Hurricane Patricia intensifies further, MultiCat cat bond risk rising

by Artemis on October 23, 2015

Hurricane Patricia has intensified rapidly into one of the strongest Category 5 storms on record in the region, threatening a devastating blow to Mexico when it makes landfall late on Friday and with the potential to trigger the MultiCat Mexico Ltd. (Series 2012-1) Class C catastrophe bond notes.

Update 24th October:
MultiCat Mexico cat bond faces hurricane Patricia loss, but how much?

Original article continues:

Hurricane Patricia saw rapid intensification as it moved over warm waters near the Mexico coast. Now an extremely dangerous Category 5 hurricane with sustained winds of an incredible 200mph, gusts to 245mph or higher and a central pressure that has plummeted down to 880mb. That is plenty low enough to trigger a 100% payout from the MultiCat Class C cat bond notes, as well as a significant (for the region) insurance and reinsurance loss.

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

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

Meteorologists are calling Patricia historic, with an incredibly fast intensification, rapid pressure drop and high winds perhaps making this the strongest observed eastern Pacific hurricane ever. It could be catastrophic for parts of Mexico in Patricia’s path, the NHC is calling for a Category 5 landfall now, with little weakening, raising the fear of winds of 180mph+ over land.

That could be catastrophic for the region where hurricane Patricia makes landfall, somewhere around the Puerto Vallarta and Manzanillo areas. Location is everything as Patricia’s eye remains small with hurricane force winds only extending 35 miles from the center, so the worst damage and greatest loss to insurance and reinsurance will be around the eye’s landfall area.

With hurricane Patricia forecast to remain at Cat 5 up to landfall, it currently does not look good for the MultiCat Mexico Ltd. (Series 2012-1) Class C catastrophe bond notes.

If a hurricane with a central pressure below 920mb enters the parametric zone for the $100m of Class C notes it will cause a 100% loss of principal to investors. A storm with pressure between 932mb and 920mb would lead to a 50% loss of principal.

Right now, with the NHC forecasting a Cat 5 landfall with little weakening, pressure currently right down at 880mb, it is hard to see how the pressure rises so far that the notes are completely safe. It is of course uncertain and requires the NHC best track data to be released some weeks after the storm but, from where we sit now with Patricia, the MultiCat Mexico 2012 Class C notes look ready to trigger.

Swiss ILS fund investment manager Plenum Investments said when commenting on the potential for MultiCat Class C to face a loss; “We therefore think that a total loss of this position is very likely.” Plenum also noted that it does not invest in this particular bond.

Here are the details of the parametric trigger for the cat bond tranche, clearly showing that hurricane Patricia will landfall within the parametric zone and that based on the latest forecast data a loss is looking increasingly likely.

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)

For Mexico a payout from MultiCat could provide a valuable source of post-disaster financial liquidity at the time it needs it most, underscoring the value in a parametric catastrophe bond. For ILS and cat bond investors of course any loss is a loss, but this is what their capital is put to work for, to provide disaster risk financing based on event parameters reaching extreme levels and they are paid for taking on that risk.

Mexico faces a potentially devastating blow from hurricane Patricia. If it makes landfall at Cat 5 strength the damage in the landfall area will be severe and hurricane force winds will likely be maintained some way inland.

That will exacerbate the insurance industry loss, creating more likelihood of a hit to reinsurance and also potentially to any collateralised reinsurance protection in the region. There will no doubt be some collateralised retrocession in the region, some of which could also come back to the ILS market and its investors if the damage is severe.

Of course insurance and reinsurance penetration in Mexico is still low, compared to say the U.S., hence it is the economic loss to Mexico that is likely to be the most severe. Here, the capital provided by a triggering of the MultiCat cat bond would be a useful source of finance for disaster recovery.

If the cat bond is triggered and if the central pressure remains very low so removing doubt, it would be beneficial for a quick payout to be arranged if at all possible. The sooner the capital is disbursed the faster it can be put to work.

We must stress that it is not possible be certain whether the Class C MultiCat Mexico cat bond notes will trigger yet, but it is looking increasingly likely. One cat bond trader we spoke with late yesterday said that he hadn’t seen any active trading of the notes during the day. However, with Patricia having intensified so rapidly overnight we could see some live-cat trading of the Class C notes today, if any speculative buyers can be found.

A $100m loss for the catastrophe bond markets investors is possible over the coming 24 hours. It will likely be well spread out across the investor base as the bond is now three years old, due for maturity this December.

More importantly though, a major impact is certain for those living or located in the landfall area where intense hurricane Patricia comes ashore. Our thoughts are with those facing such a storm.

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 you as the threat to MultiCat 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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