MultiCat Mexico Ltd. (Series 2012-1)

The MultiCat Mexico 2012-1 catastrophe bond will ultimately provide protection to The Fund for Natural Disasters of Mexico (FONDEN), via catastrophe insurance through Mexican insurer AGROASEMEX who are in turn reinsured with Swiss Re who are the sponsor, or ceding reinsurer of this cat bond and themselves will effectively have retrocessional reinsurance with MultiCat Mexico Ltd.

For the purpose of this transaction a Cayman Islands special purpose company has been established and it is expected that it will be licensed as a Class B insurer on the island. MultiCat Mexico 2009 was also Cayman Islands domiciled, but this is a new exempted company set up for this deal and potentially to issue future series of notes if required. Swiss Re, as ceding reinsurer, are responsible for any payments due under the retrocession contract between it and MultiCat Mexico.

The deal has a preliminary size of $300m and will feature three classes of notes. $140m of Class A notes which will provide protection from earthquakes, $60m of Class B notes which provide protection against Atlantic coast of Mexico hurricanes and $100m of Class C notes which provide protection against Pacific coast of Mexico hurricanes. All three classes of notes afford protection on a per-occurrence basis. The cat bond transaction is designed to provide retrocessional cover to Swiss Re, but given the underlying reinsurance the deal ultimately benefits FONDEN. The transaction will provide coverage for an expected term of just over 3 years, with maturity slated to be the 4th December 2015.

As in the MultiCat Mexico 2009 cat bond the deal features three parametric triggers, one for each class of notes.

For the $140m earthquake exposed Class A notes, there are five earthquake zones where the epicentre of a qualifying earthquake must be and both the magnitude and depth of any earthquakes will also be used in the parametric trigger. The coverage area is larger than in the 2009 transaction, which only had three earthquake zones, with two new zones in the north of Mexico. You can see the factors which will denote a trigger event and the five earthquake zones for the Class A notes below (taken from the S&P presale documentation). The parametric trigger for earthquake is much more detailed than in the 2009 transaction, where earthquake depth was the same for each zone, although the magnitude parameters did differ.

For the $60m Class B tranche of notes, which are the first hurricane exposed tranche and exposed only to hurricanes which impact the Atlantic coast of Mexico, there are two hurricane zones where the central pressure of a hurricane must be below a pre-defined level for a hurricane to qualify as a covered event. Again this is a different structure to the 2009 Multicat cat bond as that had three hurricane tranches of notes, each of which only had one hurricane zone, the 2012 transaction is a much more detailed structure. You can see the central pressure factors which will denote a trigger event and the two hurricane zones for the Class B notes below (taken from the S&P presale documentation).

Finally, the $100m of Class C notes, which are also exposed to hurricanes, features one large hurricane zone running down the Pacific coast of Mexico, but has two parameters for the central pressure of hurricanes. This tranche of notes can payout on less severe hurricanes with a higher minimum central pressure as they have a parameter which will allow for a 50% payout of principal. For more severe qualifying hurricanes a 100% payout of principal would occur. Again, this offers much broader protection for the sponsors than the previous MultiCat Mexico 2009 deal afforded. The MultiCat Mexico 2012 cat bond is a much better structure, offering broader protection to the reinsured and ultimately insured parties, but also making the transaction a slightly higher risk investment, which will likely be reflected in the coupon payments. You can see the central pressure factors which will denote both the 50% and 100% trigger event and the single hurricane zone for the Class C notes below (taken from the S&P presale documentation).

This deal is a little more risky than the 2009 MultiCat, but only because the cover has been extended and the triggers tailored to a much greater degree. The Class A notes have a probability of attachment of 4.40% and the Class B notes have a probability of attachment of 2.73%. As the Class A and B tranche would be a total loss if any qualifying event occurs their expected losses and probability of exhaustion figures are the same. The Class C notes are slightly different as they can either payout 50% or 100% of the principal depending on the minimum central pressure of a hurricane which passes through the hurricane zone and so they have a probability of attachment of 5.69%, an expected loss of 4.36% and a probability of exhaustion of 3.02%.

For the class A notes, S&P says that there have been six earthquakes since 1787 that would have reached the attachment index point. For the class B notes there have been four historical hurricanes with a central pressure that would have met the conditions for attachment, and S&P notes that these are all events in recent times since 1977. For the class C notes there have been two hurricanes between 1949 and 2004 with a central pressure that would have reached the attachment index point and both would only have resulted in 50% principal loss to the notes investors.

