Standard & Poor’s increases rating cap on cat bonds

Standard & Poor’s Ratings Services has revised its criteria for rating natural catastrophe bonds to increase the rating cap on such bonds to ‘AA.’
“The criteria revision is in response to the evolution of the natural catastrophe bond market,” S&P’s announced in a recent criteria report. “In light of the increased number property catastrophe bonds issued in the last few years and a broadening investor base, there is heightened interest in developing newer issues for a wider market.”
Basically, in assigning a rating to a natural catastrophe bond, S&P’s uses a matrix that evaluates the maturity of the note as well as the instantaneous probability of attachment of the note. The corresponding rating will be the maximum possible rating on the note, subject also to a maximum rating of ‘BB+’ for a first-event trigger, ‘BBB+’ for a second-event trigger, and ‘A+’ for a third-event trigger.
“Prospectively, if the number of natural peril catastrophe loss events are sufficiently large (minimum of fifth) and independent, then Standard & Poor’s may assign a maximum rating of ‘AA,'” the rating service noted in a release. “For a note to be rated ‘AA’, Standard & Poor’s would expect there to be limited correlation among the modeled perils.
“In addition, the occurrence of any trigger event cannot result in a downgrade, based on the probability of attachment, of more than one rating category. Standard & Poor’s will have discussions with the modeling agency to verify the methodology and results. The presence of a fifth-event payout trigger is not a guarantee of an ‘AA’ rating.”