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

GC Securities said it designed the Alamo Re catastrophe bond shelf program, for sponsor the Texas Windstorm Insurance Association (TWIA), to allow the three tranches of notes, including the two from the recent $700m Alamo Re Ltd. (Series 2015-1), to “interact seamlessly.”

TWIA’s $700m Alamo Re Ltd. (Series 2015-1) catastrophe bond completed recently as the largest cat bond transaction of 2015 so far. Reinsurance broker Guy Carpenter’s investment banking and capital markets unit GC Securities acted as the sole structuring agent and bookrunner for the deal, designing the structure to best fit sponsor TWIA’s needs.

This the the second time that TWIA has utilised the capital markets for reinsurance protection via a catastrophe bond issuance, with its $400m Alamo Re Ltd. (Series 2014-1) having been issued a year earlier.

Together the $1.1 billion of cat bond coverage from the Alamo Re shelf program provides TWIA with a pool of aggregate reinsurance protection and the way the issuances have been designed complement its traditional reinsurance protection, while allowing the individual cat bond tranches to interact seamlessly as well.

The 2014-1 Alamo Re cat bond has now been reset, with TWIA opting to adjust its attachment point so that the coverage fits in between the two tranches of the 2015-1 Alamo Re deal. Now all three tranches sit together, alongside traditional reinsurance, within TWIA’s reinsurance tower.

The 2014 cat bond still has two years left to run to maturity, while the 2015-1 Class A tranche provides three years of cover and the 2015-1 Class B tranche provides four years.

This staggering of maturities is vital to a sponsor like TWIA, providing greater certainty at renewal times and meaning it has diversification of reinsurance capital sources guaranteed across future hurricane seasons.

GC Securities said that this helps to manage the amount of cat bond capacity maturing at any one time, therefore this “mitigates the refinancing risk associated with such capacity upon its maturity.”

Cory Anger, Global Head of ILS Structuring at GC Securities, commented; “We are honored to have facilitated TWIA’s second catastrophe bond transaction and cost effectively contributed to bringing TWIA to its stated 1-in-100 year funding goal within its budget. The structure of the Alamo Re shelf program allowed TWIA to access additional catastrophe bond capacity more quickly while incurring lower transaction expenses as a subsequent issuance.”

Anger went on to explain the importance of designing the Alamo Re structure to ensure that the cat bond coverage complements traditional reinsurance purchases and has the flexibility to allow TWIA to adjust it to suit its needs in future years.

“Additionally, being mindful of financing risk associated with maturing catastrophe bonds, we designed the interaction of the Series 2014-1 Notes and the Series 2015-1 Notes to not only achieve combined results for TWIA in 2015 but also to manage duration risk to TWIA as each class within the respective series matures.

“We also designed the three tranches to interact seamlessly with each other. This approach provides flexibility to TWIA depending upon its needs to adjust the layering of such risk transfer capacity relative to the prior year’s results/impact to TWIA’s capital base or TWIA’s changing exposures,” Anger said.

John Polak, General Manager of the Texas Windstorm Insurance Association, explained the benefits of accessing the cat bond market for the insurer; “The use of catastrophe bonds has been instrumental for TWIA to achieve our goal of funding to our 100-year PML. Catastrophe bonds have allowed us to manage the overall costs of our risk transfer program, diversify our counterparties, and manage our counterparty credit risk. We appreciate the coordinated efforts of Guy Carpenter and GC Securities to holistically evaluate all sources of capacity.”

Additionally, Polak explained that TWIA now benefits from a mix of counterparties and capital sources, across both ILS and traditional markets; “Our partnership with Guy Carpenter and GC Securities has resulted in a cost-effective program that best combines traditional reinsurance, collateralized reinsurance, and catastrophe bond capacity. We value our stable partnership with Hannover Rück SE to facilitate our access to catastrophe bond capacity.”

Reinsurer Hannover Re acted as the transforming reinsurer for the Alamo Re 2015-1 deal, helping TWIA to access the capital markets more efficiently.

CEO of the reinsurer Ulrich Wallin commented; “We are delighted that TWIA has used its cat bond program ‘Alamo’ for the second time and has again trusted Hannover Re to help manage their cat bond process in a professional and efficient manner alongside GC Securities. It has been a pleasure for us being part of the successful transaction team.”

Investors received TWIA’s second trip to the ILS markets to issue a cat bond with significant support, helping it to become the largest single cat bond transaction this year.

Chi Hum, Global Head of ILS Distribution at GC Securities, explained; “GC Securities is pleased to have been selected by TWIA to work with the Guy Carpenter broker team to develop investor support for the USD 700 million Alamo Re Ltd. Series 2015-1 cat bond issuance. Recognizing TWIA’s continuing presence in the cat bond market and the goals of optimizing the proper mix of capacity sourcing and pricing of a well-structured reinsurance program, the investors responded with significant interest for the transaction and more broadly, with support for TWIA on a going-forward basis. The successful execution of this cat bond is the direct result of an organized and deliberate effort on the part of TWIA to communicate their story to the investor base. We are pleased to have been a part of this strategy.”

Finally, David Priebe, Vice Chairman at Guy Carpenter, commented; “The successful execution of the second Alamo Re catastrophe bond demonstrates Guy Carpenter’s and GC Securities’ continued commitment, expertise and industry-leading position in providing capital markets-based risk transfer solutions to residual market insurers and other public entity clients.

“Alamo Re exemplifies the benefit of the convergence between the reinsurance and capital markets and demonstrates the ongoing value that TWIA received from GC Securities, Guy Carpenter and Hannover Re, all of whom delivered a solution specifically tailored to meet TWIA’s risk transfer needs.”

After the completion of the $700m Alamo Re Ltd. (Series 2015-1) cat bond and added to the $400m Alamo Re Ltd. (Series 2014-1) deal, TWIA now has $1.1 billion of catastrophe bond protection in-force.

That volume of cat bond coverage in-force positions TWIA as the sixth largest sponsor, based on risk capital outstanding, according to Artemis’ Deal Directory data.

Also read:

– TWIA’s Alamo Re 2014 cat bond upgraded after variable reset.

– TWIA hits 100-year funding level thanks to Alamo Re cat bonds: Polak.

– TWIA’s Alamo Re 2015-1 cat bond grows to $700m.