Blue Danube II cat bond technically (but v. remotely) exposed to Odile

by Artemis on September 22, 2014

The focus of the catastrophe bond market’s exposure to hurricane Odile has been on the MultiCat Mexico 2012 deal, which is clearly at risk of loss as we’ve explained, but there are actually two other cat bonds with Mexican hurricane exposure.

We’ve been working to establish the exposure of these two other catastrophe bonds to hurricane Odile’s impact on Mexico. Both Blue Danube cat bonds, sponsored by Allianz Argos 14 GmbH, are exposed to Mexican hurricanes, but only one is actually exposed to Odile and that exposure is extremely remote we believe.

After conversations with investors and market participants in Monte Carlo at the Rendez-vous and since we returned home, it transpires that the $175m Blue Danube II Ltd. (Series 2013-1) catastrophe bond could technically be triggered by hurricane Odile, but it is extremely unlikely at the currently expected level of losses.

The first Blue Danube cat bond from Allianz, the $240m Blue Danube Ltd. (Series 2012-1), is exposed to Mexican hurricanes but for a storm to qualify the documentation mandates that it has to have a PCS catastrophe bulletin associated with it for losses in the United States.

That provided the sponsor with coverage for a hurricane which hit Mexico and the U.S. Gulf Coast. A useful structure, but not at-risk due to this hurricane as we understand that PCS has not yet issued a bulletin for Odile and is unlikely to do so.

The second Blue Danube cat bond however, Blue Danube II 2013-1, is exposed to a hurricane which only hits Mexico we are told. It does not require a PCS catastrophe bulletin, according to the documentation, and so therefore technically it is at risk from hurricane Odile’s impact on Baja California. However the chances of the modelled loss trigger for the Blue Danube II 2013 cat bond being hit is extremely remote, according to sources.

The Blue Danube II cat bond uses a modelled loss trigger approach for storms impacting Mexico. In order for the trigger to be hit the index calculation needs to rise above an index attachment point of 148.3. The hurricane portfolio limit for Mexico is said to be 918.8, which means that the covered portfolio in Mexico is large enough that Odile could technically result in the bond being triggered. However for that to happen it would require 16% of the portfolio limit to be eroded for the bond to attach, which would require such a huge damage ratio given Baja California is only a small proportion of the Mexican exposure in the bond.

In fact, Mexico only contributed a tiny proportion of the modelled expected loss for the Blue Danube II 2013 cat bond, less than 0.1%. That suggests Mexico is really only included as a covered area for hurricane events which hit both Mexico and the U.S., in such a scenario any modelled loss from Mexico would be added to the U.S. figure.

So, for completeness sake, it is technically possible for a hurricane like Odile to trigger the Blue Danube II Ltd. (Series 2013-1) catastrophe bond, but given the extremely low contribution to the deals expected loss it is so remote as to be almost impossible and as a result this cat bond will be considered safe from Odile.

Read our latest on the MultiCat Mexico 2012 catastrophe bond’s exposure to hurricane Odile.

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