The catastrophe bond market in 2013 has seen a number of firsts, as new-found flexibility, reduced pricing and near-record levels of issuance make this year one of the most eventful on record for the cat bond market. Now another new sponsor is coming to market with a new peril, in the form of the first storm surge catastrophe bond, MetroCat Re Ltd. (Series 2013-1).
MetroCat Re Ltd., a Bermuda domiciled special purpose insurer established for issuing series of catastrophe bond notes, has been set up to support the risk transfer needs of First Mutual Transportation Assurance Co. (FMTAC), the New York State-licensed captive insurer and subsidiary of the New York Metropolitan Transportation Authority (MTA).
For the first time in the history of the cat bond market, this transaction provides cover just for storm surge, resulting from named storms. Hurricane and tropical storm induced storm surge is included in many U.S. wind cat bonds, so it is not particularly diversifying, but it has never been structured into a cat bond as the sole peril in this way and is an interesting addition to the market that could spur more issuance of storm surge cat bonds. It’s another sign of the increasing maturity and flexibility in the cat bond market, as well as the increasing appetite investors are showing for catastrophe risk.
The sponsor, the captive insurer of the New York Mass Transit Authority (MTA), has significant exposure to storm surge, as evidenced by the losses it faced from last year’s hurricane Sandy. The MTA suffered a loss in the region of $5 billion from the storm, predominantly from surge due to flooded transit tunnels and subways, so it is encouraging to see it turn to the catastrophe bond market for a new source of reinsurance protection.
In this cat bond, MetroCat Re Ltd. will issue a single tranche of Series 2013-1 notes, which will be sold to collateralized a reinsurance agreement between itself and First Mutual Transportation Assurance Co. (FMTAC). FMTAC will receive from the cat bond a three-year source of per-occurrence reinsurance protection against storm surge measured during named storm events on a parametric trigger basis.
The single tranche of notes has a preliminary size of $125m we understand, although we’re told that the MTA could upsize this if pricing proves more attractive than other sources of reinsurance it utilises. The MTA’s motivation for issuing this cat bond is to expand and diversify its sources of reinsurance protection and also to obtain some coverage on a parametric basis which should payout more quickly than indemnity coverage.
The transaction features a parametric trigger based on actual recorded storm surge heights from a number of zones around New York city. A loss payment would be due based upon a parametric event index meeting or exceeding a trigger level for an applicable area, meaning that it may not necessarily directly correlate with the losses of the sponsor.
The notes offer protection against named storms that generate a storm surge event index that equals or exceeds 8.5 feet for Area A or 15.5 feet for Area B. Area A includes tidal gauges located in The Battery, Sandy Hook and Rockaway Inlet, while Area B includes tidal gauges in East Creak and Kings Point. A trigger event occurs when either Area’s event index calculated by RMS equals or exceeds the respective trigger levels. If a trigger event occurs, the loss payment from MetroCat to FMTAC will be 100% of the outstanding principal amount, so there is no sliding scale of loss here.
In a pre-sale report, rating agency Standard & Poor’s said that risk modeller RMS’ data shows that The Battery and Kings Point are the two tidal gauges that are most correlated with the MTA’s exposure, so these locations have the highest weighting. Under hurricane Sandy these were the two areas that received the most flooding that entered subway and transit tunnels. Therefore, the MetroCat Re cat bonds parametric trigger structure has focused on catching storm surge levels at tidal gauges in these areas.
The cat bond only covers storm surge from named storms, which must be tropical cyclones, tropical storm or hurricanes at some point in their lifespan. Extra-tropical cyclones are excluded, which means large storms forming in the northern Atlantic, such as the Great Nor’Easter of 1992, would not be covered.
RMS, whose risk models are used for this cat bond, said that no non-hurricanes have ever caused storm surge levels that would have breached the parametric trigger. Based on their historical modelling analysis, there have been two hurricanes which would have breached the trigger level. Hurricane Donna (1960) generated a modelled storm surge height of 9.52 feet in Area A and Superstorm Sandy (2012) generated a modelled storm surge height of 10.93 feet in Area A. Both of these storms would have exceeded the MetroCat Re Area A trigger level.
Storm surge data is collected from the National Oceanic and Atmospheric Administration (NOAA) for the tidal gauges at the Battery, Sandy Hook and Kings Point locations, and from the United States Geological Survey (USGS) for the Rockaway Inlet and East Creek tidal gauges.
As well as using the tidal gauges that are already in place in these locations, either FMTAC or RMS will enter into an agreement with the USGS that they will deploy mobile storm surge gauges at each of the five locations as backup monitors. This is a good idea in the cat bond market and we could perhaps see other mobile data collection instruments used for other perils where there is any concern about data recording during an event.
In the event of failure of the primary and back-up storm surge data recording, the data can be taken from high-water marks on permanent structures in the area. The permanent structure must be located on dry land and within 500 metres of the recording location.
There is no annual reset for the transaction, neither will there be any changes to the recording zones weighting or any other factors. Area A contributes 45% of expected losses, while Area B contributes 22.6%. Areas A and B combined contribute 32.4% to expected losses. Hurricanes making landfall directly in New York state pose the greatest threat to the deal, according to the modelling. The modelled probability of attachment, expected loss and exhaustion are all 1.67% for the notes.
S&P noted in the pre-sale report that this is the first storm surge cat bond it has rated and the first time it has rated a cat bond solely using RMS’ storm surge model. It also noted that data quality from historic events may not be as high quality as that from recent events such as Sandy, however there have been a number of events in the last few decades which have provided historical data. S&P also notes that two of the last three U.S. landfalling hurricanes did so in the U.S. northeast where the MetroCat Re cat bond is exposed.
The MetroCat Re catastrophe bond is being brought to market by GC Securities (lead manager, joint structuring agent, and sole bookrunner) and Goldman Sachs (co-senior manager and joint structuring agent).
Standard & Poor’s gave the single tranche of Series 2013-1 notes which are being issued by MetroCat Re Ltd. a preliminary rating of ‘BB-(sf)’. Credit exposure to the unrated FMTAC is mitigated because it will prepay the initial quarterly interest spread at closing of the cat bond and will prepay each subsequent quarterly interest spread 50 days before each payment date.
The MetroCat Re 2013-1 catastrophe bond notes are being marketed with a price guide range of 5% to 5.5%.
So this is a very interesting addition to the catastrophe bond market, offering investors a chance to take on exposure to storm surge alone. We actually suggested such a transaction might suit the New York MTA in an article in the wake of Sandy, so it is encouraging to see the market innovating and supporting the MTA’s risk transfer needs. We covered the launch of RMS’ new storm surge model in 2011 and suggested it might spur storm surge cat bond issuance.
Storm surge is a huge exposure around the coast of the U.S., with the total value of residential property at risk of hurricane storm surge damage now estimated at $1.1 trillion. This makes the success of this cat bond very interesting, as there are storm surge tidal gauges around much of the U.S. coastline exposed to surge and this structure of cat bond could be useful to many other insurers with significant exposures along coastlines.
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