S&P Lowers Ratings on Residential Re’s Notes to ‘B+’

Standard & Poor’s Ratings Services has lowered its rating on the Class 2009-1 notes issued by Residential Reinsurance 2009 Ltd. to ‘B+(sf)’ from ‘BB-(sf)’.

S&P explained that the rating action “is related to the changes in AIR Worldwide Corp.’s model since the notes were issued and the current annual reset. At issuance, the risk modeling was based on AIR’s model CLASIC/2 Version 10.5.

“The model was escrowed for the length of the transaction and is being used for the annual reset. Over the intervening period, AIR has made certain changes to its model. Using the latest scientific and engineering research, AIR has updated the hazard and vulnerability modules of its hurricane model (hurricane is the largest contributor to the probability of a covered event), which in its opinion results in more robust analysis.”

S&P added that when it “compared the attachment point of the notes to the probability of attachment as indicated by the most recent AIR model, CLASIC/2 Version 12.5, and applied the stress test, the adjusted probability of attachment resulted in a rating of ‘B+(sf)’ rather than ‘BB-(sf)’.

“As stated above, the rating action is related to the probability of attachment based on the results of as indicated from the updated AIR model. The notes were reset pursuant to their terms as set forth in the transaction documents. Our criteria say that if a modeling company issues an updated model and we believe there are significant changes in our perception of the risk for such peril, we may change the rating on any outstanding bonds, even if there is no model-based reset in the terms of any of the bonds concerned (see “Methodology And Assumptions For Rating Natural Catastrophe Bonds,” May 12, 2009).”

S&P concluded that, “although the changes between Versions 10.5 and 12.5 were not as significant as other model updates have been, the changes were significant enough to cause a one-notch downgrade to these notes.”

Source: Standard & Poor’s