New cat bond an important piece of Mexico’s social protection strategy: Government

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The government of Mexico has said that its newly issued $485 million World Bank facilitated catastrophe bond, the IBRD / FONDEN 2020 transaction, is an important part of the country’s social protection strategy and reflects its “enormous commitment” to protecting its citizens from natural disasters.

mexico-flagMexico’s latest and sixth catastrophe bond issuance was completed last week and as we explained the $485 million cat bond will provide the country with a four-year source of parametric earthquake and hurricane insurance protection, so more than replacing the maturing coverage of the $260 million 2018 issuance IBRD CAR 118-119.

The sixth cat bond from Mexico was well-received by the insurance-linked securities (ILS) investor base, with the transaction reaching $485 million in size, which was a 14% increase from the launch target for the issuance.

Mexico’s Ministry of Finance highlighted the important role that the new catastrophe bond will play, as a key component of the country’s disaster risk financing strategy as it continues to leverage insurance and reinsurance capital, including from the capital markets.

“The issuance of these new bonds reflects the enormous commitment of the Government of Mexico to protect the welfare of its citizens against the consequences of natural disasters,” the Ministry of Finance explained.

“Catastrophic bonds are part of the strategy to strengthen the resilience of public finances in the face of extraordinary events and are also an important part of the social protection strategy,” the Government stated. As they, “allow the immediate needs of the affected population to be met in a timely manner, particularly marginal groups, in terms of reconstruction of infrastructure and housing.”

The Government of Mexico has a robust strategy of disaster insurance, reinsurance and risk financing, developed over many years.

The country first visited the catastrophe bond market back in 2006 with the CAT-Mex Ltd. transaction.

It then returned using the World Bank’s MultiCat platform twice, with the 2009 issued MultiCat Mexico 2009 Ltd. and then the 2012 cat bond that eventually paid out for the Government following hurricane Patricia MultiCat Mexico Ltd. (Series 2012-1).

More recently, Mexico utilised the World Bank’s IBRD Capital-At-Risk Notes Program for a 2017 issuance that was triggered by the Chiapas earthquake IBRD / FONDEN 2017, and then most recently for a 2018 issuance IBRD CAR 118-119 which is now soon to mature.

At $485 million in size, the new catastrophe bond will more than replace the coverage Mexico had from its 2018 transaction, which was only $260 million in size.

The Government highlighted that Mexico is particularly exposed to natural disaster risks, with some 40% of the national territory, and about a third of its population, exposed to hurricanes, storms, floods, earthquakes and volcanic eruptions.

In economic terms, the Government states that as much as 30% of the country’s GDP is considered vulnerable to three or more natural hazards and 71% vulnerable to two or more natural hazards.

It’s clear that disaster insurance and reinsurance can play a vital role in a country so exposed economically and physically to catastrophe risks, while the capital markets can play a role in helping to absorb those risks and diversify them away from Mexico and the global re/insurance market.

Of course the reinsurance market still plays a part in facilitating the issuance of such a large catastrophe bond transaction on behalf of a sovereign sponsor, with reinsurer Swiss Re intermediating as the ceding reinsurer.

The transaction was issued in four tranches, two exposed to different levels of earthquake risks and one each to Atlantic and Pacific hurricane risks.

Being parametric in nature, the new $485 million catastrophe bond will payout should an earthquake or tropical cyclone meet the parametric location and severity criteria of the trigger, that are established in the terms of the bonds.

Any loss payments will be made by the IBRD directly to FONDEN, Mexico’s natural disaster risk fund, through the intermediation of Swiss Re and also insurer Agroasemex, S.A.

Mexico’s Government also noted the fact that its latest cat bond is the first to be sustainable.

“The bond is issued as “sustainable” since the resources will be applied to programs that fully meet the international criteria of “ESG”,” the Government said.

Further explaining that this means the investment of the collateral will “serve the interest of combating climate change” and be “socially responsible” in nature.

But most importantly, the catastrophe bond transfers disaster risks away from Mexico and into the capital markets.

“This risk management action is aligned with social protection strategies, particularly towards the most vulnerable social groups. The bond is also part of the strategy to strengthen public finances, giving it resilience to natural disasters,” the Government said.

You can read all about this new $485 million IBRD / FONDEN 2020 catastrophe bond and every other cat bond transaction in the Artemis Deal Directory.

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