Puerto Rico gets $282m parametric cover. Says cat bond “opened door” to capital market

The Government of Puerto Rico’s Autoridad de Asesoría Financiera y Agencia Fiscal (Fiscal Agency and Financial Advisory Authority) has secured $282 million of parametric disaster insurance cover, with the recent $85 million Puerto Rico Parametric Re Ltd. (Series 2024-1) catastrophe bond seen as a key component that opens the door to the capital markets.

Puerto Rico has been forward-thinking in its approach to insurance, having had a parametric disaster insurance arrangement in-force for a number of years.

In 2023, the parametric cover was traditionally insured and amounted to $220 million in coverage.

This year, with the help of its first catastrophe bond, Puerto Rico has increased its protection to $282 million under the parametric disaster insurance arrangement, with $85 million being from its first catastrophe bond.

Including reserves set aside for disaster recovery, it means Puerto Rico now has a $1.3 billion financial buffer against natural catastrophe losses for 2024 and beyond, with the multi-year nature of its first Puerto Rico Parametric Re cat bond set to benefit the territory.

Luis J. Umpierre, Deputy Executive Director & CFO of the Autoridad de Asesoría Financiera y Agencia Fiscal (AAFAF) led the transaction for the Government of Puerto Rico and commented on the addition of a parametric catastrophe bond to its disaster insurance arrangements.

Umpierre commented, “As part of our continued efforts to improve Puerto Rico’s resiliency and provide the necessary tools to respond to natural disasters, we were able to close this $282 million parametric insurance coverage for the island.

“The increase in coverage was achieved by implementing an innovative hybrid financing approach by maximizing Capacity through the mix of a traditional reinsurance policy with a Catastrophe Bond financed by the capital markets.

“We have also opened the door for the first time to tap into the capital markets as an additional alternative to obtain insurance coverage with a catastrophe bond.

“Thanks to Secretary Omar J. Marrero for the opportunity to lead these efforts for the benefit of Puerto Rico.”

Omar J. Marrero, Puerto Rico 31st Secretary of State / Lt. Governor, also stated, “Another milestone achieved! Kudos to the entire Autoridad de Asesoría Financiera y Agencia Fiscal team for ensuring Puerto Rico is financially prepared for natural disasters. Special thanks to our Deputy Executive Director, Luis J. Umpierre, CPA for leading this critical transaction.

“Unlike in the past, the Government of Puerto Rico has now built a rainy day fund of $1.3 billion and working capital reserves exceeding $1 billion.

“Alongside our improved balance sheet, this parametric insurance stands as a pillar of fiscal resiliency and as another tool to address liquidity needs in the event of the next big disaster.”

The Puerto Rico Parametric Re Ltd. (Series 2024-1) catastrophe bond will provide the territory with an $85 million component of its responsive disaster insurance arrangements, structured with a parametric trigger and insuring Puerto Rico’s Government on a per-occurrence basis, covering named storms and earthquakes impacts.

The notes issued under the cat bond will protect Puerto Rico with an almost three-year source of parametric disaster insurance protection, running to the end of May 2027.

The cat bond cover cascades down to the Government, via an insurance agreement with Starr Indemnity & Liability Company, a subsidiary of Starr International, who covers Puerto Rico’s Department of Treasury (Departamento de Hacienda).

Global reinsurance firm Hannover Re sat between Starr Indemnity and the cat bond issuer, Puerto Rico Parametric Re Ltd.

Aon Securities structured the catastrophe bond and acted as its bookrunner to distribute the notes to the investor base.

We’ve been saying in our reporting on this Puerto Rico Parametric Re catastrophe bond (which began in May) that this is a particularly notable transaction, being the first cat bond to directly benefit the government of a territory of the United States.

It’s also effectively a sovereign catastrophe bond that is being issued in the private market, to provide parametric disaster insurance to the government of a country, with no intermediation or facilitation from any multilateral organisation, making it an even rarer example.

This Puerto Rico Parametric Re Ltd. cat bond demonstrates how a government in a catastrophe-exposed region of the world can efficiently secure complementary risk financing from the capital markets, with a payout structure that is contingent on a pre-defined disaster occurring.

Finally, this groundbreaking first catastrophe bond for Puerto Rico also demonstrates a model by which other US territories, States and municipalities (or the country as a whole) can secure financial support for disaster recovery, by tapping private capital markets appetite for natural catastrophe risk.

It’s good to see Government officials of Puerto Rico promoting the use of the cat bond, as a tool that has helped the territory expand its parametric disaster insurance in 2024.

You can read all about this Puerto Rico Parametric Re Ltd. (Series 2024-1) catastrophe bond and details of more than one thousand other cat bond transactions in the Artemis Deal Directory.