World Bank completes Mexico cat bond, ILS provides bulk of capacity

by Artemis on August 4, 2017

The World Bank has announced the completion of its $360 million Mexico catastrophe bond transaction, which protects against Mexico earthquakes and named storms, and of which the majority of the capacity came from the insurance-linked securities (ILS) space.

World Bank logoThe parametric structured catastrophe bond transaction, called IBRD / FONDEN 2017, is composed of three tranches of notes, which, combined, provide $360 million of coverage against Mexico earthquake risks and named storms.

Arunma Oteh, the World Bank’s Vice President (VP) and Treasurer, said; “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.”

Interestingly, as part of the announcement the World Bank has provided a breakdown of the investor distribution of its latest catastrophe bond, for each individual tranche, as follows:

Class A notes – geographical distribution:

  • Asia-Pacific 8%
  • Bermuda 23%
  • North America 24%
  • Western Europe 45%

Class A notes – investor type:

  • Dedicated ILS 78%
  • Reinsurer 2%
  • Asset Manager 19%

Class B notes – geographical distribution:

  • Asia-Pacific 9%
  • Bermuda 16%
  • North America 38%
  • Western Europe 37%

Class B notes – investor type:

  • Dedicated ILS 69%
  • Life reinsurer 3%
  • Reinsurer 4%
  • Asset Manager 24%

Class C notes – geographical distribution:

  • Asia-Pacific 7%
  • Bermuda 22%
  • North America 25%
  • Western Europe 46%

Class C notes – investor type:

  • Dedicated ILS 60%
  • Life reinsurer 1%
  • Reinsurer 16%
  • Asset Manager 23%

As the figures show, dedicated ILS capital provided the bulk of the protection for the World Bank’s Mexico catastrophe bond transaction, while geographically, most of the investors were situated in Western Europe, followed by North America.

Michael Bennett, who leads derivatives and structured finance work for the World Bank Treasury, told Artemis; “The market reception for the transaction was extremely positive, with orders from a diverse group of investors led by the dedicated ILS funds.”

It’s important to note that ILS investor appetite for these bonds helped to push pricing down, ultimately making the coverage more cost-effective for Mexico.

The ILS market and its investors is increasingly able to back disaster risk transfer schemes for sovereign sponsors, such as this. It’s hoped that as the issuance process becomes increasingly efficient a pipeline of such deals could help to expand diversification within the catastrophe bond market.

“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,” said Gerardo Corrochano, the World Bank’s Country Director for Mexico and Colombia.

Oscar Vela, Head of Insurance, Pensions and Social Security at Mexico’s Ministry of Finance, added; “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.”

You can read all about the IBRD / FONDEN 2017 catastrophe bond and almost 500 other cat bond transactions in the Artemis Deal Directory.

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