Filed Under:Risk, Climate Change

Mexico Catastrophe Bond Expected to Be Well Received

(Reuters) - A new earthquake and hurricane catastrophe bond being marketed by the Mexican government is likely to be well received by investors eager for higher yields than stocks and bonds offer.

Swiss Re, the reinsurer for the risk transfer contract, is asking a consortium of capital market investors to buy into a $300 million catastrophe bond offering natural disaster protection, rating agency Standard & Poor's (S&P) said on Tuesday.

The $300 million bond, issued by Cayman Islands-based special purpose vehicle Multicat Mexico 2012-1 Ltd, is sponsored by the Fund for Natural Disasters of Mexico (FONDEN), said S&P.

Through Mexico's state-owned reinsurer Agroasemex, FONDEN is using the deal to obtain protection against earthquakes as well as hurricanes formed in the Pacific and Atlantic oceans.

The $140 million class A notes cover losses from earthquakes and are rated B, and the $60 million class B and $100 million C notes from hurricanes are rated B+ and B- respectively.

Interest in so-called cat bonds also reflects pent-up demand after a spate of costly natural disasters choked off new issuance for much of last year.

Pricing for the bond is favourable, say investors with knowledge of the transaction. They said it is being marketed at between 875 - 950 basis points above Treasury money market funds.

The new transaction from Swiss Re will replace the $290 million of cover provided by the MultiCat Mexico 2009 cat bond, which matures at the end of September.

The 2012 transaction will provide coverage for just over three years, with maturity scheduled for Dec. 4, 2015, said S&P.

Strong investor appetite for cat bonds fuelled a record $2 billion of issuance during the first quarter of 2012. That was helped significantly by a $750 million bond issued by Florida Citizens Property Insurance Corporation in the biggest ever single tranche deal in the market's history.

Catastrophe bonds allow insurers and reinsurers to pass on some of the natural disaster risk on their books to capital market investors, freeing up capital for alternative lines of business.

Buyers of cat bonds benefit from returns that are largely insulated from wider economic or financial market developments, but risk losing some or all of their money if a catastrophe occurs.

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