Puerto Rico Parametric Re cat bond grows to $85m, price set to mid-point

The government of Puerto Rico’s first attempt to source parametric insurance from the capital markets through a catastrophe bond appears to have been well-received by the market, as the Puerto Rico Parametric Re Ltd. (Series 2024-1) catastrophe bond has grown to $85 million in size and looks set to price at the mid-point of guidance, Artemis has learned.

We were first to report back in May on this Puerto Rico Parametric Re catastrophe bond, explaining that it 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 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 occurrence.

So, this Puerto Rico Parametric Re Ltd. cat bond demonstrates 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 pre-defined disaster occurring.

It’s also demonstrates a model by which other US territories or States could secure financial support for disaster recovery, by tapping private capital markets for risk transfer.

For this issuance, the special purpose vehicle, Puerto Rico Parametric Re, will sell cat bond notes to colllateralize a retrocessional reinsurance agreement with Hannover Re, with that reinsurer then entering into a reinsurance agreement with Starr Indemnity & Liability Company, a subsidiary of Starr International, who in turn provides that as insurance to Puerto Rico’s Department of Treasury (Departamento de Hacienda).

At launch to investors, Puerto Rico Parametric Re Ltd. was aiming to issue a single $75 million tranche of Series 2024-1 Class A notes to provide the Puerto Rican government with an almost three-year source of parametric disaster insurance protection, running to the end of May 2027.

We’re now told that the cat bond issuance size has increased, with the offering expected to be $85 million in size, so benefiting Puerto Rico with slightly more disaster protection than the initial target.

That disaster insurance protection will be on a parametric trigger and per-occurrence basis, covering named storms and earthquakes for Puerto Rico.

The now $85 million of Class A notes come with an initial base expected loss of 1.65% and were first offered to cat bond investors with price guidance in a range from 8.5% to 9.5%.

Sources have told us that the pricing has now been fixed, at the mid-point of that guidance, to pay cat bond investors a spread of 9%.

Which is a healthy multiple-at-market still and this will have helped to build investor support. We expect demand could have been higher, but Puerto Rico likely only requires a certain amount of parametric insurance cover and that may have constrained the size somewhat.

Cat bond investors tend to like these parametric deals, finding them easier to model and diversify within their portfolios. Plus, given this risk is solely concentrated on a single island, even being Caribbean wind risk in the main, it’s not surprising investors have shown support for Puerto Rico’s first cat bond deal.

It will be interesting to see if Puerto Rico’s government makes the Parametric Re catastrophe bond a core component of its disaster insurance arrangements and becomes a repeat issuer, to benefit from the staggered maturities of multi-year cat bonds, which again would be a great demonstration of the utility of cat bonds for sovereign, government and municipal risk transfer.

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.