As hurricane Milton intensifies, Mexico’s catastrophe bond comes into focus
Hurricane Milton is now a Category 4 storm with sustained winds of 155 mph at the latest NHC update. With the central pressure now estimated at 933 mb and a track that will see Milton getting very close to the northern Yucatan peninsula, it has brought the Class C notes of the IBRD CAR Mexico 2024 catastrophe bond into focus.
Hurricane Milton is now expected to continue intensifying and to reach Category 5 in the coming hours, which suggests a further drop in its minimum central pressure estimated by the NHC is likely.
The Government of Mexico secured $595 million of parametric disaster insurance protection against earthquakes and Atlantic and Pacific hurricanes through its World Bank facilitated IBRD CAR Mexico 2024 catastrophe bond transaction.
The first piece of that transaction, as the Pacific hurricane notes were issued later, was a $420 million three tranche issuance in April, $125 million of which was a Class C tranche of notes exposed to Atlantic hurricanes on a parametric trigger basis.
The $125 million of Class C Mexico IBRD Atlantic hurricane catastrophe bond notes feature a parametric trigger design that requires a storm at or below a certain central pressure to cross into the parametric arrangement for a payout to the Mexican Government to come due.
Right now, hurricane Milton is moving a little south and east, towards the northern Yucatan peninsula coastline. While a turn back to a more east north-easterly direction is anticipated, the timing of that may now be critical for where the Class C cat bond notes could face a loss.
For a loss situation to be activated, Milton’s eye would need to cross into the parametric trigger zone that runs just off the coast of that region of the Yucatan.
At currently 933 mb and dropping, the hurricane’s central pressure appears low enough to cause a triggering event. Depending on the pressure of a storm and the location it breaches the trigger box, this parametric cat bond can have a 25%, 50% or 100% loss of principal.
At this time it remains very uncertain whether Milton will track sufficiently south to get close enough to activate the catastrophe bond coverage for Mexico, but cat bond fund manager Icosa Investments has noted that it might be a close run thing.
Icosa Investments explained, “While much of the attention is on Florida, Hurricane Milton’s first financial impact could come from the IBRD Mexico cat bond, which provides parametric coverage against tropical cyclones.
“Milton’s current trajectory places it within 60 kilometers of the landfall gates, and with rapidly dropping central pressure, a trigger event cannot be fully ruled out.”
It’s worth also noting that should hurricane Milton get very near to the Yucatan or make a direct landfall there, while this specific $125 million tranche of the Mexico catastrophe bond could face a loss, that land interaction might also degrade Milton somewhat, perhaps changing the outlook for its eventual Florida landfall.
With Milton set to come close to the Yucatan and still intensifying, it has greatly increased the possibility of life-threatening damage and impacts for those living along the coast there.
Great uncertainty persists, both with this Mexico cat bond that is potentially exposed to a close encounter with hurricane Milton and also for just how impactful the storm will be in Florida.
You can track this and every Atlantic hurricane season development using the tracking map and information on our dedicated page.
Also read:
– Material hurricane Milton losses could change 2025 property reinsurance price trajectory: KBW.
– Cat bond & ILS managers explore options to free cash, as hurricane Milton approaches.
– Hurricane Milton: First Tampa Bay storm surge indications 8 to 12 feet.
– Hurricane Milton is biggest potential ILS market threat since Ian in 2022: Steiger, Icosa.
– Hurricane Milton forecast for costly Florida landfall. Cat bond & ILS market on watch.
