Mexico buys ILS coverage for first time since 2012

Mexico’s Fund for Natural Disasters (FONDEN) has returned to the insurance-linked securities (ILS) markets to secure coverage against natural catastrophes for the first time since 2012.

FONDEN has secured $360 million of coverage for three years via three tranches of catastrophe bonds issued by International Bank for Reconstruction and Development (the World Bank). The deal represents the first listed property-catastrophe bond issued under the World Bank’s Capital-at-Risk notes programme.

The deal provides FONDEN with three years of earthquake protection and three seasons of Atlantic and Pacific named storm cover. The deal secured support from 37 capital markets investors meaning the deal was upsized to $360 million from $290 million when it was initially marketed. All classes also priced between 50 and 60 basis points below the initial price guidance.

Mexico last bought coverage in this way in 2012 when it accessed capital markets-based protection via the MultiCat Mexico catastrophe bonds. Notably, the Class C MultiCat Mexico bond was triggered by an event payment resulting from 2015’s Hurricane Patricia.

The architects of the deal noted that compared with MultiCat Mexico, this deal features lower annualized pricing and broader geographic protection, representing more efficient risk transfer.

They also noted that a more precise parametric trigger significantly increases the number of trigger boxes by peril and uses a step payment structure rather than a mostly binary payout structure.

Depending on an earthquake’s location, moment magnitude and depth, the earthquake event payouts that reduce principal are in four 25 percent increments, while the Named Storm bonds, which are based on storm track and the minimum calculated central pressure for each Named Storm Gate, have event payouts that reduce principal at 25, 50, and 100 percent.

Oscar Vela, head of the insurance, pensions and social security unit at Mexico’s Ministry of Finance, said: “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.”

GC Securities and Munich Re were the joint structuring agents and joint managers. GC Securities was the sole bookrunner and initial purchaser.

“Munich Re is proud to play a major role in this transaction through our commitment to long-lasting client relationships and our expertise in risk mitigation and risk transfer. We truly hope that this program will serve the Mexican government strategy and further bolster its disaster resilience in a comprehensive and cost-effective manner,” said Matthias Marwege, senior executive manager for Spain, Portugal, Latin America and Caribbean at Munich Re.

Aidan Pope, CEO of Latin America and the Caribbean at Guy Carpenter, added: “The World Bank Capital-at-Risk notes protecting FONDEN provide a very cost-efficient source of risk transfer and maximizes protection in one of the regions with the greatest exposure.

“With this issuance, the government of Mexico has increased its resiliency in line with their overall macroprudential risk management strategy.”

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