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Puerto Rico gov’t set to issue $75M in catastrophe insurance bonds

The commonwealth is reportedly working with several insurance and reinsurance companies to structure the coverage.

As the 2024 hurricane season gets underway, the government of Puerto Rico is preparing to enter the capital markets with a $75 bond transaction to secure funds to address the financial impacts and risks associated with potential natural disasters such as storms and earthquakes.

The first Puerto Rico Parametric Re Ltd. (Series 2024-1) bond is designed to provide disaster risk financing on a parametric trigger basis. This means the government seeks to have insurance policies in place where the insurer agrees to pay a stipulated sum if a covered event reaches or exceeds a designated threshold on an index of values. The designated threshold is called a parametric trigger.

According to the issuing documents, the government is working with Aon Securities for the placement and structuring of the transaction. Aon is the sole agent and bookrunner for the bond issue, scheduled for June.

The National Oceanic and Atmospheric Administration’s (NOAA) National Weather Service has predicted a highly active hurricane season, which runs from June 1 to Nov. 30, with an 85% chance of an above-normal season, a 10% chance of a near-normal season and a 5% chance of a below-normal season. NOAA is forecasting a range of 17 to 25 total named storms (winds of 39 mph or higher).

“The Government of Puerto Rico has already been tapping traditional sources of insurance to help it plug disaster funding gaps, and now looks to the capital markets to augment this,” according to Artemis, a media service dedicated to the catastrophe bond, insurance-linked securities (ILS), nontraditional reinsurance capital, insurance-linked investments and associated alternative risk transfer markets.

The transaction involves the Puerto Rico Treasury Department, which is working with several insurance industry players, namely Starr Indemnity & Liability Co., a subsidiary of Starr International, which is acting as the reinsured party.

In turn, Starr Indemnity & Liability will be reinsured by Hannover Re, “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,” Artemis explained.

“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,” the outlet stated. “Hannover Re then enters simultaneously into a reinsurance agreement with Starr Indemnity, which enters into an insurance agreement with the government of Puerto Rico.”

The $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,” Artemis reported.

The parametric trigger features two boxes: a gold box that spans the entirety of Puerto Rico and a red box focused on San Juan and surrounding higher population and exposure density regions, according to the outlet.

“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,” Artemis noted. “We’re told that hurricane risk makes up the majority of the expected loss for these notes, at more than 82%, and historical modeling shows that a repeat of 2017’s Hurricane María 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,” Artemis stated.

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%.

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This story was written by our staff based on a press release.

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