Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

MultiCat Mexico 2012 cat bond payout not guaranteed yet


The fate of the MultiCat Mexico Ltd. (Series 2012-1) catastrophe bond is not as clear-cut as it seems. We understand that investors must wait for confirmed data on hurricane Odile to be released by the National Hurricane Center (NHC) which can take some weeks.

The calculation agreement for the MultiCat Mexico 2012 cat bond specifies that the final assessment, of whether the bond is triggered, has to be based on the data released by the NHC in its post event tropical cyclone reports using the ‘best track’ data analysis it provides, we’re told.

The ‘best track’ data includes confirmed information on each cyclone with data on the intensity of the storm in six-hourly positions. This will enable the calculation agent, which is risk modelling firm AIR Worldwide, to establish, using its calculation process, the central pressure of the storm when it was within the cat bonds parametric hurricane zone.

The NHC’s reported minimum central pressure when hurricane Odile made landfall was 930mb, as we wrote just after Odile struck Mexico, which if accurate would definitely indicate a 50% loss of the $100m principal to the Class C noteholders of MultiCat Mexico 2012. However these are based on estimates between various measurement points.

The NHC releases best track data to firm up the six hourly measurements and it is likely that unless one of those measurements is within the parametric hurricane zone, the calculation agent will have to extrapolate from the two nearest points what the central pressure was when hurricane Odile was directly within the hurricane zone. It’s likely the calculation process describes how this would be achieved, but we haven’t seen that.

To do this calculation the best track data needs to be made available first, something which can take as much as two months we understand. Looking at the NHC website the best track data is only available for a few storms so far in the Pacific this year, with the most recent being Fausto, a tropical storm that occurred on 7th to 9th July.

That shows just how long the insurance-linked securities (ILS) market may have to wait to finally understand whether some ILS investors face this $50m loss.

That does raise the question of how a parametric catastrophe bond, particularly one which is a World Bank arranged cat bond designed to provide post-disaster risk financing, is structured and how a trigger is designed. Typically a parametric trigger would be expected to pay out very quickly and cleanly, and we certainly hope this one will if it is deemed to be triggered, but the ambiguity created by having to wait for this best track data is perhaps not an ideal situation.

We’re told that a report from rival risk modeller RMS looks at the calculation process and trigger of the MultiCat Mexico 2012 cat bond and the firms assessment, using preliminary track data from the NHC, finds that if there is no change to the data the notes would be triggered.

However the process RMS used to derive that result may differ slightly from that used by AIR Worldwide it notes, so we still need to wait for an official announcement, after the best track data becomes available and AIR has run through its process, on whether ILS investors face this loss.

With up to two months to wait investors will likely largely hold onto these notes, rather than selling them in the secondary cat bond market at this time. We understand from brokers that being a 50% loss scenario, any bids or offers are likely to be for $50 although some have reported receiving a few speculative bids at lower levels.

We will of course keep you updated as any more information emerges on the fate of the MultiCat Mexico Ltd. (Series 2012-1) catastrophe bond Class C notes.

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