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PennUnion Re Ltd. (Series 2015-1)

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PennUnion Re Ltd. (Series 2015-1) – At a glance:

  • Issuer: PennUnion Re Ltd. (Series 2015-1)
  • Cedent / sponsor: Amtrak
  • Placement / structuring agent/s: GC Securities & Goldman Sachs are joint structuring agents and bookrunners
  • Risk modelling / calculation agents etc: RMS
  • Risks / perils covered: U.S. storm surge & wind from named storm, U.S. earthquake
  • Size: $275m
  • Trigger type: Parametric
  • Ratings: S&P: 'BB-(sf)'
  • Date of issue: Oct 2015

PennUnion Re Ltd. (Series 2015-1) – Full details:

With a corporate sponsor in Amtrak, the PennUnion Re cat bond is being sponsored by Passenger Railroad Insurance, Ltd., a Bermuda insurer owned by Amtrak’s parent the National Railroad Passenger Corporation. Passenger Railroad Insurance insures Amtrak, like a captive arrangement and also reinsures some of Amtrak and its partners insurance arrangements, we understand.

PennUnion Re Ltd. is a Bermudian SPI established for the purpose of issuing catastrophe bond notes. In this deal PennUnion Re will seek to issue a single tranche of Series 2015-1 Class A notes which will be sold to ILS investors. We understand the cat bond deal is targeting a size of at least $200m.

By selling the notes, PennUnion Re will be able to fully-collateralize a reinsurance agreement between itself and Passenger Railroad Insurance, which will in turn provide insurance protection to Amtrak.

The coverage from the PennUnion Re 2015-1 cat bond will be on a per-occurrence basis, across just over a three-year period, providing protection against the perils of U.S. storm surge and wind from named storms, as well as earthquakes.

Storm surge protection, which we understand to be the main driver of the cat bond expected loss, is for New York City and Delaware. Named storm wind protection is across Connecticut, Delaware, Maryland, Massachusetts, New Jersey, New York, Pennsylvania and Rhode Island. Earthquake protection is for Delaware, New Jersey, New York, Pennsylvania and Rhode Island.

All three perils feature parametric triggers, commonly used in corporate catastrophe bonds such as this where the beneficiary wants a source of insurance protection that pays out rapidly. The payout mechanics are designed to provide a sliding scale of payment for all three perils, with increasing payouts for increasingly severe events.

We understand that the surge parametric trigger is based on calculation points at tidal stations, such as New York City’s The Battery and in Delaware City. The named storm wind parametric trigger uses the Weatherflow hurricane network recording stations as calculation points, which are located around the U.S. coastline. The earthquake peril’s trigger is based on shake data and information reported by the USGS.

This cat bond transaction will provide a source of responsive insurance coverage for Amtrak, paying out in the event of a catastrophe above certain parameters of intensity impacting the region where the rail company operates and has the highest concentration of assets and infrastructure.

The sliding scale mechanism ensures that payouts are linked to intensity of catastrophe events and the likely ensuing damage and interruption to Amtrak’s infrastructure and business. We expect to see more of these corporate sponsored parametric cat bond transactions, as they make perfect sense as a source of risk finance and transfer.

We understand that the Series 2015-1 cat bond notes to be issued by PennUnion Re Ltd. will have an attachment probability of 2.68%, at the base case, with an exhaustion probability of 1.58% and an expected loss of 1.97%.

The $200m of notes are being offered to investors with price guidance in a range of 4.5% to 5.25%, we’re told. Which would suggest a multiple ranging from 2.3 to 2.7 times the expected loss.

We understand that in terms of historical events, superstorm Sandy would have caused a 100% loss to the cat bond notes. With the cat bonds exposure heavily weighted towards storm surge events, it’s clear that for Amtrack the key type of event it wants protection from is a repeat of such a storm and the resulting surge.

Rating agency Standard & Poor’s has assigned a ‘BB-(sf)’ preliminary rating to the Series 2015-1 notes to be issued by PennUnion Re Ltd.

S&P highlights that this is only the second cat bond in the market’s history to include storm surge as the primary driver of the risk being transferred to the capital markets.

S&P also notes that being a parametric transaction, there is basis risk between the attachment levels and actual losses incurred. However, mitigating that fact is that the measuring stations are located in areas that S&P says are correlated to Amtrak’s modelled losses.

It’s also worth noting that for Amtrak the cat bond is designed to provide insurance payouts in the event of catastrophes that it knows will have a serious impact on its business. Hence the basis risk is likely not a major issue for the sponsor.

Update 1:

Amtrak’s PennUnion Re Ltd. catastrophe bond was upsized during marketing by 38% to $275m.

At the same time the pricing settled at the lowest end of guidance, at 4.5%, a drop of almost -8% from the mid-point of guidance.

The Class A notes to be issued by PennUnion Re Ltd. have an initial expected loss of 1.97%, which means the coupon will provide investors a multiple of 2.28 times the EL at the base case. A sensitivity case multiple would be a little lower at 2.19x’s the sensitivity case EL of 2.05%.

Also noteworthy is the fact that the issuance of this cat bond was delayed by hurricane Joaquin which threatened an east coast U.S. landfall, causing the cat bond to be held back by one week.

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