TWIA to top up with $1.1bn traditional & collateralized reinsurance

by Artemis on May 13, 2016

The Texas Windstorm Insurance Association (TWIA) is set to purchase an additional $1.1 billion of reinsurance coverage for the 2016 hurricane year, from both traditional and fully-collateralized sources, taking its total reinsurance coverage for the year to $2.2 billion.

TWIA’s Board of Directors has unanimously approved the recommendations of its Actuarial & Underwriting Committee and will add $1.1 billion of reinsurance coverage to its already $1.1 billion of outstanding Alamo Re catastrophe bonds, according to a TWIA spokesperson.

Speaking to Artemis, a TWIA spokesperson revealed that the organisation has no plans to issue any additional catastrophe bonds this year.

“The remaining $1.1 billion in reinsurance will be placed with a combination of traditional and fully-collateralized reinsurers, as TWIA has done in recent years,” a TWIA spokesperson told Artemis.

That TWIA will look to secure the most efficient source of capacity and plans to utilise both the traditional and fully-collateralized markets, suggests that insurance-linked securities (ILS) capacity will feature somewhere in its 2016 programme, in addition to the use of third-party capital in its cat bonds.

TWIA currently has two outstanding catastrophe bonds in the market, the $400 million single tranche Alamo Re Ltd. (Series 2014-1) bond, and the $700 million Alamo Re Ltd. (Series 2015-1) deal, which consists of two tranches at $300 million and $400 million in size.

The $2.2 billion layer of reinsurance coverage will attach at $2.7 billion, which means TWIA will actually purchase $100 million less reinsurance than it did for the 2015 hurricane year, when it purchased $2.3 billion, excess of $2.6 billion.

By Texas statute TWIA’s required to be funded up to the 1-in-100 year probable maximum loss (PML) level, which, according to modelling data is roughly $4.7 billion, using TWIA’s exposures as at 31/12/2015.

$2.2 billion of reinsurance coverage, which attaches at $2.7 billion, means that TWIA will be funded up to $4.9 billion for the 2016 hurricane year, with the organisation stating that any funding that is leftover “would be used to obtain protection against the additional reinsurance coverage required the year following a catastrophe.”

Should a major event occur in 2016 TWIA could have as much as a $700 million gap in its funding structure for the following year, as premiums and the Catastrophe Reserve Trust Fund (CRTF) balance may erode.

Further erosion of the CRTF could significantly impacts TWIA’s position and ability to meet its SB 900 funding requirements the following year, according to reinsurance broker Guy Carpenter, which worked on the programme.

As a result, and utilising any funds leftover from its total funding of $4.9 billion for the 2016 hurricane year, Guy Carpenter suggests that TWIA looks at securing an additional reinsurance layer of $700 million, excess $2 billion with the 2017 CRTF balance inuring itself to its benefit.

This would mean that should the CRTF erode by 50% in 2016, “the reinsurance coverage responds with $350m of gap coverage below the reinsurance programme in 2017.”

The estimated cost of its reinsurance programme in 2016 is $114.5 million to $120.4 million, which is below its original 2016 budget of $125.3 million, according to broker Guy Carpenter.

So for the 2016 year TWIA actually purchased $100 million less reinsurance than for the previous year, with catastrophe bonds making up 50% of its $2.2 billion, excess of $2.7 billion programme, and the remaining funding coming from traditional and fully-collateralized reinsurers.

TWIA’s use of both traditional and ILS market capacity ensures it secures adequate protection up to $4.9 billion in total funding, excess of the 1-in-100 year PML as is required by statute.

Along with approval of the $2.2 billion programme the TWIA Board approved that it looks into a second season cover that could protect against any future funding gaps as a result of further CRTF erosion.

Whether this is in the form of traditional reinsurance, fully-collateralized or another form of ILS capacity remains to be seen, but it’s to be expected that as in the past, TWIA will seek the most efficient form of capital to bolster its reinsurance layer in the event of a loss and to meet all necessary mandates.

Also read:

TWIA to tweak reinsurance for 2016, may add second-event protection.

TWIA to reset Alamo Re cat bonds to fit with 2016 reinsurance program.

TWIA’s Alamo Re cat bonds designed to “interact seamlessly”: GC Securities.

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