S&P Says Katrina Won’t Hit Cat Bonds

August 30, 2005

Although they are still relatively rare, compared to the number of commercial property policies in force, a number of cat bonds covering specific property risks were briefly threatened by Hurricane Katrina.

However, according to a statement from Standard & Poor’s, the hurricane’s weakened intensity and its change in course at the last minute, making landfall east of New Orleans, have greatly reduced the risk that cat bond holders in the area at risk will lose their investment.

“Based on a preliminary analysis, it appears that the damage caused by Hurricane Katrina will not result in any of the outstanding hurricane-related catastrophe bonds hitting their respective attachment points,” stated S&P Ratings Services credit analyst James Doona. “Therefore, we have not placed any catastrophe bond ratings on CreditWatch.”

S&P said it “has outstanding ratings on $4.25 billion of natural peril catastrophe bonds. Of this, $1.61 billion carry an exposure to North Atlantic hurricanes, generally covering the Gulf and Eastern Seaboard states from Texas to Maine. In aggregate, these hurricane bonds have an average life of 1.91 years, with the longest-dated bond maturing on June 30, 2009 (in 3.8 years). Of these, $630 million are parametric, dependent only on measurements of wind speed or storm intensity–as provided by the National Hurricane Center of the National Oceanic and Atmospheric Assoc.

“However, the majority of the notes–$975 million–are indemnified, which means that they are based on actual insured losses. All of these hurricane notes are rated mostly in the ‘B’ to ‘BB+’ range, though two with exceptional structural subordination are rated higher: The Class B notes of Foundation Re Ltd. are rated ‘BBB+’, and the Arbor II Ltd.’s Series 1 notes are rated ‘A+’. ”

S&P also noted that, “the parametric notes are structured to emphasize coverage of Florida exposures, and Hurricane Katrina is unlikely to cause them any principal loss. The companies protected by the indemnity notes are still assessing the impact of Katrina. At this point, none of the notes seems likely to attach, but Standard & Poor’s will continue to monitor them closely.”

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