23 March 2016

Catastrophe Risk 2016: PennUnion Re

When Superstorm Sandy whipped the east coast of the US in 2012, Amtrak was among those that felt the pain.


The US's intercity passenger rail service suffered more than $1 billion in damage as a storm surge inundated both tubes of the Hudson River tunnel and two of the four tubes of the East River tunnel.

But an innovative transaction that saw Amtrak tap the catastrophe bond market for the first time means the rail company is now better protected against such floods.

In October, Amtrak obtained $275 million of protection against damage caused by a natural disaster to Amtrak-owned infrastructure in the northeast corridor of the US.

Amtrak – via Passenger Rail Insurance Liability, a Bermuda-based insurance company it owns – obtained the insurance from PennUnion Re, an independent special purpose insurer, also based in Bermuda. PennUnion Re issued the cat bond to collateralise the insurance.

The insurance protects against storm surge, wind damage or earthquakes. But, according to risk modeller Risk Management Solutuions, the vast majority of the coverage is designed to protect against the risk of another Sandy-like storm surge.

The bond was well received even though while it was being marketed Hurricane Joaquin was loitering in the Atlantic, menacing the US eastern seaboard. The bond was upsized from $200 million and was several times oversubscribed.

The notes, which mature in December 2018, were bought by cat funds, which bought 72%, hedge funds, pension funds, endowments, money managers and reinsurers.

The strong demand meant that it priced at the bottom of the range of 450 to 525 basis points above US Treasury money market funds or cash.

Issuing a cat bond was a cheaper way for Amtrak to acquire additional cover on top of the $125 million it placed through the traditional insurance markets.

"We couldn't achieve the limit [of cover] we wanted in the traditional insurance markets, and the capital markets provided a cheaper, more accessible alternative," explains Michael P McGee, senior vice president and treasurer at Amtrak.

Cory Anger, of GC Securities, says Amtrak chose to tap the cat bond market because of the "attractive" price of such protection, as well as the easily understood triggers, the speed of payment, and the amount of capital that could be raised.

"Investors in the cat bond market are very interested in being closer to the original owners of the risk, such as corporates or government-owned entities," Ali Al-Ali, Goldman Sachs

The structure of the bond is also interesting. Whereas most cat bonds are indemnity-based – ie the pay-out is based on the losses incurred by the sponsor – in this transaction payments are based on the severity of events, known as a parametric trigger, says Ali Al-Ali, managing director and co-head of insurance structured finance at Goldman Sachs, which was joint structuring agent and bookrunners with GC Securities.

For example, if storm surge rises above eight feet across an average of three named locations in the New York City area, there will be a 25% payout, rising to a 100% if the surge hits 8.5 feet.

Another interesting feature is that whereas most cat bonds to date have been issued by insurers or reinsurers, Amtrak is an example of non-insurer tapping the market.

"It was the first time that Amtrak had accessed the capital markets to purchase protection against natural catastrophes," says Al-Ali. "Investors in the cat bond market are very interested in being closer to the original owners of the risk, such as corporates or government-owned entities.

"It's a very interesting development for the cat bond market overall."

This trend of bringing non-insurers to the cat bond market is set to continue.

"We continue to work with insurance and non-insurance clients who are interested in accessing the capital markets for catastrophe risk cover," adds Al-Ali. "We expect more of these types of companies to come to the cat bond market to buy protection, not necessarily in lieu of the traditional insurance market but as a complement."

Anger at GC Securities agrees: "The overall level of interest in alternative capital with non-insurance clients has never been higher." EF

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