Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

S&P begins to resolve status of model change impacted catastrophe bonds, downgrades six


Standard & Poor’s (S&P) has begun to resolve the issues surrounding ratings of 16 catastrophe bond tranches which use the Risk Management Solutions (RMS) U.S. hurricane model. RMS released a new risk model earlier this year which S&P felt had sufficiently changed the risk profile of the transactions to warrant placing them on CreditWatch negative while they were re-modelled using the updated version.

We reported two weeks ago that S&P were hoping to resolve the ratings issues soon. Now S&P have announced that they have received the updated probability of attachment for 10 of the 16 cat bond tranches based on the new RMS model. They have also received probability of attachment figures from AIR Worldwide’s risk model as well.

All 10 of the cat bond tranches have been removed from CreditWatch negative and 6 of the tranches have been downgraded due to the new probability of attachment, a full list of the cat bonds and the ratings changes can be seen below.

Cat bond To From
Ibis Re Ltd.
Series 2009-1 Class A notes BB(sf) BB(sf)/Watch Neg
Series 2009-1 Class B notes B+(sf) BB-(sf)/Watch Neg
Series 2010-1 Class A notes BB-(sf) BB(sf)/Watch Neg
Series 2010-1 Class B notes B(sf) B+(sf)/Watch Neg
Montana Re Ltd.
Series 2009-1 Class A notes B(sf) BB-(sf)/Watch Neg
Series 2009-1 Class B notes CCC+(sf) B-(sf)/Watch Neg
Series 2010-1 Class C notes CCC+(sf) B(sf)/Watch Neg
Longpoint Re II Ltd.
Series 2009-1 Class A notes BB+(sf) BB+(sf)/Watch Neg
Series 2009-1 Class B notes BB+(sf) BB+(sf)/Watch Neg
Calabash Re III Ltd.
Series 2009-1 Class B notes BB+(sf) BB+/Watch Neg

S&P said that usually a model update would not affect the probability of attachment dramatically but in this case it has increased significantly enough to warrant these ratings changes. They note that if there are no covered events between now and the annual reset for the Montana Re 2010-1 Class C notes they would expect to raise the ratings to ‘B(sf)’ as the model is required to use the latest version of the RMS risk model for each reset. The Longpoint Re notes also have a requirement to use the latest version of the RMS risk model at each reset.

These ratings changes won’t be unexpected in the market and many will be pleased to have this resolved, however there may be some knock-on effects to secondary market prices for some of these bonds as investors decide whether to continue to hold them at the new ratings.

S&P say they intend to resolve the rating status of the remaining 6 catastrophe bonds within the next two weeks.

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