Swiss Re Insurance-Linked Fund Management

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S&P publish latest rating methodologies for P&C insurance-linked securities


Every so often Standard & Poor’s publishes the latest versions of it’s methodology and assumptions for rating insurance-linked securities and catastrophe bonds. This keeps the market aware of the kind of factors they are looking for to rate a transaction more highly and also allows S&P to factor in new structural factors which come from the issuers. In the past week S&P have published two updates.

The first is a publication of its methodology for rating non-catastrophic property/casualty insurance-linked securities.

S&P says: ‘”We have observed both increasing new issuance of securitizations of non-cat property/casualty risks and a growth in demand for diversification away from cat risks by specialist ILS investors,” according to credit analyst Cameron Heath.

It is opportune, therefore, to outline our general approach in our analysis of these risks to further issuers’ and investors’ understanding of our rating process and help them interpret our ratings.

“It is important to highlight that each of these transactions is highly individual and, as such, the criteria article describes high-level concepts rather than transaction-specific information. Furthermore, this is not an
exhaustive list,” Mr. Heath added.

The information we would typically request to analyze an ILS risk generally includes information similar to that sought by an underwriter looking to price that risk in the traditional reinsurance market. However, there are often instances where we look for more detail and/or take a different focus in our analysis of the insurance risk.

Leaving aside the legal, structural, and collateral issues we review, we focus in the published criteria on insurance risk. In particular, we describe the typical information we look for, our analysis of that data, the modeling we perform, and ultimately the results that are likely to form the basis of our rating decision.’

You can read the full rating methodology publication here but you will need to sign up with S&P for a free login account.

The second is a publication of an updated version of its methodology and assumptions for rating natural catastrophe bonds. This takes into account changes and improvements in transaction structure.

About this publication S&P says: “Since we first rated a nat-cat bond, this market has seen significant developments, and we have been updating our criteria accordingly,” said Standard & Poor’s credit analyst Maren Josefs. For example, the roster of natural perils now supported by accepted models has increased significantly. Similarly, coverage by geographic area has expanded to reflect the increase in insurable exposure around the world.

“At the same time, transactions have also evolved beyond what was once considered the traditional single-event, single-peril nat-cat bond to include multi-peril and multi-event structures, “sidecars”, loans, and even
collateralized debt obligations of nat-cat bonds,” added Ms. Josefs.

Our nat-cat bond ratings reflect our opinion of the likelihood of timely payment of interest and ultimate return of principal no later than the legal final maturity date, in each case according to the transaction terms. When rating a nat-cat bond, we look at the different sources of risk that we believe could affect the timely payment of interest or the ultimate return of principal. Interest payments usually depend on the creditworthiness of the ceding company in making premium payments and the cash generated by the collateral investments. In transactions where these cash flows have been guaranteed by a third party, typically in the form of a total return swap (TRS), we usually look at the creditworthiness of the third party. The return of principal depends on whether a covered nat-cat event occurs during the risk period and on the quality of the collateral investments—unless their value has been guaranteed by a third party, in which case we look at the creditworthiness of the third party.

Again, you can read the full publication on the S&P website here but will require a free login.

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