World Bank hails first cat bond from new Capital-at-Risk Notes Program

by Artemis on July 1, 2014

The World Bank has hailed the successful issuance of the first catastrophe bond notes through its newly created Capital-at-Risk Notes Program, which resulted in the World Bank – CCRIF 2014-1 cat bond we covered last week.

The transaction is the World Bank’s first directly issued catastrophe bond, using the International Bank for Reconstruction and Development (IBRD) as issuer, with its bond issuance facilities, to complete the deal instead of using a special purpose insurer, as is more typical of most cat bonds. By using its own facilities the World Bank can keep the issuance costs down even further, making the cat bonds it directly issues very cost-competitive.

The three-year, $30m transaction is the first under the World Bank’s newly created Capital-at-Risk Notes Program. The cat bond is linked to tropical cyclone and earthquake risks in 16 Caribbean countries.

With the issuance of this cat bond the World Bank is providing reinsurance protection to the Caribbean Catastrophe Risk Insurance Facility (CCRIF). The transaction sees the World Bank enter into a catastrophe swap with the CCRIF mirroring the terms of the cat bond.

If the bond is triggered by a referenced natural hazard, hence the parametric trigger, then the principal of the bond will be reduced by an amount determined under the bond terms and an equivalent amount will be paid to CCRIF under the swap.

So the World Bank has effectively replaced the segment of the CCRIF’s reinsurance program which used to be transacted as a catastrophe risk swap directly into the capital markets. This is a good first step, allowing the CCRIF to benefit from multi-year cover and it will be interesting to see whether the cat bond expands in future years.

GC Securities acted as placement agent for the World Bank – CCRIF catastrophe bond. The co-structuring agents on behalf of the CCRIF are GC Securities and Munich Re. Swiss Re Capital Markets acted as advisor to the World Bank.

“The World Bank’s new Capital-at-Risk Notes Program is an innovation for both our clients and investors, and marks a further extension of our disaster risk management work, which also includes structuring and intermediating cat and weather swaps, providing catastrophe contingent loans and acting as arranger of the MultiCat program. With this first transaction under the Capital-at-Risk Notes Program, CCRIF benefits from access to the highly competitive prices offered by the cat bond market as well as from the efficiency of using this program. At the same time, cat bond investors benefit from exposure to new perils,” commented Madelyn Antoncic, Vice President and Treasurer at the World Bank.

For the CCRIF, accessing the capital markets through this cat bond will provide it with a diversification for its reinsurance capital sources, multi-year protection and lessen the impact of any future price volatility in the reinsurance market. So locking in protection is important to the CCRIF and could lead it to rely more and more on catastrophe bonds, we would imagine.

Isaac Anthony, CEO, Caribbean Catastrophe Risk Insurance Facility, explained; “CCRIF welcomes this Capital-at-Risk Notes Program and recognizes that this cat bond would enable the Facility to capitalise on the increasing participation of institutional investors in the reinsurance market. CCRIF is always actively trying to source the best policy pricing for existing and new members and this cat bond will provide strategic benefits in that it will broaden capacity over time which in turn would help to better manage volatility in the reinsurance market. We are indeed pleased to be the beneficiary of the World Bank’s first ever catastrophe bond and for this induction to the capital markets.”

The World Bank hails the completion of this first cat bond under its new Capital-At-Risk Notes Program as; “A further substantial step in the evolution of the partnership between the two institutions.”

Antoncic explained that the structure has more uses than purely for catastrophe risk; “This new innovative structure can also be used to hedge other risks such as credit risk which could enable the World Bank to expand our lending capacity.”

David Priebe of Guy Carpenter commented; “The creation of the World Bank’s Capital-at-Risk Notes Program is an important milestone in the development of the public sector risk transfer market and streamlining access to the capital markets. GC Securities is honored to have collaborated with the World Bank on the inaugural transaction on behalf of the CCRIF.”

“We are happy to have been able to support the World Bank by co-structuring their first-ever cat bond transaction and we are also proud of still being one of the major risk carriers in the CCRIF itself. We had been involved in the development of the CCRIF concept back in 2007 from the outset and therefore are very happy that this innovative cross-national coverage concept still supports the countries involved with insurance cover against the different natural perils the Carribean is exposed to,” added Georg Daschner, member of Munich Re’s Board of Management responsible for Europe and Latin America.

“Governments’ fiscal positions are increasingly exposed to natural catastrophes and climate change. Swiss Re Capital Markets is proud to have supported the World Bank in forming the Capital-at-Risk Notes Program to provide governments another instrument to transfer these risks to institutional investors. Inaugurating the Program with the CCRIF further demonstrates that disaster risk management has become a cornerstone of tackling sovereign contingent liabilities,” highlighted Martyn Parker, Chairman Global Partnerships, Swiss Re.

The World Bank also said that the first cat bond will pay investors a coupon of 6.3% to 6.5% above 6 month LIBOR.

Read more about this innovative World Bank catastrophe bond deal here:

World Bank sells hurricane & earthquake catastrophe bond for CCRIF.

More details on the World Bank – CCRIF catastrophe bond issuance.

World Bank – CCRIF 2014-1.

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