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19 November 2015 Alternative Risk Transfer

MultiCat Mexico offers lessons in secondary trading

The insurance-linked securities (ILS) investor community has recently been focused on the way some catastrophe bonds can be triggered and the implications for certain deals in the run up to and during a big event. The most sophisticated investors can also take tactical advantage of such situations.

That is the view of Roman Muraviev, head of catastrophe bonds at Twelve Capital, who has a number of insights around the consequences for investment selection following Hurricane Patricia, which made landfall in Mexico in October, and the tactical implications around portfolio management that this and other similar events have on the ILS market.

Despite the Category 5 hurricane being one of the most powerful storms in the Pacific Basin area ever recorded, it weakened quickly upon making landfall and insured losses from the event are not expected to be severe. AIR Worldwide estimates they will be around the $200 million mark.

MultiCat Mexico, a cat bond designed to cover losses from exactly this type of event, was structured using a parametric trigger – meaning it is triggered by meteorological factors including central pressure within certain geographical parameters. Even though the final loss to the insurance industry was relatively low, the $100 million Class C tranche of the bond seems likely to have been triggered.

Parametric triggers are usually used by sponsors because they allow funds to be released very quickly. In this case, the Mexican government would have wanted access to funds as quickly as possible in the aftermath of a large loss event.

Muraviev says the behaviour and strategy of investors in the secondary market during such events has been fascinating. MultiCat Mexico C is structured in such a way that if the central pressure of the storm falls below 932 millibars (within a pre-defined area), the bond starts to experience a loss. If it falls below 920 millibars it represents a full loss.

The bond was close to being triggered last year by Hurricane Odile. In the secondary market, the bond was priced at 50 cents on the dollar for a period of time, although in the end no loss was recorded. The bond recovered accordingly to par, only to fall again post Hurricane Patricia.

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