World Bank – CCRIF 2014-1

The World Bank has issued (perhaps directly sponsored) its first catastrophe bond, according to reports, in a $30m deal designed to provide hurricane and earthquake reinsurance protection to the Caribbean Catastrophe Risk Insurance Facility (CCRIF).

The issuance will provide the CCRIF with a fully-collateralized source of reinsurance protection against hurricanes and earthquakes impacting its 16 member island nations. The deal provides three years of protection to the CCRIF.

The 16 current members of the CCRIF are: Anguilla, Antigua & Barbuda, Bahamas, Barbados, Belize, Bermuda, Cayman Islands, Dominica, Grenada, Haiti, Jamaica, St. Kitts & Nevis, St. Lucia, St. Vincent & the Grenadines, Trinidad & Tobago, Turks & Caicos Islands.

This is not a typical catastrophe bond issuance. No special purpose insurer has been used as an issuing vehicle, as would be more typical of a cat bond deal. The World Bank’s Treasury unit has its own bond issuance platform, the Global Debt Issuance Facility and these catastrophe linked notes have been issued directly by the World Bank as a series of unsecured general obligation bonds.

In the past a $30m top layer of the CCRIF’s catastrophe reinsurance program had been transferred to the capital markets in a catastrophe swap form, it would appear that this cat bond is to replace that layer.

The way the CCRIF provides its protection to its members means that this cat bond will contain some risk of storm surge, as well as wind from tropical cyclones, as well as the earthquake risk. The CCRIF takes parameters of an event and applies them to member government exposure information to determine a loss estimate.

The issuance uses a parametric modelled loss arrangement, the same as the underlying trigger for the CCRIF’s reinsurance program. The $30m of cover is assumed to be the same layer of the reinsurance program which was previously transferred to the capital markets in a catastrophe swap form. The catastrophe bond, or notes, can be triggered on an annual aggregate basis, so provide protection for losses from multiple events as well as a single large event. We do not have attachment probabilities at this time.

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.

The World Bank is standing between the investors in the cat bond, which the FT reports to be specialist insurance-linked securities funds, catastrophe funds, hedge funds and other investment companies.

We understand that the notes have been issued in such a way as to be transferable in the secondary market, meaning they can have liquidity and the investors holding them will be able to sell them through secondary broking desks.

The catastrophe bond is the first issuance through the World Bank’s newly created Capital-at-Risk Notes Program and was issued by the International Bank for Reconstruction and Development (IBRD).

The notes will pay investors a coupon of LIBOR plus 6.3% to 6.5%.

Note: As this transaction does not use an SPI, as would be more typical of most cat bonds, the name we have given it of ‘World Bank – CCRIF 2014-1’ is our own naming, not an official series name.