Pacific Alliance earthquake cat bond target rises to $1.39 billion

by Artemis on January 31, 2018

The first catastrophe bonds to benefit all four member nations of the Pacific Alliance trade bloc in Latin America is set to increase in size, as the mooted $1 billion cat bond issuance has now had its target increased to as much as $1.39 billion of earthquake risk coverage for the region.

The first Pacific Alliance catastrophe bond issuance is made up of 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 and will provide insurance or reinsurance protection to Pacific Alliance member nations.

When this transaction launched earlier this month it was targeting a $1 billion issuance across the five series of notes. Sources say that the deal has been oversubscribed, as investors displayed a strong appetite for these notes, and that the aggregate target size for the issuance has now been lifted to as much as $1.39 billion across the four member nations of the Pacific Alliance.

Due to the demand investors and ILS funds have shown for this Pacific Alliance cat bond, the pricing guidance has dropped on all tranches, now coming in below the initial mid-points.

Out of the five tranches of catastrophe bond notes being issued in this deal, three will provide insurance protection to each of Chile, Colombia and Peru against earthquakes striking their countries, while two of the tranches will cover Mexico against earthquakes.

The potentially $1.39 billion of catastrophe bonds are divided into a Chilean earthquake bond IBRD CAR 116, a Colombian earthquake bond IBRD CAR 117, two Mexican earthquake bond series IBRD CAR 118-119 (due to the two series of notes involved) and a Peruvian earthquake cat bond IBRD CAR 120.

Each of the five Pacific Alliance series of catastrophe bond notes feature parametric triggers and will provide their protection on a per-occurrence basis, leveraging the capital markets and ILS fund investor appetites for catastrophe reinsurance risks to source their efficient sovereign risk transfer capacity.

The IBRD CAR 116 issuance features one series of Capital At Risk notes (CAR Series 116) covering Chile earthquake risk, which will provide insurance protection directly to the Republic of Chile. This series launched as a $300 million offering, but our sources now say that this series is targeting between $460 million and $500 million, while the initial pricing range marketed of 2.75% to 3.5% has been narrowed to 2.5% to 2.75%, so below the original guidance range.

The IBRD CAR 117 offering, launched as a single $300 million tranche of catastrophe-linked Capital At Risk notes (CAR Series 117) designed to cover Colombian earthquake risks directly for the Republic of Colombia. This tranche is now targeting between $375 million and $400 million of coverage for Colombia, while the initial coupon guidance of 3.5% to 4.25% has now dropped to 3.00% to 3.50%, we understand.

The IBRD CAR 118-119 issuance for Mexico, which features two series of catastrophe-linked Capital At Risk notes (CAR Series 118 Class A and CAR Series 119 Class B), was launched as a CAR Series 118 Class A tranche sized at $140 million and a riskier CAR Series 119 Class B note offering sized at $85 million.

The CAR 118 Class A notes are now targeting a $160 million to $175 million issuance, while the CAR 119 Class B tranche are now targeting $100 million to $115 million of notes.

Pricing on the CAR 118 series Class A notes launched at 3% to 3.75% but this has now dropped to 2.5% to 3%, while the CAR 119 series Class B notes that launched at 9% to 9.75% have now seen their pricing guidance drop to 8.25% to 9%.

Finally, the IBRD CAR 120 offering of Peru earthquake linked notes, that will directly protect the Republic of Peru, launched seeking $175 million of risk transfer capacity, but are now targeting $200 million, we’re told. The pricing for the Peru earthquake cat bond tranche was launched at 7% and 7.75%, but again the pricing has dropped to a range of 6% to 7%.

So all of these series of Pacific Alliance earthquake notes are set to increase in size while coupon equivalents have dropped to levels that suggest final pricing will likely be at below the bottom-end of the initial guidance.

This reflects the very high levels of investor appetite for all of these series of Pacific Alliance catastrophe bond notes, as they offer a good diversification opportunity for investors and ILS funds outside of their more typical property catastrophe reinsurance risk zones.

If these catastrophe bond issuances all execute at increased size and with coupon equivalents priced below their initial guidance it is a further sign of the high levels of investor appetite for ILS investments at this time.

It’s a further testament to the ability of the capital markets to provide insurance and reinsurance protection to sponsors such as sovereign governments at very efficient pricing levels as well.

Also the Chile, Colombia and Peru earthquake cat bonds demonstrate how the World Bank can directly assist governments to secure insurance through the capital markets, without the need for a reinsurer in between. This model also demonstrates that other direct issuers of cat bonds, such as large corporations, could tap the capital markets for risk transfer in similar ways.

Further details on all of these transactions, the the Chilean earthquake cat bond IBRD CAR 116, the Colombian earthquake cat bond IBRD CAR 117, the Mexican earthquake cat bond IBRD CAR 118-119 (due to the two series of notes involved) and the Peruvian earthquake cat bond IBRD CAR 120, can be found in our cat bond Deal Directory.

We understand that this transaction is set to complete in February. We will update you once final pricing and sizes are available.

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