Earthquake Triggered Mexico Catastrophe Bond, Until It Didn’t

The March 20th magnitude 7.4 earthquake that struck Mexico initially triggered the government-issued $290 million catastrophe bond, but the loss was avoided after the epicenter was moved in a geological update, according to a report issued Tuesday by Swiss Re.

The quake caused “nearly” a full payout on MultiCat Mexico’s $140 million Class A tranche when initial United States Geological Survey (USGS) estimates placed the epicenter near Mexico City, according to Swiss Re. The tranche contained a threshold of magnitude 7.4 or greater for a trembler located in, or around, the capital city.

But the USGS revised its estimates and placed the epicenter in the “Oaxaca” box of the bond’s parametric trigger. That box had a higher magnitude threshold of 8.0 on the richter scale, saving the bond a payout.

A parametric trigger within a catastrophe bond is based on the actual reported physical events — like earthquake magnitude — as opposed to more common indemnity triggers that are based on a sponsor’s actual losses.

The possible trigger of MultiCat Mexico did cause some investors to react between the initial location estimate and the subsequent revision, but the selling was extremely limited, the Swiss Re said.

“We heard of only one trade in the secondary market at a slightly discounted level,” the report said.

MultiCat Mexico 2009 was issued by the government’s Fund for Natural Disasters (FONDEN) against earthquake, Pacific hurricane and Atlantic hurricane risks.

Catastrophe modeling firm EQECAT estimated that insured losses from the March 20th earthquake to be less than $100 million.

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