Massachusetts Residual Market Insurer Obtains $96 Million Cat Bond

The Massachusetts Property Insurance Underwriting Association, the state's residual market insurer, has secured a $96 million catastrophe bond that would be triggered by a hurricane, said GC Securities.

It's the first Massachusetts-only, wind-risk cat bond. Massachusetts is the second state-run Fair Access to Insurance Requirements plan to obtain reinsurance protection through a cat bond, said Cory Anger, managing director and global head of insurance-linked securities structuring for GC Securities. GC Securities, a division of MMC Securities Corp., is a subsidiary of Marsh & McLennan Cos., as is Guy Carpenter, the broker of record for MPIUA's traditional reinsurance program.

GC Securities assisted the MPIUA in securing the transforming reinsurer, Munich Re America, which reinsured the MPIUA and then retroceded the coverage to Shore Re Ltd., a Cayman Islands special purpose Class B reinsurer that issued the bonds. Investor demand for the bond was oversubscribed at the originally sized $100 million, Anger said, but the transaction was ultimately sized at $96 million due to the "warm reception we received on the traditional reinsurance side," which was authorized before the catastrophe bond was priced.

The catastrophe bond has an indemnity trigger structure based on the ultimate net loss of the MPIUA in the event of a hurricane.

The use of catastrophe bond capacity is becoming more mainstream, Anger said. "Not only do you see two residual market insurers using it, but there's a growing number of primary insurers using this market as well. It shows the acceptance of this product to provide risk transfer capacity," she said.

Primary writers like that "catastrophe bonds can provide multiyear, fully collateralized capacity that can help to mitigate rate volatility," Anger said.

While many people associate hurricane damage with Southern states, especially those along the Gulf Coast, the entire Eastern seaboard is exposed to potential hurricane damage, Anger said.

The most recent hurricane to cause significant damage in Massachusetts was Hurricane Bob, which struck in 1991. Massachusetts had $772.8 billion in coastal property exposed to hurricane damage in 2007 -- about 54% of the state's total property value, according to the Insurance Information Institute.

In May, a new $305 million catastrophe bond program was completed to benefit the North Carolina Joint Underwriting Association and the North Carolina Insurance Underwriting Association. The cat bond program, Johnston Re Ltd., a Cayman Islands special purpose Class B reinsurer, follows the NC JUA/IUA's first cat bond transaction in 2009, Parkton Re. Together, they provide a combined $505 million in catastrophe bond protection for the wind pool to manage its hurricane risk for the 2010 hurricane season (BestWire, May 13, 2010).

Munich Re America Corporation Group currently has a Best's Financial Strength Rating of A+ (Superior).

(By Meg Green, senior associate editor, BestWeek: [email protected])