TWIA targets $400m of protection from first catastrophe bond

The Texas Windstorm Insurance Association (TWIA) is targeting $400m of fully-collateralized reinsurance protection on an annual aggregate basis from its first catastrophe bond, as part of a $1.35 billion layer of its reinsurance program.

TWIA’s actuarial and underwriting staff have been working closely with its reinsurance broker Guy Carpenter, as well as the capital markets and insurance-linked securities (ILS) specialists at GC Securities, in the development of its 2014 reinsurance program.

As Artemis reported on the 8th May, the TWIA board approved the issuance of the association’s first catastrophe bond and also approved the transformation of its private market reinsurance protection from per-occurrence to aggregate protection, citing the need to protect against more frequent, smaller tropical storms.

This is the first time that the idea of sponsoring a cat bond has got this far at TWIA, having been on the agenda for discussion the two previous years but never receiving the final approval from the board. With reinsurance and catastrophe bond market conditions at their most conducive ever for buyers, 2014 may have been a case of now or never for TWIA.

So in 2014 this approval was received and TWIA has wasted no time in pursuing its catastrophe bond ambitions, alongside its broker Guy Carpenter. The TWIA board approved a reinsurance program budget of $118m, for the purchase of reinsurance and catastrophe bonds to provide aggregate cover above a layer attachment point of $1.9 billion.

TWIA and Guy Carpenter have developed a reinsurance program which provides $1.35 billion of reinsurance protection for the budgeted $118m, more than it had expected to secure. The reinsurance cover will sit in a single layer of TWIA’s program, with both traditional and catastrophe bond protection co-participating with an attachment at $1.9 billion up to an exhaustion point of $3.25 billion, according to documents (see diagram below) from the latest TWIA board meeting today.

TWIA’s documents show a catastrophe bond with an estimated size of $400m, which is the association’s target we understand. That would leave the other $950m to be sourced from a traditional reinsurance contract, although some of the protection may come from collateralized reinsurance markets, so also from capital market investors, it is understood.

That is a reduction in traditional reinsurance buy from the $1 billion TWIA purchased last year, meaning that not only is the alternative reinsurance and ILS market set to secure the $400m of cat bond cover but they will have eroded how much of the TWIA reinsurance program goes to traditional global reinsurers as well. If alternative reinsurance capital also participates in the ‘traditional’ side of the program, on a collateralized basis, as well, this erosion of the traditional reinsurers participation could be much larger.

We still don’t have any details on the TWIA catastrophe bond available, but hope to source some soon and it will be added to the Artemis Deal Directory as soon as we have something. Right now we assume that the TWIA cat bond is being pitched to investors and is making progress to market. We will follow-up with more details as and when they become available to us.

The diagram below, taken from TWIA’s board meeting documents today, shows where the reinsurance and proposed catastrophe bond will sit in the association’s various layers of financial protection.

TWIA proposed 2014 reinsurance program including catastrophe bond