S&P Analyzes Nat Cat Market

In anew article – “Clarifying The Framework For Rating Natural Catastrophe Bonds -” Standard & Poor’s Ratings Services takes a look at the factors it considers when assigning ratings to nat cat bonds. “These include the role of the TRS (total return swap) and the importance of rating dependency to our methodology,” said S&P. “Our analysis also incorporates the impact of a swap counterparty or ceding insurer being downgraded or becoming insolvent.”

Those two factors haven’t historically been of great concern, but, as S&P points out, “it has been a rocky past few months for the natural catastrophe (nat cat) bond market, with the failure of Lehman Brothers shaking up investors.”

S&P notes that in September, “we downgraded four catastrophe bond issues as a result of the bankruptcy filing of Lehman Brothers Holdings Inc. (LBHI). LBHI was the guarantor of Lehman Brothers Special Financing, the TRS counterparty for the four downgraded bonds (Ajax Re Ltd. Class A, Carillon Ltd. Class A-1, Newton Re Ltd. Class A 2008-1, and Willow Re Ltd. Class B 2007-1).”

Credit analyst Cameron Heath added: “As a follow-up to these rating actions, we are clarifying our rating methodology regarding the impact of downgraded counterparties in traditional catastrophe bond structures, such as either a TRS counterparty or a ceding insurer.”

The report is available to subscribers of RatingsDirect, the real-time Web-based source for Standard & Poor’s credit ratings, research, and risk analysis, at: www.ratingsdirect.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-9823 or sending an e-mail to: research_request@standardandpoors.com. Ratings information can also be found on Standard & Poor’s public Web site at: www.standardandpoors.com.

Source: Standard & Poor’s