S&P cuts credit reinsurance cat bond, sees payout

LONDON Aug 20 (Reuters) - Standard & Poor on Thursday downgraded a catastrophe bond sold by Crystal Credit to cover losses on part of Swiss Re's RUKN.VX credit reinsurance portfolio, saying it was likely notes would be triggered.

The credit rating agency said it cut its ratings on all three classes of Crystal Credit Ltd's principal-at-risk variable-rate notes, "due to the further deterioration in claim activity and an increase in aggregate losses".

Swiss Re placed the 252 million euro bond, the first indemnity-based credit reinsurance securitisation, in January 2006, according to its website.

The transaction helped the world's second-biggest reinsurer free up capital by transferring some credit reinsurance risk to the capital markets.

The bonds are based on a retrocession agreement between Swiss Re and Crystal Credit covering a portfolio of credit reinsurance treaties for the underwriting years 2006 to 2008. Retrocession is the transfer of reinsurance risk to other reinsurers.

S&P said that, based on information from Swiss Re, it expected the class C notes to sustain a loss, "and that the repayment of principal will most likely not be made in full by the legal maturity of the notes".

"The default probability for the other two classes of notes has also increased," S&P said.

It said the increased probability of attachment reflected the global economic downturn, "in particular... a steep increase in claims reported in the Spanish market".

The 108 million euro A tranche is now rated B+, the 81 million euro B tranche CCC+, and the 63 million euro C tranche CC, S&P said. The bonds were rated BBB-, BB and B at launch in 2006.

As of June 23, 2009, Swiss Re had reported aggregate losses of 583 million euros for the underwriting years 2006-2008 to be ceded to Crystal Credit, S&P said, noting that losses of 666 million euros would trigger a payout on the class C notes.

It said current aggregate gross losses were currently 209 million euros for 2006, 286 million for 2007, and 202 million for 2008, of which Swiss Re will retain at least 10 percent under the terms of the retrocession agreement.

Ceded losses would need to reach 729 million euros to trigger a loss on the class B notes, S&P said, adding that an unusually high number of claims threatens a principal loss.

Under the terms of the transaction, Swiss Re will not be able to deliver a proof of loss to Crystal Credit and request payment of retroceded losses until April 2012, S&P said.

The bonds' term has thus been extended to June 30, 2012 to allow for loss development and reporting.

Peter Schmidt, Head of Swiss Re's Credit Solutions Division said when the bond was issued that the underlying credit reinsurance book was highly diversified in terms of geography and industrial sectors.

(Reporting by Catherine Evans; Editing by John Stonestreet)

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