Mexico Sponsors Quake Bond

The Mexican government has sponsored the first ever catastrophe bond to cover earthquake risk in that country.

Standard & Poor's Ratings Services said Friday that it has assigned its “double-B-plus” credit rating to the $160 million class A and B principal-at-risk notes issued by CAT-Mex Ltd.

The transaction, sponsored by the Mexican government to finance rescue and rebuilding after an earthquake, closed on May 11, at which time ratings were assigned to both classes of variable-rate notes.

“This is the first catastrophe bond we have rated that covers Mexican earthquakes,” said Standard & Poor's credit analyst Maren Josefs. “Cat bonds of this type are well-established risk management tools for insurance and reinsurance companies to transfer peak risks in certain parts of the world into the capital markets.”

Ms. Josefs added that these cat bonds are also unique in that investors will lose all their investment if all the trigger conditions are met.

This contract will provide for payments to Swiss Re if an earthquake with a certain magnitude and depth in any of three predefined zones in Mexico occurs.

Swiss Re will pay the upfront and ongoing expenses of CAT-Mex in connection with this security issuance.

For either class notes to trigger, the Ministry of the Interior needs to also have publicly issued a state of emergency declaration following the occurrence of an earthquake. If all of the specified trigger conditions are met, 100 percent of the principal amount of that class of notes would be paid to Swiss Re and the respective noteholders would lose their entire investment.