No Odile loss for MultiCat Mexico 2012 catastrophe bond

by Artemis on December 29, 2014

Investors in the MultiCat Mexico Ltd. (Series 2012-1) Class C catastrophe bond notes will not face any loss due to September’s hurricane Odile as calculation made using the latest data from the NHC deems the parametric trigger had not been triggered.

The calculation agent for the MultiCat Mexico 2012 cat bond, AIR Worldwide, has now delivered its assessment using the new data from the National Hurricane Center (NHC). In a loss report seen by investors on the 23rd December, AIR reported that the hurricane’s central pressure was not low enough to trigger the notes when Odile moved into the parametric trigger zone.

Hurricane Odile struck the Baja California peninsula of Mexico in September. At that time the National Hurricane Center (NHC) had reported the central pressure of hurricane Odile as being 930mb at landfall, but the official report from the NHC showed that the central pressure was lower.

The new information from the NHC suggested, as Artemis wrote here on the 22nd December, that it looked unlikely that the MultiCat Mexico 2012 cat bond would be triggered. The cat bond’s trigger language states that the ‘best track’ data from the NHC’s official tropical cyclone report would be the information used to make a final calculation as to whether the bond had been triggered or not.

The new data published on the 19th raised the figures, stating that the estimated central pressure of hurricane Odile at the point of landfall was actually 941mb, a significant increase from the 930mb that the earlier report had suggested.

For the $100m of threatened Class C notes to be triggered the central pressure of the storm, when it is over the parametric box, must fall between 932mb and 920mb to result in a 50% loss of principal, or below 920mb to cause a 100% loss to the investors.

The Class C tranche of the MultiCat bond had been facing a 50% loss of principal, based on the earlier pressure readings which had resulted in the bond being priced around 50 by trading desks that deal in cat bonds. We understand that these desks have repriced the notes to around 100 to reflect the fact that no loss will now be due.

The case of MultiCat and Odile does leave questions as to whether any savvy investor could have seen the NHC report as soon as it was released (on the 19th) enabling them to attempt to buy the threatened MultiCat Class C notes before the calculation was delivered (on the 23rd). There may have been a small window of opportunity to take advantage of this if broking desks had not been informed of the new NHC report as soon as it emerged.

So the MultiCat Mexico Ltd. (Series 2012-1) Class C catastrophe bond notes were not triggered and investors will not face any losses due to hurricane Odile. It is the closest a parametric catastrophe bond has come to facing a loss since Muteki Ltd. was triggered by the 11th March 2011 earthquake off the coast of Tohoku Japan.

It is encouraging to see the trigger process working as defined in the terms of the cat bond transaction. It would, of course, be preferred by both the cedent and investors if the final calculation could have been provided more rapidly, allowing for a quickr payout and greater certainty for the investors. However the calculation agent is always reliant on the data source defined in the documentation and the NHC report typically takes some two months or more to be produced.

Read our previous coverage of the fate of the MultiCat Mexico 2012 cat bond after hurricane Odile’s landfall:

Did hurricane Odile just trigger the MultiCat Mexico 2012 cat bond?

MultiCat Mexico 2012 cat bond payout not guaranteed yet.

Fate of MultiCat Mexico 2012 should be known within 120 days: S&P.

MultiCat Mexico 2012 cat bond may not trigger, hurricane Odile data shows.

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Mark Powell December 29, 2014 at 6:39 pm

There’s not much detail to go on in the report to describe how the landfall pressure and storm center was determined. Since the source was not an official weather station, some process would be advised to independently evaluate the accuracy, height, and exposure of the pressure and wind instruments (if there were any wind instruments), as well as where the actual storm center was and how that location was determined. According to NHC’s report:

“An observation of 943.1 mb with about 20 kt winds at 0505 UTC 15 September was measured by a storm chaser at the Holiday Inn Express in Cabo San Lucas, Baja California Sur (22.90231°N and 109.88354° W). Based on this observation, which is judged to be very near Odile’s center at landfall, the estimated landfall pressure is 941 mb.”

With so much at stake the level of analysis described in this report is disappointing.

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