Mexico ‘setting the standard’ with $175m World Bank cat bond for hurricane risk
The Government of Mexico has secured $175 million of additional insurance coverage for its pacific hurricane risk through a new catastrophe bond transaction facilitated by the World Bank (International Bank for Reconstruction and Development, or IBRD).
The new bond expands Mexico’s coverage for Pacific hurricane risk from the recently expired $125 million cat bond. This, combined with three other cat bonds issued by the World Bank brings Mexico’s overall insurance coverage backed by the cat bond market in 2024 to $595 million.
The cat bond, issued under IBRD’s “capital at risk” notes programme, can be used to transfer risks related to natural disasters and other risks from developing countries to the capital markets.
The cat bond drew 22 global institutional investors, providing financial protection to Mexico for four years, with payouts triggered if a named storm along the Pacific coast meets the parametric criteria for location and severity set forth in the bond terms.
Insurance payouts, funded by principal reductions of the bonds, will be passed by IBRD to the Government of Mexico through the intermediation of Munich Re, and Agroasemex, S.A., a Mexican state-owned insurance company.
GC Securities, a division of MMC Securities, along with Aon and Munich Re, jointly structured the transaction with AIR Worldwide serving as risk modeler and calculation agent.
Héctor Suárez, head of insurance, pensions and social security in Mexico’s Ministry of Finance, said: “The renewal and expansion of hurricane cover for the pacific coast demonstrates the Government of Mexico’s commitment to be prepared financially for natural disasters. Together with the recent earthquake and Atlantic cat bonds issued by the World Bank, this cat bond increases Mexico’s resilience against future events by $110 million compared to the cat bond cover which was previously in place.
“The insurance arrangements supported by the World Bank cat bonds compliment Mexico’s other disaster risk financing instruments, and are a fundamental part of the federal strategy for financial protection of disaster risks presented by the Minister of Finance for Mexico, Rogelio Ramírez de la O, as evidenced by the $60 million hurricane Otis payout received by Mexico through the previous cat bond.”
Mark Thomas, World Bank country director for Mexico, added: “Mexico is setting the standard for disaster risk management by using innovative financial tools like World Bank cat bonds to safeguard public funds from the effects of natural disasters.”
Paul Schultz, CEO of Aon Securities, commented: “Following the successful placement of the Atlantic hurricane and earthquake tranches earlier this year, Aon Securities is proud to again partner with the World Bank to help the Government of Mexico secure critical pacific hurricane protection. This placement and related insurance arrangement forms an important part of the government of Mexico’s risk management strategy for natural disasters, which aims to protect the population, reduce fiscal exposure, and contribute to the government response. Further, the proceeds from the notes will be used by the World Bank to finance eligible sustainable development projects, which are designed to achieve positive social and environmental impacts and outcomes. The social objectives of the government of Mexico and the World Bank are of utmost importance to Aon Securities.”
Cory Anger, managing director of GC Securities, said: “We are honoured to have completed the last part of the World Bank’s Mexico-related catastrophe bond renewal supporting the Government of Mexico through the issuance of the World Bank class d notes. Given Mexico and the World Bank’s commitments to consistently protect Mexico from natural peril catastrophes, this transaction demonstrates the sustainable partnership of insurance-linked securities (ILS) investors to support recent loss-affected regions with expanded capacity.”
Andreas Müller, head of global retro and ILS at Munich Re, added: “Munich Re is pleased to see the Government of Mexico and the World Bank successfully complete and upsize the capital market transaction with a volume of $175 million for Mexico's hurricane protection on the pacific coast. Taking into account the already placed cat bond classes A, B and C, the aggregate transaction volume amounts to nearly USD 600 million which is a great success. Munich Re is happy and proud to be part of this transaction and would like to thank all involved parties for making this possible.”
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