Mexico returns seeking $360m of World Bank catastrophe bond coverage

The Government of Mexico has returned to the catastrophe bond market, seeking $360 million or more in disaster insurance protection for earthquake and hurricane events, through a World Bank facilitated IBRD CAR Mexico 2024 parametric catastrophe bond, Artemis has learned.

Mexico’s previous IBRD / FONDEN 2020 catastrophe bond, which as we reported last week after the final NHC tropical cyclone report was published, appears set for a roughly 50% loss of principal to the Class D notes after hurricane Otis, is scheduled to mature this month.

We reported last year, that Mexico’s government had already been planning a renewal of the Fonden 2020 cat bond when it matures, so it is good to see the country continuing to pursue efficient disaster insurance protection with the help of the World Bank and catastrophe bond investors.

Now, that renewal cat bond has emerged and this time the Mexican government is looking for parametric earthquake protection and Atlantic named storm and hurricane protection, both on a parametric trigger basis.

But the Pacific coast hurricane cover that responded to Otis is not getting renewed, at least not with this new deal, we understand.

Mexico is again partnered with the World Bank and the IBRD to issue this new catastrophe bond, which will be issued by the International Bank for Reconstruction and Development (IBRD) under its global debt issuance facility and Capital-At-Risk notes program.

$360 million of catastrophe-linked notes are being offered, spread across three tranches with two covering earthquake risks and one Atlantic named storm risks.

Global reinsurance giant Munich Re is sitting in the middle to front the reinsurance market, so will enter into a retrocessional agreement with the IBRD issuer and then pass on the reinsurance to AGROASAMEX, which is the Mexican governments insurer, that in turn passed on the coverage directly to the Mexican governments Secretary of Treasury and Public Credit.

Like the previous and maturing Fonden 2020 cat bond deal, Mexico will benefit from parametric coverage against earthquakes and Atlantic hurricanes, providing an efficient and capital markets backed source of disaster insurance directly to the government, to help them in paying relief, reconstruction and recovery costs when major catastrophes occur.

The parametric triggers are said to be similar to the previous deal as well, with a stepped payout trigger of 25%, 50%, 75% and 100% of principal for the earthquake risk cover, 25%, 50% and 100% for Atlantic named storm, and boxes indicating the size of payout dependent on the magnitude of an earthquake or the depth of central pressure of a hurricane.

So, again it is location and intensity of the catastrophe event that will determine the payout, which allows the Mexican government to calibrate the parametric triggers for the coverage so that they respond based on risk and exposure.

The Atlantic named storm cover parametric trigger features a linear payout factor from 25% upwards, depending on the parameters of location and minimum central pressure, we understand.

The $360 million of protection across the three tranches of notes is all based on a parametric trigger and provides per-occurrence coverage, while that coverage will run across a four year term, to early April 2028, sources explained.

A $175 million Class A tranche of notes are the first to provide earthquake coverage and have an initial attachment probability of 1.17%, an initial expected loss of 0.9% and are being offered to investors with price guidance in a range from 3.5% to 4.25%, we are told.

The second $60 million Class B tranche of notes also provide parametric earthquake protection, but are much riskier, having an initial attachment probability of 8.3%, an initial expected loss of 5.84% and are being offered to investors with price guidance in a range from 10.25% to 11.25%.

The final $125 million Class C tranche are the notes that will provide Atlantic named storm protection on a parametric basis, and have an initial attachment probability of 7.96%, an initial base expected loss of 5.69% and are being offered to investors with price guidance in a range from 12.5% to 13.5%, sources said.

As with other recent World Bank and IBRD facilitated issues, the proceeds from the cat bond will be used to support the financing of sustainable development projects during the lifetime of the transaction.

It’s good to see Mexico returning to renew at least some of its catastrophe bond coverage, as perhaps the longest-standing consistent sovereign sponsor of cat bonds.

The fact no Pacific hurricane cover is included in this new IBRD CAR Mexico 2024 cat bond deal is perhaps telling of how catastrophe bond market appetites respond to losses. But also, after the devastation of hurricane Otis in Acapulco, there is perhaps a need for the reconstruction effort to progress further, before additional coverage for that coasts exposures is sought.

You can read all about this IBRD CAR Mexico 2024  catastrophe bond and more than 1,000 other cat bond transactions in the extensive Artemis Deal Directory.