The first catastrophe bond to be sponsored by the Texas Windstorm Insurance Association (TWIA), Alamo Re Ltd. (Series 2014-1), would be exposed to a Texas hurricane as severe as 2008’s hurricane Ike according to new information on the deal.
2008’s hurricane Ike was the most powerful Texas hurricane in recent memory, striking the Galveston area as a strong Category 2 storm to become the third most costly U.S. hurricane ever to make landfall and the most costly to hit Texas. So it’s no surprise to learn that a repeat of hurricane Ike would result in an insured loss to TWIA large enough to breach the $1.9 billion attachment point of its new Alamo Re catastrophe bond.
A pre-rating comment report from Fitch Ratings, the rating agency that will provide a credit rating for the Alamo Re cat bond issue, provides additional information on the transaction structure, modelling and risks included in the covered portfolio of risk.
The Alamo Re 2014-1 cat bond launched earlier this week to the insurance linked investment market, offering a single tranche of notes sized at $300m, but likely to upsize towards TWIA’s target of $400m before close. The Alamo Re cat bond transaction sees German reinsurer Hannover Re stepping in between the special purpose insurer and TWIA to act as a transformer for the issue, with Hannover Re acting as the ceding reinsurer in the transaction, meaning that TWIA enters into a reinsurance agreement with Hannover Re while it enters into a retrocession agreement with Alamo Re Ltd.
The notes issued by Alamo Re will collateralize reinsurance agreements to provide TWIA with a source of fully-collateralized, multi-year reinsurance protection against Texas named storms on an annual aggregate basis using an indemnity trigger. The term of the cat bond will be three years from the issuances completion.
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.
Fitch Ratings said that it expects to rate the notes issued by Alamo Re Ltd. in the Series 2014-1 cat bond issuance ‘Bsf’.
That’s all the additional information we have found on the Alamo Re Ltd. (Series 2014-1) catastrophe bond. You can read all about the cat bond deal in the Artemis Deal Directory. We will update you further as the transaction progresses to market.