After Hurricane Melissa slammed into Jamaica as a strong Category 5 storm, carving a path of destruction, investors are expected to make a full payout on Jamaica's $150 million catastrophe (cat) bond.
Such a hefty payout is unlikely to deter investors from participating in its future cat bonds, however, or deter future offerings from other Caribbean nations that have yet to approach the market.
The IBRD CAR Jamaica 2024 bond offering, issued in May 2024, accounts for approximately 25 basis points of the total cat bond market, representing a relatively small loss overall.
The support network
"Besides the loss of 25 basis points, which many investors view as immaterial, there won't be an observable impact to the market or our portfolios," said the manager of a major fund investing in insurance-linked securities (ILS). "The spread level in our fund is at such a level that we'll still turn out a positive return in October."
I don't see Jamaica having any difficulties issuing another cat bond
Fifteen global investors backed the bond, with two thirds of it purchased by ILS funds and another third by asset managers, according to Artemis, which tracks and analyzes the ILS market. Despite the full payout on the cat bond, Jamaica's second following a $185 million inaugural deal in 2021, investors are likely to support future ILS the country may pursue.
"I don't see Jamaica having any difficulties issuing another cat bond," said Chris Lefferdink, managing director at Aon Securities, which structured and placed the bond along with Swiss Re Capital markets. "Jamaica has been very proactive about risk financing for disasters, including this bond, and all the other things they do as part of their National Natural Disaster Risk Financing (NNDRF) policy."
In fact, Jamaica is the first and so far only Caribbean nation to issue a cat bond. Some skepticism emerged about the benefits of cat bonds after Hurricane Beryl swept by Jamaica's southern coast in July 2024. It caused significant damage, but because the main thrust of the storm bypassed the island no payout was triggered. Lefferdink noted, however, that had the bond trigger's parameters been lower, resulting in more frequent payouts, then investors would have demanded a higher spread.
"When designing a parametric, sponsors always have to balance coverage and the bond's cost," Lefferdink said. "The fact that Jamaica was able to budget it in the first place was fantastic, since it's easier for governments to put the cost of a catastrophic event on future administrations."
The fact that Jamaica's NNDRF model has worked as anticipated may encourage other Caribbean sovereigns to consider similar transactions, especially given the dynamic worldwide political environment.
"It may be more important for sovereign nations to think about their own resilience, if it's harder to rely on large neighbors to bail them out," Lefferdink said.
Investors at ease
The model's performance should also placate investors, since Melissa fits well within its bounds.
"Melissas was well-understood by the model, so I don't expect any investor concerns," Lefferdink said. "Investors know they're going to pay a loss at some point; they just want to have an accurate view of that risk and then get paid appropriately."
He added that concerns arise when an event isn't considered by the model, such as 2017's Hurricane Harvey, which didn't trigger a cat bond, but caused enormous and unexpected flooding in the Houston area.
A major benefit to parametric triggers, compared to indemnity versions, is that cedants are paid relatively quickly, likely by December 1 in the case of Jamaica's government, which will be able to use the proceeds as it chooses to aid the island's recovery.
Playing an advisory role to issue Jamaica's cat bond was the World Bank, which offers a comprehensive platform to help sovereign entities issue bonds, including documentation and potential donor funds. The bond's collateral is placed in the International Bank for Reconstruction and Development's sustainable development fund.
