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Earthquake could threaten Multicat Mexico 2009 catastrophe bond Class A notes


A large earthquake has struck Mexico near the Pacific coast not far from Acapulco and Oaxaca within the last hour or two. The USGS gave the earthquake an initial magnitude of Mw7.6, which they’ve since reduced to Mw7.4, and the earthquake struck at a depth of 20km. So far there are no reports of significant damage, however buildings are said to have swayed in Mexico City, some distance away for over a minute. There is likely to be some damage from an earthquake of this size, but of immediate interest to our readers is the fact that this earthquake has the potential to put the $140m Class A notes of the MultiCat Mexico 2009 Ltd. catastrophe bond at risk.

The Class A notes of MultiCat Mexico 2009 are exposed to earthquakes across three defined geographical zones in the country. You can see the three zones in the image below.

MultiCat Mexico catastrophe bond risk zones

MultiCat Mexico catastrophe bond risk zones

The Class A notes issued by MultiCat Mexico 2009 can be triggered by certain magnitudes of earthquake in each zone. Earthquake zone C, which covers Mexico City but also extends almost to the Pacific Coast, requires an earthquake of Mw7.4 or greater and shallower than 200km in order for the cat bond to be triggered.

The image below shows the location of today’s earthquake, the star in the shakemap is the epicentre of the quake. As you can see it’s not really clear whether that falls within EQ Zone C or not, but it certainly looks close!

Mexico earthquake location

Mexico earthquake location

So, at the moment it’s not possible for us to accurately say whether this deal has been triggered but it is certainly at risk due to the location being so close, and potentially within, the EQ Zone C. The magnitude that the USGS are reporting of Mw7.4 and the depth of 20km are both capable of triggering the $140m of MultiCat Mexico 2009 Ltd. Class A notes.

Here are some details on the loss calculation process for this cat bond. The USGS has to issue a preliminary report shortly after any earthquake event with the officially recorded event parameters. These reports are usually finalised in two to three weeks. Risk modeller AIR Worldwide, as calculation agent, reviews the reported parameters AIR and determines whether a triggering event has occurred. As a parametric cat bond if any of the triggers are breached then there is a 100% loss of principal to the relevant class of notes. The MultiCat Mexico deal is due to mature in October 2012.

If the deal is indeed under threat we’d expect rating agency Standard & Poor’s to report on it, perhaps with a downgrade. We’ll update you if any further news on this comes to light which can confirm whether or not it is likely to be triggered.

Update – 21st March: It’s looking unlikely that this quake will be deemed as within EQ Zone C and it seems more probable that it will be within EQ Zone B which means it would have required an Mw8.0 or greater to trigger the cat bond. A brief update can be found here.

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