A catastrophe bond (IBRD CAR 123-124) has been launched to the market seeking to secure risk transfer and disaster insurance protection for the Philippines, with the World Bank supporting the country in securing a capital markets backed source of capacity for catastrophe loss events.
A Philippines catastrophe bond has been in the offing since at least 2010, when we first wrote about the potential for the country to become a beneficiary of catastrophe bond backed disaster risk financing and insurance.
The World Bank has always been in discussion with the Philippines, given its significant disaster exposure and a number of times a cat bond issuance has been mooted, but failed to get to market due to a range of political hurdles it had to clear.
Now, those hurdles appear to have cleared and momentum had picked up on the cat bond work again in 2019 as we reported at the start of the year.
Finally we have a Philippine catastrophe issuance in the market, which our sources tell us is seeking at least $225 million of protection for the country, against losses from the perils of earthquakes and tropical cyclones.
We understand that the World Bank is set to issue a catastrophe bond on behalf of the Philippines, using the International Bank for Reconstruction and Development (IBRD).
We’re told that the $225 million Philippines cat bond will aim to secure the country both earthquake and tropical cyclone insurance coverage, on a modelled loss trigger basis.
The issuance is taking place under the World Bank’s IBRD Capital-At-Risk Notes program, as other recent World Bank issued cat bonds have.
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, we are told.
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.
The first tranche features currently $75 million of IBRD CAR 121 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 122 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.
$225 million is a reasonably significant sum for the first Philippines catastrophe bond to be seeking, in terms of protection, although given the huge exposure that the country has to the perils of earthquakes and cyclones more could certainly benefit it.
But, issuance size aside, this is a very significant first step into the insurance-linked securities (ILS) market for the Philippines, with the support of the World Bank Treasury and a further demonstration of the ability of the capital markets to deliver on much needed disaster risk financing capacity for countries around the world.
As well as a further demonstration of the important role the World Bank can play in bringing efficient disaster risk transfer to countries around the globe.
We’ll update you as the first Philippines catastrophe bond comes to market and if further information comes to light.