High probability Mexico cat bond loss will be 50% ($62.5m) from Otis: Plenum

There is a “high probability” that holders of the $125 million Pacific hurricane tranche of the Mexican government’s IBRD / FONDEN 2020  catastrophe bond face a 50% loss of notional, which would equate to a $62.5 million loss for the cat bond market, investment manger Plenum has explained.

Plenum Investments concurs with our assessment from this morning, that the parametric trigger threshold for a 50% loss of principal to the Class D tranche of notes from Mexico’s cat bond has been breached by hurricane Otis.

We reported first thing this morning, as the storm made landfall, that, based on the reported pressure at landfall from the NHC, it appears hurricane Otis will trigger the Fonden cat bond notes, causing a loss of principal to investors holding them.

A $125 million Class D tranche of notes from the Fonden cat bond provide parametric insurance protection against Pacific hurricane events, with a parametric trigger based on the landfall location and minimum central pressure of any storm that approaches the Mexican coast.

In order for the $125 million Class D Fonden 2020 cat bond notes to face any loss of principal at all, the minimum central pressure of hurricane Lidia would need to fall to 935 mb or below.

Hurricane Otis is reported to have had a minimum central pressure of 923 mb at landfall, with sustained winds of a devastating potential at 165 mph, which puts the storm in the region of intensity needed for a 50% loss, as we explained this morning.

Plenum Investments is first to comment on the storm, in an update to investors, saying, “There has never been a hurricane of this intensity in this part of Mexico in the past. Moreover, what sets this hurricane apart is its rapid intensification in the last 24 hours. Indeed, hurricane Otis formed only 3 days ago, on October 22 2023, in the Eastern Pacific, close from Mexico. The storm then remained a low intensity storm (tropical storm) for the following 2 days. Only 12 hours before landfall the storm began to intensify at a very rapid rate. Within 12 hours, the storm intensified from a tropical storm into a category 5 storm, which represents the fastest intensification of a hurricane in Eastern Pacific history (according to Chicago State University).”

Going on to explain the cat bond exposure to Otis, “The CAT Bond market has one bond exposed to hurricanes in the Pacific coast of Mexico, namely the CAT Bond IBRD 128 D. This bond, was issued by the International Bank of Development and Reconstruction in February 2020 and has a nominal amount of $125mm with a parametric trigger structure based on the central pressure of the storm. Based on the latest central pressure information of the storm, we expected with a high probability that the bond will experience a 50% loss to the notional due to Hurricane Otis.”

Plenum then explained that it has a small investment into the Class D notes that are now exposed to a loss after hurricane Otis, but says, “This should only have a minor impact on our CAT bond funds.”

In fact, Plenum has estimated the impact, should a 50% loss of notional be the outcome, as just 0.13% impact to its Plenum Insurance Capital Fund and 0.23% to its Plenum CAT Bond Dynamic Fund.

The investment managers flagship and lower-volatility pure cat bond strategy, the Plenum CAT Bond Fund, would not face any impact, according to Plenum, so presumably does not hold any exposure to the Fonden cat bond Class D notes.

Also read: Hurricane Otis likely to trigger Mexico catastrophe bond payout.

You can read all about the $485 million IBRD / FONDEN 2020 catastrophe bond and every other cat bond transaction in the Artemis Deal Directory.