A beach home on the west end of Dauphin Island, Alabama in the Gulf of Mexico is left pieces after the wake of Hurricane Katrina. (Photographer: Kari Goodnough/Bloomberg News)

World Bank Group Issues its Biggest-Ever Catastrophe Bond

(Bloomberg) -- The World Bank Group issued its largest catastrophe bond, providing Mexico with financial protection of as much as $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 percent 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 $2.5 billion 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 percent above the six-month U.S. dollar Libor benchmark to 8.92 percent above it, the bank said.