Cat bonds help TWIA surpass funding expectations for hurricane season


The Texas Windstorm Insurance Association (TWIA) has secured $4.9 billion in total aggregate funding for the 2017 hurricane season, which includes $1.1 billion of catastrophe bonds and around $800 million in the Catastrophe Reserve Trust Fund (CRTF).

TWIA’s 2017 renewal includes $2.1 billion in reinsurance, which is slightly down on the $2.2 billion for 2016, and which includes $1.1 billion in catastrophe bond transactions, being the $700 million Alamo Re Ltd. (Series 2015-1) and the $400 million Alamo Re Ltd. (Series 2017-1) deals, and $1 billion in traditional reinsurance protection.

At the programs core, the outstanding catastrophe bonds provide TWIA with multi-year structures, a stable source of cat funding at pricing levels it found, generally, comparable to the traditional reinsurance marketplace.

Furthermore, catastrophe bonds enable TWIA to diversify both its funding in terms of capital and investors, which compliments its traditional reinsurance partners.

TWIA underlined how well received the 2017 catastrophe bond issuance was by the insurance-linked securities (ILS) community. Investor appetite saw the deal oversubscribed, which resulted in an upsizing from $250 million to $400 million, and also an improvement in the interest rate spread.

“The outstanding catastrophe bonds have staggered maturity dates so as to reduce TWIA’s exposure to fluctuations in market conditions,” explained TWIA’s Chief Financial Officer (CFO), Jerry Fadden.

TWIA also highlighted how well the market received the placement of its traditional reinsurance, which was also oversubscribed, with final firm order pricing below initial indications.

The total $4.9 billion in funding is effective June 1st, 2017 to May 31st, 2018, and is in excess of the 1-100-year funding requirement, which, TWIA says is based on a blend of the RMS and AIR models, of roughly $4.3 billion.

The firm explains that a reduction in projected exposures and changes to hurricane models saw a decrease in the 100-year Probable Maximum Loss (PML) for 2017, declining to $4.3 billion from $4.7 billion a year earlier.

Supporting its reinsurance component, the 2017 renewal also includes roughly $800 million in the CRTF, $1 billion in Class 1, 2, and 3 public securities, and $1 billion in potential insurance company assets.

In the event the CRTF is exhausted, TWIA also purchased $400 million of “second season” cover for its 2017 program.

John Polak, TWIA General Manager, said; “Every year, TWIA pushes itself to surpass the funding expectations of the year. This is evidence of TWIA’s commitment to ensure the financial sustainability of the enterprise to provide quality service to our policyholders, and operate efficiently to achieve the best use of policyholder funds.

“We want all our stakeholders to be confident that TWIA remains fiscally responsible and prepared to pay claims should a catastrophic event occur.”

Guy Carpenter acted as TWIA’s reinsurance broker for the traditional element of its reinsurance placement, with GC Securities serving as structuring agent for TWIA’s catastrophe bonds.

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