Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

Peru’s World Bank cat bond could be triggered by M8.0 earthquake


A magnitude 8.0 earthquake that struck Peru yesterday, Sunday 26th May, could trigger the IBRD CAR 120 catastrophe bond, which was part of the Pacific Alliance issuance, with the available data suggesting that a 30% loss of principal should be expected by investors in the cat bond.

The magnitude 8.0 earthquake struck Peru yesterday with the epicentre in a relatively sparsely populated area of the Amazon jungle, but it was the most intense quake to strike the country in twelve years, reports say, with damage quite widely reported to homes and commercial buildings.

Strong shaking was felt as far as 600 miles away from the epicentre, which was situated around 110 miles east of the town of Moyobamba, which is the capital of the San Martín region of north Peru.

The depth of the quake was almost 110 km’s, according to the USGS, which is relatively deep and so will have helped to reduce the level of damage that has occurred.

The Pacific Alliance catastrophe bond covers the four member nations of that trade bloc with parametric earthquake insurance protection, with Peru a beneficiary through the World Bank issued IBRD CAR 120 cat bond.

A single $200 million tranche of notes was issued and sold to cat bond investors, providing the reinsurance capital to back the earthquake protection for Peru.

These $200 million of earthquake-linked notes are able to be triggered with a range of payout amounts, set at 30%, 70% or 100% of the cat bonds principal, depending on various parameters associated with an earthquake event, including the magnitude, epicenter location and depth.

It looks like the IBRD CAR 120 Peru quake cat bond may be facing a 30% loss of principal, so a $60 million loss for the market to bear, as the location of the epicentre, the magnitude at 8.0 and the depth all fall within the required range of parameters for a payout to come due.

It appears that the earthquake struck in a parametric zone where a magnitude 7.8 to 8.1 quake would result in a 30% payout of investors principal and another loss for the catastrophe bond market.

Cat bond specialist investment manager Plenum Investments also expects a 30% hit to the $200 million of principal of the Peru earthquake catastrophe bond, saying that, “According to current information, this parametric trigger bond will suffer a loss of 30% of its face value.”

ILS investment manager Twelve Capital also noted the potential impact to the IBRD Peru earthwuake catastrophe bond, agreeing that a 30% loss of principal is the most likely outcome.

Twelve Capital also said that it expects only a minimal impact on its private ILS strategies, suggesting there could be some limited collateralised reinsurance exposure for the ILS market from this event as well.

The Peru cat bond had an initial modelled expected loss of 5% and the coupon equivalent risk margin paid to investors was just 6%, after pricing dropped while the cat bond was marketed, resulting in a particularly low multiple.

Investors may now question whether the compensation paid for investing in this Peru cat bond was high enough, given it looks set to be triggered by an earthquake that was far from the highly populated cities and towns of the country.

But the cat bond will do its intended job, if it does indeed payout, as the capital will be made available for the Peruvian government to put towards disaster recovery.

It is to be hoped that a determination on whether the 30% of principal will payout is made rapidly, as it is essential that post-disaster risk finance is deployed as quickly as possible to get to the people and communities who really need it after a disaster strikes.

It’s important to note that we cannot confirm this payout, but the assumption right now is that the quake has breached the trigger of this cat bond and a 30% loss of principal ($60 million) is the most likely outcome. How long it could take for an official designation of payment to be made is unclear.

You can real all about this Peruvian earthquake cat bond IBRD CAR 120 in the Artemis catastrophe bond Deal Directory.


ils-asia-2019Register today to attend our next ILS conference in Singapore, ILS Asia 2019.

We’re returning to Singapore for our fourth annual ILS market conference for the Asia region. Please register today to secure the best prices. The last few Early Bird tickets are still available.

Register today for ILS NYC 2023, our next insurance-linked securities (ILS) market conference. Held in New York City, February 10th, 2023.

Artemis London 2022 - Insurance-linked securities conference in London

Get a ticket soon to ensure you can attend. Secure your place at the event here!

Print Friendly, PDF & Email

Artemis Newsletters and Email Alerts

Receive a regular weekly email newsletter update containing all the top news stories, deals and event information

  • This field is for validation purposes and should be left unchanged.

Receive alert notifications by email for every article from Artemis as it gets published.