Baillie Gifford Faces $150m Disaster Relief Payout After Hurricane Melissa

Strategic Insights -

Investors through Baillie Gifford's two funds are set to contribute up to $150m to disaster relief efforts in Jamaica following the category 5 storm, Hurricane Melissa, which triggered parametric triggers in a "catastrophe bond" the company had invested in. The bond, issued by the World Bank on behalf of the Jamaican government, was designed to cover named storm events over four hurricane seasons, from 2024 to 2027. Other investors in the bond include Stone Ridge and Schroders.

Key Takeaways:

  • Baillie Gifford is exposed to a "catastrophe bond" that will require the company to pay out up to $12m due to Hurricane Melissa.
  • The company is part of a group of investors that will pay a total of $150m in disaster relief funds to Jamaica.
  • The World Bank issued the "cat bond" on behalf of the Jamaican government, with coverage for named storm events over four hurricane seasons: 2024 to 2027.
  • Investors in the bond include Stone Ridge with holdings of over $28m and Schroders with holdings of over $9m.
  • Baillie Gifford's investment in the cat bond is unusual for a generalist multi-asset portfolio, as investors typically expect to find such instruments in specialized catastrophe bond funds.
  • Investors take on the risk that an event won't happen, but hold different cat bonds to diversify the risk.
  • The market for "cat bonds" allows governments and insurance companies to transfer climate risk to capital markets.
  • The insurance industry is facing losses of over $100bn a year due to climate change.
  • Investors use long-term historical data to rationalize cat-bond purchases, but there are questions about whether these securities can remain valid as disaster frequency may rise exponentially with climate change.

Statistics:

  • Up to $150m expected to be paid out by investors in the "catastrophe bond" to Jamaica.
  • $28m in holdings by Stone Ridge.
  • $9m in holdings by Schroders.
  • Over $100bn in annual losses faced by the insurance industry due to climate change.
  • Four hurricane seasons (2024-2027) for which the "cat bond" provides coverage.

Sources:

  • "Data seen by The Observer", provided by Baillie Gifford without further details.
  • Morningstar data regarding investors in the "catastrophe bond".