Mexico’s latest World Bank supported catastrophe bond, the IBRD / FONDEN 2020 transaction, has now successfully secured $485 million of capital markets backed natural disaster insurance protection for the country, upsizing by 14% thanks to investor demand.
The successful pricing of this latest World Bank facilitate catastrophe bond issuance means that the government of Mexico now has a $485 million multi-year source of parametric earthquake and hurricane insurance protection for the country, more than replacing the maturing coverage of the $260 million 2018 issuance IBRD CAR 118-119.
As we explained last week, what began as a $425 million issuance was slated to grow, as investor demand lifted the target for the IBRD / FONDEN 2020 catastrophe bond by 24%, with the deal seen as likely to close as large as $525 million.
But in the end, we understand that the transaction has priced at $485 million in size, a 14% increase from its launch and towards the upper-end of the revised $410 million to $525 million target.
The $485 million of notes will be issued and sold to investors across four tranches, with the proceeds providing the necessary reinsurance capital to support Mexico’s expanded disaster insurance protection.
The trustee of Mexico’s disaster fund FONDEN will be the ultimate beneficiary of the insurance coverage from this catastrophe bond, entering into an insurance agreement with the Mexican government-owned insurer Agroasemex S.A. to secure it.
Agroasemex S.A. in turn enters into a reinsurance arrangement with Swiss Re, acting as the ceding reinsurance company, and Swiss Re in turn enters into retrocessional reinsurance agreements with the IBRD, the issuer of the notes.
Two tranches of earthquake-linked notes will be issued, as well as one tranche of notes covering Atlantic named storms and one covering Pacific named storms and all four tranches providing their disaster insurance coverage to the Mexican government on a parametric trigger and per-occurrence basis across a four-year term.
The first tranche of Class A notes, a lower-risk earthquake exposed layer, launched targeting $125 million of protection for Mexico from notes having a modelled expected loss of 0.9% and price guidance of 3% to 3.5%. The target then lifted to $150 million to $175 million of coverage, with pricing at 3.5%. We understand this tranche secured the upper-end of the target at $175 million in size, but at top-end of pricing at 3.5%.
What was a $100 million tranche of Class B notes, a higher-risk earthquake exposed layer with a modelled expected loss of 5.78% and initial price guidance of 8.25% to 8.75%, had a raised target of $60 million to $100 million and with tightened price guidance of 8.75% to 9%. This tranche has now been priced at $60 million in size, we’re told, the lower-end of the target, with pricing of 9%, so the upper end of revised guidance and above the initial guidance range.
What was a $100 million tranche of Class C notes, covering named storms and hurricanes on the Atlantic coast and with a modelled expected loss of 5.61% at the base case, had initial price guidance for investors of 10% to 10.5%. This target lifted to $100 million to $125 million with price guidance tightened to 10% to 10.25%. We’re told this tranche has priced at $125 million in size, with pricing of 10%, so at the lower-end of initial guidance.
The final $100 million Class D tranche, covering named storms and hurricanes on the Pacific coast of Mexico with a modelled expected loss of 4.06% , were initially offered to investors with price guidance of 6.75% to 7.25%. Again the target lifted to $100 million to $125 million with price guidance tightened to 6.5% to 6.75%. This tranche also achieved the upper-end of the targeted size at $125 million, with pricing of 6.5% actually below the initial guidance range.
So a mixed result in terms of demand and pricing, with the riskier earthquake layer of notes seemingly less popular with the cat bond investor base.
But for Mexico the new cat bond issuance has resulted in a positive upsizing of its disaster insurance protection for the next four years, helping to protect the government and its people against the impacts of future major natural catastrophe events.
It’s also encouraging to see this first sustainable development catastrophe bond successfully brought to market.
This latest catastrophe bond from the World Bank and IBRD has a twist, as it is the first ever cat bond where the proceeds from the sale of the notes can be used by the IBRD to fund sustainable development projects in its member countries.
The hybrid structure incorporates elements of a sustainable development bond alongside a catastrophe bond and is a concept that has been broadly discussed around the market as a mechanism for tapping into investor appetite to allocate to ESG appropriate assets.
It’s assumed this means the IBRD can use the liquidity from the sale of the notes within its developmental programs and projects, but if the catastrophe bond is triggered it will make up the collateral to the agreed amount under a guarantee.
As a result, it provides sustainable development bond investment characteristics, as well as being a catastrophe linked investment, perhaps attracting an increased range of institutions and investors, broadening the insurance-linked securities (ILS) investor base.
Generali recently launched its own framework for Green Insurance Linked Securities which provides further details on a similar way to make catastrophe bonds an even more ESG appropriate investment opportunity.