Jamaica Catastrophe Bondholders Now Face Full-Trigger Event

Investors in Jamaica’s catastrophe bond now face a full trigger event that would force payment of the entire $150 million bond to help the island deal with fallout from Hurricane Melissa.

That’s according to Florian Steiger, chief executive of , a Swiss investment firm specializing in alternative fixed-income strategies.

“We expect the cat bond to pay out in full or at least close to it,” he told Bloomberg on Tuesday.

Jamaica’s cat bond, which was arranged by the World Bank, is designed as the ultimate backstop to help provide funds to pay for only the most extreme weather events. The last time a weather-related cat bond paid out in full was in connection with Hurricane Ian in 2022, when several bonds suffered a 100% loss in principal, , a data provider specialized in insurance-linked securities.

Jamaica narrowly missed getting any coverage from its cat bond last year when Hurricane Beryl hit, after it was judged that the air pressure required for a payout wasn’t reached. That’s despite the fact that Jamaica’s prime minister had declared the island a disaster area.

Hurricane Melissa became the first recorded Category 5 storm to strike Jamaica, coming ashore on Tuesday as one of the most powerful landfalls ever observed in the Atlantic. The storm had estimated maximum sustained winds of 185 miles (298 kilometers) per hour, according to a 1 p.m. New York time advisory from the US National Hurricane Center. The high winds and flooding rains put at risk the country’s residents and at least 25,000 tourists still on the island.

Losses from Hurricane Melissa may fall short of early estimates that went as high as $16 billion, said Chuck Watson, a disaster modeler with Enki Research. He now estimates losses will reach $6.5 billion, comparable to the impact of Hurricane Gilbert in 1988.

A spokesperson for the World Bank said it is closely monitoring Melissa’s location and severity. Jamaica’s catastrophe bond includes parametric triggers based on storm characteristics such as its central pressure and path, and the World Bank will provide updates as they become available, the spokesperson said.

Jamaica, which the World Bank estimates is the third most-exposed country to natural catastrophes, has built up several layers of disaster-risk financing, including pre-arranged credits and parametric insurance. Its cat bond sits at the top of the insurance tower as protection against extreme events.

Melissa ranks among “the most intense Atlantic hurricanes ever observed,” Icosa said in a LinkedIn post on Tuesday. “The human toll and physical damage will be severe, with recovery efforts requiring significant international support over the coming months and years.”

A full payout of the Jamaica cat bond will “hopefully bring some fast relief funds to the most affected communities,” Steiger at Icosa said.

Cat bonds allow issuers 鈥� often insurers but sometimes also whole countries 鈥� to pass part of their risk to capital markets. Sales of the instruments have soared amid increasing risk from property exposure, inflation and climate change. Investors can face potentially large losses if a bond is triggered and can generate significant returns if a predefined catastrophe doesn’t occur.

Even a full $150 million payout of Jamaica’s cat bond isn’t likely to have a big impact on investor portfolios because it makes up a tiny portion of the $55 billion market for the securities.

Cat bonds have delivered record returns since 2023 and investors have dodged major losses so far this year, despite forecasts of an above-normal US hurricane season. Returns for the year currently stand at 10% according to the Swiss Re Cat Bond Total Return Index.

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