World Bank gives largest ever disaster bond

The group issued US$350m to help Mexico combat financial hardship from cyclones and earthquakes

Financial burdens from natural disasters, such as earthquakes and cyclones can cause a headache for governments . Alberto Orsini / AP

The World Bank issued its largest catastrophe bond, providing Mexico with financial protection of as much as US$360 million against losses from tropical cyclones and earthquakes.

Mexico is among the countries most vulnerable to natural disasters, the bank said in a statement. Nearly a third of its population lives in areas exposed to hurricanes, storms, floods, earthquakes and volcanic eruptions. The coverage is the equivalent of 71 per cent of the country’s economic output considered at risk from two or more natural hazards.

The bonds were issued in three structures to provide coverage against earthquakes, Atlantic tropical cyclones, and Pacific tropical cyclones. If a natural disaster occurs that’s eligible for coverage, some or all of the bond proceeds will be made available to the Mexican Fund for Natural Disasters.

The bank has arranged risk-transfer transactions worth about $1 billion in the past two months, compared with $2.5bn in the past decade, it said by email. It’s ramping up its activities as it seeks to help transfer risk from poorer nations.

The bonds amount to an “innovative use of private-sector instruments to transfer risk to the capital markets,” Arunma Oteh, the bank’s treasurer, said in the statement. Bonds issued under the program offer investors higher returns than other World Bank bonds, since investors may lose part or all of their money, the bank said.

Bond coupons range from 4.12 per cent above the six-month US dollar Libor benchmark to 8.92 per cent above it, the bank said.

*Bloomberg