Catastrophe bond investors will not suffer losses from Hurricane Odile after all.
Odile, which made landfall near Cabo San Lucas, a major tourist area, on Sept. 15, had threatened holders of $100 million of MultiCat Mexico Ltd. (Series 2012-1) Class C notes with a 50% loss of their principal.
Cat bonds transfer a specific set of risks from their sponsors (typically insurance companies) to investors. If a triggering event occurs, the sponsor can stop paying interest or even keep some or all the principal to cover losses.
MultiCat Mexico was issued by the Mexican government under the World Bank’s “MultiCat” program. It covers wind storms on the Pacific coast of Mexico on a parametric’ basis. That means the trigger for principal impairment is based on a natural hazard, in this case wind pressure, as opposed to actual losses.
Initial readings put wind pressure low enough to trigger a 50% payout of principal, and on Sept. 16, Swiss Reinsurance submitted an event notice to the calculation agent, AIR Worldwide Corp.
This caused Moody’s Investors Service to put the bonds, rated B-,’ under review for a possible downgrade.
However, revisions to the data in the final National Hurricane Center report, published Dec. 19, put the notes out of harm’s way, and on Dec. 23 AIR confirmed that investors face no loss of principal.
Moody’s subsequently affirmed its rating on the notes on Dec. 31, removing them from its watch list.
A default could have made big waves; there have only been a handful since the catastrophe bond market was founded in the late 1990s, according to Artemis. Those included bonds covering payouts on Hurricane Katrina in 2005 and the 2011 Tohoku earthquake in Japan, which led to the Fukushima Daiichi Nuclear Power Plant meltdown.
In the absence of losses, private capital has been pouring into the market over the past few years, pushing yields down and prompting insurers to offload a wider range of risks.
Mexico's insurance industry appears to have escaped Hurricane Odile unscathed as well.
The Mexican Insurance Institutions’ preliminary estimate put the economic loss caused by the storm at about $900 million. However insurance penetration in Mexico is only 2% of gross domestic product, one of the lower rates in Latin America, and it is estimated that only 5% of Mexican homes are protected by some kind of property and casualty insurance, according to Fitch Ratings. Even though the area affected by Hurricane Odile is a tourist area, it has a lower insurance penetration than other parts of Mexico.
Fitch said in September that it believes the losses caused by Odile will be absorbed by the insurance/reinsurance industry without causing widespread financial stress, considering the ample solvency margins, catastrophic reserves and reinsurance coverage.