How Mexico uses bonds to bet millions against natural disasters (without much luck)
Mexico looked to the bond market to find a quick way to cut the costs of earthquakes and hurricane disasters. Achieving that depends on a sort of bet.
The government offers investors a type of bond that bets against the force of nature over a period of years. If it gets hit with a large enough natural disaster, Mexico gets millions of dollars. If nature doesn’t hit a minimum force level, buyers recover their investment plus a profit.
How is the bet won?
Whether or not Mexico receives the money depends on where the disaster happens and the intensity of the earthquake or hurricane (measured by the Richter scale or the atmospheric pressure). The Mexican catastrophe bond covers earthquakes, hurricanes in the Pacific and hurricanes in the Atlantic. In this chart you can see the areas covered by the bonds between 2012 and 2015 and their conditions.
EARTHQUAKE BONDS
4
In each zone, the conditions regarding when the bond is payable vary.
3
5
1
2
Zone
Magnitude
Depth
1
≥ 7.9
≤ 200
2
≥ 8.1
≤ 200
3
≥ 7.4
≤ 70
4
≥ 7.6
≤ 200
5
≥ 7.0
≤ 80
HURRICANE BONDS
2
1
In the Pacific
Payment
Pressure
50%
≤ 932 mb y > 920
100%
≤ 920 mb
In the Atlantic
Zone
Pressure
1
≤ 920 mb
2
≤ 920 mb
EARTHQUAKE BONDS
4
In each zone, the conditions regarding when the bond is payable vary.
3
5
1
2
Zone
Magnitude
Depth
1
≥ 7.9
≤ 200
2
≥ 8.1
≤ 200
3
≥ 7.4
≤ 70
4
≥ 7.6
≤ 200
5
≥ 7.0
≤ 80
HURRICANE BONDS
2
1
In the Pacific
In the Atlantic
Payment
Pressure
Zone
Pressure
50%
1
≤ 932 mb y > 920
≤ 920 mb
100%
2
≤ 920 mb
≤ 920 mb
EARTHQUAKE BONDS
4
In each zone, the conditions regarding when the bond is payable vary.
3
5
1
2
Zone
Magnitude
Depth
1
≥ 7.9
≤ 200
2
≥ 8.1
≤ 200
3
≥ 7.4
≤ 70
4
≥ 7.6
≤ 200
5
≥ 7.0
≤ 80
HURRICANE BONDS
2
1
In the Atlantic
In the Pacific
Payment
Pressure
Zone
Pressure
50%
1
≤ 932 mb y > 920
≤ 920 mb
100%
2
≤ 920 mb
≤ 920 mb
EARTHQUAKE BONDS
HURRICANE BONDS
4
In each zone, the conditions regarding when the bond is payable vary.
2
1
3
5
1
2
Zone
Magnitude
Depth
In the Atlantic
In the Pacific
1
≥ 7.9
≤ 200
Zone
Pressure
Payment
Pressure
2
≥ 8.1
≤ 200
1
≤ 920 mb
50%
≤ 932 mb y > 920
3
≥ 7.4
≤ 70
2
≤ 920 mb
100%
≤ 920 mb
4
≥ 7.6
≤ 200
5
≥ 7.0
≤ 80
How likely is it that Mexico receives money from the bondholder? Press the button of this simulator to discover which disasters fulfilled the conditions of the bond between the years 2012 and 2015.
Disaster simulator
Two earthquakes, different results
2017 was unusual : in 12 days two large earthquakes hit the country, leaving hundreds of injured and multi-million dollars losses. Each catastrophe got different bond results.
EARTHQUAKE from 09/07/2017
CONDITIONS
OF THE BOND
DISASTER
Depth
Intensity
Intensity
Depth
8.1
8.2
≤ 200 KM
47 KM
This disaster COMPLIED WITH THE CONDITIONS ESTABLISHED BY THE BOND. The Mexican government received $150 million. The earthquake left a hundred dead.
EARTHQUAKE from 09/19/2017
CONDITIONS
OF THE BOND
DISASTER
Depth
Intensity
Intensity
Depth
7.4
7.1
≤ 70 KM
52 KM
This disaster DID NOT FULFILL THE CONDITIONS OF THE BOND. In addition, the bondholders are not required to pay twice in the same period. More than 300 people died during the earthquake.
EARTHQUAKE from 09/07/2017
CONDITIONS OF THE BOND
DISASTER
Depth
Intensity
Intensity
Depth
8.1
8.2
≤ 200 KM
47 KM
This disaster COMPLIED WITH THE CONDITIONS ESTABLISHED BY THE BOND. The Mexican government received $150 million. The earthquake left a hundred dead.
EARTHQUAKE from 09/19/2017
CONDITIONS OF THE BOND
DISASTER
Depth
Intensity
Intensity
Depth
7.4
7.1
≤ 70 KM
52 KM
This disaster DID NOT FULFILL THE CONDITIONS OF THE BOND. In addition, the bondholders are not required to pay twice in the same period. More than 300 people died during the earthquake.
