$1 billion Pacific Alliance earthquake cat bond launched by World Bank

by Artemis on January 22, 2018

The awaited first catastrophe bond to cover the four member nations of the Pacific Alliance trade bloc in Latin America has now been launched by the World Bank, with an offering seeking $1 billion of earthquake coverage for Chile, Colombia, Mexico and Peru, in what will be one of the largest cat bond issuances on record.

The catastrophe bond issuance features five series of earthquake-linked capital-at-risk notes, which are being issued through the World Bank’s International Bank for Reconstruction and Development (IBRD) global debt facility.

One tranche of notes will cover each of Chile, Colombia and Peru against earthquakes striking their countries, while two tranches will cover Mexico against earthquakes.

It’s worth remembering that Mexico’s most recent catastrophe bond, the IBRD / FONDEN 2017 transaction, was triggered and paid out $150 million because of a magnitude 8.1 earthquake that struck off the coast of Chiapas in September. So this new transaction and its two tranches of notes will more than replace that lost coverage.

So, this $1 billion offering from the World Bank’s IBRD will provide earthquake insurance coverage for Chile, Colombia, Mexico and Peru. We’ve split the transaction in our cat bond Deal Directory, for peril diversification sake, with the Chilean earthquake bond being IBRD CAR 116, the Colombian earthquake bond being IBRD CAR 117, the Mexican earthquake bond being IBRD CAR 118-119 (due to the two series of notes involved) and the Peruvian earthquake cat bond being IBRD CAR 120.

The basic information we’ve gleaned on this large cat bond transaction is below and available in our Deal Directory.

In each case the IBRD will issue the catastrophe-linked Capital At Risk notes through its debt issuance facility and these will be sold to qualified investors and insurance-linked securities (ILS) specialists, to provide the insurance and reinsurance capital to back the earthquake protection for each country.

The IBRD CAR 116 issuance features an offering of one series of Capital At Risk notes (CAR Series 116) covering Chile earthquake risks. The IBRD will enter into a risk transfer agreement directly with the Republic of Chile.

The issuance is preliminarily sized at $300 million of coverage for the Republic of Chile, which on a parametric basis would be a sizeable source of disaster recovery financing should any qualifying major earthquakes occur.

The single tranche of IBRD Chilean earthquake-linked capital-at-risk notes will provide the Republic of Chile with per-occurrence insurance protection across a three-year period, with maturity scheduled for February 2021.

The $300m of IBRD Chilean earthquake-linked capital-at-risk Series 116 Class A notes have a modelled attachment probability of 1.35%, a modelled expected loss of 0.86% and are being offered to investors with a risk margin (effective coupon) of between 2.75% and 3.5%, we understand.

The Chilean earthquake-linked notes can be triggered with a range of payout amounts, set at 30%, 70% or 100% of principal, depending on various parameters associated with an earthquake event, including the magnitude, epicenter location, depth etc.

The IBRD CAR 117 offering, features one $300 million tranche of catastrophe-linked Capital At Risk notes (CAR Series 117) covering Colombia earthquake risks. The IBRD will enter into a risk transfer agreement directly with the Republic of Colombia.

The single tranche of IBRD Colombia earthquake-linked capital-at-risk notes will provide the Republic of Colombia with per-occurrence insurance protection across a three-year period, with maturity scheduled for February 2021.

The $300m of IBRD Colombia earthquake-linked capital-at-risk Series 117 Class A notes have a modelled attachment probability of 2.78%, a modelled expected loss of 1.56% and are being offered to investors with a risk margin (effective coupon) of between 3.5% and 4.25%, we understand.

These Colombian earthquake-linked notes can be triggered with a range of payout amounts, set at 25%, 50% or 100% of principal, depending on various parameters associated with an earthquake event, including the magnitude, epicenter location, depth etc.

The IBRD CAR 118-119 series of notes features two tranches of catastrophe-linked Capital At Risk notes (CAR Series 118 Class A and CAR Series 119 Class B).

For this Mexican earthquake cat bond the trustee of FONDEN, the Mexican government-owned insurer Agroasemex S.A., acts as the insured, which then enters into a reinsurance arrangement with Swiss Re, who act as ceding reinsurance firm. Swiss Re then enters into retrocessional reinsurance risk transfer agreements with the IBRD, with those capitalised and collateralized by the sale of two tranches of earthquake-linked notes.

This Mexican quake issuance is preliminarily sized at $225 million of coverage for Mexico’s FONDEN, with the CAR Series 118 Class A note offering sized at $140 million and the riskier CAR Series 119 Class B note offering sized at $85 million.

The two tranches of IBRD Mexico earthquake-linked capital-at-risk notes will provide Mexico’s FONDEN with per-occurrence protection across a two-year period, with maturity scheduled for February 2020.

The $140m of IBRD Mexico earthquake-linked capital-at-risk Series 118 Class A notes have a modelled attachment probability of 1.09%, a modelled expected loss of 0.79% and are being offered to investors with a risk margin (effective coupon) of between 3% and 3.75%, we understand.

The $85m of IBRD Mexico earthquake-linked capital-at-risk Series 119 Class B notes have a modelled attachment probability of 8.25%, a modelled expected loss of 6.54% and are being offered to investors with a risk margin (effective coupon) of between 9% and 9.75%.

Both tranches of the Mexico earthquake-linked notes can be triggered with two payout amounts, set at 50% or 100% of principal, depending on various parameters associated with an earthquake event, including the magnitude, epicenter location, depth etc.

Finally, the IBRD CAR 120 offering of Peru earthquake linked notes features one $175 million series of catastrophe-linked Capital At Risk notes (CAR Series 120). The IBRD will enter into a risk transfer agreement directly with the Republic of Peru.

The single tranche of IBRD Peru earthquake-linked capital-at-risk notes will provide the Republic of Peru with per-occurrence protection across a three-year period, with maturity scheduled for February 2021.

The $175m tranche of IBRD Peru earthquake-linked capital-at-risk Series 120 Class A notes have a modelled attachment probability of 7.14%, a modelled expected loss of 5% and are being offered to investors with a risk margin (effective coupon) of between 7% and 7.75%, we understand.

The Peruvian earthquake-linked notes can be triggered with a range of payout amounts, set at 30%, 70% or 100% of principal, depending on various parameters associated with an earthquake event, including the magnitude, epicenter location, depth etc.

This $1 billion Pacific Alliance catastrophe bond offering is set to be the largest insurance-linked security (ILS) issued with the support and assistance of the World Bank and once issued will be one of the largest ILS offerings on record.

The Pacific Alliance member nations will benefit from an efficient source of capital markets-backed earthquake insurance protection, with the parametric trigger structure meaning payouts can be made relatively quickly post-disaster.

We understand that the calculation process for the notes could take 14 days from the date of a qualifying earthquake, after which capital due to be paid out could be disbursed almost immediately.

This would be much more rapid than many sources of post-disaster financing and relief funding, which is precisely why parametric catastrophe bonds can be a valuable and efficient source of risk capital for sovereign countries that face major catastrophic risks.

Transactions like these demonstrate the value that capital market investors interest in reinsurance linked returns can offer to those seeking to secure post-disaster risk capital liquidity.

We’ll update you as the Chile, Colombia, Mexico and Peru earthquake catastrophe bonds come to market and you can read about all of them in our cat bond Deal Directory.

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