TWIA pleased with $2.1bn pro-rata reinsurance & cat bond program

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The Texas Windstorm Insurance Association (TWIA) has successfully secured its planned $2.1 billion reinsurance and catastrophe bond program for the 2019 hurricane season, saying it is pleased with the placement as both reinsurance and new Alamo Re cat bonds were well-received.

TWIA logoAt the same time, TWIA has successfully shifted its reinsurance tower to a pro-rata approach, as we first explained was set to be the case back in February this year.

The $2.1 billion of private market reinsurance and catastrophe bond coverage provided by TWIA’s renewal is at the lowest end of its funding needs, as this reinsurance will sit on top of $2.1 billion of other sources of funding, to bring TWIA’s protection to the statutory minimum of $4.2 billion for the 2019 hurricane season.

TWIA’s reinsurance program is effective as of June 1st and provided $4.2 billion in aggregate funding, including the $2.1 billion private market risk transfer (reinsurance and cat bonds), plus the Catastrophe Reserve Trust Fund (CRTF) of around $118 million, as well as alternating layers of debt securities issued and member company assessments which together make up $2 billion of the funding tower.

The reinsurance program provides TWIA with aggregate coverage, so multiple hurricane or thunderstorm loss events are covered under the terms of the traditional reinsurance and catastrophe bonds.

The $2.1 billion of risk transfer is made up of $400 million of Alamo Re Ltd. (Series 2017-1) catastrophe bonds, $400 million of Alamo Re Ltd. (Series 2018-1) catastrophe bonds, $200 million from the recently issued Alamo Re Ltd. (Series 2019-1) cat bond deal, as well as $1.1 billion of newly renewed traditional reinsurance coverage.

The traditional reinsurance has a one-year term, while the catastrophe bonds are all multi-year in nature, so providing greater certainty in reinsurance capital pricing over the longer term for TWIA. All of the instruments attach at $2.1 billion and provide a pro-rata share of coverage up to the $4.2 billion tower exhaustion point.

TWIA told us that it feels the placement of its 2019 reinsurance program has been successful.

Guy Carpenter acted as reinsurance broker for the renewal, while GC Securities acted on the recent catastrophe bond issuance for Alamo Re 2019.

TWIA explained the importance of the catastrophe bonds in the funding tower, telling us that they provide “a stable source of cat funding at pricing levels generally comparable over time to the traditional reinsurance market” while also bringing diversification to the risk capital, through a diverse group of investors, which acts as a complement to TWIA’s traditional reinsurance capital sources.

The fact they are multi-year and have staggered maturity dates is also seen as a positive, as TWIA feels this helps to insulate it from market fluctuations.

Both the $1.1 billion of reinsurance secured and the new $200 million Alamo Re cat bond issuance were well-received at the renewal, TWIA said.

The Alamo Re cat bond ended up securing pricing at the mid-point of guidance, at 4.5%, which in the current market conditions must be seen as a successful issuance when so many other cat bonds have priced up at the renewal this year.

TWIA told us that the successful 2019 reinsurance placement is largely down to the market’s positive response to its lengthening record of strong financial management, as well as to several years of continuous operational and financial improvements.

John Polak, General Manager of the Texas Windstorm Insurance Association, told us, “TWIA is pleased by the success of our reinsurance placement for the 2019 hurricane season. Our strong relationships in both the ILS and traditional reinsurance markets, bolstered by our record of responsible financial stewardship, allows us, once again, to have sufficient funding to pay catastrophic losses, so we can deliver on our promise to our policyholders.”

The shift to a fully pro-rata reinsurance tower had been coming for some time, as only the legacy cat bonds that have now matured were still sitting in horizontal layers a year ago.

Now, with all the outstanding catastrophe bond coverage sitting vertically, the transition to each instrument taking a share of any loss from the ground up is complete for 2019.

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