Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

S&P downgrades five more catastrophe bonds on hurricane model update


Standard & Poor’s (S&P) has now finished resolving the ratings issues surrounding 16 catastrophe bond tranches which use the Risk Management Solutions (RMS) U.S. hurricane model. The RMS model was updated earlier this year causing the probability of attachment for some cat bonds to increase, thus resulting in an assessment and new rating from S&P.

Earlier this month S&P resolved the ratings of 10 tranches of cat bonds, full details of those changes can be found here, but said that the resolution of the final six tranches would take a little longer. Six cat bonds were downgraded in that first announcement and the other four had their ratings affirmed and removed from CreditWatch. Now the remaining six tranches have been assessed and ratings resolved as well.

Five more cat bond tranches have had their ratings downgraded in the latest announcement from S&P, bringing the total number of downgrades due to the updated RMS risk model to 11. S&P have received the new probabilities of attachment from RMS for these deals and as a result have adjusted the ratings to reflect a heightened risk profile. S&P did not receive results for two tranches for which they have estimated the change and downgraded the tranches anyway.

The 16 tranches of cat bond notes were placed on CreditWatch on the 18th April so it’s taken three months for this issue to be resolved which is a long time to leave the market in flux in our opinion. The market had made their own conclusions about the impact of the model long ago and it’s a shame this issue couldn’t have been resolved more quickly.

The affected catastrophe bond tranches and the change to their ratings are below:

Cat bond To From
Foundation Re III Ltd.
Series 2010-1 Class A notes BB(sf) BB+(sf)/Watch Neg
Lodestone Re Ltd.
Series 2010-1 Class A notes BB(sf) BB+(sf)/Watch Neg
Series 2010-1 Class B notes BB-(sf) BB(sf)/Watch Neg
Series 2010-2 Class A-1 notes BB(sf) BB+(sf)/Watch Neg
Series 2010-2 Class A-2 notes BB(sf) BB(sf)/Watch Neg
Calabash Re III Ltd.
Series 2009-1 Class A notes B+(sf) BB-/Watch Neg

You can find full details of all catastrophe bonds in our Deal Directory.

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