World Bank hails investor appetite for “historic” $1.36bn cat bond

by Artemis on February 7, 2018

The World Bank has hailed the “very strong demand” for its recently completed issuance of $1.36 billion of parametric earthquake catastrophe bonds, to the benefit of Pacific Alliance member countries Chile, Colombia, Mexico and Peru, calling the transaction “historic” and highlighting some records it has set.

World Bank logoThe $1.36 billion Latin and South American earthquake cat bond is split into five series of notes, which we have listed in our Deal Directory as a $500 million Chilean earthquake bond IBRD CAR 116, a $400 million Colombian earthquake bond IBRD CAR 117, two Mexican earthquake bond series amounting to $260 million IBRD CAR 118-119 and a $200 million Peruvian earthquake cat bond IBRD CAR 120.

The World Bank said that this is the largest single issuance of catastrophe bonds it has ever facilitated, in fact the largest sovereign risk insurance transaction ever seen. It is also the second largest issuance of catastrophe bonds on record, after the Florida Citizens $1.5 billion Everglades Re transaction that was issued in 2014.

Each of the series of notes issued covers the respective countries against earthquake risks, on a parametric trigger basis and each series has different terms to benefit the unique risks each sovereign sponsor faces.

Chile, Colombia and Peru all benefit from three years of earthquake insurance protection from their cat bonds, while Mexico will have two years of coverage, aligning maturity with its still in-force Fonden 2017 cat bonds protection, we assume.

For Chile, Colombia and Peru this is the first time any of the countries have accessed the capital markets to source disaster risk insurance.

These transactions are particularly groundbreaking as they also represent the first-time we’ve seen a sovereign nation act as a direct counterparty for a catastrophe bond risk transfer deal, without a reinsurance firm or risk pooling institution sitting in between.

It is only thanks to the expertise and structure of the World Bank that this is possible, that it can face-off directly against a sovereign counterparty to provide an efficient way to source disaster insurance capacity from the capital markets.

“Helping our client manage risk and build resilience against natural disasters is a strategic priority for the World Bank,” commented Arunma Oteh, World Bank Vice President and Treasurer. “This historic transaction cements the World Bank’s role as a pioneer in leveraging capital market instrument to build resilience, and showcases our unique ability to bring together sovereigns for a market transaction that transfers risk and will help support countries when the unforeseen does occur.”

“When there are people just one disaster away from poverty, managing risk is a development priority,” added Jorge Familiar, World Bank Vice President for Latin America and the Caribbean. “These Pacific Alliance catastrophe bonds are an example of the innovative contributions that stem from the Bank’s partnership with Latin America and the Caribbean.”

Demand for these World Bank catastrophe bonds was extremely high, as they offered a new source of diversification to investors given they contain risks from four different geographies.

Timing will also have been helpful, with ILS fund and investor demand for new risk at a high around the January renewals, meaning the appetite for a large issuance offering risks that are uncorrelated to each other was particularly high.

The result of all that investor demand? These Pacific Alliance country catastrophe bonds could have been almost twice as large, had the capacity been required.

The World Bank said that more than 45 investors from around the world participated in these transactions, with this demand helping to attract orders totaling $2.5 billion from the ILS and institutional investors.

The Pacific Alliance catastrophe bonds form part of the World Bank’s work to support Chile, Colombia, Mexico and Peru in better managing their natural disaster risks. The fact the cat bonds were structured as a joint transaction meant that all four countries benefited from cost savings for legal and other related transaction fees.

They may also have benefited from economies of scale, as this certainly will have stimulated investor demand, perhaps helping the transaction pricing to be fixed at such low levels below guidance, as we explained earlier this week here.

Paul Schultz, CEO of Aon Securities, the capital markets arm of the reinsurance broker, which acted as joint structuring agent and joint bookrunners, commented on the deal, “We are honored to support the Pacific Alliance members and World Bank in bringing this pioneering transaction to the market. This record-breaking issuance highlights the strategic partnership between nations seeking efficient sources of capital to fund emergency costs and investors seeking to invest in diversifying risks and support sustainable development initiatives. We are optimistic that this transaction will pave the way for other governments to develop more resilient risk management programs for their uninsured exposures.”

Martyn Parker, Chairman Global Partnerships at reinsurance firm Swiss Re, which was also joint structuring agent and joint bookrunner, added, “By working together to manage their financial exposure to earthquake, the leaders of Chile, Colombia, Peru and Mexico are making a powerful commitment to their people to promote long-term economic development. We are privileged to have been part of this landmark transaction.”

John Modin, Head of Insurance Solutions at Citi, a joint bookrunner on the deal, said, “Citi is proud to participate in this landmark issuance. This transaction represents the largest sovereign catastrophe bond and the largest earthquake bond ever. But more important, it provides timely and vital support and economic protection for these countries in the event of a catastrophic earthquake.”

Finally, Rob Newbold, Executive Vice President, AIR Worldwide, also said, “We’re honored to be the modeling and calculation agent for the first ever catastrophe bond to cover earthquake risk in South America, as well as coverage for Mexico,” “We’ve committed significant resources in improving the resilience of communities in Mexico and South America, and have proudly supported Mexico’s cat bonds since their first one in 2006. Being selected by the World Bank to model this innovative transaction further validates our focus on becoming the leading risk modeler in Latin America.”

These Pacific Alliance catastrophe bonds covering Latin American earthquake risks are also the largest catastrophe bond issued by the World Bank to-date, which the organisation noted positions it as, “a leader in helping its member countries access risk insurance through the capital markets.”

More details on all the Pacific Alliance cat bond transactions from the World Bank can be found in our cat bond Deal Directory: the $500m Chilean earthquake cat bond IBRD CAR 116, the $400m Colombian earthquake cat bond IBRD CAR 117, the $260m Mexican earthquake cat bond IBRD CAR 118-119, and the $200m Peruvian earthquake cat bond IBRD CAR 120.

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