Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

Hurricane Jova unlikely to trigger Multicat Mexico 2009 catastrophe bond


Hurricane Jova is approaching the Pacific coastline of Mexico carrying maximum sustained winds of 115mph. Jova, a major hurricane, has weakened slightly but is still expected to cause significant damage as the storm makes landfall near Manzanillo, both from the strong and damaging winds and torrential rainfall Jova will bring to higher ground. Interestingly, hurricane Jova is the first real threat to the MultiCat Mexico 2009 Ltd. catastrophe bond.

MultiCat Mexico 2009 Ltd. is a hurricane and earthquake cat bond which was issued to protect the Fund for Natural Disasters of Mexico, also known as FONDEN. The MultiCat program is sponsored by the World Bank and the International Bank for Reconstruction and Development helped to arrange the program, with the aim of bringing risk transfer to developing nations at affordable prices.

MultiCat Mexico has rarely been threatened by storms or quakes, but hurricane Jova has caused some worry amongst investors in the MultiCat Mexico notes. We’ve learnt that some investors have been watching the storms development closely as the forecast path puts Jova right in the geographic region which the cat bonds Class C notes cover. Hurricane cover provided by MultiCat Mexico is in three Class specific geographic regions, with the Class C notes exposed to losses from hurricanes approaching part of the Pacific coastline. You can see the specific area in the image below (taken from the Standard & Poor’s presale report).

MultiCat Mexico 2009 hurricane trigger zones

MultiCat Mexico 2009 hurricane trigger zones

And below you can see the current position and forecast path of category 3 hurricane Jova as it approaches the Mexican coastline. Notice that the forecast path puts Jova making landfall right in the upper left of the Class C hurricane trigger zone near the border of Jalisco and Colima States, areas that are covered by MultiCat Mexico 2009.

Current position and forecast path of Hurricane Jova

Current position and forecast path of Hurricane Jova

So it’s not surprising that some investors and parties with a vested interest in the MultiCat Mexico 20o9 cat bond have been watching hurricane Jova’s development and approach with some trepidation. The way MultiCat Mexico 2009 was structured means that if the parametric trigger is breached then the notes within the affected Class face a 100% loss of principal. However, for a hurricane to qualify and breach the parametric trigger, not only must it be within one of the trigger zones but it must also have a minimum central pressure of (for the Class C notes) 944mb or lower.

At the moment hurricane Jova has a minimum central pressure of 963mb and while the National Hurricane Centre are forecasting some chance of strengthening before landfall it is unlikely the pressure will drop by another 20mb. So at the moment, with less than twelve hours to landfall, we feel it’s unlikely that MultiCat Mexico 2009 will face any loss from this storm despite heading directly towards the Class C trigger zone due to the way this cat bonds parametric trigger has been structured.

Update: At landfall, Jova had weakened to 100mph winds and the minimum central pressure had risen to 973mb, meaning it is not possible for the storm to trigger the MultiCat Mexico catastrophe bond.

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