Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

S&P to resolve ratings on RMS model exposed catastrophe bonds shortly


Sixteen tranches of outstanding catastrophe bond transactions were placed on CreditWatch negative on the 18th April as a result of the updated hurricane risk model launched by Risk Management Solutions (RMS). Ratings agency Standard & Poor’s placed the notes on watch while it assessed the impact to the cat bonds risk profile and trigger points.

The changes in the latest version of RMS’ U.S. hurricane risk model have led to a higher risk profile for some inland states and as a result S&P requested that RMS re-model the 16 cat bond tranches and report back with the results so that they can assess whether any ratings changes are warranted.

Now, in a report published on the S&P website about a recent panel discussion on catastrophe management, credit analyst Gary Martucci says that the market should expect to see the ratings resolved soon. “Currently there are 15 bonds we’ve rated that were modeled by RMS that are on CreditWatch negative, all linked to U.S. hurricane risk. We expect to resolve those ratings in the next few weeks,” he said. We assume the reason for only mentioning 15 is that one cat bond tranche of Montana Re has already been downgraded due to its Japan earthquake exposure.

Explaining that the ratings agency needs to be sure about their response to the model change Gary Martucci said; “There’s still a lot of uncertainty about the model. We want to make sure we’re comfortable with the results before we take rating actions.” S&P are apparently discussing these issues with RMS and industry participants.

The likelihood is that some of the exposed catastrophe bonds will receive a ratings downgrade. When you consider that it has already been reported that on average cat bonds expected loss has risen by 90% under the new model it’s hard to see how they could escape without a ratings change. Gary Martucci explained; “We expect that some bond ratings might not change, and some may go down a notch or two”.

We will of course report back as soon as we hear the results of the ratings review on these cat bonds.

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