The first catastrophe bond to benefit the Caribbean island nation of Jamaica has now been launched to investors, with the IBRD CAR 130 transaction, that is being issued via the World Bank, set to provide the Government with a $175 million or greater source of named tropical storm and hurricane disaster insurance protection.
We learned recently that important grant agreements had been signed and as a result the first catastrophe bond for Jamaica was imminent and could come to market as early as this week.
That has proved accurate and now the World Bank’s cat bond for Jamaica is in the market and details are with the insurance-linked securities (ILS) investment community, as well as other institutional investors we’d expect.
The first interesting fact about Jamaica’s first catastrophe bond is that it is explicitly called a sustainable development bond in the documentation, sources told us.
The World Bank has been allocating collateral from the IBRD issued catastrophe bonds it facilitates to projects considered to be sustainable already, but in this case the Jamaica cat bond is explicitly being marketed as a “sustainable development bond” investment opportunity.
That could open up the range of investors willing to invest, which of course could also assist in setting the pricing a little lower, as it may ramp up demand for the notes somewhat.
The World Bank is set to issue the catastrophe bond on behalf of the Caribbean country, through the International Bank for Reconstruction and Development’s (IBRD) Global Debt Issuance Facility.
The issuance is taking place under the World Bank’s IBRD Capital-At-Risk Notes program, with a single class of notes set to be issued and sold to ILS investors, in order to collateralize an underlying swap, or risk transfer, agreement that provides the risk transfer and resulting disaster insurance protection to the Government of Jamaica.
As a result, the World Bank’s IBRD is the issuer of the catastrophe bonds, while the Government of Jamaica will be the beneficiary of an underlying catastrophe risk transfer agreement between it and the Bank that facilitates the protection.
The series 130 Capital-At-Risk notes set to be issued and sold to investors 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, we understand.
So the trigger for Jamaica’s first catastrophe bond is parametric, as we’d anticipated, while the protection will be on a per-occurrence basis.
We understand the named storm and hurricane protection will run across almost three hurricane seasons, with the notes maturity set for December 2023.
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 currently $175 million of IBRD CAR 130 Class A notes will have an initial expected loss of 1.52% we’re told and the notes are being offered to investors with coupon price guidance in a range from 3.75% to 4.5%.
Insurance and reinsurance broker Aon’s capital markets division Aon Securities and reinsurance firm Swiss Re’s capital markets unit Swiss Re Capital Markets are both joint structuring agents and bookrunners for the first Jamaica cat bond deal, while AIR Worldwide is providing risk modelling and calculation agent services, we understand.
It’s been a long road for Jamaica to get its first catastrophe bond to market, a significant effort for its own Government, in particular the Ministry of Finance, as well as for the World Bank Treasury team.
Jamaica has been exploring ways to increase its natural disaster resilience through risk finance and insurance for some years, with its target being to introduce multiple sources of capital to support the Government’s own financing capabilities.
Introducing a catastrophe bond will provide a disaster-contingent capital source funded by capital markets to Jamaica, that could be an extremely valuable layer of financing if a significant hurricane impacts the island nation.