TWIA adds $500m of pre-event bonds to its risk transfer

by Artemis on October 2, 2014

Showing that it’s not all about reinsurance, catastrophe bonds and ILS when building a diversified capital base to pay claims from catastrophic events, the Texas Windstorm Insurance Association (TWIA) has added $500m of pre-event Class 1 bonds to its coverage.

One of TWIA’s goals this year has been to take advantage of attractively priced sources of risk capital to help it to diversify its sources of reinsurance protection. With the reinsurance market softer than in previous years and insurance-linked securities (ILS) more attractively priced than perhaps ever before, TWIA showed its ambition by completing its first catastrophe bond in June, the $400m Alamo Re Ltd. (Series 2014-1).

So to further diversify its coverage, beyond traditional reinsurance, any collateralized reinsurance protection and its new Alamo Re catastrophe bond, TWIA has successfully secured another $500m of risk capital through the issuance of Class 1 bonds. This puts the association in the best financial state it has been in since 2008’s hurricane Ike, no mean feat given the losses that TWIA faced after that storm.

“We’re very excited about the bond issuance, which will provide $500 million in funds that will be immediately available to pay claims after a catastrophe,” commented TWIA’s Chief Financial Officer, Pete Gise. “The bonds bring our total funding for the 2014-2015 catastrophe season up to $3.85 billion. This is over a billion dollars more than the combined losses from Hurricanes Dolly and Ike, and would enable TWIA to pay claims associated with 98.6% of all modeled storms, or in other words, a 70-year storm. This also brings us closer to achieving our goal of securing funding for a 100-year storm.”

The $500m of Class 1 bonds have a ten-year tenure and pay an interest coupon to investors of around 8%. Sources told us that there are actually two bonds, one of $85.4m paying a 5.25% coupon with maturity due in 2017 and another of $414.6m paying 8.25% with maturity due in 2024.

The Class 1 bonds sit along with $1.45 billion of reinsurance coverage purchased in 2014, which includes the $400m in catastrophe bonds. TWIA’s funding structure for 2014 now allows for $1.9 billion of losses after which reinsurance will pay for the next $1.45 billion. TWIA’s reinsurance paid for approximately $1.5 billion in losses associated with Hurricane Ike in 2008.

“TWIA appreciates the assistance of the Texas Public Finance Authority, the Texas Department of Insurance and Bank of America Merrill Lynch in successfully securing this most recent funding element and emphasizing our commitment to provide financial security to our policyholders,” said TWIA’s General Manager, John Polak.

The Class 1 bonds issued by TWIA were marketed to ILS fund managers and ILS investors, we understand, with some taking up the opportunity if their mandates and diversification strategies allowed. With the main risk for Texas during the hurricane season almost passed, typically storms affecting that area are earlier in the season, some investors may have been tempted to buy and hold the securities until next June.

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