MultiCat Mexico cat bond facing hurricane Patricia loss, but how much?

The $100m tranche of MultiCat Mexico Ltd. (Series 2012-1) Class C catastrophe bond notes look almost certain to face a loss from the impact of hurricane Patricia yesterday, but the question now, due to the parametric triggers conditions, is how much.

Hurricane Patricia weakened on approach to the Mexican coastline, but was still estimated to be a Category 5 storm with sustained winds of 165mph and a minimum central pressure of 920mb at the time it made landfall, according to a National Hurricane Center update.

The parametric trigger for the $100m of MultiCat Mexico Class C tranche of notes states that if a storm travels into the defined parametric zone with a minimum central pressure of less than or equal to 920mb, then the $100m tranche would be a total loss.

A storm with pressure greater than 920mb, but less than or equal to 932mb would cause a 50% loss of principal to the tranche, so $50m.

So, on the basis that the NHC’s 920mb at landfall is accurate and with the MultiCat Mexico 2012 Class C parametric trigger zone beginning just off the coast, where the pressure would likely have been slightly lower than at landfall, when hurricane Patricia entered the parametric box, you would imagine the $100m tranche to face a 100% loss of principal.

One of Artemis’ market contacts drew their own plot of the approach of hurricane Patricia towards landfall, using the coordinates of the parametric trigger zone and extrapolating the minimum central pressure from the NHC reports along the track, finding that the pressure as the eye of the storm entered the trigger zone would have been below 920mb. See image below:

An extrapolated track of the pressure changes as hurricane Patricia entered the MultiCat Mexico Class C notes parametric trigger zone

So based on this preliminary investigation, by a risk science and modeling contact, it shows the MultiCat Class C notes would face a 100% loss under the current scenario of a 920mb landfall, with pressure almost certainly lower than 920mb when the storm entered the parametric trigger zone.

So the $100m tranche looks to be a 100% loss, based on the preliminary data and our contacts analysis. However any change in the data after post-event analysis, to above 920mb, would reduce the payout to 50% of principal. It does seem impossible that the notes could escape the 50% loss of principal, so now the question is whether it’s the full 100% loss or just the 50%.

But, as we said, this is based on the preliminary data from the NHC. The cat bond calculation agreement for the MultiCat Mexico 2012 Class C notes specifies that the final assessment, of whether the cat bond notes are triggered, will be based on the data released by the NHC in its post event tropical cyclone reports using the ‘best track’ data analysis it provides.

So there is some room for uncertainty still, as it’s likely that before any decision of a loss is taken the post event tropical cyclone report for Patricia will need to be released, as that is the terms of the deal.

For hurricane Odile that took some weeks, that hurricane hit on September 15th 2014 and the NHC’s report came out in the second half of December that year, three months later, so investors may have to wait for that long to find out how much of a loss the notes face in this case. There is a chance that the NHC may get the report out quicker as it’s been another quiet year on the hurricane front for them.

When the final report for Odile was released the pressure estimate measurements had been raised enough to save the notes, making no payout due from investors in the cat bond.

In the case of hurricane Patricia, it appears almost certain that a 50% loss of principal will be due to Mexico’s natural disaster fund FONDEN, the beneficiary.

It also looks highly likely that a 100% loss of principal will occur, but given the pressure measure at landfall is so close to the 50%/100% deciding point, with only a few mb’s of upwards movement required to make all the difference, it could need the final NHC tropical cyclone report to make that decision.

Here’s the MultiCat Mexico Class C parametric trigger graphic again, so you can make your own assumptions about the chances of it being triggered as a 50% or 100% loss of principal.

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

It’s also worth noting that, as we wrote, the catastrophe bond and ILS investor community had priced these notes at a loss yesterday, with one trading desk marking the Class C tranche for bids of around 20, while another marked it right down to 2.

That suggests investors were confident that hurricane Patricia was so powerful that a loss would be faced. Now the waiting game begins as investors wait for a final decision on how much the notes lost, 50% of principal do $50m, or 100% of principal so $100m.

It’s a shame the trigger isn’t more clear-cut, but without real-time wind monitoring and recording stations the best that can be done is using estimated and then the final data, after post-event analysis. It’s worth remembering this deal was issued in 2012 and that Mexico does not have a wealth of weather recording stations along its coastline.

With the potential for data to be revised in post-storm analysis, that means there is always going to be some uncertainty again for investors in this cat bond.

However it does look likely to us that a 100% loss occurred, and definite that a 50% loss at least is due, based on this initial analysis of the data. However we can’t confirm that until the calculation agent does, which could mean waiting for the final NHC report on hurricane Patricia.

Finally, it’s not possible to make any assessments about the potential for losses to the insurance industry, any reinsurance coverage or indeed any collateralised reinsurance or retrocession covers provided by ILS players at this time. That will become clearer in the days to come.

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.