Fitch Adjusts Rating Method For Cat Bonds

Fitch Ratings will make some minor but “important” adjustments to its approach in rating catastrophe bonds, the company said.

The changes were outlined in a report, which explained that the updated rating methodology will be similar to its previous method but will differ “in several important ways.”

Fitch said the most significant change will be that it will now rate all catastrophe bond tranches (segments or tiers) against a probability of loss criterion, as opposed to only rating investment-grade catastrophe bond tranches in this way.

Previously, Fitch said, non-investment-grade tranches were rated against an expected loss benchmark.

Fitch defines “probability of loss” as “the probability that the issuer will fail to make a principal or interest payment as scheduled.”

This change, Fitch said, will bring the rating methodology for catastrophe bonds in line with the methodology it uses for other structured finance transactions and insurance-linked securities.