A magnitude 8.0 earthquake struck Peru on Sunday 26th of May, with reports suggesting that it could trigger the IBRD CAR 120 catastrophe bond.
The earthquake’s epicentre was in a fairly sparsely populated region of the Amazon, although reports do state that it’s the strongest quake to hit the country in more than a decade. Strong shaking was felt more than 600 miles away from the epicentre, which was around 110 miles east of Moyobamba, the capital of the San Martin region of North Peru. According to data from the UGCS, the quake occurred at a depth of almost 100 km’s.
The IBRD CAR 120 catastrophe bond is part of the Pacific Alliance issuance, which covers the four member nations of the trade bloc with parametric earthquake insurance protection, issued by the World Bank.
Our sister publication, Artemis has reported that available data suggests that a 30% loss of principal should be expected by the cat bond’s investor base.
The Peru catastrophe bond saw the issuance of a single $200 million tranche of notes that were sold to cat bond investors, providing reinsurance cover to back Peru’s earthquake protection.
The structure of the bond meant that notes are able to be triggered with a range of payout amounts, set at 30%, 70%, or 100% of the bond’s principal, dependent on various predetermined parameters, such as the epicentre, magnitude, location and depth.
With this is mind, it looks like investors in the cat bond will face a 30% loss of principal, so a $60 million loss, as the epicentre location, magnitude and depth of the quake all fall within the range to trigger a 30% payout.
The design of the bond and other parametric structured deals, means that a determination on whether the 30% payout is made should happen pretty quickly, which in turn means that the government of Peru receives recovery finances rapidly to assist with post-event recovery.
However, it’s important to stress that we cannot confirm this payout, but available data and industry reports suggest that a 30% loss of principal is fairly likely.
