Puerto Rico government seeking Parametric Re cat bond protection

The government of Puerto Rico is seeking $75 million in parametric insurance protection against the financial impacts of named storms and earthquakes from the capital markets, through a new Puerto Rico Parametric Re Ltd. (Series 2024-1) catastrophe bond transaction, Artemis has learned.

This first Puerto Rico Parametric Re catastrophe bond is particularly notable as the first cat bond to directly benefit the government of a territory of the United States.

It’s also worth highlighting that this is a very rare sovereign catastrophe bond that is being issued in the private market, to provide disaster insurance to the government of a country, with no intermediation or facilitation from any multilateral organisation, such as the World Bank.

As such, we believe this to be a very encouraging development, as this Puerto Rico Parametric Re Ltd. cat bond is a good example of how a government in a catastrophe-exposed region of the world can secure financing from the capital markets, with a payout that is contingent on a disaster occurring.

It’s also encouraging as it shows a model by which other US territories and States could secure financial support for disaster recovery, by tapping private capital markets.

That can benefit a government by, funding recovery from a disaster, as well as in providing budgetary liquidity at a time of potential stress, ultimately helping the recovery from a major catastrophe to be quicker and emergency funding to be deployed more rapidly.

Hence the use of a parametric trigger, for this first cat bond for the government of Puerto Rico, is no surprise, as it helps to deliver on the speed of settlement of any claims after a qualifying major natural catastrophe event, providing faster liquidity than a traditional insurance product might.

Puerto Rico, an island in the Caribbean that is an unincorporated territorial possession of the United States, faces hurricane risks each year and has been severely impacted by storms such as 2017’s Maria. The country also faces earthquake risks, so it makes sense for the government to be seeking parametric protection for both of these perils with its first cat bond deal.

The government of Puerto Rico has already been tapping traditional sources of insurance to help it plug disaster funding gaps, we understand, but now looks to the capital markets to augment this with a diversified source of insurance and a parametric trigger instrument to aid in faster payouts.

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%.

As we said, it’s very encouraging to see a catastrophe bond like this that will benefit a government and is being issued in the private market.

It’s a clear demonstration of the government of Puerto Rico’s desire to narrow the protection gap that becomes evident when a major catastrophe strikes the island, as was seen with hurricane Maria.

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