Swiss Re Insurance-Linked Fund Management

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Mariah Re Ltd. Series 2010-2 triggered as covered tornado losses pass attachment point


Yesterday we updated you with the news that ratings agency Standard & Poor’s had updated the covered loss totals for the Mariah Re Ltd. Series 2010-1 catastrophe bond transaction. The losses have been mounting from the severe tornado season in the U.S. and the holders of the $100m of Series 2010-1 notes are now just $98.1m away from incurring losses to their investment principal.

The Series 2010-1 notes are not the only ones at risk from this years record breaking tornado season however. American Family Mutual Insurance, the sponsor of the Mariah Re Ltd. transactions, set up the Mariah Re entity structure as a shelf program so that they could issue subsequent series of notes. They returned to the catastrophe bond market just over a month after their first Series 2010-1 issuance with another $100m of Mariah Re Ltd. Series 2010-2 notes.

The second Mariah Re cat bond was designed to provide an additional layer of $100m of cover and as a result the Series 2010-2 notes have an attachment point of $725m, compared to the $825m attachment point of the earlier Series 2010-1 notes.

Yesterdays announcement from Standard & Poor’s stated that total covered losses under the terms of the Mariah Re Series 2010-1 notes has now reached $726.9m up to the 31st July. However the Series 2010-2 notes were not rated and so S&P’s loss update does not directly apply.

The Series 2010-2 notes are structured in an almost identical manner to the earlier tranche, except for the lower attachment point, as far as we can tell. So, we feel it’s safe to assume that Mariah Re Ltd. Series 2010-2 has been triggered and is now set to payout some of the investor principal which will help American Family Mutual Insurance with the cost of their tornado claims.

Notes from both series of the Mariah Re cat bonds have been trading well below par in the secondary market in recent weeks suggesting that investors have expected a loss to occur. The Series 2010-2 notes have been trading markedly lower than the Series 2010-1 notes.

Of course there are still further losses to be counted and some of the catastrophe events which have qualified will be updated, no doubt leading to increased covered loss totals. This scenario is making the Series 2010-2 notes of Mariah Re look particularly at risk of perhaps losing all of the investors principal and there is a chance that losses could eat into the Series 2010-1 notes as well if covered losses rise high enough.

We’ll keep you updated as more details emerge and when S&P update the covered loss totals for the Series 2010-1 transaction.

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