MetroCat highlights capital markets support for bespoke ILS solutions: GC Securities

The successful issuance of the first storm surge catastrophe bond in the insurance-linked securities markets history, MetroCat Re Ltd. (Series 2013-1), highlights the ability of capital market investors to strongly support bespoke ILS solutions, according to bookrunner, joint structuring agent and lead manager on the deal, GC Securities.

Catastrophe bond investors have demonstrated a good degree of flexibility and an ability to get to grips with new, and sometimes complex, structural features in cat bond deals in 2013. The success of MetroCat Re, with its parametric trigger protecting against storm surge height in the New York metropolitan region, is the latest demonstration that cat bond investors are happy to accept new and unique structures as long as they are well designed, offer transparency and match their risk appetites.

GC Securities, the capital markets and ILS focused arm of reinsurance broker Guy Carpenter, acted as sole bookrunner, joint structuring agent and lead manager on the MetroCat Re cat bond deal. GC Securities worked closely with Marsh, the insurance broker to the transactions beneficiary, First Mutual Transportation Assurance Company (FMTAC), a New York State licensed and domiciled captive insurance company and subsidiary of the Metropolitan Transportation Authority (MTA).

The transaction saw strong support from a broad panel of ILS and cat bond investors, with more than 20 different ILS investors participating in the placement of MetroCat Re. MetroCat demonstrates the ILS investor markets willingness to support unusual, new and innovative transactions.

Cory Anger, Global Head of ILS Structuring at GC Securities, said; “This transaction highlights again the acceptability and flexibility of capital markets-based risk transfer capacity to accept and strongly support bespoke ILS solutions, specifically in this case a new peril and first of its kind trigger structure, to meet the specific needs of FMTAC. The novel and thoughtful use of various water level sources in a parametric trigger structure to align with FMTAC’s storm surge risk exposure in the New York City metropolitan area coupled with the broad-based and robust support of over 20 investors demonstrates the depth and sophistication of capital markets capacity as it expands its footprint in the insurance, reinsurance and retrocession marketplaces.”

Chi Hum, Global Head of ILS Distribution, GC Securities, added; “We approached the market with a new trigger structure for a new sponsor and the investors rose to the challenge and gave us an oversubscribed book facilitating a deal upsize from the original target of 125mm and pricing through the initial price guidance. The MTA should consider this an invitation from the capital markets to make regular use of this diversifying and deep source of reinsurance capacity. The transparent trigger structure and potential capacity needs makes the MTA an ideal “core holding” for many investors. GC Securities is proud to have brought to market this path breaking transaction that will benefit the MTA and all the citizens in the Greater New York area.”

It will be very interesting to see whether the MTA looks to the capital markets for an increased level of cover with a second MetroCat Re deal in the next year. It would make a lot of sense for it to grow its reinsurance protection with cat bonds at a time when the cover can be arranged more cheaply that its traditional alternatives.

David Priebe, Vice Chairman of Guy Carpenter and Head of GC Securities, added; “The remarkable convergence of capital markets capacity with the reinsurance market that has been witnessed in 2013 to-date is also applicable to the insurance markets as is evidenced by the successful MetroCat Re cat bond issuance benefiting FMTAC. Capital markets investors embraced this new peril and sponsor. Marsh and McLennan Companies is committed to leveraging the GC Securities platform for the benefit of all its operating companies’ clients.”

Jerry Harley, Managing Director of Marsh, stated; “Following the damage caused by Superstorm Sandy, we worked with the MTA to find an innovative approach to manage its catastrophe risk going forward. By working with our sister company, Guy Carpenter, we were able to provide a capital market-based solution that gives the MTA the flexibility to spread risk over a long-term solution and introduce new sources of reinsurance capacity to replace post-storm market capacity reductions.”

Thomas F. Prendergast, MTA Chairman and CEO, commented on the MTA’s appreciation of its first catastrophe bond cover; “In the aftermath of Superstorm Sandy, the traditional avenues we use for insurance and reinsurance contracted dramatically, making it exceedingly difficult for the MTA to obtain insurance. We appreciate the contributions of all of our business partners. This strengthens our position with regard to future interactions with the traditional reinsurance market. We anticipate that this deal represents the start of a long-term alternative reinsurance option that diversifies MTA’s risk management strategy.”

Given the success of MetroCat Re and the ILS markets clear willingness to accept storm surge risk, it begs the question, where next? There are other regions of the U.S. coastline where storm surge is a real threat and cat bond coverage may be a suitable source of re/insurance. It will be interesting to see if anyone attempts to emulate MetroCat.

You can read all about the first storm surge cat bond, MetroCat Re Ltd. (Series 2013-1), in our catastrophe bond and ILS Deal Directory.