Hurricane Grace set for two Mexico landfalls, risk to World Bank cat bond low

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Hurricane Grace is soon to make landfall on Mexico’s Yucatan Peninsula, with sustained winds of 80 mph and gusts closer to 100 mph and a dangerous storm surge expected.

Hurricane Grace took the more southerly route, having once been expected to enter the Gulf of Mexico as a potential United States landfall threat.

Weakened by Hispaniola, Grace meandered towards a more southerly track, but then intensified into a hurricane after passing the Cayman Islands and set a course for Mexico.

As with any hurricane striking Mexico, the insurance, reinsurance and insurance-linked securities (ILS) market threat is minimised by the low levels of insurance penetration.

But there is still exposure, especially with resorts in the Yucatan region increasingly seen to be buyers of parametric insurance cover, while Mexico also has catastrophe bond coverage from its World Bank facilitated transaction.

You can see hurricane Grace’s location and forecast path below:

Hurricane Grace forecast path and track towards Mexico

The NHC warned, “Hurricane conditions and a dangerous storm surge are expected in portions of the Hurricane Warning area in the eastern Yucatan Peninsula of Mexico beginning during the next several hours. Preparations to protect life and property should be rushed to completion.”

Hurricane force winds extend outwards around 35 miles from the center of hurricane Grace, while tropical storm force winds extend outwards up to 140 miles.

Isolated maximum rainfall totals of 12 inches are expected, perhaps higher in some areas, raising the prospects of flash flooding and potential landslides.

A storm surge of 5 foot is forecast for the region where landfall is made, which could inundate the coast and be damaging as well.

After crossing the Yucatan peninsular, hurricane Grace is expected to emerge weakened, but then to intensify as it moves towards a second landfall as a hurricane.

Intensity guidance from the models shows Grace having a chance of being a stronger hurricane for its second landfall, than its first. The below image is from Tropical Tidbits.

Hurricane Grace modelled intensity guidance

It seems unlikely hurricane Grace will get to the levels of intensity needed to cause any concern for the IBRD / FONDEN 2020 catastrophe bond, which was issued with the assistance of the World Bank and reinsurance firm Swiss Re, to be considered exposed, which covers Mexico against hurricane and earthquake risks.

This first landfall would need to see hurricane Grace with a far lower central pressure for the cat bond coverage to be triggered.

Currently Grace has a minimum central pressure of around 986mb, but the FONDEN catastrophe bond would require that to drop to 920mb to 930mb prior to the soon to occur landfall, so this is not a threat currently.

Update: Grace made its first landfall on the Yucatan peninsula with a minimum central pressure of 986 mb, so nowhere near the lower levels required to trouble the FONDEN catastrophe bond.

The second landfall, on the eastern Mexico coastline across the Gulf of Mexico from Yucatan, would need to see hurricane Grace’s central pressure drop to at least 955mb or lower for a 25% payout of the cat bonds principal of the $125 million Class C notes, or lower still for a larger payout to be due.

Right now that seems unlikely, as the intensity guidance only suggests an outside chance that hurricane Grace could reach even category 2 wind speeds, which would suggest the central pressure will not drop sufficiently to threaten these notes.

As a result, it appears at this time like the IBRD – FONDEN 2020 catastrophe bond will not face a threat of loss because of hurricane Grace.

Update: Grace’s second landfall came with 125 mph winds on the 21st, but the minimum central pressure was not reported to have dropped sufficiently to trouble the catastrophe bonds.

The wildcard here would be rapid intensification, when Grace moves across the Gulf, but that is seen as unlikely by almost all the forecast models at this time.

Meanwhile, tropical storm Henri continues to track around Bermuda and is forecast to head north, parallel to the US coastline. Model runs are suggesting Henri will become a hurricane in the next day or so, while each model run is bringing its track nearer to the United States.

But still, most forecasters believe Henri will pass just offshore and not threaten a landfall at this time. However it is worth keeping an eye on this, as steering currents can be notoriously weak and difficult to predict for more northerly storms.

Insurance, reinsurance and ILS market interests can keep track of this activity over on our 2021 Atlantic hurricane season page and we’ll update you should a more significant threat develop.

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