Hurricane Patricia heads for Mexico, MultiCat cat bond at risk?

by Artemis on October 22, 2015

Read our latest on Hurricane Patricia here. Hurricane Patricia formed this morning off the Pacific coast of Mexico. With sustained winds of 85mph currently the forecast calls for Patricia to strengthen towards a Cat 3 or stronger landfall, perhaps putting the Class C notes of the MultiCat Mexico Ltd. (Series 2012-1) catastrophe bond at risk.

Update 23rd Oct: Read our latest on hurricane Patricia here. Patricia has intensified rapidly to a Cat 5 storm with pressure well below the trigger point for the MultiCat Mexico 2012 Class C notes. The latest.

Hurricane Patricia is a Category 1 storm with a minimum central pressure of 980mb, sustained winds of 85mph and gusts of as much as 105mph. Situated off the Pacific coast of Mexico, Patricia is forecast to come ashore perhaps as a Category 3 hurricane or stronger, right within the parametric trigger zone for the MultiCat Mexico 2012 Class C cat bond notes.

Hurricane Patricia forecast path or track to Mexico

Hurricane Patricia forecast path or track to Mexico (from Weather Underground)

It’s important to note that it’s impossible to forecast a hit to the MultiCat cat bond, the minimum central pressure of a hurricane needs to drop to below 932mb when a hurricane enters the parametric trigger zone for the Class C notes. That’s quite a drop in pressure, but feasible if Patricia becomes a strong Cat 3 or higher hurricane. Patricia is certainly a risk to MultiCat, as well as to any insurance or reinsurance covers in the landfall region right now.

It’s worth noting that Mexico said it was planning to issue a new MultiCat catastrophe bond this month, as the 2012 cat bond matures in December.

The details of the MultiCat Mexico 2012 Class C notes parametric trigger zone and parameters can be seen below, clearly showing that hurricane Patricia will landfall within the zone based on the latest forecast.

MultiCat Mexico 2012 catastrophe bond Class C notes trigger zone

MultiCat Mexico 2012 catastrophe bond Class C notes trigger zone (click for more details on this cat bond and its trigger)

The $100m MultiCat Mexico 2012 Class C notes require a storm with a central pressure between 932mb and 920mb to strike the parametric zone for a 50% loss of principal to occur. A storm with a pressure below 920mb would cause a 100% loss of principal to investors in the notes.

The MultiCat Mexico 2012 cat bond was threatened by hurricane Odile in September 2014, but eventually the best track data from the National Hurricane Center showed that Odile did not have a sufficiently low central pressure to trigger the Class C notes.

Odile was a Category 3 hurricane when it entered the parametric trigger zone, which based on the latest forecast for Hurricane Patricia means that the market should consider there is a risk to the Class C notes, based on the latest forecast.

Landfall is expected sometime on Friday and as you can see from the top tracking map in this article it is expected that Patricia will weaken as it interacts with land. That could make all the difference, as far as becoming a triggering event is concerned. The minimum central pressure is the key to this cat bond parametric trigger.

Whether the MultiCat cat bond is put seriously at risk or not over the coming few days, as hurricane Patricia intensifies, there will be a definite threat to insurance, reinsurance and likely some collateralised reinsurance or private ILS interests.

Clearly, when it comes to hurricanes impacting Mexico, the landfall location is important in determining the potential for a meaningful insurance industry loss, and Mexico continues to have low insurance and reinsurance penetration rates.

But any Category 3 hurricane making landfall can pose a threat to insurance, reinsurance and collateralised reinsurance or retrocession covers that are in force in the region, hence making hurricane Patricia a storm to watch for more than just cat bond investors.

The U.S. National Hurricane Center warns that hurricane Patricia could become a major hurricane (Cat 3 or stronger) by early Friday. That means the catastrophe bond and ILS investor community needs to watch this storm as it develops and intensifies over next day or so.

Hurricane Patricia forecast path

Hurricane Patricia forecast path (from U.S. National Hurricane Center)

The tracking charts in this article will update automatically and the real-time surface wind graphic below is constantly updated. We will update this post and write additional ones as the storm develops and the threat to MultiCat, if any, becomes clearer.

You can read all about the MultiCat Mexico Ltd. (Series 2012-1) catastrophe bond in the Artemis Deal Directory. It’s also worth noting that Mexico plans to renew its MultiCat 2012 cat bond, which matures in December.

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