Swiss Re Insurance-Linked Fund Management

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S&P lifts rating on Queen Street V Re cat bond after reset


Rating agency Standard & Poor’s has lifted the rating on one of reinsurer Munich Re’s catastrophe bonds after the transaction went through its annual reset. The Queen Street V Re Ltd. catastrophe bond was reset at the end of June and based on changes to payout factors due to a shift in Munich Re’s European exposures S&P raised the rating.

The $75m Queen Street V Re cat bond provides Munich Re with a source of fully-collateralized retrocessional reinsurance for certain U.S. hurricane and European windstorm risks. Protection for both perils is on a per-occurrence basis and the transaction uses an industry loss trigger, with Property Claims Services (PCS) reporting data for U.S. hurricane risks and PERILS AG for European windstorm cover.

S&P said that the risk modeller and calculation agent for the transaction AIR Worldwide released a reset report on the 1st July, detailing new attachment and exhaustion points based on updated exposure information.

For U.S. hurricanes risks, the updated attachment point is an index value of 110,944 (from 104,000) and the updated exhaustion point is an index value of 143,863 (from 136,000). For European windstorms, the updated attachment point is an index value of 13,067 (from 16,569) and the updated exhaustion point is an index value of 16,174 (from 20,414).

S&P notes that since the Queen Street V Re cat bond was issued in February 2012, the sponsor Munich Re has shifted its exposures in Europe towards the UK from France and Germany. As well as this shift in exposure, PERILS industry exposure database has seen an increase in market penetration.

This has led to a change in the CRESTA Zone level payout factors in Europe, which coupled with risk modeller AIR’s disaggregation process has resulted in a lasting change in the shape of the “exceedance probability” curve for Queen Street V Re over time, according to S&P.

So, while the change in attachment points detailed above could make it looks like the European windstorm risk profile has increased, the changes in exposure, moving towards the UK, actually means that the risk of an event causing sufficient losses to reach the attachment point has decreased significantly enough to warrant a lift in the rating. Here the payout factors show their importance in calculating the probability of attachment and EP curve for a cat bond and show that the attachment point should not be looked at in isolation.

After taking these new findings into account, S&P has adjusted the rating on the catastrophe risk to ‘BB-‘ from ‘B+’, and as a result has also raised the rating on the Queen Street V Re notes to ‘BB- (sf)’ from ‘B+ (sf)’.

The increase in market penetration for PERILS’ industry exposure database for European windstorm could result in other cat bonds changing their risk profile at reset in future. We’ll update you if any future resets change a cat bonds rating.

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