To rate landmark Yardstick Re flood cat bond, Moody’s looked beyond headline modelled outcome

Following the recent closure of German insurer Gothaer’s €100 million Yardstick Re DAC (Series 2026-1) flood catastrophe bond, analysts at Moody’s Ratings explained how the agency looked beyond just the standard model outputs when it came to rating the first-ever pure German flood cat bond, due to the bond having a very remote risk of attaching.

The agency recently assigned a Baa2 (sf) rating to the Series 2026-1 Class A Notes issued by Yardstick Re DAC, via German insurer Gothaer’s debut €100 million Yardstick Re DAC (Series 2026-1) catastrophe bond issuance.

Recall, that Moody’s Ratings finalised and published its awaited new methodology for rating insurance-linked securities (ILS) such as catastrophe bonds in November 2025.

As mentioned, the agency has now assigned a Baa2 rating to Gothaer’s €100m German flood Yardstick Re Series 2026-1 cat bond, marking the first deal it has rated under its revised ILS methodology.

Artemis recently spoke to both Brandan Holmes, an analyst on the insurance ratings team, based in London, who leads the agency’s work on ILS, and Beka Bakuradze, a structured finance rating analyst based in Frankfurt, who was the lead analyst for this cat bond transaction.

With the revised rating methodology in place and this Yardstick Re DAC (Series 2026-1) marking the first rated catastrophe bond under it and having a rare investment grade, we asked the analysts to describe how the process ran with Gothaer, as well as what the response was like amongst the ILS market.

“We used a joined-up team of Structured Finance and Insurance rating analysts, which meant we were able to assess both the bond structure and collateral mechanics, as well as the underlying German insurance risk and market dynamics,” the analysts explained.

Adding: “We believe this was helpful because the team was already familiar with the relevant insurance context, so discussions could focus quickly on the key credit and structural questions rather than on explaining the market context or the basics of property insurance.”

Given that Gothaer’s debut cat bond sponsorship marked the first catastrophe bond to ever come to market that is solely focused on flood risks in Germany, this did lead to a number of features that made the rating more challenging.

“The bond has a very remote risk of attaching, which is unusual for cat bonds. We looked beyond the headline modelled outcome and evaluated the risk from several perspectives,” Holmes and Bakuradze explained.

“That included a deep dive into selected stochastic scenarios that could trigger the bond, and consideration of what those events could look like on the ground, as well as evaluation of historical events and volatility in the range of modelled outcomes. We also considered unmodelled risks, mainly storm surge and coastal flooding, and did further work to understand that these risks were not material to the expected loss.”

Beyond the environmental perils, Moody’s also had to factor in the operational realities of the sponsor itself.

The analysts continued: “Evaluating the sponsor’s underwriting, claims handling capabilities and reserving was also important in the context of an investment-grade indemnity bond. This was especially relevant given the sponsor had recently undergone a merger, and the impact this could have on its systems and processes.”

Given that Moody’s RMS also served as the risk modeller for the transaction, the analysts clarified how the rating agency maintains a strict boundary between its rating division and the modeling software arm.

“Speaking from the perspective of Moody’s Ratings, our process is agnostic as to who the risk modeller is. The rating process would operate in the same way whether the modelling agent was Moody’s RMS or another risk modeller.

“Moody’s rating analysts are familiar with catastrophe models and benefit from ongoing, non-deal-specific training on different perils and modelling considerations. That background helped inform our evaluation of the German flood model results, alongside input from our rating analysts who cover the German insurance market on market-specific features and risks.”

The analysts said that Moody’s assessment of the model output is done based on a review of the model description, the risk analysis results, and discussions with the modelling team, that were coordinated via the transaction structurer, during which the firm interrogated the modelling approach, key assumptions, and model limitations.

Adding: “We also consider the modelling firm’s operational history and performance in insurance risk modelling, including whether its models are widely accepted and have a substantial track record of use by the insurance industry.”

As flood risk continues to expand as a peril, the analysts highlighted how communication amongst investors was important to help them understand Moody’s rating process, and the analytical considerations for the transaction.

“At the same time, this needs to be balanced against the non-public nature of the cat bond offering materials, which limit the level of transaction-specific detail that can be shared. Our rating communications highlighted certain key features and considerations. For new bond issuances, analysts also often engage directly with investors where they have specific questions or want to better understand our analytical process,” the analysts added.

As Holmes and Bakuradze explained to Artemis, the main learnings that Moody’s Ratings derived from working on this transaction were both analytical and process-related.

“Analytically, we focused on identifying areas of risk or uncertainty that may not be fully reflected in the base modelled results, and considered whether adjustments to the EP curve and EL% were required to more fully reflect these risks,” Holmes and Bakuradze said.

“In this case, the only adjustment we made was for potential exposure growth. We evaluated other factors, such as the extent of non-modelled risk, mainly storm surge, variable reset risks and flood model uncertainty, and took the view that they were adequately captured for this very remote risk bond.”

To conclude, Moody’s Ratings outlined a number of factors that could potentially lead to an upgrade or downgrade of the rating. The agency particularly stressed that the occurrence of a significant flood event in Germany could lead to a multi-notch downgrade of the rating.

Additionally, if the Moody’s Ratings Aaa-mf assessment of the money market fund shares were to be downgraded or withdrawn, the agency stated that rating of the Series 2026-1 Notes may no longer be commensurate with an investment-grade level, in which case, the agency could choose to either downgrade or withdraw its assigned rating.

“The transaction includes an annual variable reset mechanism that permits the Ceding Insurer to adjust the attachment and exhaustion levels at each Reset Calculation Date, subject to caps on the updated modeled one-year expected loss and attachment probability. A material increase in modeled expected loss following a variable reset could lead to a downgrade, while a decrease in expected loss or the passage of time without a triggering event could be credit positive,” Moody’s Ratings added.