2016-02-15 - By Henrik Sjöholm

MultiCat Funds Will Strengthen Mexican Reconstruction After Patricia

Losing money from an investment will always be a sour experience. However the cause of the loss certainly affects how it is perceived. The MultiCat Mexico Class C cat bond is a good example, as funds are now released for reconstruction in Mexico in the aftermath of hurricane Patricia.

While hurricane Patricia was the strongest hurricane ever recorded and actually the strongest ever to make landfall in Mexico, the damages were describes as “little” or “not major”. Still, “little damage” by a hurricane can still be quite serious.

Beforehand, the potential impact of Patricia was described as “disastrous” by the Mexican government. Considering this, the damages were limited, but still considerable:

  • More than 10 000 homes were destroyed or damaged. Several small villages were completely flattened.
  • About 100 000 acres of crops (papaya, banana and plantain) were damaged. More than one-third (about 37 000 acres) was completely destroyed.
  • Mudslides and erosions from coastal flooding caused damages to infrastructure and beaches.
  • Six people died as a result of the hurricane

The overall damages were estimated at $325 million.

Papaya plantation in Michoacàn's coast devastated by Patricia

Papaya plantation in Michoacàn’s coast devastated by Patricia © Armando Solis/Pacific Press/Alamy Live News

There are several reasons why the major catastrophe feared was avoided:

  • Patricia made landfall between two major urban centres, Manzanillo and Puerto Vallarta. Had the hurricane moved slightly further east or west, the impact would have been magnitudes higher.
  • Patricia not only broke the record for being the strongest hurricane and the second deepest low pressure, but also for being the most rapidly declining category 5 hurricane on record. In the last few hours before landfall, the central pressure increased by 54 hPa.
  • Mexico has been widely acclaimed for its catastrophe preparedness, with warning systems, plans for evacuations and disaster relief, which again proved reliable.

After the hurricane, several reconstruction programs have been initiated and funds allocated for disaster relief. An interesting aspect is that the reconstruction committees formed in several areas will have equal representation of men and women, ensuring that women’s perspective on the reconstruction are taken into consideration.

Reports from the program in Armeria in the state of Colima show a thoughtful process, incorporating improvement into the reconstruction efforts. All government funding is direct, without using intermediaries. Funds are particularly directed to young farmers and to improve productivity in the agricultural sector when restoring the capacity. Financial support to farmers and fishermen aims at returning them to productive work as soon as possible.

A new breakwater is being constructed to improve the protection against future hurricanes. As tourism is an important industry in the region, houses are being painted, beaches cleaned and new lightning installed. With several beaches restored, the city now invites people to return and to make the beaches living again.

To us as managers of the SEF Entropics Cat Bond Fund, the reports from Mexico are reassuring. The Mexican effort shows cat bonds at their best, not only providing insurance protection, but being a part of a comprehensive disaster relief system, where governments and private entities incorporate a risk transfer program in a large system of pre-emptive efforts.

Of course, losing fund value due to a trigger event is a sour experience for us as well. This is why we control risk by diversifying our portfolio. Still, these events will eventually occur and, when they occur, it is important that the funds are being put to good use.

Sources:

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Henrik Sjöholm

Henrik Sjöholm

Director of Communications and Responsible Investment

Henrik has 20 years’ of communications experience, as a speech writer for former minister of industry, Maud Olofsson, and as a PR consultant. He has successfully worked together with Brummer & Partners to influence the issue of pension savings transferability in Sweden. Prior to joining Entropics, he was head of the policy department at the Swedish Federation of Business Owners.

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