Mexico’s government triggered a catastrophe bond in the wake of the devastation left by Hurricane Otis in Acapulco, one of the country’s top tourist destinations.
“We can confirm that the bond has already been activated in accordance with the protocols established with the World Bank,” a spokesperson from the Finance Ministry told journalists on Friday, without disclosing the size of the payout.
In March 2020, the World Bank issued $485 million worth of cat bonds in four tranches for Mexico’s Fonden natural disasters fund to insure against losses caused by earthquakes and hurricanes over a four-year period.
Of this amount, $125 million covers hurricanes on the country’s Pacific coast, where Acapulco is located, while $125 million is for hurricanes on the Atlantic coast, $175 million is for low-frequency earthquakes and $60 million is for high frequency earthquakes, according to the World Bank.
However, Zurich-based asset manager Twelve Capital, said the payout under the bond tranche that corresponds to hurricanes in the Pacific Ocean will likely face a 50% reduction, due to uncertainty surrounding estimates of the hurricane’s central pressure.
“Given that the US National Hurricane Center (NHC) reporting of central pressure is not measured constantly but using intervals, this introduces uncertainty with respect to the central pressure estimate used in the trigger, especially given the observed rapid intensification,” Twelve Capital said on Friday in a statement on LinkedIn.
Mexico’s Finance Ministry did not respond to LatinFinance‘s request from comment on the payout at the time of publication.
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The Mexican government also has MXN17.1 billion ($944 million) in its disaster fund which it can draw on to repair damage produced by phenomena such as hurricanes, the Finance Ministry said. It did not say how much would be deployed in Acapulco.
It also has catastrophe insurance for MXN5 billion to cover damage to infrastructure in areas such as health, education and roads, the ministry said.