A.M. Best Co. has assigned a debt rating of “bb+” to the €120 million ($156 million) principal-at-risk variable rate notes due January 10, 2010, issued by Atlas Reinsurance III p.l.c., a newly created Irish special purpose public limited company. The rating outlook is stable.
Best explained that the “primary business purpose for the creation of the issuer is for the issuance of the notes and the service and performance of various agreements entered into, including the retrocessional agreement between the issuer and Scor (the cedant) providing coverage for European windstorms within the specific covered area and Japanese earthquakes and the swap agreement entered into between the issuer and Goldman Sachs International (swap counterparty) and other related covenants.”
“The issuer, through issuing the notes and arranging the retrocessional agreement, will provide the cedant with up to €120 million of three-year second and subsequent event source of retrocessional capacity.”
The transaction is quite similar to a classic sidecar, except that it covers retrocessional coverages rather than treaty risks. “The proceeds from the issuance of the notes will be deposited into a collateral trust account and will be available to pay amounts owed by the issuer to Scor under the retrocessional agreement,” Best noted. “This includes amounts owed to the swap counterparty; loss payments required to be made by the issuer under a multi-year retrocessional agreement; and payments in respect of such notes under an indenture between the issuer and the Bank of New York, the indenture trustee, which has a long-term deposit rating that meets or exceeds the minimum pre-established rating threshold.
“All funds in the collateral trust account will be invested as per the investment guidelines set in the indenture, which governs the selection of the directed investment(s) to be acquired. The notes have limited recourse to certain assets of the issuer and are without recourse to the cedant.”
Best indicated that the assigned rating reflects its opinion “as to the issuer’s ability to meet its financial obligations to security holders when due. The rating considers the probability of loss payments exceeding a stated threshold amount, which will be made to the cedant when second and subsequent qualified modeled loss events occur within the applicable three-year risk period.
It also noted that the “annualized attachment probability of both the activation and the event attachment point were calculated based on modeled losses on a notional portfolio that mirrors Scor’s actual exposure using a catastrophe model developed by EQECAT (catastrophe modeler), which is subject to escrow. In addition, the rating takes into consideration the creditworthiness of Scor, who under the retrocessional agreement, is responsible for making periodic payments (premium and expense reimbursements) to the issuer.”