Private ILS maybe exposed to Mexico quake, FONDEN cat bond loss expected

ILS and reinsurance linked investment manager Twelve Capital has said that there could be private ILS transactions, usually collateralized reinsurance arrangements, which are potentially exposed to last Friday’s magnitude 8.1 earthquake that struck off the coast of Mexico.

The ILS investment manager reported that the earthquake, which is thought to have been the largest ever to strike Mexico, means that it will activate its damage assessment process for private ILS transactions, once the required and relevant information becomes available.

We understand that there are a number of reinsurance and retrocession contracts with exposure to the Mexico earthquake and that some ILS market participation is seen in a handful of these, largely on the retro side we’re told.

The Mexico earthquake is also set to trigger the World Bank supported IBRD / FONDEN 2017 catastrophe bond (as Artemis first revealed on Friday), with the only question now being how much it will payout, with anywhere between 50% and 100% seen as possible by earthquake modellers who have analysed the transaction for us.

Today, speaking at the Monte Carlo Reinsurance Rendez-vous event, CFO of the World Bank Joaquim Levy said that the Bank believes the FONDEN 2017 cat bond could be at least partially triggered, which he called a good proof of the value of risk transfer for disaster risks and the protection offered by the capital markets.

So there could be some small additional losses for the ILS market to bear from this Mexico earthquake, aside from just the FONDEN cat bond.

Twelve Capital and fellow ILS manager Plenum Investments both reported that they have invested in the FONDEN 2017 cat bond, with Plenum reporting it has a 1.15% allocation and expects a total loss at this time.

Secondary cat bond pricing sheets show the FONDEN notes marked down as low as for bids of just 5, suggesting the market anticipates a total loss of the $150 million Capital-At-Risk Series 113 tranche of Class A notes issued in the FONDEN 2017 cat bond.

The Mexican Finance Minister Jose Antonio Meade told Reuters recently that they are evaluating whether a payout is due, expecting to claim up to the full $150m depending on the payout factors for the parametric trigger.

He also said that he expects Mexico to have sufficient funds to assist in disaster recovery whether the cat bond is triggered or not. But a fast payout determination would clearly be beneficial in mobilising disaster relief capacity.

It should become clear whether this cat bond will payout within a few weeks at most.

You can read all about the IBRD / FONDEN 2017 catastrophe bond and every other cat bond transaction since the market began in the Artemis Deal Directory.