The latest catastrophe bond that will provide a source of reinsurance risk transfer for Mexico’s Fund for Natural Disasters (El Fondo de Desastres Naturales), the IBRD / FONDEN 2017 multi-peril cat bond, has secured its targeted $360 million size, while the pricing has now been fixed at the lowest end of reduced guidance.
The deal launched aiming for a $290 million cat bond issuance to benefit Mexico’s FONDEN, issued with the assistance of the World Bank Group’s multilateral development bank, the International Bank for Reconstruction and Development (IBRD).
As we wrote yesterday the target size for this cat bond transaction jumped to $360 million and now we can report that this upsize has been achieved, and the transaction has now been priced.
The three tranches of catastrophe-linked Capital At Risk notes will provide FONDEN and ultimately the Mexican government with a source of parametric insurance protection against losses due to earthquakes and named storms on both the Pacific and Atlantic coasts, securing the country a source of capital that can pay out rapidly after an event to assist with disaster relief.
That protection has been secured at an incredibly efficient pricing level, with the final pricing for all three tranches coming in at the bottom end of a guidance range that had already been reduced.
The deal launched with a $120 million sized CAR Series 113 tranche of Class A notes, offering parametric earthquake protection across a three-year term. This tranche of earthquake linked notes, with a modelled expected loss of 3.43% were originally marketed to investors offering a risk margin of between 5% and 5.5%.
The targeted size was increased to between $140m to $150m in size and we’re told this tranche has secured the upper end at $150m. Meanwhile the pricing guidance fell to 4.5% to 5%, and we understand this has now been fixed at 4.5%.
The Class B CAR Series 114 Atlantic named storm notes saw their target size jump from $85 million to $100 million of notes, a tranche size that has now been secured. With a modelled expected loss of 5.56% this tranche was marketed offering a risk margin in a range from 9.9% to 10.5%, but that guidance fell to 9.3% to 9.9% and we’re told has now settled at the bottom end of 9.3%.
The last tranche of Class C Series 115 Pacific named storm notes also began as an $85 million slice, but the target was lifted to $100m to $110m and the upper end of that range has been achieved. This tranche has a modelled expected loss of 3.96% and were initially marketed offering a risk margin in a range from 6.5% to 7.1%, which was subsequently reduced to 5.9% to 6.5%, and has now been fixed at the bottom end of 5.9% we understand.
So this catastrophe bond protection for Mexico is going to be an extremely efficient layer of protection for the Mexican government and its FONDEN natural disaster insurance fund. Compared to the previous MultiCat Mexico 2012 cat bond that benefited FONDEN, this deal looks like a more efficient layer of coverage for the sponsor, with lower pricing when considered on an annualised basis and broader protection.
For Mexico the return to the capital markets provides an efficient source of risk transfer, on a parametric basis. The trigger in this instance is more complex than the previous deal, which will help to minimise any basis risk between storm or earthquake severity and actual loss, although it does make the trigger a little less transparent and straightforward.
We understand that final completion for this latest World Bank supported catastrophe bond issuance will be on August 4th.
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