Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Did hurricane Odile just trigger the MultiCat Mexico 2012 cat bond?


Hurricane Odile made landfall in southern Baja California Sur, near Cabo San Lucas as a major storm with winds of 125mph and more importantly for catastrophe bond investors a minimum central pressure of 930mb, according to the NOAA.

Update 23rd Dec 2014:

It looks like the MultiCat Mexico Class C notes will not be triggered by Odile, as the best track data from the NHC has raised the central pressure of the storm at landfall quite considerably. More details here.

Original article:

We say more important as it looks to us, note we’re not risk modellers or actuaries, as if the landfall may have been at the right intensity and in the correct location to trigger the Class C tranche of notes of the World Bank arrange MultiCat Mexico Ltd. (Series 2012-1) catastrophe bond.

The Class C notes require a hurricane with a minimum central pressure of a certain value to pass within a parametric zone, essentially an area drawn onto a map of Mexico.

In the case of the Class C notes it is possible for the cat bond to pay out either 50% of principal or 100%, depending on how intense the storm is as defined by how low its central pressure is. In this case it looks like investors may be at risk of losing 50% of their principal from the $100m tranche of MultiCat Mexico notes, as the central pressure appears to have been at the right level for such a loss to occur.

The $100m 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.

Hurricane Odile had a central pressure of 930mb and struck in Cabo San Lucas, which is right on the tip of Baja California Sur. Looking at the map from the MultiCat Mexico 2012 cat bond offering, that would result in a 50% payout. See the map from our Deal Directory entry on the cat bond below.

MultiCat Mexico 2012 catastrophe bond, Class C notes parametric zone

MultiCat Mexico 2012 catastrophe bond, Class C notes parametric zone

Now compare that map with the NOAA’s hurricane track map, which clearly shows that hurricane Odile made landfall within the parametric zone for the Class C notes.

Hurricane Odile landfall location

Hurricane Odile landfall location

Timing is interesting of course with the reinsurance and much of the insurance-linked securities (ILS) market in Monte Carlo right now. There has, as ever, been a lot of discussion from traditional reinsurers that ILS is not tested frequently in its ability to pay losses, despite the fact that many ILS managers pay regular claims on collateralized reinsurance contracts (which always seems to be overlooked).

In the case of MultiCat Mexico 2012, if it has indeed been triggered and faces a loss, the cat bond should pay out very quickly being a parametric structure. It is designed to be simple to assess whether a loss occurs, based on location and central pressure of a hurricane. This responsiveness to loss is a key benefit of parametric cat bonds, which means they pay quickly and with certainty to the sponsor.

In this case the cat bond was sponsored by Swiss Re to 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. The World Bank helped to arrange and facilitate the cat bond through its own MultiCat cat bond platform.

If it is triggered this could really raise the profile of MultiCat again and help to drive the message that this is an ideal way to transfer disaster risk from sovereign type facilities to the capital markets, thus helping countries become more resilient to natural disasters financially.

Please note, we cannot be certain that this cat bond has been triggered. The calculation agent for the MultiCat Mexico 2012 cat bond is AIR Worldwide. It will be asked to assess, using the National Hurricane Center data which is the same we looked at, whether hurricane Odile has triggered the bond or not and will report back to the sponsor.

Our view is that Odile does look to have met the location and central pressure parameters for the Class C notes to be facing a 50% loss, or $50m of principal. This loss would, we assume, be divided evenly across investors that are holders of the Class C notes.

Luca Albertini of ILS investment manager Leadenhall Capital Partners told Artemis; “The bond triggers when there is a forecast for a medium loss potential, so if it is confirmed to be triggered it proves to be an effective strategy for the buyer. We do not hold any as we did not like the price multiples at issuance and do not need to use ILS for diversification in our strategies as we also use private placements.”

We will update you when/if confirmation or otherwise about the fate of the MultiCat Mexico Ltd. (Series 2012-1) Class C notes emerges.

Artemis Live - ILS and reinsurance video interviews and podcastView all of our Artemis Live video interviews and subscribe to our podcast.

All of our Artemis Live insurance-linked securities (ILS), catastrophe bonds and reinsurance video content and video interviews can be accessed online.

Our Artemis Live podcast can be subscribed to using the typical podcast services providers, including Apple, Google, Spotify and more.

Print Friendly, PDF & Email

Artemis Newsletters and Email Alerts

Receive a regular weekly email newsletter update containing all the top news stories, deals and event information

  • This field is for validation purposes and should be left unchanged.

Receive alert notifications by email for every article from Artemis as it gets published.