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 Business News | May 2006 
Mexico is Offering Bonds to Cover a Major Quake
 Elisabeth Malkin - NYTimes
| | More than twenty years have passed since a devastating 8.1 magnitude earthquake struck Mexico City on the morning of September 19, 1985 . The damage to health infrastructure was shocking. In the three largest health institutions in Mexico City, 5,826 hospital beds were lost either to the direct impact of the quakes or because the hospital had to be evacuated. |
Mexico City — The Mexican government has tapped international markets to issue a special catastrophe bond to finance rescue and rebuilding in case of a disastrous earthquake, finance ministry officials said on Friday.
The $160 million bond is part of a larger $450 million insurance package over the next three years that will cost the Mexican government $26 million.
Mexico is considered more at risk for a strong earthquake than even California, and the memory of the 1985 earthquake is still vivid for many residents of Mexico City. The death toll in that disaster may have been as high as 20,000.
Despite the risks, the government has not bought insurance until now, said José Antonio González Anaya, the finance ministry official who has spent three years trying to structure the deal.
Investors who buy the bonds are essentially betting that an earthquake will not hit Mexico in the next three years.
Swiss Re, the Zurich-based reinsurance group, issued the bonds, which pay 230 basis points over the Libor benchmark interest rate.
"If there's no disaster in three years," the finance minister, Francisco Gil Diáz, said, "the investors keep the premium and the interest" and get back the bond.
But if a quake hits, the government gets the full value of the bonds, and investors lose their money.
Catastrophe bonds were started in the 1990's, and have largely been issued by private companies to cover losses from natural disasters. Taiwan is the only other government that has issued such a bond against a quake, but it covers damages from losses.
In Mexico's case, the government collects the $450 million in the bonds and the insurance payout if a quake of 7.5 or 8 magnitude on the Richter scale hits specific regions, regardless of damage. Mr. González Anaya said that meant the government would have money for rescue operations immediately after a disaster.
Mexico has a special fund for natural disasters but the fund has only $80 million.
Last year, the Mexican government spent $1.2 billion to cover rescue and rebuilding operations after Hurricanes Stan and Wilma. Mr. González Anaya hopes to issue a similar kind of catastrophe bond against hurricanes. |
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