MetroCat Re Ltd. (Series 2020-1)

This is the third parametric catastrophe bond to be sponsored by First Mutual Transportation Assurance Co. (FMTAC), the New York State-licensed captive insurer and subsidiary of the New York Metropolitan Transportation Authority (MTA).

The transport operator had previously secured $125m of parametric New York storm surge (named storm induced) and earthquake insurance coverage from the capital markets through its MetroCat Re Ltd. (Series 2017-1) cat bond, which matures in May 2020. That followed a $200 million MetroCat Re Ltd. (Series 2013-1) transaction.

So it is encouraging to see the New York MTA return for another renewal of this important catastrophe insurance protection from the capital markets.

For its third MetroCat Re transaction, the issuing vehicle will seek to issue a currently $100 million single tranche of Series 2020-1 Class A notes, which will be sold to investors and the proceeds used to fully collateralise underlying reinsurance agreements between the issuing vehicle and the New York MTA’s captive insurer First Mutual Transportation Assurance Co., which will in turn provide the insurance protection to the MTA.

The Series 2020-1 notes issued by MetroCat Re Ltd. will be exposed to storm surges caused by named storms striking the New York areas and also earthquake risks within the New York metropolitan area, across a three-year term.

The reinsurance agreements and ultimately the natural disaster insurance coverage provided to the New York MTA will be on a parametric trigger and per-occurrence basis, with the trigger being binary in terms of the nature of its payout.

In other words, for both of the covered perils of storm surge from named storms, or earthquakes, the parametric triggers must be breached for a 100% payout of principle to occur, with no sliding scale in terms of payouts available.

That makes for a simpler parametric trigger arrangement, which will help in getting catastrophe bond investors comfortable with the deal.

For named storm surges, the parametric trigger would require a storm surge to form from a named storm event (so a tropical storm or hurricane) and for the resulting surge to be recorded as 7.75 feet or above at either the Battery, Sandy Hook or Rockaway Inlet, or 12.75 feet or above at Kings Point and East Creek.

These locations are used as they are areas where a major storm surge can definitely swamp the MTA’s transit system, or where a significant storm surge would be pushed more broadly into New York’s metropolitan area.

For earthquake risk, there are a number of locations that can record a quake in the NYC metro area and the trigger would require a parametric index level of 1,000 or higher to be reached in order for a payout to come due.

The currently $100 million of Series 2020-1 Class A notes that MetroCat Re Ltd. is seeking to issue will have an initial annual modelled attachment probability and expected loss of 0.888%, we understand.

The notes are being offered to cat bond funds and investors with coupon price guidance in a range from 4.5% to 5%, we’re told.

Named storm risk makes up the majority of the expected loss with this transaction.

Update 1:

The price guidance for the notes was lifted to a range of 5% to 5.5% after investors fed back on the transaction and noted the change from an RMS model for the 2017 cat bond to an AIR model for this 2020 MetroCat was not felt to warrant the level of coupon being offered.

The response was to lift the coupon range by half a percent, which should ensure that the deal gets the traction it requires.

Update 2:

The MetroCat Re 2020-1 catastrophe bond issuance remained at $100 million in size, so will only partially replace the soon to mature 2017 deal that was $125 million in size.

The $100 million of Series 2020-1 catastrophe bond notes being issued by MetroCat Re have now been priced at the top-end of that guidance, to offer investors a coupon of 5.5%.

It’s a roughly 16% increase in pricing from the mid-point of the initial guidance range to the new coupon of 5.5%, now offering investors a multiple at market of almost 6.2 times the expected loss.

It seems a hefty multiple, but model differences do matter here (especially with parametric trigger structures) and investors we spoke with claimed this is warranted and not purely a reflection of the higher pricing seen in the cat bond market of late, although clearly this is also a factor here and the cat bond market has firmed in 2020.