Swiss Re Insurance-Linked Fund Management

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Mariah Re catastrophe bond downgraded on tornado impact


As insured loss estimates from the record-setting U.S. tornado season are reported, the potential impact to exposed catastrophe bonds become clearer. The latest update on the cat bond fallout was reported today as Standard & Poor’s announced that they have downgraded the ratings of Mariah Re Ltd.’s Series 2010-1 notes.

The Mariah Re catastrophe bonds provide American Family Mutual Insurance with protection against severe thunderstorms and resulting tornadoes across the U.S. on an annual aggregate basis. Qualifying losses have been accumulating rapidly as reports for the events come in from Property Claims Services (PCS) whose catastrophe loss estimates are used to define whether an event qualifies under the terms of the deal or not.

When we last wrote about Mariah Re, it had been placed on CreditWatch negative as S&P were awaiting loss estimates for the Joplin, Missouri tornado event among others. Now, PCS have reported their preliminary estimate of losses from the Joplin event. S&P say that total losses to be covered by Mariah Re’s notes for the Joplin event are approximately $263m. In addition, another event has been deemed to qualify as losses for Mariah Re, PCS Catastrophe Series Number 47, causing an additional $13.3m to accumulate.

Covered losses through the end of May for Mariah Re are now estimated at $453m. Modelled losses to the end of May were expected to be $302m. So, as you can see the run rate at which Mariah Re is accumulating aggregate losses has quickened significantly during May, by the end of April the modelled loss should have been $157m and actual losses were estimated at $177m.

Of course none of this means that Mariah Re has defaulted or that investors in the notes will suffer a loss. As the cat bond works on an annual aggregate basis losses need to reach a trigger point of $825m before any investor principle is lost. However, S&P note that according to the modelling June is expected to be the peak month for losses and as yet PCS hasn’t reported anything for June, so the fate of Mariah Re remains uncertain.

S&P have downgraded Mariah Re Ltd’s notes from ‘B’ to ‘CCC+’ as a result of the increased aggregate losses. They have also revised the CreditWatch status on the notes to developing to account for the potential impact from further loss events which could be reported from June or from future events. Peak tornado season runs through to the end of July so S&P say that the developing status is warranted. If no future covered events occur and loss estimates on the previous covered events don’t increase significantly S&P say they could raise the rating again (to no more than ‘B’). If more events do occur then they say they could downgrade the notes further.

If Mariah Re Ltd. makes it to the end of the current risk period, the 31st December 2011, without covered losses breaching the trigger point then the annual aggregate loss amount will revert to zero, the deal will be reset and S&P would re-rate the deal based on their view of the risk of the original deal terms.

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