The Texas Windstorm Insurance Association (TWIA), the insurer of last resort who provide windstorm and hail insurance to Texas Gulf Coast property owners who might otherwise be left uninsured, is the latest semi-governmental insurer to look seriously at the catastrophe bond market as a way to complement their reinsurance and risk transfer program. A meeting of the TWIA Actuarial & Underwriting Committee held yesterday discussed a proposal from broker Guy Carpenter to bring a cat bond to market in March 2012.
The goal of the TWIA through their 2012 reinsurance and risk transfer program is to be covered for a 1 in 100 year hurricane be that through traditional or alternative sources of reinsurance cover. To date the TWIA has not issued a catastrophe bond, preferring to rely on traditional reinsurance, although cat bonds were discussed last year but we believe discounted due to the market pricing conditions.
This year is looking more favourable though and the TWIA is keen to utilise cat bonds to augment their reinsurance cover as long as the deal meets certain conditions. Pricing is of course the main issue, the TWIA want to ensure that any cat bond layer of their reinsurance program is comparable in price or even cheaper than traditional reinsurance. Pricing conditions are attractive in the market right now and recent examples of cat bonds coming to market, particularly the California Earthquake Authorities Embarcadero Re, show that cat bonds can work for these semi-governmental insurers and be extremely price competitive. Another issue the TWIA want to be assured of is that payout of a cat bond would come before they themselves have to payout policyholder claims after an event has hit the State. Cat bonds are of course well suited to providing a speedy payout, particularly when the trigger and contract language is designed with that purpose in mind.
The discussion of catastrophe bonds at yesterdays TWIA committee meeting took approximately two hours and went into great details about the potential structures that could be used to bring a cat bond to market. Broker Guy Carpenter had representatives present at the meeting and took the committee members through a number of scenarios of how a cat bond could be achieved.
The committee members were told that capital markets based risk transfer in the form of a cat bond would complement their traditional reinsurance coverage and how it has benefitted other semi-governmental insurance organisations. They were presented with two possible structures for a cat bond, a transformer or a dedicated reinsurer structure, the committee decided that a transformer would be more appropriate for a first foray into the capital markets due to the lower friction and potentially lower legal costs.
Guy Carpenter presented a range of coverage layer options with estimated pricing for a three-year cat bond. The TWIA already has reinsurance coverage which provides $636m of coverage xs $1.6 billion. The cat bond layers presented proposed coverage for claims above $2 billion up to $3.8 billion with estimated annualised all-in costs ranging from 7.39% for the highest layer of cover to 10.52% for lower layers attaching at $2 billion. The actual size of the proposed cat bond is unknown, a figure of $250m was used as an example at one point during the meeting.
During the meeting Guy Carpenter also presented some feedback from four investors they had approached about the potential cat bond to gauge their appetite for the transaction. Overall the investors were keen as a cat bond solely exposed to Texas hurricane risk does not exist in the market and will offer them some level of diversification. One investor indicated an interest in up to $100m of capacity in the deal and also stated that they felt that the market could clear a TWIA cat bond as large as $500m. The TWIA asked Guy Carpenter to go back to the investors to gauge appetite and pricing for a more specific layer of cover.
The TWIA is also looking at other forms of collateralised reinsurance (including retro) but were keen to ensure that this didn’t conflict with their sources of traditional reinsurance and were also unsure about placing a large amount of risk with a single investor backed party.
TWIA were told that the proposed cat bond could take 12 weeks to get to market and Guy Carpenter proposed that it would be better to aim for an end of March 2012 issuance date, to separate it from their reinsurance renewal of 1st June 2012 and also to get the deal to market as soon as possible as the pipeline of deals is likely to be busy during the first half of 2012.
The meeting ended with the committee unanimously voting in favour of putting the proposal in front of the TWIA Board at their next meeting in December with the aim of getting approval at that Board meeting to proceed with the ground-work to get the cat bond to market. They noted that the work would need to start as soon after that meeting as possible if they were to keep the end of March issuance date in sight.
A Texas windstorm only catastrophe bond from the TWIA would definitely sit well with investors at that time next year as there are likely to be a number of U.S. hurricane cat bonds coming to market, so the Texas only component will be good for investors seeking to balance their portfolios. We’ll update you on the TWIA’s decision as to whether they will pursue the cat bond proposal after their board meeting in December.
We’ve discussed the possible use of cat bonds by the TWIA a number of times before. Read all our previous articles on the TWIA here.