Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Speculative investors buy MultiCat cat bond, in hope not a full loss


Speculative investors have been buying some of the at risk $100m Class C tranche of the MultiCat Mexico Ltd. (Series 2012-1) catastrophe bond at very low prices, likely hoping that the event report reveals that hurricane Patricia only caused a 50% loss of principal, which could allow them to profit.

We’re unable to tell whether these are dedicated and experienced insurance-linked securities (ILS) and catastrophe bond players, or whether the buyers are investors from outside the sector who see an opportunity to speculate in the ILS asset class.

It’s happened before that when a cat bond was deemed at risk of a loss, speculators or experienced ILS investors with their own view on the risk of loss, have purchased notes at distressed prices in the hope that they could rebound.

On the 26th October, just a couple of days following hurricane Patricia’s impact on the Mexican coast, a trade was made which saw more than one million dollars worth of MultiCat Mexico 2012 Class C cat bond notes purchased for the low price of 4.25/4.35.

Following that, yesterday on the 5th November another trade took place, with again over one million dollars of MultiCat Mexico Class C notes changing hands, but this time for around double the price, at 9.4/9.5.

A default or loss looks almost certain for the MultiCat Class C notes, with the rating now downgraded as even Standard & Poor’s said that a default looks almost inevitable. However the question is just how big a loss could it be.

The parametric trigger defines two loss scenarios of the Class C notes, either a 50% loss if the central pressure reading was equal to or below 932mb when it was within the covered area, or a 100% loss of principal if the central pressure was 920mb or below.

The investors buying the notes at distressed levels clearly believe, or hope and are willing to bet, that the Class C notes will not suffer a 100% loss. Following the release of some real-time recorded pressure data by a storm chaser, which Artemis covered as it happened here, the chance of the full loss looks slimmer and the 50% loss began to look the more likely end result.

However, there is still significant uncertainty and until the final data is released by the NHC and the final event report published by calculation agent AIR Worldwide, it’s really not possible to be fully sure which loss level will be suffered by investors.

Situations like this allow ILS investors, or speculators from outside the market, to run their own analysis and come to their own conclusions about whether the notes will suffer the full loss or not. That leaves room for some speculative buying, as has now been seen.

It’s worth noting that we can only track trades that have happened across U.S. desks, there could have been more in Europe but we have no way of knowing.

But the fact that some investors clearly believe that there is a good enough chance of recovery at least to 50% to put their money on MultiCat Mexico Class C shows that the final decision is likely to be a very tight one.

Read our coverage of hurricane Patricia and the MultiCat catastrophe bond:

S&P downgrades MultiCat cat bond notes on default expectation.

Pressure recordings show uncertainty in MultiCat cat bond loss.

S&P put MultiCat Mexico Class C notes on negative watch post-Patricia.

MultiCat Mexico cat bond facing hurricane Patricia loss, but how much?

Cat bond market pricing MultiCat Class C for potential loss.

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