S&P identifies strengths and weaknesses of the recent Swiss Re cat bond

Standard & Poor's has assigned credit ratings to some of the notes issued by Successor X, the Swiss Re cat bond. It gave a preliminary rating of B- to the I-U1 class notes.

S&P has provided this list of strengths and weakness of this cat bond:

Strengths

1. A parametric loss trigger, based on reported parameters from the USGS and used to calculate index values by EQECAT, is in place to cover risk on the earthquake peril. Modeling risk is confined to uncertainties within the hazard module of the model, which implies a lower level of modeling risk for this peril than other loss triggers.

2. Models for California earthquake and North Atlantic hurricanes are well-established in the insurance industry as these are one of the main natural catastrophe perils.

3. Swiss Re regularly issues natural-peril, insurance-linked securities.

4. There are no non-modeled perils for this transaction.

5. The collateral is invested in highly rated U.S. government-backed assets which will reduce the default risks.

6. The earthquake model used by EQECAT in this bond incorporates updated information from the most recent USGS study.

Concerns

1. An industry loss trigger, based on insured exposure and payout factors by region and estimated by PCS, is in place to cover the hurricane peril. Modeling risk is increased as it incorporates uncertainties in various modules of the model.

2. Timing risk is an issue for an index-based transaction such as the hurricane peril. There is potential for a significant development period before investors and cedents have reasonable certainty about the likelihood of default.

3. The overwhelming majority of the initial one-year expected loss on the hurricane perils is contributed by the Florida (59%) and Gulf (19%) regions

4. EQECAT include time dependency in its earthquake model, therefore the results typically show a reduced probability of a triggering event.

5. S&P has used a base case probability of attachment in evaluating this transaction as opposed to the sensitivity case probabilities stipulated by our criteria.

Mitigating factors

1. EQECAT is a widely recognised firm that develops catastrophe risk assessment and management methodologies and techniques for the global insurance and reinsurance industry.

2. S&P has stressed the parametric and industry loss "exceedance" probability curves, in line with the strengths and weaknesses we have identified.

3. S&P believes that the differences between sensitivity case and base case probabilities of attachment are statistically insignificant.

The bond was issued by Successor X Ltd, and was arranged by Swiss Re Capital Markets. Indenture trustee is Bank of New York Mellon. Administrator is Wilmington Trust (Cayman) Ltd. Calculation and reset agent is EQECAT.