TWIA to lower Alamo Re 2014 cat bond attachment probability at reset

The Texas Windstorm Insurance Association (TWIA) is set to lower the attachment probability of its $400m Alamo Re Ltd. (Series 2014-1) catastrophe bond at the annual reset, in order to slot the cover it provides between the two tranches of its new Alamo Re Ltd. (Series 2015-1) offering.

At the upcoming first reset date of 1st June 2015, TWIA has elected to utilise its variable reset feature for the Alamo Re 2014-1 notes in order to restructure its reinsurance coverage to have a better desired fit with the new Alamo Re 2015-1 transaction.

According to Fitch Ratings, the reset report from risk modeller AIR Worldwide outlines that TWIA will opt to lower the annual attachment probability of the Alamo Re Series 2014-1 notes to 2.09%, from the initial attachment probability of 3.8%.

As a result the Alamo Re 2014-1 Class A notes attachment point will move up, from the initial attachment level of $1.9 billion up to a new attachment level for the second annual risk period of $3.2 billion.

Additionally, the insurance percentage of the layer of TWIA’s reinsurance programme covered by the Alamo Re 2014-1 Class A notes will also change, increasing to cover 50% of the layer instead of the original 30%.

This effectively makes the Alamo Re 2014-1 catastrophe bond notes less risky, attaching at a greater level of losses suffered by TWIA after a Texas named storm or hurricane.

The end result after the reset will be that the Alamo Re 2014-1 cat bond notes attach at $3.2 billion of losses and shares 50% of all losses up to an exhaustion point of $4 billion, Fitch explains.

By moving the Alamo Re 2014-1 cat bond notes up its reinsurance programme tower TWIA will slot its coverage directly between the Class A and B notes from the Alamo Re 2015-1 issuance, which launched to the market recently.

The end result will be that the upper end of TWIA’s reinsurance programme for 2015 will feature three tranches of Alamo Re catastrophe bonds, attaching at $2.6 billion of losses and running right up to $4.8 billion, with traditional reinsurance co-participating on 50% of losses in each layer.

Beneath the catastrophe bond covers will be layers of Class 1, 2 and 3 public securities and also the Catastrophe Reserve Trust Fund. So before any losses will be felt by cat bond investors TWIA will need to erode these layers first.

Artemis has sourced the following diagram of how the 2015 reinsurance programme tower for TWIA will look after the issuance of the Alamo Re 2015-1 cat bond and the reset of the 2014-1 transaction:

Texas Windstorm Insurance Association (TWIA) reinsurance programme for 2015, including Alamo Re catastrophe bonds

As the Alamo Re 2014-1 Class A catastrophe bond notes have been reset at a new attachment probability, the coupon paid to investors will also be adjusted in-line with the new risk profile. According to Fitch Ratings the coupon will decline to 5.24% from the initial interest spread of 6.35%, reflecting the reduced risk.

So once the 2015 renewal is completed and the new Alamo Re 2015-1 catastrophe bond issued, the first cat bond layer to be eroded by any losses is the Series 2015-1 Class A notes, followed by the Series 2014-1 Class A notes and finally the Series 2015-1 Class B notes.

Fitch Ratings said that it has placed the ‘Bsf’ rating for the Alamo Re Ltd. Series 2014-1 Class A Principal At-Risk Variable Rate Notes, expected to mature Jun. 7, 2017, on Rating Watch Positive. Given the 2014-1 notes will become less risky than the 2015-1 Class A notes which are set to be rated ‘B+sf’ it seems likely that the Alamo Re 2014-1 notes will be upgraded after the reset is completed.

We’ll keep you updated as TWIA’s new catastrophe bond issuance Alamo Re Ltd. (Series 2015-1) comes to market and as the reset occurs for the Alamo Re Ltd. (Series 2014-1) catastrophe bond. You can read about both these transactions in the Artemis Deal Directory.