2015 Alamo cat bond still on agenda for TWIA’s reinsurance renewal

The Actuarial and Underwriting Committee of the Texas Windstorm Insurance Association (TWIA) has just completed its latest meeting, at which the committee resolved to pursue a 2015 reinsurance renewal that can include a new Alamo Re catastrophe bond.

TWIA is the insurer of last resort for Gulf Coast property owners in the state and, like so many other large cedents, has increasingly been utilising the capital markets, collateralized reinsurance and insurance-linked securities (ILS) as part of its reinsurance renewals.

TWIA has used collateralized reinsurance within its renewal for some time, but in 2014 approached the catastrophe bond market for the first time resulting in the issue of the $400m Alamo Re Ltd. (Series 2014-1) cat bond transaction.

The insurers reinsurance renewal is due for the June 1 renewal period and the Actuarial and Underwriting Committee has been working with its reinsurance broker Guy Carpenter, and the GC Securities capital markets and ILS specialists, to define a strategy for its 2015 renewal.

As we wrote on 20th Jan, TWIA is considering issuing a second catastrophe bond through its Alamo Re special purpose Bermudian insurance vehicle in 2015. At the meeting today the committee discussed its renewal options with its broker, with Alamo Re 2015 high on the agenda.

The committee has an objective for 2015 to get as close as possible to being protected with risk financing and reinsurance for at least a 1-in-100 year storm, while also limiting its spend on risk financing and transfer. Committee members said today that they feel it is vital to reach that level of funding as quickly as possible.

TWIA committee members discussed placing the reinsurance renewal on top of the $500m of pre-event bonding that the insurer secured last year. This could reduce TWIA’s spend, or allow it to buy more cover, by moving the private market reinsurance up the tower to a higher attachment level.

The discussion ranged around the attachment point for some time, with the goal of moving where the reinsurance layer attaches now in order to make best use of the 2015 purchase and multi-year protection that is now more widely available in the market.

The Alamo Re 2014 catastrophe bond features a very flexible variable reset facility, which would allow TWIA to move the attachment point within a wide range from as low as $1.7 billion up to $3.7 billion. This means wherever TWIA decides to attach its reinsurance program the Alamo Re 2014 cat bond can be moved to complement this, either co-participating on a layer or covering a whole layer of the program itself.

This new flexibility in catastrophe bonds, since variable resets began to feature, is very attractive to sponsors like TWIA who tend to buy reinsurance tactically year, by year, depending on where its other sources of financing sit.

TWIA’s reinsurance broker Guy Carpenter feels that a cat bond for 2015 is a good idea, given market conditions, the experience TWIA had in 2014 and the flexibility cat bonds can now offer (as evidenced by Alamo Re 2014), as well as the clear investor appetite for new cat bond issues.

If TWIA was to buy reinsurance above all of its retention and pre-event, Class 1, 2 and 3 bond funding, it could move the attachment point up to $2.6 billion. Should TWIA choose to move to that structure the Alamo Re 2014 cat bond could be moved to support that with an attachment between the $2.6 billion and the maximum of $3.7 billion.

At the moment the Alamo Re 2014 cat bond co-participates across the reinsurance program, from an attachment point of $1.9 billion and covers up to an exhaustion point of $3.25 billion. In future, if it is reset to fit better into the new structure that results from 2015’s renewal, it may not cover the same layer.

The committee charged Guy Carpenter with the following for 2015. Coming back with a proposal which would buy as much reinsurance protection as is possible, within a rough budget of $117m to $119m (or just above) of premium spend, in order to get as close as possible to fully funding a 1-in-100 year event.

This can include an Alamo Re 2015 catastrophe bond if pricing is competitive and it fits within the budget and structure. The TWIA committee is agnostic to the form of the protection, rather looking for the best solution possible.

The whole reinsurance purchase will be designed to cover from an attachment point of $2.6 billion, above the pre-event bonding, so if this proposal is followed to the letter it will likely result in a variable reset for Alamo Re 2014 to above that level.

TWIA’s ambitions of reaching the 100 year storm level of funding within its budget can likely be reached, with a combination of traditional reinsurance, collateralized reinsurance and a new Alamo Re catastrophe bond.

Guy Carpenter’s representatives highlighted that they see U.S. catastrophe reinsurance pricing as down around 10.3% year on year, which suggests TWIA could get more cover from its budget. TWIA also may look to a program structure that includes multi-year traditional covers, which would complement multi-year cat bonds, if the broker finds the market receptive to this. TWIA moved its entire program to an aggregate cover in 2014, so any new purchases will likely follow this approach.

Cory Anger of GC Securities, the capital markets and ILS focused unit of Guy Carpenter, said that due to the high-level of maturing cat bonds in the first-half of 2015, there is a significant amount of capital ready to be deployed into new cat bond transactions.

Anger said that the “market environment is very favourable for accessing alternative capital via 144a catastrophe bonds.”

With all the matured capital ready to be reinvested in new deals, TWIA may find that appetite for an Alamo Re 2015 cat bond is even higher than it experienced in 2014, when the deal upsized and priced below guidance. A cat bond may prove to be an extremely efficient way of getting closer to the 1-in-100 year loss funding goal.

So Guy Carpenter and GC Securities will continue to work on the design of the reinsurance renewal, a process that will take some weeks. The program looks set to include an Alamo Re 2015 catastrophe bond if deemed appropriate and cost-effective, as part of the overall program structure.

We will update you as TWIA’s renewal approaches, it is due for June 1st, but if any cat bond is to be included it is sure to be launched well in advance of that date.