Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Storm surge cat bond MetroCat Re increases in size, prices below guidance


The insurance-linked securities markets first ever storm surge catastrophe bond has been extremely well-received by investors with demand helping the deal to increase in size and enabling the sponsor, First Mutual Transportation Assurance Co. (FMTAC) to secure the fully-collateralized reinsurance protection at attractive pricing terms.

The cat bond, MetroCat Re Ltd. (Series 2013-1), which launched in mid-July and will provide FMTAC, the New York State-licensed captive insurer and subsidiary of the New York Metropolitan Transportation Authority (MTA), with a source of storm surge reinsurance protection, was priced this week and we believe will complete before the end of the month.

MetroCat Re will provide the MTA with a source of fully-collateralized, multi-year per-occurrence reinsurance protection for storm surge risks. The deal uses a parametric trigger, with trigger events linked to actual surge heights during named storms as measured by tidal gauges in key locations around New York and Manhattan.

When the deal launched earlier this month it was as a $125m tranche of notes which were being offered with price guidance of 5% to 5.5% above the return of the collateral assets. The transaction has received strong demand from global ILS investors who have helped the MetroCat cat bond grow in size by 60% to now feature $200m of coverage. Investor sources suggest that demand was high enough to grow this transaction even further but the MTA chose to close it at $200m.

At the same time the pricing on the transaction dropped to below the lower end of the guide range the deal launched with. Pricing finished at 4.5%, a drop of 14% from the mid-point of the original guidance or 18% from the upper end of that range. This means that the New York MTA has managed to secure more coverage than initially sought at a significantly cheaper price than it was originally offered at. A definite win for its first trip to the cat bond market as a sponsor.

We understand that there were some investors who declined to participate in the MetroCat Re catastrophe bond. This is possibly because the investors may already hold significant northeast U.S. hurricane exposures and adding storm surge linked to named storms may have left them overexposed to storms hitting New York. There has also been some discussion in the market about the pricing, with one investor we spoke to saying that it felt the pricing was too low for the risk being offered.

However, as we’ve seen throughout 2013, there are plenty of investors in the ILS and cat bond space who are new, in which case unlikely to be overexposed in the region, or who have return requirements that this deal would have suited. It’s definitely a positive step for the market in gaining investors acceptance of storm surge risk on a parametric basis. With this transaction so well received by the majority of the ILS investor market we may well see others try to emulate it and bring storm surge cat bonds to market.

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.

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