The New York Metropolitan Transportation Authority (MTA) has returned to the catastrophe bond market for the third time, seeking to sponsor an at least $100 million renewal of its soon to mature parametric cat bond coverage with a new MetroCat Re Ltd. (Series 2020-1) transaction.
The transport operator had 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.
This new MetroCat Re 2020 cat bond is set to be a renewal of that coverage, we understand from sources.
The New York MTA first visited the catastrophe bond market back in 2013, when it secured a $200 million MetroCat Re Ltd. (Series 2013-1) transaction that was solely focused on named storm related storm surge insurance coverage.
So it is encouraging to see the New York MTA return for another renewal of this important catastrophe reinsurance 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, it seems.
The MTA had said in the past that at the right price it would look to secure as much catastrophe coverage as it could from the capital markets. So it will be interesting to see whether cat bond investor appetite is strong enough to support its reinsurance coverage needs and whether this deal upsizes.