MetroCat Provides Insurance for the New York Subway
MetroCat is an insurance solution using cat bonds to provide insurance protection for the New York Metro against damages from storm surges.
When Hurricane Sandy hit North east USA on October 28, it caused enormous destruction, with 53 fatalities and estimated damages of 32 billon USD. In New York alone, the damages were estimated at 18 billion. The accompanying storm surge was more than 4 meters above the Mean Low Water.
One of the more spectacular effects was a flooding of the New York Metro, completely shutting down the service for several days and causing USD 5 billion of damages.
One conclusion of the flooding was a need to invest in improved resilience for the subway system, including new pumps, waterproofing of tunnels and replacement of plywood and sandbag barriers with metal and plastic. Also, climate change poses further challenges, calling for extensive investments to mitigate future threats.
The hurricane also had profound impact on the insurances used to cover damages in the subway. The devastating economic effects more or less dried up the opportunities to find comprehensive and affordable insurance coverage in the ordinary insurance market and the New York Metropolitan Transportation Authority (MTA) turned to the capital market by issuing the first cat bond designed to cover subway damages from extreme weather events.
The MetroCat Re Cat Bond 2013-1 provides the MTA (through its subsidiary First Mutual Transportation Assurance Co) with protection against storm surges. The bond has a parametric trigger based on storm surges from named storms. If these surges exceed 2.6 meters (8.5 feet) in zone A (The Battery, Sandy Hook and Rockaway Inlet) or 4.7 meters (15.5 feet) in zone B (East Creak and Kings Point). If the bond triggers, the entire principal amount of the bond will be released, meaning that there is no scale with increasing payments. The parametric construction ensures that capital can be released fairly quickly after a storm and thus be available for reconstruction.
The MetroCat Cat Bond proved attractive to investors. Initially, the bond was intended to raise USD 125 million with an indicative price range of a 5 to 5.5% coupon. However, the bond was upsized to USD 200 million and during the transaction, the coupon dropped to 4.5%.
The MetroCat bond demonstrates not only that cat bonds are attractive to entities seeking affordable insurance coverage, but also that these bonds are interesting to investors as they provide additional diversification opportunities. It also shows that parametric triggers can be an important feature when potential actual indemnities can be hard to assess and speedy payment if a catastrophe takes place is of importance.
Entropics has, at the time of the publishing of this blog post, MetroCat in its portfolio.