Jamaica’s cat bond priced at upsized $185m, ILS funds take 66% of notes

Jamaica’s first catastrophe bond, the IBRD CAR 130 transaction, has now been successfully priced and the Caribbean island nation has secured the upsized target of $185 million of coverage, with pricing closer to the upper-end of guidance.

Dedicated insurance-linked securities (ILS) investment funds took the lions share of the cat bond notes on offer, absorbing 66% of the arrangement, the World Bank reported.

As we reported recently here, the first catastrophe bond for Jamaica looked set to increase a little in size, from the original offering of $175 million of notes.

At the same time, the original price guidance of 3.75% to 4.5% was raised and tightened to 4.4% to 4.5%, but the notes have now been successfully priced at the 4.4% risk margin, according to the World Bank.

Regular readers will know that we’ve been covering Jamaica’s road to its first cat bond, as part of its broader disaster risk financing arrangements, for a number of years.

In fact, it is exactly three years today since we first wrote about formalised work beginning between the country and the World Bank.

Recently, we reported that important grant agreements had been signed and as a result the first catastrophe bond for Jamaica was imminent and could come to market within days, which proved accurate as the deal emerged soon afterwards.

Now priced, the World Bank has hailed this first catastrophe bond for a small island state, which will now will provide the Government of Jamaica with disaster insurance protection of up to US $185 million against losses from named storms, across three Atlantic hurricane seasons ending in December 2023.

Jamaica is the first Caribbean government to sponsor a catastrophe bond and the first small island state in the world to access the cat bond market, the World Bank explained.

The IBRD CAR 130 cat bond transaction for Jamaica can be triggered by named storms and hurricanes of a certain intensity, with a stepped percentage payout structure and the World Bank notes an “innovative reporting feature resulting in a quick payout calculation, within weeks of a qualifying named storm.”

In addition, the World Bank terms the structure a “cat-in-a grid parametric trigger design for tropical cyclone risk”, which it says this is the first cat bond to use one.

As we explained before:

The series 130 Capital-At-Risk notes will cover losses from named storms, so tropical storms and hurricanes, that have a sufficiently low minimum central pressure and breach a parametric box structure.

The parametric trigger is based on inputs related to the storm track location and the minimum central pressure, using data from the best track files out of the NHC’s automated tropical cyclone forecasting system.

These files are typically delivered a few weeks after a storm, but are validated figures from a trusted source so often used in parametric triggers.

The event parameters will be a calculated central pressure figure and also the storm track, while Jamaica and the surrounding Caribbean Sea have been divided up into a series of parametric boxes.

Different payout factors will then apply, depending on the box a storm tracks into and the minimum central pressure, calculated from the best track data.

We understand that a linear sliding scale of payout amounts will be used for this catastrophe bond, but with the minimum payout being 30% of the cat bond’s principal, running up to a full 100% payout.

The road to pricing this catastrophe bond has been particularly long and it is testament to the World Bank Treasury’s team and the IBRD, as well as to the Jamaican Ministry of Finance that their persistence has paid off with a successful issuance and a significant boost to Jamaica’s disaster financing arrangements.

Jingdong Hua, Vice President and Treasurer, World Bank, commented, “We are pleased to be able to support this transaction and bring together so many different partners all committed to strengthening Jamaica’s resilience to tropical cyclones. We especially thank the capital market investors for their support and participating in this important mission.”

Carlos Felipe Jaramillo, Vice President for Latin America and Caribbean, World Bank, added, “The Caribbean region is vulnerable to climate related events and we know how important it is to protect the welfare of the people in the region. We are proud to support Jamaica in reducing risks associated with these kinds of events.”

Dr. The Hon. Nigel Clarke, Minister of Finance and the Public Service, Government of Jamaica, also said, “The Government of Jamaica has strategically prioritized Disaster Risk Financing to mitigate the adverse fiscal impact of tropical cyclones and natural disasters, thereby strengthening Jamaica’s economic resilience. We are pleased with the successful placement of this catastrophe bond, which adds an indispensable layer of disaster risk financing that complements our multi-layered approach. In this transaction, Jamaica benefited from the vast technical resources of the World Bank, and from the strength of its balance sheet. We are also grateful to our bilateral partners, the Governments of the United Kingdom and Germany, through the Global Risk Financing Facility, and to the United States through the United States Agency of International Development who provided financial support for the transaction.”