EARTHQUAKE from 09/07/2017
CONDITIONS OF THE BOND
DISASTER
DEPTH
INTENSITY
INTENSITY
DEPTH
8.1
8.2
≤ 200 KM
47 KM
This disaster COMPLIED WITH THE CONDITIONS ESTABLISHED BY THE BOND. The Mexican government received $150 million. The earthquake left a hundred dead.
EARTHQUAKE from 09/19/2017
CONDITIONS OF THE BOND
DISASTER
DEPTH
INTENSITY
INTENSITY
DEPTH
7.4
7.1
≤ 70 KM
52 KM
This disaster DID NOT FULFILL THE CONDITIONS OF THE BOND. In addition, the bondholders are not required to pay twice in the same period. More than 300 people died during the earthquake.
EARTHQUAKE from 09/07/2017
EARTHQUAKE from 09/19/2017
CONDITIONS OF THE BOND
DISASTER
CONDITIONS OF THE BOND
DISASTER
DEPTH
INTENSITY
INTENSITY
DEPTH
DEPTH
INTENSITY
INTENSITY
DEPTH
8.1
7.4
8.2
7.1
≤ 200 KM
≤ 70 KM
47 KM
52 KM
This disaster COMPLIED WITH THE CONDITIONS ESTABLISHED BY THE BOND. The Mexican government received $150 million. The earthquake left a hundred dead.
This disaster DID NOT FULFILL THE CONDITIONS OF THE BOND. In addition, the bondholders are not required to pay twice in the same period. More than 300 people died during the earthquake.
Three years of disasters (2012-2015)
Between 2012 and 2015, only Hurricane Patricia met the conditions for Mexico to receive money from the bondholders. It was in 2015, the first time since the scheme was launched in 2006 that investors had to pay out.
Bond areas
Disasters
Hurricanes
Hurricanes
X
Earthquakes
Earthquakes
ISAAC
MEXICO
ODILE
Atlantic Ocean
PATRICIA
Mexico City
6.1
5.8
7.2
6.2
7.4
6.4
6.9
Pacific Ocean
Bond areas
Disasters
Hurricanes
Hurricanes
X
Earthquakes
Earthquakes
ISAAC
MEXICO
ODILE
Atlantic Ocean
PATRICIA
Mexico City
6.1
5.8
7.2
7.4
6.4
6.2
6.9
Pacific Ocean
Bond areas
Disasters
Hurricanes
Earthquakes
Hurricanes
Earthquakes
X
ISAAC
ODILE
MEXICO
Atlantic Ocean
BLANCA
INGRID
PATRICIA
DOLLY
LORENA
IVO
SONIA
PAUL
MARIE
FERNAND
MANUEL
Mexico City
NORBERT
ERNESTO
6.1
5.8
BARBARA
RACHEL
BARRY
7.2
6.2
7.4
CARLOTTA
6.4
MARTY
ERICK
BORIS
TRUDY
6.9
MIRIAM
RAYMOND
Pacific Ocean
Disasters
Bond areas
Hurricanes
Hurricanes
Earthquakes
Earthquakes
X
ISAAC
ODILE
MEXICO
Atlantic Ocean
BLANCA
INGRID
PATRICIA
DOLLY
LORENA
IVO
SONIA
PAUL
MARIE
FERNAND
MANUEL
Mexico City
NORBERT
ERNESTO
6.1
5.8
BARBARA
RACHEL
BARRY
7.2
6.2
CARLOTTA
7.4
MARTY
6.4
ERICK
BORIS
TRUDY
6.9
MIRIAM
RAYMOND
Pacific Ocean
Bond areas
Hurricanes
Earthquakes
ISAAC
Disasters
Hurricanes
ODILE
Earthquakes
X
MEXICO
Atlantic Ocean
BLANCA
INGRID
PATRICIA
DOLLY
LORENA
IVO
SONIA
PAUL
MARIE
FERNAND
MANUEL
Mexico City
NORBERT
6.1
ERNESTO
5.8
BARBARA
RACHEL
BARRY
7.2
6.2
CARLOTTA
7.4
MARTY
6.4
ERICK
BORIS
TRUDY
6.9
MIRIAM
RAYMOND
Pacific Ocean
In these three years, as the map shows, dozens of hurricanes and several earthquakes hit the country hard. Although these disasters left hundreds of dead and billions of dollars in losses, none qualified to receive the bond money.
This research is a collaborative project coordinated by the International Consortium of Investigative Journalists (ICIJ), thanks to data provided by the German newspaper Süddeutsche Zeitung. The findings on catastrophe bonds were made by three Mexican websites: Fifth element Lab, Mexicans against Corruption and Impunity, and Proceso; and two partners in the United States; Columbia University and the Los Angeles Times.