The Texas Windstorm Insurance Association (TWIA), the residual market or last-resort property insurer for Texas, is planning to reset its Alamo Re catastrophe bonds to fit within its 2016 program, as it plans an increase in its reinsurance retention.
TWIA has two in-force catastrophe bond transactions currently, the $400m Alamo Re Ltd. (Series 2014-1) and more recent $700m Alamo Re Ltd. (Series 2015-1). With $1.1 billion of cat bond sourced reinsurance protection to consider, TWIA values the flexibility offered by its cat bond variable reset features.
TWIA’s current reinsurance program provides $2.3 billion of protection above a $2.6 billion retention, with $1.1 billion of the reinsurance layer provided by its cat bonds and the other $1.2 billion by traditional reinsurance contracts, some of which could be collateralised.
For its 2016 reinsurance renewal, which is due to be completed by the 1st June, TWIA intends to increase its reinsurance retention by $100m thanks to having injected an additional $90m to $100m into its Catastrophe Reserve Trust Fund (CRTF) in 2015. That would push the retention level up to approximately $2.7 billion for 2016.
According to James Murphy, Chief Actuary & Vice President of Enterprise Analytics at TWIA, the insurer will again seek to protect itself up to the statutory 1-in-100 year probable maximum loss level (PML) (as it did in 2015 thanks to the cat bonds), defined by an analysis of its current exposures.
Murphy explained to the Board at its most recent meeting that reinsurance broker Guy Carpenter was set to assist in modelling TWIA’s exposures to define the 2016 1-in-100 year PML target. The expectation is that it won’t have changed significantly as the exposure has not changed dramatically in the last year.
If that’s the case then TWIA may be able to purchase less reinsurance in 2016, thanks to the increased funding of the CRTF. With the $1.1 billion of cat bonds still in-force it may be able to reduce its spend on traditional or collateralised reinsurance cover resulting in cost-savings.
As part of the renewal the Alamo Re cat bonds will be reset. The cat bonds feature three tranches of notes providing reinsurance protection at different attachment points. All three tranches from the two issuances have a variable reset feature, enabling TWIA to flex the attachment and exhaustion points up or down.
This means that TWIA can effectively move the Alamo Re cat bond protection in response to reinsurance market pricing and appetite for the remainder of its program, making most effective use of the cat bond coverage. In return for any change in risk level due to an adjusted attachment point at the reset, investors in the cat bond will be compensated with an adjusted coupon.
Last year TWIA opted to reduce the attachment point on its 2014 Alamo Re cat bond, shifting the protection down the reinsurance tower slightly and resulting in the cat bond having its rating upgraded as the risk level fell.
TWIA board documents explain that this process is underway; “Staff has begun preparations for the reset of the catastrophe bonds and planning for the 2016 reinsurance program assuming a $2.7 billion retention and a gross premium of no more than $125 million, consistent with the TWIA 2016 budget.”
The Alamo Re cat bond resets will be completed in March, allowing TWIA plenty of time to complete its reinsurance placement around them. With the U.S. named storm and hurricane season off-risk, having the reset a few months before the renewal provides more flexibility to TWIA in ensuring it makes best use of both traditional and alternative capital in its reinsurance program.
Murphy said that along with its broker, TWIA would now begin the process of contacting reinsurance markets, traditional and alternative, to get a feel for current market pricing, secure some quotes and begin to put the 2016 program into shape.
The cat bonds will play an important role in shaping the 2016 program, with the ability to perform a variable reset a highly valuable asset to TWIA as it looks to ensure its reinsurance protection is as efficient and cost-effective as possible.
A special April TWIA Board meeting will be held, Murphy explained, at which reinsurance options will be discussed and finalised, with the goal being to buy enough cover, from either alternative or traditional sources, to reach the 1-in-100 year PML, while maximising cost-savings and perhaps even buying more reinsurance cover if the pricing is conducive to doing so.
No doubt catastrophe bonds will be looked at as an option by TWIA’s reinsurance broker Guy Carpenter, however whether the residual market insurer would increase cat bonds to more than 50% of its total cover remains to be seen.
There is, of course, a chance that another multi-year cat bond may provide the most stable source of reinsurance cover, with inbuilt flexibility thanks to the variable reset feature. That could be enough to compel TWIA to look to the capital markets again in 2016, however traditional reinsurance is likely to be very competitively priced as well.
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