By Jasper Cox
The World Bank issued the first catastrophe bond to be sponsored by an Asian government – and the first to be listed on the Singapore Exchange – in November in a landmark transaction for the region.
The deal insures the Philippines against losses of up to $225 million. The bond came with two tranches: $75 million of earthquake protection and $150 million of protection from tropical cyclones.
If an earthquake or a cyclone is projected to cause a certain amount of loss, the bond will trigger, meaning investors will lose their principal and the Philippines government will receive budget support.
The bond has a three-year maturity, meaning the coverage lasts this long unless it is exhausted before then.
The deal is important for the Philippines, which the World Bank says is “among the most disaster-prone countries in the world”.
In 2013, super typhoon Yolanda caused 6,300 deaths and an estimated $12.9 billion of damage, equivalent to about 4.7% of the country’s GDP.
But the deal wasn’t just a boon for the Philippines, it also puts Singapore in play.
The cat bond, listed in the city sate, comes as Singapore aims to become a hub for insurance-linked securities (ILS), challenging venues such as Bermuda and London. It has offered to fund the up-front costs of transactions. This latest deal benefited from such a grant, although Singapore did not pay the full cost.
The maximum amount paid by the country would be S$2 million ($1.46 million), while a transaction like the World Bank’s could typically cost about $2 million, encompassing legal fees, modelling fees and underwriting commission.
As a form of Asian risk, the bond acts as a diversifier for ILS investors away from the US-centric market.
“We have brought reinsurance transactions in the past but never Philippines risk in a cat bond form, so for cat bond investors it was a new risk,” says Michael Bennett, head of derivatives and structured finance, capital markets, treasury at the World Bank.
There is growing interest in the product in Asia. Indonesia has been looking at cat bonds, while Hong Kong is relaxing issuance rules for Chinese insurers.
“Many countries in Asia are highly vulnerable to natural disasters, which makes finding innovative, capital markets solutions a major priority to address the impact on their economies,” says Jingdong Hua, World Bank vice-president and treasurer.
Loh Boon Chye,
Loh Boon Chye, chief executive of the Singapore Exchange, adds: “We hope the listing of this first cat bond on an Asian exchange will pave the way for the development of such insurance-linked securities in Asia, which will provide investors globally with another avenue for portfolio diversification.”
ILS is increasingly being presented as a sustainable investment, and there were questions about environmental, social and governance criteria on the roadshow.
“We had one investor send us a set of ESG questions – I presume due diligence to support their own internal classification of this as an ESG instrument,” says Bennett. “I had never seen that before with a cat bond.”
GC Securities and Swiss Re were joint structuring agents, joint bookrunners and joint managers. Munich Re was joint structuring agent, placement agent and joint manager.
The performance of cat bonds issued so far by the World Bank has varied.
Peru and Mexico have received pay-outs from such bonds. But a cat bond the multilateral development bank issued for pandemic diseases has come under criticism for not triggering in the face of a large Ebola epidemic in the Democratic Republic of Congo.
How cat bonds are structured varies. Some use pure parametric triggers, where the amount paid out corresponds to certain attributes of a catastrophe, independent of the actual amount of damage – for example, the wind speed of a storm or the magnitude of an earthquake.
This has the benefit of leading to quicker pay-outs, because it is simple to determine when a bond has triggered. But the amount that is paid out may not match the eventual amount of damage caused.
Other bonds use indemnity triggers, where the pay-out corresponds to actual claimable losses. But this is slower and can involve money remaining tied up after the maturity date of the bond if a final determination over losses has not been given.
The cat bond for the Philippines uses a trigger based on modelled loss: the risk-modelling firm on the deal, AIR Worldwide, uses certain physical details of an earthquake or cyclone to come up with projected losses.
This should provide a pay-out amount that is closer to the actual amount of damage caused, while also being quicker to pay out than an indemnity structure.
First published on GlobalCapital.com