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Moody’s updates catastrophe bond rating methodology


Rating agency Moody’s Investors Service has published an updated version of its rating methodology for catastrophe bonds, clarifying the firms approach to monitoring in-force cat bonds and mortality bonds, while making editorial changes to the methodologies text for clarity.

Currently, Moody’s does not rate any outstanding catastrophe bonds, but the rating agency would like to be involved in the process of analysing and assigning credit ratings to insurance-linked securities (ILS) linked to catastrophe or mortality risk, among others.

The new version of the cat bond rating methodology from Moody’s replaces a document dated June 2013.

“The updated report includes minor text updates and other changes to some sections and appendices and various editorial changes,” Moody’s explained.

Additionally, Moody’s said that it has clarified the section of the methodology that discusses the ongoing monitoring of rated catastrophe bonds including what might trigger a rating review, one of the most important aspects of the rating agencies job once the transaction has been issued and rated.

Catastrophe bond ratings are not as in-favour as they were previously, with many cat bonds now issued forgoing the rating, as sponsors and investors do not always require them.

However, rating securities is valuable to many large institutional investors, some of which are only able to allocate capital to invest in securities which are rated at investment grade by a recognised agency. Hence ratings are unlikely to ever go away from the cat bond market and in fact could become more prevalent as the market grows.

Recently ILS fund manager Leadenhall Capital Partners achieved an investment grade rating for two private cat bonds it issued, a first for the ILS market and showing that ratings are perhaps not as costly as many believe, plus are still considered important even by more mature market participants.

Moody’s clearly sees the need for its methodology to remain updated if it is to stand a chance of winning cat bond rating business. It is as important for a rating agency to move with the market and be up to date with its thinking as it is for ILS managers, investors and sponsors of transactions.

You can read the new Moody’s cat bond rating methodology here.

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