M7.2 earthquake close to the trigger of MultiCat Mexico 2012 cat bond

by Artemis on April 19, 2014

A magnitude 7.2 earthquake which struck Mexico on Friday 18th April in the south-western state of Guerrero, came very close to the magnitude and location required to breach the parametric trigger of the MultiCat Mexico Ltd. (Series 2012-1) catastrophe bond.

The M7.2 quake, which was located not far from the beach resorts of Acapulco, shook the region with residents of Mexico City almost 280km away reporting strong shaking from the earthquake as well.

Friday’s earthquake was one of the largest felt in the Mexican capital in a number of years, perhaps due to the relatively shallow nature of the quake. The USGS initially recorded it as a M7.5 quake event, with a depth of 24km. It was subsequently downgraded to a M7.2 magnitude.

This earthquake is perhaps the closest that the MultiCat Mexico 2012 catastrophe bond, the cat bond sponsored by the Fund for Natural Disasters of Mexico (FONDEN) with the assistance of the World Bank, has come to being triggered.

The MultiCat Mexico 2012 cat bond features a $140m Class A tranche of notes which is solely exposed to earthquakes on a parametric trigger basis. The structure features five parametric zones, each of which requires an earthquake to be above a specified magnitude while being below a specified depth for an event to qualify and trigger the protection.

The protection provided by MultiCat Mexico 2012 is on a per-occurrence basis, meaning that should an event qualify it would wipe out the notes completely. MultiCat Mexico 2012 also provides hurricane protection on a parametric basis as well.

Friday’s M7.2 earthquake came very close to the trigger of this cat bond. The quake actually occurred within one of the parametric trigger zones, it’s hard to specify exactly which as it occurred very close to where the Zone 1, Zone 2 and also Zone 3 parametric trigger zones meet.

Location of Friday’s M7.2 earthquake in Mexico:

Location of Mexican earthquake

Location of Mexican M7.2 earthquake

Location of the MultiCat Mexico 2012 Class A notes parametric zones:

MultiCat Mexico 2012 catastrophe bond parametric earthquake zones

MultiCat Mexico 2012 catastrophe bond parametric earthquake zones

If you look closely, it appears that Friday’s earthquake was most likely not in the blue Zone 3, as it occurred just below, but had it been and had the initial magnitude of 7.5 been maintained then we would have seen the MultiCat Mexico 2012 catastrophe bond triggered.

It looks as if the quake’s location was very close to where Zone 1 and Zone 2 meet, perhaps looking more like it fell within the green Zone 2 parametric trigger zone. Zone 2 requires a very strong quake of 8.1 or greater so in that zone Friday’s quake was further from the trigger.

The M7.2 earthquake may have been as close as 60km or 70km away from Zone 3, making this without a doubt the biggest threat we’ve seen to the MultiCat Mexico 2012 cat bond.

However, given the damage from Friday’s quake was not particularly extensive this shows that the MultiCat parametric zones have been well designed to minimise any basis risk between the cat bond being triggered and actual losses from an earthquake event where possible.

You can read all about the MultiCat Mexico Ltd. (Series 2012-1) catastrophe bond in the Artemis Deal Directory.

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