Financial support to get the cat bond to market came from the United States through the United States Agency for International Development (USAID), the World Bank’s Disaster Protection Program funded by the United Kingdom, as well as the Global Risk Financing Facility (GRiF), supported by Germany and the United Kingdom.

These grants pay the premiums and much of the upfront issuance costs to enable the cat bond to be issued, strengthening the financial resilience of Jamaica through this pre-arranged risk financing instrument.

Dr. Heike Henn, Director Climate and Energy, Sustainable Urban Development, Environment, German Federal Ministry for Economic Cooperation and Development, commented, “We are pleased to have contributed to this important milestone in strengthening Jamaica’s economic resilience to climate risks. Our support is an integral part of our efforts within the InsuResilience Global Partnership, whose vision is to strengthen the resilience of developing countries and protect the lives and livelihoods of poor and vulnerable people against the impacts of climate and disaster risks. It also shows how important it is that the Partnership brings together governments, civil society, international organizations, the private sector, and academia. Only together we will be able to meet the challenges of climate change.”

Asif Ahmad, the British High Commissioner to Jamaica, also said, “The United Kingdom stands in solidarity with countries on the frontline of climate change, especially Small Island States like Jamaica which are particularly vulnerable. That is why we have used our Presidencies of the G7 and COP this year to advance the use of innovative financing for resilience. We congratulate Jamaica on this new catastrophe bond, which will ensure that funds are available rapidly for early response and recovery after hurricanes. The UK is delighted to have supported this work through the Global Risk Financing Facility, alongside our G7 partners Germany and the United States, as well as the World Bank.”

Jason Fraser, Jamaica Country Representative, United States Agency for International Development, added, “This bond solidifies USAID’s and the United States Government commitment to support innovative disaster financing mechanisms that provide financial reserves in the wake of natural disasters. In the end, this will enable Jamaica to finance its own recovery from natural disasters and reduce recovery costs. This agreement is an important step in the longstanding partnership between Jamaica and the United States and our growing engagement with the Caribbean region as our neighbor, partner and friend.”

The global insurance and reinsurance market played its role in getting the transaction to market, with broker Aon Securities and reinsurance firm Swiss Re Capital Markets acting as joint structuring agents and joint bookrunners for the deal. AIR Worldwide acted as the risk modeler and calculation agent.

Paul Schultz, CEO, Aon Securities, stated, “Aon Securities is pleased to partner with the World Bank to help the Government of Jamaica bring this landmark transaction to the capital markets. We recognize the potential for natural disaster events to have a significant impact on the country, and we are excited to help establish this protection to help Jamaica build a stronger social safety net and a more resilient economy for its citizens.”

Jean-Louis Monnier, Managing Director and Head of Retro & ILS Structuring, Swiss Re Capital Markets, also commented, “Swiss Re Capital Markets is proud to have partnered with the World Bank and the Government of Jamaica to successfully bring the nation’s first catastrophe bond issuance to market. This ground-breaking transaction features innovative payout mechanics which provide Jamaica with faster access to disaster relief funds following a triggering event. As such, it embodies Swiss Re’s mission to make the world more resilient.”

Finally, the investors, perhaps the most important part of this catastrophe bond equation, as without them there wouldn’t be the financial backing to underpin the deal.

Dedicated ILS funds took the majority of the offering, at 66%, followed by insurance and reinsurance firms that between them took 17%, asset managers at 14% and then pension funds at 3%.

European investors were the largest participants, at 60% of the deal, you can see the rest of the investor mix below.

So we come to the end of the long-road to catastrophe bond issuance for the Jamaican government, marking an important step in its disaster risk financing and preparedness, with now $185 million of additional capital secured in case a major storm strikes the island nation.

The efforts of Jamaica to reach this achievement have been significant and their journey to secure catastrophe bond coverage may help to stimulate interest in other small island states around the world.

You can read all about this IBRD CAR 130, Jamaica cat bond issuance in our comprehensive catastrophe bond Deal Directory.