses over the rest of the current year period not reach the trigger level then S&P say they will upgrade the notes again.

It could come as a shock to some that this deal has been impacted as we heard nothing of any impact from the main earthquake, and this serves to remind us of the scale of the earthquake event in Japan. Many of the aftershocks were of M7.0 and above and were much closer geographically to the population centre of Tokyo where many of the exposed catastrophe bonds provided cover. While this deal now has some aggregate losses to its name it would still take a severe European windstorm season, or another major earthquake in Japan, to actually cause any loss of principal to noteholders.

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