Some uncertainty, but probable Otis will trigger 50% Mexico cat bond loss: Twelve Capital
Specialist insurance and reinsurance-linked investment manager Twelve Capital has highlighted some uncertainty with respect to the final central pressure figure that will get reported for hurricane Otis, but still believes it is probable the Mexican government’s exposed catastrophe bond tranche will face a 50% loss of principal.
Recall that, we reported early Wednesday morning, as hurricane Otis was making its Category 5 landfall, that, based on the reported pressure from the NHC, it appears hurricane Otis will trigger the $125 million Pacific hurricane tranche of the Mexican government’s IBRD / FONDEN 2020 catastrophe bond, causing a loss of principal to investors that hold them.
As we said at the time, the concensus we had reached and that we were hearing from sources, was that the early indications pointed to a 50% loss of principal, so $62.5 million of the exposed tranche of cat bond notes.
While it appears clear-cut that a loss will be suffered, given how low the central pressure of hurricane Otis was at landfall, 923 mb, Twelve Capital highlights that there is always some uncertainty, given the parametric trigger design.
Twelve Capital explains, “This bond uses a parametric trigger design that relies on reported storm location and central pressure values. Given that the US National Hurricane Center (NHC) reporting of central pressure is not measured constantly but using intervals, this introduces uncertainty with respect to the central pressure estimate used in the trigger, especially given the observed rapid intensification.
“This ultimately means it is too early to provide certainty on the eventual pay-out, but given the latest estimates of central pressure, it’s probable that there could be pay-out in the range of 50%. We will continue to monitor the data coming from the NHC in order to quantify the potential impacts.”
The best track data from the NHC has so far not changed from the landfall declaration of pressure, neither has the reported interval before that.
But changes have been seen before, when the finalised best track data is released, so as Twelve Capital says there can be uncertainty, given the pressure will be interpolated to derive the figure at the point hurricane Otis’ center passed into the parametric trigger zone close to Acapulco.
To derive that, typically the finalised best track data is required and risk modeller Verisk (AIR), acting as calculation agent, will perform the task of interpolating the central pressure along the track of hurricane Otis, to define the figure for the time it passed into the parametric trigger zone.
That may take some weeks, which does mean a payout could also take that long. However, if it continues to look like a clear-cut loss, there is a chance a determination might be able to be made sooner, we’d expect.
You can read all about the $485 million IBRD / FONDEN 2020 catastrophe bond and every other cat bond transaction in the Artemis Deal Directory.
Also read:
– Hurricane Otis likely to trigger Mexico catastrophe bond payout.
– High probability Mexico cat bond loss will be 50% ($62.5m) from Otis: Plenum.
– Hurricane Otis a “monumental” weather model miss: RMS.
– Hurricane Otis “insurable” loss estimated $10bn to $15bn by CoreLogic.
