Puerto Rico Parametric Re Ltd. (Series 2024-1)

The Puerto Rico Parametric Re Ltd. (Series 2024-1) catastrophe bond is designed to provide disaster risk financing to the Government of Puerto Rico, on a parametric trigger basis.

The Government of Puerto Rico has already been tapping traditional sources of insurance to help it plug disaster funding gaps, and now looks to the capital markets to augment this.

Helping Puerto Rico to access the capital markets for catastrophe bond coverage, Starr Indemnity & Liability Company, a subsidiary of Starr International, is acting as the reinsured party, so fronting the reinsurance protection for the government, specifically for its Department of Treasury (Departamento de Hacienda), we understand.

While Hannover Re is said to be acting as the reinsurer and will sit between Starr Indemnity, reinsuring it, while entering into a retrocessional reinsurance agreement with Puerto Rico Parametric Re Ltd. to transform the capital markets coverage, which will flow back to the government’s benefit.

Puerto Rico Parametric Re Ltd. is set to issue a single tranche of notes that will be sold to investors and the proceeds used to collateralize the retrocession agreement with Hannover Re.

Hannover Re then enters simultaneously into a reinsurance agreement with Starr Indemnity, which enters into an insurance agreement with the government of Puerto Rico.

A $75 million Series 2024-1 Class A tranche of notes are designed to ultimately provide the Puerto Rican government with an almost three-year source of disaster insurance protection, running to the end of May 2027, we are told.

The protection will be on a parametric trigger and per-occurrence basis, covering impacts of named storms and earthquakes for the country.

The parametric trigger features two boxes, a gold box that spans the entirety of Puerto Rico and a red box which is focused on San Juan and surrounding higher population and exposure density regions.

Different payout factors apply for the two boxes, with the risk of triggering highest should a hurricane or earthquake pass through or occur in the red box focused on the higher exposure region.

We’re told that hurricane risk makes up the majority of the expected loss for these notes, at more than 82%, and historical modelling shows that a repeat of 2017’s hurricane Maria would trigger the Puerto Rico Parametric Re cat bond.

There are also different payout percentages possible under the parametric trigger, dependent on the intensity of hurricane or earthquake, so the Puerto Rican government could benefit from payouts ranging from 25% of principal upwards with this cat bond, dependent on event severity, we are told.

The $75 million of Class A notes come with an initial base attachment probability of 3.07%, an initial base expected loss of 1.65% and they are being offered to cat bond investors with price guidance in a range from 8.5% to 9.5%.

Update 1:

We understand that the government of Puerto Rico’s first Parametric Re catastrophe bond has increased in size, to now provide it $85 million of parametric disaster insurance protection.

At the same time, we’re told the price has now been fixed at the mid-point of the initial guidance, to pay investors a spread of 9%.