Tight cat bond capacity drove simultaneous issuance of Chile cat swaps: World Bank

The fact capacity and capital was tight in the catastrophe bond market at the time of the issuance of the $350 million of IBRD – Chile 2023 cat bond notes drove the World Bank team to look to traditional re/insurers and the issuance of simultaneous catastrophe swaps, resulting in much stronger execution for Chile.

Back in March catastrophe bond market conditions were a far cry from the relatively abundant capacity we see today, that has been triggered by a faster flow of maturities and so recycling of capital, as well as investors inflows to cat bond funds.

The World Bank came to market with a parametric earthquake catastrophe bond for the government of the Republic of Chile in March, but found a simultaneous tapping of capital markets alongside traditional insurance and reinsurance capital the optimal issuance solution.

The cat bond secured $350 million of parametric earthquake and tsunami insurance cover for Chile, but an additional $280 million of cat swaps were also priced, with traditional insurers and reinsurers their holders.

The World Bank said that there was a large size target for this Chile cat bond issuance.

But that, due to market conditions, characterised by “tight cat bond market liquidity in the second half of 2022,” the decision was taken to “explore simultaneous placement in the cat bond and (re)insurance markets.”

The tight liquidity reflected investor losses across the traditional bond and equity markets, that drove significant disruption in capital markets through late 2022 and into early 2023.

These market conditions drove a need for investors to rebalance their portfolios, while at the same time coinciding with high inflation that was driving up demand for risk capital as well.

As a result, sponsors had to compete for “scarce capital,” the World Bank explained, while hurricane Ian had also dented the cat bond market’s capacity base, even though much of that recovered.

“Through marketing the risk simultaneously in cat bond and (re)insurance markets, the World Bank was able to build price tension across the two books and maximize size for Chile,” the World Bank stated.

As a result of this simultaneous approach to issuance, the transaction priced at the low-end of guidance at 4.75%, while in the end providing Chile with 26% more in insurance coverage than its previous 2018 cat bond issuance.

The World Bank noted that the Chile cat bond became the largest single country cat bond transaction in history.

It was also the first cat bond and first World Bank bond listed on the Hong Kong Exchange, and was supported by the Hong Kong Insurance Authority.

Watch our recent video interview with Jorge Familiar, Vice President and Treasurer of the World Bank, who discussed the Chile catastrophe bond issuance with us.

You can read all about the IBRD – Chile 2023 catastrophe bond in the extensive Artemis Deal Directory.