IBRD CAR 123-124

A catastrophe bond for the Philippines has finally come to market, as the World Bank is set to issue on behalf of the country, through the International Bank for Reconstruction and Development (IBRD), a $225 million cat bond to secure both earthquake and tropical cyclone insurance coverage on a modelled loss basis.

The issuance is taking place under the World Bank’s IBRD Capital-At-Risk Notes program, with two classes of notes set to be issued and sold to investors to collateralize underlying swap agreements that provide the risk transfer and insurance protection to the Republic of the Philippines.

Two classes of notes are set to be issued and sold to investors to collateralize underlying swap agreements that provide the risk transfer and reinsurance protection to the Republic of the Philippines, we understand, with one class of notes devoted to coverage for each of the two perils.

The World Bank’s IBRD is the issuer, while the Treasury of the Republic of the Philippines is understood to be the beneficiary of an underlying catastrophe swap agreement between it and the Bank that facilitates the protection.

The swap agreements are fully collateralised through the sale of the two tranches of notes, providing the capacity to back the disaster risk transfer protection for the Philippines government.

Both of the perils coverage will be on a modelled loss basis, using modelling from AIR Worldwide we understand, while the trigger is a per-occurrence structure.

The catastrophe bond will provide the Philippines government with a three year source of disaster risk transfer capacity that would pay out should an earthquake or tropical cyclone event breach the modelled loss triggers parameters during the term.

Depending on the calculated modelled loss amount following any earthquake or tropical cyclone event, the outstanding principal of either tranche may be reduced by 0%, 35%, 70%, or 100%. Hence the severity of a catastrophe will denote how large a payout comes due.

The first tranche features currently $75 million of IBRD CAR 123 Class A notes that will be exposed to Philippine earthquake risks.

We’re told this earthquake risk tranche will have an attachment probability of 5.3% and an expected loss of 3%, while the notes are to be offered to ILS investors with a risk margin (spread) of between 5% and 5.75%.

The second tranche features currently $150 million of IBRD CAR 124 Class B notes that will be exposed to Philippine tropical cyclone risks.

This tranche, we understand, has an attachment probability of 5.3% and an expected loss of 3%, with the notes offered to investors with a risk margin of between 5.2% and 6%.

Both tranches will cover the entirety of the Philippines and represent the first 144a catastrophe bonds to have exposure to the country.

Update 1:

After marketing, we understand that this first Philippines catastrophe bond looks destined to complete at the original $225 million size, despite having been marketed as up to $300 million to potential investors.

Update 2:

The pricing was fixed with both tranches of notes settling with a risk margin fixed within the upper-half of guidance ranges.

The first tranche of $75 million IBRD CAR 123 Class A notes, that will be exposed to Philippine earthquake risks, have an initial expected loss of 3% and were offered to ILS investors with a risk margin (spread) of between 5% and 5.75%. This tranche priced with the risk margin at 5.5%, so in the upper-half of guidance.

The second tranche of $150 million IBRD CAR 124 Class B notes, exposed to Philippine tropical cyclone risk, have an initial expected loss of 3% and were offered to investors with a risk margin of between 5.25% and 6%. This tranche priced with the risk margin fixed at 5.65%, which is only slightly above the mid-point.

Update – December 22nd, 2021:

The Philippines Government Treasury department issued a notice to the calculation agent requesting that an assessment be made as to whether recent super typhoon Rai (locally known as Odette) might have triggered its World Bank issued catastrophe bond coverage.

Update – January 24th, 2022:

The Philippines government will make a recovery under the terms of its World Bank issued catastrophe bond, as we’ve learned that the event calculation process has now run and super typhoon Rai (locally known as Odette) has breached the parametric trigger for wind.

We can report that this tranche of notes faces at least a 35% payout of principal, or US $52.5 million of the $150 million tropical cyclone exposed Class B notes, after the calculation agent AIR ran its models and the event parameters breached the trigger, activating the lowest level of payout. Calculation for precipitation is ongoing, meaning the loss of principal could potentially increase.

As a result, the Class B tropical cyclone exposed notes are now reduced to $97.5 million in principal outstanding, after the recovery.

Update – April 19th 2022:

The Bureau of the Treasury of the Republic of the Philippines has issued another notice to the calculation agent of this cat bond after the impacts of April’s tropical storm Megi (locally known as storm Agaton).

Storm Megi did not achieve typhoon strength, but its rains were particularly impactful and deadly, hence the calculation process will now be run to derive whether the modelled loss from this tropical cyclone would trigger the notes again.

Update – May 16th 2022:

A calculation process that has been ongoing for the rainfall from typhoon Rai (locally known as Odette) has now completed and no additional reduction in principal was triggered.

The calculation process for Megi continues at this time.

Update – May 23rd 2022:

The calculation agent has found that the winds from tropical storm Megi, that struck the Philippines in April 2022, had not been sufficiently severe to breach the catastrophe bond trigger and result in any additional payout for the Government.

The calculation process for Megi’s rainfall will continue, but could take some months based on how long it took for typhoon Rai.

Update  – Sept 10th 2022:

We learned that after running the calculation process for storm Megi (Agaton) rainfall, the calculation agent found that they were not severe enough to trigger the cat bond notes, with no additional payout due.

Update – Sept 26th 2022:

Super typhoon Noru (locally known as Karding) made landfall in Luzon, northern Philippines over the weekend and early indications are that it will definitely be an event that requires another run of the calculation process for the Philippines government’s World Bank cat bond, with one cat bond fund manager saying they feel it’s likely to default again as a result of the storm.

It’s impossible to know how large a default this could be, as with the percentage based scale it could be 0%, 35%, 70%, or 100% of the remaining $97.5 million in principal outstanding from the Class B tropical cyclone exposed notes.

Update – Oct 10th 2022:

We’ve now learned that an event notice had been officially submitted for super typhoon Noru (Karding) by the Philippines government. Risk modeller Verisk will now run the documented calculation agent process and report back to the Bureau of the Treasury, as well as to investors in the catastrophe bond, whether any payout of principal is due for the storm.

Update – Feb 2023:

The remaining $97.5m of notes from the Philippines cat bond were not exposed to any losses due to typhoon Noru and so the issuance matured.