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Mexico secures $360 million of catastrophe cover with World Bank cat bond

4th August 2017 - Author: Luke Gallin

Mexico has secured $360 million of protection against earthquake and tropical cyclone risks via a catastrophe bond transaction from the World Bank, which has now completed.

Mexico flag mapThe deal is structured into three tranches, with one providing protection against Mexico earthquakes, one against Atlantic tropical cyclones, and one providing coverage against Pacific tropical cyclones.

Combined, the catastrophe bond transaction, named IBRD / FONDEN 2017, provides the country with $360 million of catastrophe risk protection, the majority of which came from the capital markets via insurance-linked securities (ILS) investors.

According to the World Bank, roughly a third of Mexico’s population live in areas susceptible to natural disaster events, such as flooding, earthquakes, storms, hurricanes, and also volcanic eruption. The World Bank states that this translates into more than 70% of the country’s gross domestic product (GDP) being at risk from at least two natural catastrophe exposures.

Arunma Oteh, the World Bank’s Vice President (VP) and Treasurer of the World Bank, commented; “The World Bank bonds we have launched today are not only a financial innovation—but also a milestone in our partnership with Mexico, and in our joint pursuit of preventing the human and financial tolls of earthquakes and floods. We are leveraging Mexico’s leadership in developing risk insurance mechanisms against natural disasters, and the World Bank’s innovative use of private-sector instruments to transfer risk to the capital markets, so that together we can deliver innovative financial solutions that help eradicate poverty and boost shared prosperity.”

Stratumn, by SIA Partners

“Today’s transaction marks another step in the evolution of the relationship between Mexico and the World Bank in the area of catastrophe risk. Mexico is one of the most experienced governments in catastrophe risk management. An in depth understanding of the risks has allowed the Mexican government to successfully access international reinsurance and capital markets to transfer specific risks. Building disaster resilience is essential, not only for reducing the risks and impacts from natural hazards but for protecting the most vulnerable,” added Gerardo Corrochano, the World Bank’s Country Director for Mexico and Colombia.

GC Securities, a division of MMC Securities LLC, jointly structured and managed the transaction alongside reinsurance giant Munich Re, and was also the only bookrunner and initial purchaser of the deal.

Cory Anger, Global Head of ILS Origination and Structuring at GC Securities, said; “The refined ‘Cat-in-a-Box’ structure for earthquake and the use of Named Storm Boxes for named storms in the World Bank Capital-at-Risk notes benefitting FONDEN better aligns the earthquake or storm severity hazard parameters and the actual loss suffered by the government of Mexico, given the trigger improvements and broader geographic scope.

Additionally, the transparent trigger better expedites payments to support Mexico’s recovery efforts and needs.”

Aidan Pope, Chief Executive Officer (CEO) of Latin America and the Caribbean at reinsurance broker Guy Carpenter, added; “The World Bank Capital-at-Risk notes protecting FONDEN provide a very cost-efficient source of risk transfer and maximizes protection in one of the regions with the greatest exposure. With this issuance, the government of Mexico has increased its resiliency in line with their overall macroprudential risk management strategy.”

Munich Re’s Senior Executive Manager for Spain, Portugal, Latin America and the Caribbean, Matthias Marwege, also commented; “Munich Re is proud to play a major role in this transaction through our commitment to long-lasting client relationships and our expertise in risk mitigation and risk transfer. We truly hope that this program will serve the Mexican government strategy and further bolster its disaster resilience in a comprehensive and cost-effective manner.”

According to a statement from the World Bank, over the last ten years it has executed around $2.5 billion in catastrophe risk transactions, and this deal is the organisations largest so far, as shown by the Artemis Deal Directory, which lists all catastrophe bond transactions since the market’s inception.

Oscar Vela, Head of Insurance, Pensions and Social Security at Mexico’s Ministry of Finance, said; “Over the past 10 years, Mexico has built and expanded a long term strategy for catastrophic risk management. This policy has the key objective of creating financial mechanisms to mitigate and stabilize the impact of natural disasters on fiscal accounts.

“The issuance of the catastrophe bonds—the result of a partnership among key public and private sector institutions—renews the solid financial shield to FONDEN, and helps to further strengthen the set of macroprudential policies used by our Ministry of Finance. The Mexican government remains committed to promoting policies that transfer risk to the capital markets, so that we can jointly create deeper markets and better diversification opportunities, foster better fiscal policy management, and support socially responsible initiatives.”

Gerardo Corrochano, the World Bank’s Country Director for Mexico and Colombia, also commented; “Today’s transaction marks another step in the evolution of the relationship between Mexico and the World Bank in the area of catastrophe risk. Mexico is one of the most experienced governments in catastrophe risk management. An in depth understanding of the risks has allowed the Mexican government to successfully access international reinsurance and capital markets to transfer specific risks. Building disaster resilience is essential, not only for reducing the risks and impacts from natural hazards but for protecting the most vulnerable.”

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