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S&P downgrades Mariah Re 2010-1 notes on loss payment


Ratings agency Standard & Poor’s have downgraded the issue credit rating on the Series 2010-1 notes issued by Mariah Re Ltd. from ‘CC’ to ‘D’ today. This may well be the final update on this the first of the defaulted Mariah Re severe thunderstorm catastrophe bonds which became a total loss due to the record losses suffered in the U.S. tornado season in 2011.

S&P received notification from the cat bonds issuer that a loss payment has now been made to the cedent American Family Mutual Insurance for the full principal amount ($100m).

It became clear that this first Mariah Re cat bond was a total loss in November (our articles at the time can be found here and here) after aggregate tornado losses that qualified under the terms of the deal passed the exhaustion point for this tranche of notes. There had been some concerns over the way some catastrophe events had their classifications changed according the terms of the modelling and reporting used for the deal which resulted in large increases in aggregate loss estimates. Two events in particular were reclassified as ‘metro’ events which increased their estimates significantly.

Apparently some investors had questioned this change in estimates and it was reported that there were unhappy murmurings in the market. As with any cat bond deal the devil will have been in the detail of the offering documents and if such event classification changes were well documented in the modelling, reporting and calculation literature details then it would seem to have been actioned correctly. Given the payout has now been made in full we can only assume that this was the case.

It can take time for the settlement of a cat bond, particularly aggregate deals where losses can develop for some months, however this payout by Mariah Re has been effected reasonably quickly which is good to see.

As the second Mariah Re cat bond (Series 2010-2), which provided a lower layer of cover and so became a total loss first, was not rated we don’t have the visibility of the progress of any loss payment decision for this tranche. As there was no reported ambiguity around the exhaustion of this tranche of notes we expect that the payout for the Mariah Re 2010-2 $100m will have been made to the cedent as well.

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