Fitch Rates Catastrophe Bond Compass Re II Ltd. Series 2015-1 Class A Notes 'B+sf'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned a 'B+sf' rating to the following Principal At-Risk Variable Rate Notes issued by Compass Re II Ltd., an exempted special purpose insurer in Bermuda:

--$300,000,000 Series 2015-1 Class 1 Principal At-Risk Variable Rate Notes expected maturity Dec. 8, 2015.

The Rating Outlook is Stable.

These are zero-coupon notes and will be offered at an Offering Price of 95% to the Original Principal Amount.

The notes provide reinsurance protection to various insurance company subsidiaries and affiliates of American International Group, Inc. (AIG; rated 'A-'; Outlook Positive by Fitch). The notes are exposed to Windstorms intersecting with Boundaries along the U.S. coastline ranging from approximately Brownsville, TX to Nantucket, MA, as reported by the National Hurricane Center (or successor organization). The trigger is a per occurrence event based on a parametric index. With a parametric index, noteholders are exposed to basis risk that the Event Payment Amount may not be related to the actual claim experience of AIG.

The Windstorm Parameters of latitude and longitude at landfall and radius determine the Parameters X and Y used in calculating the Event Index Value. The Event Index Value is a mathematical formula that multiplies the Parameter X by the Maximum Sustained Wind Speed to the Parameter Y exponent. If the wind speed and radius are not available at landfall, then the largest of the reading just before and after making landfall will be used. If the Windstorm intersects multiple Boundaries, the respective Event Index Values will be summed to determine the Event Percentage (or the amount to be paid to the Ceding Insurer). There is a complicated linear interpolation formula, which is easily traceable in a spreadsheet format.

Noteholders are exposed to principal loss if the Event Index Value exceeds 100.0 and face total principal loss if the Event Index Value reaches 150.0. Assuming maximum sustained wind speeds of 100 mph and a 100 mile radius, the Notes would be triggered if a wind storm crosses certain parts of New Jersey coastline, but no other areas along the U.S. coastline. Increasing the wind speed to 130 mph while maintaining the 100 mile radius, the Notes could be vulnerable if landfall occurred to certain parts of the Texas, Florida, Virginia and New York coastline. A category 4 hurricane is defined with wind speeds in excess of 130 mph.

Fitch reviewed data for certain notable events as identified by the National Hurricane Center data (HURDAT2). This dataset lists hurricane events from 1851 to 2014, though information regarding radius size is nearly non-existent prior to 2004. For historical context, Super storm Sandy had an Event Index Value of 25.275, Hurricane Rita was 21.642 and Hurricane Frances (which had two landfalls) was 3.034. Hurricane Camille (1969) had a calculated Event Index Value of 61.135 based on an assumption that the radius was 90 miles. There have been 21 recorded Category 4 and 5 land falling hurricanes since 1851.

The risk period is the six month period from June 4, 2015 to Nov. 30, 2015. The notes may be extended to June 8, 2016 if certain qualifying events occur, or at the discretion of AIG. However, the notes are not exposed to any further catastrophe events during this extension. The notes may be redeemed at any time due to regulatory or tax law changes or partially by AIG during the extension period or under certain Early Redemption Events. The repayment of the notes to the noteholders occurs subsequent to any qualified payments to AIG for covered events. Noteholders have no recourse to AIG.

KEY RATING DRIVERS

The rating is based on the evaluation of the natural catastrophe risk, the counterparty risk of AIG and the credit risk of the collateral assets. The natural catastrophe risk represents the weakest link and currently drives the rating of the Series 2015-1 Class 1 Notes.

The rating analysis in support of the evaluation of the natural catastrophe risk is highly model-driven. As with any model of complex physical systems, particularly those with low frequencies of occurrence and potentially high severity outcomes, the actual losses from catastrophic events may differ from the results of simulation analyses. Fitch is neutral to any of the major catastrophe modeling firms that is selected by the issuer to provide the modeling analysis, and thus Fitch did not include any explicit margins or qualitative haircuts to the probability of loss metric provided by the modeling firm.

AIR Worldwide Corporation (AIR), one of the leading natural catastrophe modelers for the industry, simulated 10,000 wind storm events incorporating the Event Index Value (AIR also acts as the calculation agent if an actual wind storm occurs). Loss estimates were calculated using version 16.0 of the AIR U.S. Hurricane Model as implemented in Touchstone 2.0.2. The model produced an attachment probability of 2.41% which corresponds to an implied rating of 'B+' according to our calibration table as found in Fitch's Insurance Linked Securities Methodology. A stress test using the Warm Sea Surface Temperature Conditioned Catalog had an attachment probability of 2.67% which would not alter the implied rating. The expected loss is 1.77% and 1.94%, respectively for the two catalogs.

AIR is expected to release an updated version of Touchstone (Touchstone 3.0) in the summer of 2015. There was no indication if this model change would have a positive or adverse effect on the attachment probability. Results from other possible modelers or from AIG were not provided.

The ceding insurer subsidiaries of AIG (IDR: 'A-'; Rating Outlook Positive) are responsible for making a Premium Payment within ten business days following the Issuance Date such that the sum of that payment plus the proceeds received on the Notes offered equals the Original Principal Amount. These subsidiaries are also responsible for Additional Premiums that are used to pay certain expenses of the Issuer. AIG has been designated as a systemically important financial institution and identified as a global systemically important insurer. Thus, note holders are exposed to the counterparty risk of the AIG ceding insurers for this payment or potential regulatory restrictions imposed on AIG or its ceding insurers.

Proceeds from this issuance will be held in a reinsurance trust account and used to purchase high-credit-quality money market funds meeting defined eligibility criteria, otherwise funds will be held in cash. Investment yields generated from these permitted investments are passed directly to noteholders and may increase the Repayment Amount above the Notes Offered to note holders. Noteholders are exposed to possible market value risk if the net asset value of a money market fund falls below $1.00. Finally, certain actions may be required if the reinsurance trust account is invested in money market funds and FATCA is deemed to apply in late 2016.

RATING SENSITIVITIES

This rating is sensitive to the occurrence of a qualifying event(s), the counterparty rating of AIG and the rating on the assets held in the reinsurance trust account.

If qualifying covered events occurs that cause the Event Index Value to exceed the Attachment Level, Fitch will downgrade the notes reflecting an effective default and issue a Recovery Rating.

To a lesser extent, the notes may be downgraded if the money market funds should "break the buck" or the AIG ceding insurers fail to make timely premium payments.

DUE DILIGENCE USAGE

No third party due diligence was provided or reviewed in relation to this rating action.

Additional information is available at www.fitchratings.com.

Applicable Criteria

Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744158

Global Structured Finance Rating Criteria (pub. 31 Mar 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864268

Insurance Rating Methodology (pub. 04 Sep 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=756650

Insurance-Linked Securities Methodology (pub. 08 Aug 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752532

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985706

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Shashi Srikantan
Director
+1-212-908-0393
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Jeff Mohrenweiser, FSA, CFA
Senior Director
+1-312-368-3184
or
Committee Chairperson
Kevin Corrigan
Managing Director
+1-212-908-0156
or
Media Relations:
Sandro Scenga,+1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Shashi Srikantan
Director
+1-212-908-0393
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Jeff Mohrenweiser, FSA, CFA
Senior Director
+1-312-368-3184
or
Committee Chairperson
Kevin Corrigan
Managing Director
+1-212-908-0156
or
Media Relations:
Sandro Scenga,+1-212-908-0278
sandro.scenga@fitchratings.com