Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

Mariah Re cat bond at risk due to U.S. tornadoes, placed on CreditWatch


The Mariah Re Ltd. catastrophe bond, which provides coverage to American Family Mutual Insurance for severe thunderstorms including tornadoes, has continued to incur qualifying event losses from the recent severe weather across the U.S. The events which have qualified have now resulted in sufficient covered losses for the rating of the transaction to be placed on CreditWatch with negative implications by Standard & Poor’s.

As we wrote in early May, certain severe thunderstorm and tornado events during April had qualified as covered events under the term of the catastrophe bond deal. For an event to qualify as covered under the terms of the cat bond it must have an event index equal to or greater than $10m. The initial attachment point for the first risk period is $825m, with a maximum event index for any single event of $300m for the Series 2010-1 deal.

The Mariah Re transaction uses PCS catastrophe loss estimates to define whether an event qualifies as covered. In April Catastrophe Series numbers 38, 42, and 43 all qualified  as covered and caused losses which amounted to approximately $103.5m to begin mounting for Mariah Re. At the time Standard & Poor’s said there were further events which they were awaiting loss estimate reports for, those events have now been reported. Catastrophe Series Numbers 44, 45, and 46 have raised the estimate of total covered losses for Mariah Re through the end of April up to approximately $177m.

According to modelling for Mariah Re, by the end of April losses up to $157m would have been expected (without affecting the transaction), so the $177m estimate takes Mariah Re’s covered losses to $20m above the expected loss run-rate. S&P note that by the end of May the modelled loss run-rate allowed for losses up to $302m, however they have not received a PCS Catastrophe Serial report for the Joplin, Missouri tornado (which we suggested would impact cat bond aggregate losses here) which occurred during May, hence the CreditWatch placement.

The Joplin tornado loss estimate will be reported in Catastrophe Serial Number 48. Given the magnitude of that event S&P say they would not be surprised if covered losses equalled Mariah Re’s maximum event index of $300m.

If the Joplin tornado results in a full event limit covered loss, S&P say they will likely downgrade the rating by one to three notches, however they note that it will depend on when it is reported and the total covered losses at that time (we assume compared to the modelled loss run-rate). There is also the potential for previously estimated event loss figures to be increased or for more covered events to be reported as well, especially given that we are now in peak tornado season for the U.S. As a result of this uncertainty S&P will wait till losses develop before taking any rating action and stress that the outcome could be different. So the future over the next few months is uncertain for Mariah Re.

The current risk period for Mariah Re runs until the end of the year so there is still some way to go for investors in this cat bond to incur a loss of principal. We’re now more than half way through the accepted season for severe thunderstorms and tornadoes in the U.S. so Mariah Re could still escape without an actual loss although it may well receive a downgrade once the full impact of the Joplin tornado is known. If Mariah Re makes it to the end of the year without incurring a loss to noteholders then the probability of attachment resets and annual aggregate losses return to zero.

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