PennUnionRe, Amtrak’s cat bond, offers storm surge protection

Amtrak is turning to the catastrophe bond market for protection against future damage from storm surges.

PennUnion Re, which will be rated by Standard & Poor's, is only the second ever to provide reinsurance against this kind of risk. The first was completed by New York’s Metropolitan Transportation Authority two years ago. It totaled $200 million.

S&P said late Wednesday that it assigned a preliminary 'BB-' preliminary rating to the deal’s Series 2015-1 notes, but did not indicate the deal’s size. It has yet to issue a presale report.

However, the notes will cover losses in the Northeast U.S. from storm surge and wind from named storms, and from earthquake on a per-occurrence basis. Proceeds from the deal will be held in a trust and invested in money market funds; investors will be paid a set rate of interest per year, unless a defined event occurs, in which case the money will be available to Amtrak for repairs.

Note payments for storm surge are based on what is known as a parametric trigger, one that is based on a hazard and not the actual claims prompted by a disaster.

S&P noted that, as with any parametric transaction, there is basis risk between the attachment levels and actual losses incurred. However, the measuring stations are located in areas that are correlated to Amtrak's modeled losses.

The rating is based on the lowest of the natural catastrophe risk ('BB-') and the rating on the assets in the reinsurance trust account (rated 'AAA' at closing). S&P does not maintain an interactive rating on Passenger Railroad Ins. Ltd., although the rating agency assessed the creditworthiness of PRIL and it supports the assigned rating. PRIL is a wholly owned subsidiary of Amtrak.

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