Alamo Re Ltd. (Series 2023-1)

The Texas Windstorm Insurance Association (TWIA), the residual market property insurer for the State of Texas, is back in the catastrophe bond market for 2023 and trying to tap demand for investments with an interesting dual-series approach, featuring both Rule 144a cat bond securities and Section 4(A)2 cat bond securities as well.

As with every TWIA-sponsored catastrophe bond, we understand that TWIA will use the services of global reinsurance firm Hannover Re as the ceding reinsurer to front the capital markets, while TWIA will be the reinsured party.

Hannover Re will therefore front the Alamo Re special purpose insurer, entering into a retrocessional reinsurance agreement with it, while entering into a reinsurance agreement with TWIA to pass on the protection to the Texas based insurer.

Alamo Re Ltd., the Bermuda based special purpose insurer, is looking to issue two series of notes, with at least $250 million of reinsurance coverage sought for TWIA.

Both Series of notes feature the same risk metrics, the main differences being the type of securities offered, with the Series 2023-1 Class A notes being a Rule 144a offering, the Series 2023-2 notes being a Section 4(A)2 offering.

The $250 million targeted limit will be split across the two series, so allowing TWIA to maximise on demand, for one type of securities or the other, we assume.

The only other difference is that an initial interest spread, before the risk period kicks in, is said by our sources to be higher for the Rule 144a notes. It’s also notable that the Section 4(A)2 notes are still said to have secondary transferability, which is an important consideration for investors.

Both the Series 2023-1 Class A notes and Series 2023-2 Class A notes will provide their reinsurance protection to TWIA, via Hannover Re, on an indemnity trigger and annual aggregate basis, across a three-year term running from June 1st, we’re told.

The reinsurance protection is for Texas named storms and severe thunderstorms, so the same as previous Alamo Re cat bonds have provided to TWIA.

The notes, both series, can attach after a loss of $2.965 billion to TWIA, we understand and cover a share of losses up to exhaustion at $4.508 billion, with a $50 million per-event minimum loss needed for an event to qualify.

As a result, the two series of Class A notes issued will come with initial attachment probabilities of 2.58%, an initial base expected loss of 2.05% and they are being offered to investors with price guidance in a range from 9.5% to 10.5%.

Presumably, the two Series can price differently, so allowing TWIA to test investor appetite for one format of cat bond securities over the other.

We also assume that this means TWIA could elect to drop one Series, if the other proved the more popular, or indeed issue both, to maximise the opportunity from the cat bond market at this time.

Update 1:

TWIA opted for issuing only the 144a securities under the Series 2023-1 issuance, with the Section 4(A)2 Series 2023-2 now not being issued.

But the Series 2023-1 notes are set to upsize, perhaps significantly, with now between $350 million and $450 million of reinsurance being sought, we understand.

At the same time, the price guidance has been lowered to between 8.75% to 9.5%, a further indication of continued softening in the cat bond market.

Update 2:

TWIA is now looking to secure up to $500 million of reinsurance from its latest Alamo Re cat bond, with pricing approximately 12.5% to 15% below the mid-point of initial guidance.

The size target has been elevated again to between $450 million and $500 million of Alamo Re Series 2023-1 notes, while price guidance has been updated again, with latest range being from 8.5% to 8.75%.

Update 3:

TWIA has now secured its new Alamo Re 2023-1 catastrophe bond at double the originally targeted size, to provide the residual market property insurer a $500 million source of reinsurance protection.

At the same time, the notes eventually were priced with a spread of 8.5%, which represents a roughly 7% drop from the mid-point of initial price guidance.