The U.S. based National Railroad Passenger Corporation, better known as Amtrak, said that the just completed $275m PennUnion Re Ltd. (Series 2015-1) parametric catastrophe bond enables it to diversify its risk capital at an attractive cost.
For corporate sponsors of catastrophe bonds there tend to be a number of drivers, cost and diversification of insurance capital providers are typically key, while enhancing their coverage can also be a motivation for entering the cat bond market.
Gaining access to a new source of capacity, so removing the reliance solely on traditional insurance or reinsurance capacity can improve the counterparty credit profile of a major corporate insurance program, by reducing exposure to the traditional market alone.
“This is the first time Amtrak has used the capital markets to broaden our base of insurance coverage,” explained Gerald Sokol, Jr., Amtrak executive vice president and chief financial officer.
In a similar manner to the New York MTA’s MetroCat Re Ltd. (Series 2013-1) cat bond, Amtrak has secured itself a multi-year source of insurance protection for its assets and infrastructure in the U.S. northeast corridor.
The PennUnion Re cat bond provides Amtrak with financial protection against peak catastrophe exposures to hurricanes, storm surge and also earthquakes. Also similar to the MTA’s cat bond deal, Amtrak’s is mostly at risk due to storm surge, as the threat of wind-driven inundation carries the greatest threat for these rail related businesses.
“The catastrophe bond market provides us with a means to diversify our sources of insurance in a cost effective manner,” Sokol continued, explaining the benefits of being able to access capital market investors for some of Amtrak’s insurance capacity.
Effectively the transaction provides reinsurance for named storm related surge and wind risks, as well as earthquakes, through the use of Amtrak’s own Bermudian insurance company Passenger Railroad Insurance, Ltd. which sat in the middle of the deal as an intermediary.
PennUnion Re sold a single tranche of $275m of Series 2015-1 Class A notes to ILS or capital market investors. The proceeds of the sale of the notes fully-collateralized a reinsurance agreement between PennUnion and Passenger Railroad Insurance (Amtrak’s own captive-style insurance vehicle), which in turn provided the insurance protection to Amtrak.
In this way a corporation can directly access reinsurance capacity from the capital markets using its own captive intermediary and a special purpose vehicle, making achieving the securitised risk transfer much more cost-effective.
Utilising a parametric trigger the PennUnion Re cat bond can be triggered if key intensity measurements of the physical parameters for each respective peril, captured at specified measurement locations, breach certain levels.
The transaction was placed with the assistance of reinsurance broker Guy Carpenter’s investment banking unit GC Securities, which acted as joint structuring agent and joint bookrunner for Amtrak.
David Priebe, Vice Chairman of Guy Carpenter, commented on the transactions completion; “The successful execution of PennUnion Re Ltd. on behalf of Amtrak continues to demonstrate GC Securities’ position as the global market leader for capital markets-based insurance risk transfer solutions not only for (re)insurance companies but also for corporate and quasi-governmental entities with critical infrastructure exposure.
“Marsh & McLennan’s continued commitment to bringing alternative capital solutions for the benefit of our global clients highlight the breadth of the GC Securities platform for the benefit of all its operating companies’ clients.”
Cory Anger, Global Head of ILS Structuring, GC Securities, explained on GC Securities role and the structure saying that they were “delighted to demonstrate the willingness of capital markets investors to provide attractive pricing and capacity.”
Anger said that Amtrak’s decision to access the capital markets for insurance “represents further strides in the ILS market by being the first catastrophe bond ultimately benefiting a corporate that provides multi-peril coverage.”
Chi Hum, Global Head of ILS Distribution, at GC Securities, said that the support from investors was encouraging; “We are pleased at the overwhelming support and oversubscribed offering from the more than 25 participating capital market investors or the PennUnion Re Series 2015-1 Notes.”
Hum noted that investor interest in the PennUnion Re cat bond enabled Amtrak to grow the size of the deal, saying; “This strong support allowed the transaction size to be increased by 37.5% from the initial offering size while at the same time pricing at the lowest end of price guidance.”
Anger continued, explaining the parametric trigger; “The novel and dynamic trigger mechanisms based on physical observations for each of the perils covered (for example, storm surge heights for Named Storms, wind speeds from Named Storms, and earthquake intensities) were tailored to specific losses to Amtrak’s infrastructure and are fairly unique in the current ILS landscape.”
Hum added that; “Capital markets investors continue to offer support to new entrants into the catastrophe bond space, including, not only for diversifying perils but also for unique triggers structures and sponsor types. We are pleased the investor community is supportive of transactions with thoughtful structural features suited for a sponsor such as Amtrak.”
Anger concluded; “GC Securities is pleased to have yet again brought this type of structure to the market and demonstrates the applicability of ILS structures to public sector risks including on the federal level.”
Meanwhile, risk modelling specialist firm RMS, which provided the risk analysis for the PennUnion Re cat bond, vital for creating a robust and reliable parametric trigger, noted that Amtrak appreciated the insight which allowed it to enhance its risk transfer strategy.
“RMS is delighted to have helped develop PennUnion Re Ltd, protecting Amtrak-owned infrastructure along one of the most important railroads in the northeast region,” commented Ben Brookes, vice president of capital markets at RMS.
“The bond’s robust trigger, based on measured hazard values, will help Amtrak receive a quick settlement, enabling the agency to recover quickly following a hurricane or earthquake.”
“PennUnion is another ground-breaking catastrophe bond transaction predicated on mature, metric-based understanding of current and future risk that RMS has helped develop for a transport agency,” Brookes said.
The PennUnion Re cat bond for Amtrak is another great example of the important risk transfer role that ILS and parametric triggers can play for corporations looking to gain access to efficient risk financing for their peak catastrophe or weather risks.
As Anger of GC Securities said, this demonstrates the applicability of ILS, catastrophe bonds and the parametric trigger to public sector risks, an area that the market expects to see grow in the coming years.
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