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Mexico increases size of cat bond issue after strong demand

Friday, 5 Oct 2012 | 11:03 AM ET

Oct 5 (Reuters) - Mexico has increased the size of a catastrophe bond issued by MultiCat Mexico Ltd to protect the country in the event of earthquakes and hurricanes during marketing, while reducing pricing from the original guidance due to strong investor demand.

The bond was increased from $300 million to $315 million after the government increased the amount of coverage it wanted for Atlantic hurricanes, sources familiar with the deal told Reuters.

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.

The deal was issued by Cayman Islands-based special purpose vehicle MultiCat Mexico 2012-1 Ltd last week, and is sponsored by the Fund for Natural Disasters of Mexico (FONDEN).

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.

Mexico's reinsurance transaction is structured into three classes of risk. The $140 million class A covers losses from earthquakes in the country and was rated B by rating agency Standard & Poor's (S&P). Pricing came in at 800 basis points above Treasury money market funds (TMMF), down from 875-900 bp.

The class B notes, rated B+ by S&P, cover Atlantic hurricane, and have been upsized from $60 million to $75 million, say investors. Final pricing has been set at 775 bp over TMMF, down from a guidance price of 900-950 bp.

The transaction's class C notes cover Mexico from $100 million of Pacific hurricane risk. The notes are rated B- by S&P and pricing has been set at 750 bp above TMMF, down from a guidance price of 875-910 bp.

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.

Swiss Re is the reinsurers for the risk transfer contract, while AIR Worldwide will provide the risk modeling analysis for the deal.

The recent transaction replaces the $290 million of cover provides by the MultiCat Mex 2009 cat bond, which matured at the end of September.

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(Reporting by Sarah Mortimer; Editing by Hugh Lawson)

((sarah.mortimer@thomsonreuters.com +44)(0)(20 7542 9619 Reuters Messaging: sarah.mortimer.thomsonreuters.com@reuters.net))

Keywords: MEXICO/CATBOND