The Class A, earthquake exposed notes, are expected to pay investors a coupon of 8.75% to 9.00% above Treasury Money Market Funds. The Class B, Atlantic coast hurricane notes, are expected to pay 9.00% to 9.50%. The Class C, Pacific coast hurricane exposed notes, are expected to pay a coupon of 8.75% to 9.10%.

Standard & Poor’s has assigned its ‘B (sf)’, ‘B+ (sf)’, and ‘B- (sf)’ preliminary ratings to the Series 2012-1 class A, B, and C notes respectively which are being issued by MultiCat Mexico Ltd. in this cat bond transaction.

You can also view the details of the MultiCat Mexico 2009 transaction.

Update:

The transaction upsized a little, with the Class B tranche of notes growing from $60m to $75m, taking the total transaction size to $315m before close.

Price guidance dropped quite dramatically during the marketing phase. You can see the reduction in the table below:

Class A: Was 8.75% – 9.00%, Now 8.00% – 8.50%

Class B: Was 9.00% – 9.50%, Now 7.75% – 8.50%

Class C: Was 8.75% – 9.10%, Now 7.50% – 8.25%

Update 2:

The transaction closed and the variable rate note program and issued notes were listed on the Cayman Islands Stock Exchange.

Rating agency Standard & Poor’s affirmed the deals ratings as ‘B (sf)’, ‘B+ (sf)’, and ‘B- (sf)’ preliminary ratings to the Series 2012-1 class A, B, and C notes respectively.

The final pricing was at the bottom of the revised guidance range, indicating the demand in the market yet again enabling a sponsor to acquire cover at a lower than expected price.

The $140m of Class A notes which are exposed to earthquakes priced at 8.00%, the upsized $75m of Class B notes which are exposed to Atlantic hurricanes priced at 7.75% and the $100m of Class C notes which are exposed to Pacific hurricanes priced at 7.50%.

Update on Hurricane Odile:

On 15th September 2014 Hurricane Odile made landfall near Cabo San Lucas in Mexico, an area where the class C notes cover hurricane losses. The data on Odile’s landfall made it look as if the Class C tranche of notes would be triggered.

An event report was submitted and the Class C notes were placed on a rating watch by S&P on the 18th September.

On the 19th of December the National Hurricane Center, the reporting agency, published its cyclone report for Hurricane Odile.

This report featured the data required for the calculation agent AIR Worldwide to establish whether Hurricane Odile had breached the parametric trigger causing a loss to the Class C notes or not.

The data from the NHC had changed sufficiently since the initial landfall, due to extra analysis and data collection, to raise the minimum central pressure sufficiently to put the notes out of harms way.

On the 23rd December 2014 AIR Worldwide published its final event report, confirming that it had determined that hurricane Odile was not a triggering event meaning that investors did not face a loss.

More details can be found in our articles covering this event.

– 15th September, Did hurricane Odile just trigger the MultiCat Mexico 2012 cat bond?

– 18th September, MultiCat Mexico 2012 cat bond payout not guaranteed yet.

– 19th September, Fate of MultiCat Mexico 2012 should be known within 120 days: S&P.

– 22nd December, MultiCat Mexico 2012 cat bond may not trigger, hurricane Odile data shows.

– 29th December, No Odile loss for MultiCat Mexico 2012 catastrophe bond.

– 31st December, S&P affirms MultiCat Mexico cat bond as Odile not a triggering event.

Update on Hurricane Patricia, October 2015:

Hurricane Patricia has become the most powerful storm in the region on record. A massive pressure drop down to 880mb, with sustained winds of 200mph as the hurricane approaches land put the Class C notes of MultiCat Mexico 2012 on watch.

As the storm neared there seems little chance it will weaken enough to spare the notes, making a loss increasingly likely.

The latest: Hurricane Patricia intensifies further, MultiCat cat bond risk rising.

Update on Hurricane Patricia, February 2016

Finally a determination was made that the $100m Class C tranche of notes would face a 50% loss of principal. This took a considerable length of time as the National Hurricane Center’s final tropical cyclone report and best track data was not released until the 4th February 2016.

Calculation agent AIR Worldwide then published its final report, revealing a $50m event payment determination meaning investors in this Class C tranche faced a 50% loss of principal to their investments.