Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

MultiCat Mexico 2012 cat bond upsizes a little, pricing drops a lot


Interest in the catastrophe bond market and demand for new issuance is showing no sign of letting up, as investor sources tell us that the latest cat bond deal to come to market has increased in size a little and the price guidance has been reduced a lot. MultiCat Mexico Ltd. Series 2012-1, the 22nd insurance-linked securitization of the year recorded in our Deal Directory, is once again reflecting the strong demand from investors for diversifying catastrophe risk opportunities in cat bond form.

The MultiCat Mexico 2012 catastrophe bond ultimately covers The Fund for Natural Disasters of Mexico (FONDEN), via catastrophe insurance through AGROASEMEX and reinsurance with Swiss Re who are the actual sponsor, or ceding reinsurer of this deal. Swiss Re themselves will effectively receive a fully collateralized, multi-year source of retrocessional reinsurance cover for Mexican hurricane and earthquake risks through MultiCat Mexico 2012.

Given the geographically diversifying nature of this transaction we always expected it would prove popular, as we stated when we wrote about the transaction at its launch. The cat bond features parametric triggers based on specific zones for Atlantic and Pacific hurricanes and for earthquakes in Mexico. The triggers require an event to occur within the specified zones as well as to meet or exceed certain intensity measurements. There are three tranches of notes in the deal and each is targeting a different peril.

Only one of the three tranches of notes has increased in size during marketing, the Class A notes which are exposed to earthquakes remain at $140m, the Class B notes which are exposed to Atlantic coast hurricanes have increased in size slightly from $60m to $75m and the Class C notes which are exposed to Pacific coast hurricanes remain at $100m. This means the deal has upsized from $300m to $315m, not a large jump but it’s not surprising as FONDEN only require a certain amount of cover and their ambitions to grow the deal will likely not have been strong.

The pricing guidance movement is very interesting though as it has moved downwards considerably, making the transaction effectively cheaper to bring to market thanks to strong investor demand for the risks and investors willingness to take on the risk for a lower return. You can see the original price guidance and the revised price guidance below.

Tranche $ Pricing before Pricing after
Class A $140m 8.75% – 9.00% 8.00% – 8.50%
Class B $75m 9.00% – 9.50% 7.75% – 8.50%
Class C $100m 8.75% – 9.10% 7.50% – 8.25%

As you can see, the pricing has dropped by a significant amount during the marketing of the MultiCat Mexico 2012 catastrophe bond. This trend for prices falling, thanks to strong demand from investors, before cat bond deals close has been a feature of 2012 and looks set to continue. With prices on MultiCat having come down so far below the initial guidance range the sponsors will be achieving their desired risk transfer at a cheaper rate. These price reductions are another factor that is helping to make catastrophe bonds more competitive with traditional reinsurance.

Final pricing for MultiCat Mexico Ltd. Series 2012-1 is due on Friday, we’re told, and when completed will take 2012 ILS issuance to around the $4.7 billion mark. The deal is expected to close later next week.

You can read more details about this transaction in our Deal Directory.

Read our archive of articles regarding the MultiCat Mexico 2009 deal and the MultiCat Program which do make for interesting reading as there have been a number of catastrophe events which threatened the 2009 deal but did not qualify under the terms of the parametric triggers.

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