Alamo Re Ltd. (Series 2014-1)

The Texas Windstorm Insurance Association’s cat bond has been launched to the market and is to be issued by Bermuda registered special purpose insurer Alamo Re Ltd. TWIA is using German reinsurer Hannover Re as the ceding reinsurer in the transaction, so TWIA enters into a reinsurance agreement with Hannover Re while it enters into a retrocession agreement with Alamo Re Ltd.

In this cat bond issuance Alamo Re Ltd. is set to issue and sell to investors a single tranche of Series 2014-1 notes to collateralize the retrocessional agreement with Hannover Re and ultimately the reinsurance agreement with TWIA. The single tranche of notes are sized at $300m at launch, although that could grow if TWIA sticks to its $400m target, and have a three-year term, with maturity expected at 1st June 2017.

The Alamo Re 2014-1 catastrophe bond will provide three years of reinsurance protection, ultimately to TWIA, on an annual aggregate basis using an indemnity trigger based on TWIA’s ultimate net losses suffered in the covered area. The protection is for Texas named storms, meaning that the Alamo Re cat bond will cover TWIA for losses from hurricanes and tropical storms.

Only named storms that affect Texas and cause an ultimate net loss to TWIA of more than $50m will qualify as covered under the terms of the Alamo Re cat bond, we’re told. That means that TWIA, while gaining the aggregate benefit of protection for frequent smaller windstorms affecting Texas, will not see its aggregate eroded by the smallest of storms. Using the named storm definition for tropical cyclones also means that perils such as hail and tornadoes which occur due to tropical storm systems will also qualify if they cause a sufficiently large loss to TWIA.

The Alamo Re 2014-1 cat bond will trigger at the private reinsurance layer attachment point of $1.9 billion and will provide cover up to the layer exhaustion point of $3.25 billion. This means the cat bond will provide reinsurance for a percentage of TWIA’s losses within the private reinsurance layer. It also means that should TWIA choose to it could upsize the cat bond even further than the $400m if it should deem it more cost-effective than traditional reinsurance protection.

The $300m of notes being issued by Alamo Re Ltd. in this Series 2014-1 deal have an attachment probability of 3.8%, an expected loss of 2.84% and an exhaustion probability of 2.09%, Artemis understands. The notes are being marketed with coupon price guidance of 6.5% to 7%.

Update 1:

Further details have emerged thanks to the rating report from Fitch Ratings.

Fitch’s article on the deal discusses the covered portfolio of business, which the rating agency says is located across the 14 first-tier coastal counties of Texas (as well as a small portion of Harris County). The subject business represents $84.4 billion (as of Dec. 31, 2013) of total insured value. The subject business consists of 85% residential and 15% commercial properties, with a minimal amount of exposure to mobile homes.

The exposures covered by the Alamo Re cat bond are concentrated in Galveston and Brazoria counties, which between them represent 50% of the total insured value. Galveston is 30% of the insured values at risk, Brazoria 20%, Nueces 18%, Jefferson 12% and Cameron 6%, Artemis understands.

Interestingly, the percentage of insurable value is not the same as the percentage contribution to expected losses by county. Galveston alone contributes 50% of the Alamo Re cat bonds expected loss, Artemis understands, while Nueces is 16%, Brazoria 11% and Jefferson 7% of the deals expected loss.

Fitch Ratings notes that there have been 37 hurricanes that have made landfall in Texas since 1900. In 2008, the combined impacts of hurricane Ike and hurricane Dolly would have eroded the Alamo Re cat bond principal by 26%. Hurricane Rita from 2005 would not have caused any losses. Four historical no name hurricanes prior to 1933 would have caused a 100% loss of principal on a modelled basis.

The Alamo Re cat bond features an optional variable reset facility which will allow TWIA to adjust the attachment level of the notes within a pre-defined range of attachment probability. The deals initial attachment probability is 3.8% and at reset TWIA can opt to reset that to anywhere in the range of 4.4% to 1.75%, so the notes could become riskier or indeed less risky. Investors will be compensated for any increase or decrease in risk level assumed as the risk interest spread will be recalculated to reflect any change in exceedance probability.

Fitch noted a number of aspects about the Alamo Re cat bond which are unmodelled, or not included in the modelling performed by AIR Worldwide.

Firstly, the modelling did not include costs associated to debris removal, however this was implicit in the claims data history. The model only simulates hurricane activity making landfall, which means it understates losses related to named storms or hurricanes that degrade prior to landfall. That is quite important as losses from storms which do not reach hurricane status could be sufficient to qualify and begin to erode the aggregate attachment layer during an annual period.

Also it’s not clear whether the model would have analysed the risks of tornadoes or hail resulting from named storms, which we understood to be covered by this cat bond as TWIA has expressed a desire to have a cat bond which provided protection against these smaller, or related perils that the tropical storm season can bring to Texas.

Fitch notes that investors will be exposed to any basis risk between the modelled results and the actual ultimate net losses suffered by TWIA. There has always been an element of basis risk between modelled results and actual losses in cat bonds but this does seem to be widening with the more recent trends to expand the protection provided.

Fitch also notes that there is a risk that transforming reinsurer Hannover Re could not pay its retrocessional premiums which are a component of the coupon payment. This is an extremely remote risk given Hannover Re’s size, standing in the reinsurance market and stability.

Update 2:

The Alamo Re cat bond has upsized to TWIA’s targeted $400m.

At the same time as upsizing the price guidance on the Alamo Re cat bond notes has been lowered and narrowed to a range of 6.35% to 6.5%.

Update 3:

At final pricing the Alamo Re cat bond has priced at the low-end of the reduced range, to offer its investors a coupon of 6.35%.

Update 4, June 2nd 2015:

TWIA elected to use the variable reset to adjust the attachment probability of Alamo Re 2014-1, in order to arrange its reinsurance programme to take into account new purchases and the two Alamo Re 2015-1 cat bond tranches.

Fitch initially rated the Alamo Re Ltd. series 2014-1 class A notes at ‘Bsf’ when the deal was issued, but after the annual reset, which saw the modeled attachment probability lowered to 2.09% from its initial annual attachment probability of 3.80%, the 2014-1 notes have now been upgraded to ‘B+sf’.

Any cat bond with an attachment probability below 3.015% on Fitch’s Insurance Linked Securities Calibration Table is rated as ‘B+sf’ or higher.

At the reset, risk modeller AIR also recalculated the risk interest spread for the 2014-1 class A notes to 5.24%, a decrease from the initial spread of 6.35%.

Using the variable reset allows TWIA to move the attachment level of the Alamo Re 2014-1 class A notes up to $3.2 billion, from the initial attachment level of $1.9 billion. At the same time TWIA elected to increase the notes insurance percentage to 50% of its respective layer, up from approximately 30%.

Now, after the reset, TWIA has the Alamo Re 2014-1 Class A notes positioned in between the Series 2015-1 Class A and Class B notes, with all three tranches having a 50% co-participation alongside traditional reinsurance.