TWIA reinsurance renewal has $110m placed with capital markets

by Artemis on June 3, 2016

The Texas Windstorm Insurance Association (TWIA) announced the completion of its reinsurance renewal yesterday, confirming the expected $1.1 billion of reinsurance coverage purchased for the 2016 hurricane year and telling Artemis that $110m of it is collateralized by capital markets investors.

Update: In addition to the 2016 reinsurance program renewal detailed below, TWIA also secured an additional second season reinsurance cover at renewal.

Thanks to “operational efficiencies and several hurricane-free seasons” TWIA has been able to bolster its Catastrophe Reserve Trust Fund (CRTF) to its largest ever balance in 2016, at $600m, which has in turn enabled TWIA to reduce its overall reinsurance spend by $100m.

TWIA still has its two outstanding catastrophe bonds, the $400 million single tranche Alamo Re Ltd. (Series 2014-1) bond, and the $700 million Alamo Re Ltd. (Series 2015-1) deal, which provide $1.1 billion of coverage.

To that TWIA has added $1.1 billion of traditional reinsurance, to provide $2.2 billion of reinsurance protection for 2016, which the insurer told Artemis recently would be “placed with a combination of traditional and fully-collateralized reinsurers” as it takes advantage of where the best terms and rates are, as well as ensures diversity among its reinsurance capital sources.

Of that $1.1 billion layer of reinsurance, TWIA told us that $110m has been placed with the capital markets on a collateralized basis, while the remaining $990m has been placed with traditional rated reinsurers.

Of course, it’s not possible to know whether any of the $990m is actually backed by ILS markets, either through their own rated reinsurance vehicle or via fronting agreements, however it is possible that the capital markets participation is larger than just the $110m for that reason.

TWIA told Artemis that it could not divulge its full list of counterparties at this time, but that “participation from capital markets was consistent with prior years.”

TWIA’s Chief Actuary and Vice President of Actuarial & Enterprise Analytics, James C. Murphy, explained to us; “TWIA is pleased to once again be able to utilize both traditional reinsurers and capital market capacity in its reinsurance program. Accessing capital market capacity in this manner helps to diversify and stabilize the reinsurance program and TWIA plans to continue to rely on capital markets as part of its overall reinsurance strategy.”

So with the $110m of collateralized reinsurance capacity, added to the $1.1 billion of outstanding cat bonds, as well perhaps as additional ILS participation through rated fronting carriers, TWIA’s $2.2 billion 2016 reinsurance program has been at least 55% sourced from the capital markets and fully-collateralized.

Thanks to a new funding structure, its largest-ever CRTF balance, a comprehensive catastrophe plan, new claims management technology and the $2.2 billion of capital market and traditional reinsurance protection, TWIA says it is in “its strongest-ever position for this year’s hurricane season with $4.9 billion in total funding available to pay claims.”

That level of funding is sufficient to cover the legislated requirement of meeting payouts for a 1-in-100 year hurricane, which equates to more than 99% of storm seasons.

The slight reduction of $100m in TWIA’s reinsurance purchase should be no surprise, given the focus on depopulation at these residual market insurers and the build up of catastrophe reserves thanks to a lack of major storms in recent years.

As depopulation continues and more of the policies once borne by the likes of TWIA are passed over to the private market, the drop in reinsurance demand for these large buyers is likely eclipsed by increases in demand from the private market.

TWIA’s General Manager John Polak commented on TWIA’s financial position; “TWIA’s position of strength has been built upon our commitment to continuous improvement in policyholder service. When you add together our level of funding, improved claims management technology, and a comprehensive catastrophe (CAT) response plan, you get a TWIA that is competent and capable of responding to a catastrophic weather event, regardless of the season.”

TWIA’s reinsurance layers continue to sit at the top of its funding for the 2016 hurricane season, with the $2.2 billion of traditional and collateralized reinsurance and the cat bonds attaching at $2.7 billion of losses, and providing protection up to $4.9 billion of losses to the insurer.

TWIA had also suggested in may buy an additional reinsurance cover for a second season, that could protect against any future funding gaps as a result of further CRTF erosion after a major storm. However the insurer has not announced any such purchase at this time.

TWIA continues to look for the most efficient way to source capacity, using both the traditional and fully-collateralized markets, and enabling ILS fund manager capacity to feature more broadly, in addition to the use of third-party capital markets backing for its cat bonds.

Also read:

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

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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