Fitch Ratings Weighs in on Jamaica's Catastrophe Bond

Fitch Ratings has released an analysis of the recent catastrophe (cat) bond issued by the World Bank for the benefit of Jamaica. The bond, totaling $150 million, aims to bolster Jamaica's risk-mitigation strategy by providing a fiscal buffer in the event of named storm occurrences.

Fitch Ratings noted that while the bond is not an obligation of Jamaica, its issuance under the World Bank's Capital at Risk Notes program allows Jamaica to transfer some hurricane risk to the bond markets without increasing its debt levels. This approach aligns with Jamaica's ongoing efforts to reduce its debt-to-GDP ratio, which is forecast to decline to 66 percent by fiscal years 2025 and 2026 from a high of 135 percent in fiscal years 2012 and 2013.

However, the transaction entails costs for Jamaica, with an annual risk margin payment of $10.5 million, equivalent to a 1.0 percent increase in interest costs or a 0.2 percent increase in total expenditures. The higher cost reflects both increased interest rates and the market's assessment of heightened hurricane risk. The initial risk margin of the first cat bond was covered by contributions from the United States, United Kingdom, and Germany, but they are not sharing the expenses of the new issuance.

In the event of a hurricane, a parametric model would determine the size of a potential payout from the bond's outstanding principal, with funds flowing directly to the Jamaican government for immediate utilization in relief and recovery efforts.

While the cat bond serves as a liquidity management tool, it may not provide sufficient funds to cover the costs of large-scale hurricanes, necessitating additional debt issuance to address storm damage and potential economic and fiscal impacts.

Jamaica's broader strategy for managing financial exposure to hurricane risk includes membership in the Caribbean Catastrophe Risk Insurance Facility and access to additional financial resources to mitigate exposure, thereby supporting its sovereign credit profile.