The World Bank has issued $420 million in catastrophe bonds for renewed disaster risk protection for the Government of Mexico.
The cat bond, which will finance insurance coverage against named storm events along the Atlantic coast of Mexico and earthquake events, will be issued by the International Bank for Reconstruction and Development (IBRD) under its Capital-At-Risk notes program.
According to the announcement, the cat bonds replace and increase by $60 million the previous cat bonds for these perils.
The bonds attracted 27 institutional investors from around the world, providing financing for catastrophe insurance to Mexico for four years.
Payouts work on a parametric trigger basis – when an earthquake or named storm event meets the parametric criteria for location and severity set forth in the bond terms.
Through the intermediation of global reinsurer Munich Re, the IBRD issuer will pass on the reinsurance to AGROASAMEX, the Mexican government insurer, which in turn will pass on the coverage directly to the Mexican governments Secretary of Treasury and Public Credit.
Jorge Familiar, Vice President and Treasurer of the World Bank, commented: “For almost two decades, Mexico has been partnering with the World Bank to access the risk-bearing capacity of the capital markets for its disaster risk management.
“The continued success of these transactions is a good example for other countries we are working with, as they consider the capital markets as a resource for financial protection against unpredictable natural events.”
With over 40% of the country’s territory and nearly a third of its population exposed to hurricanes, storms, floods, earthquakes, and volcanic eruptions, Mexico is a country highly exposed to many natural hazards.
In economic terms, this translates to 30% of the country’s GDP considered to be at-risk from three or more hazards and more than 70% at risk from two or more hazards.
In 2006, the Mexican government was the first to use the cat bond market for its risk financing needs, and since then it has sponsored 20 cat bonds.
Héctor Santana Suárez, Head of Insurance, Pensions and Social Security in the Ministry of Finance of México, said: “The issuance of the 2024-2028 Cat Bonds is a fundamental part of the federal strategy for Financial Management of Disaster Risks and reaffirms the commitment of the Government of Mexico to increase protection to the population affected by a disaster, to safeguard macroeconomic stability and have additional resources to deal with potential external shocks caused by natural disasters.
“The new coverage includes a higher insured amount, optimises risk modelling and incorporates improvements in the exposure and parameters for the activation of the Bonds”.
“Mexico has been a leader in having a comprehensive disaster risk financing strategy and using innovative instruments, such as cat bonds to mitigate disasters’ impact on public finances,” Mark Roland Thomas, World Bank Country Director for Mexico, added.
GC Securities, a division of MMC Securities LLC, Aon, and Munich Re were the joint structuring agents.
GC Securities and Aon were joint bookrunners for the transaction with AIR Worldwide the risk modeller and calculation agent.
