Here’s an interesting bit of news regarding MTA finances and a new bond issue: In what amounts to an essential hedge against future storm surges, the MTA has issued a $125 million “catastrophe” bond through its reinsurance broker that could cover some costs from a rainstorm or hurricane. Both Reuters and The Wall Street Journal have reported on the bond issue, and S&P assigned the bonds a BB- rating.
The bonds are unique in that they are a form of parametric insurance tied only to storm surge levels, and it is, according to S&P, a first-in-the-nation issuance. Essentially, the MTA would recoup the outstanding principal from the bonds in the event a named storm generates a storm surge of at least 8.5 feet in the Battery, Sandy Hook and the Rockaway Inlet or a 15.5-foot surge in the tidal gauge in the East Creek and at Kings Point.
The Journal notes that these bonds are “structured securities that allow insurers to transfer their own risks to capital-markets investors, instead of buying protection from more traditional insurance providers,” and Reuters notes that these are high-interest bonds that could carry significant risk for investors. The issuance details are available via Artemis, and the insurance news site offers up more analysis:
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.
According to risk models, only Hurricane Donna in 1960 and Superstorm Sandy in 2012 would have triggered the principal payments and reinsurance provisions from these bonds. Market observers are intrigued by this new form of reinsurance, and analysts expect the MTA to ramp up use of such bonds if market response is positive and market conditions are favorable. In a sense, the MTA, which has not yet commented on these bonds, seems to feel that New York’s vulnerability to such surges from named storms will only continue to increase as the next three years elapse, and recovery money may be easier to access via these catastrophe bonds.