The Board of the Texas Windstorm Insurance Association (TWIA) is being urged to enter the catastrophe bond market and plan for a renewal of expiring Alamo Re notes sooner than normal, as market conditions could make the placement more challenging.
TWIA’s reinsurance broker Gallagher Re has urged the Board of the residual market insurance entity to consider commencing its reinsurance renewal planning process immediately, at least in terms of the cat bond coverage likely to be sought.
Normally, TWIA brings catastrophe bonds to market through its Alamo Re program of deals just prior to the start of the US hurricane season.
That normally involves decisions being taken as to how much reinsurance to buy by the end of the first-quarter of the year, with the placement process running through April and into May, typically.
Things are likely to be a little different this year and Gallagher Re and its Gallagher Securities unit are advising TWIA get out sooner, than later, especially for any cat bond renewals.
TWIA has $1.1 billion of Alamo Re catastrophe bonds in-force, but $400 million of that is slated to mature before the 2023 hurricane season.
Because of the hardening of the reinsurance market, which Gallagher Re calls historic, the broker recommends that TWIA’s reinsurance planning and purchasing process for 2023 begins as soon as possible.
As a result, they ask TWIA’s Board to set a 1-in-100 year reinsurance purchasing target for 2023 earlier than they normally would, with an interim meeting likely to be called for January.
They also ask for the reinsurance renewal process commencement to be authorised, at least for the next Alamo Re catastrophe bond.
Gallagher Securities has urged TWIA to begin the preliminary cat bond placement process this month, at least getting the initial compliance and legal tasks underway.
Then, they say it would be best to get the risk modelling information available for the start of January, while also preparing the cat bond offering documents that month, alongside the additional interim TWIA Board meeting being held to decide on the 1-in-100 year reinsurance purchase level.
With the goal of getting a cat bond offering out to investors for the end of January 2023, so being able to hold investor meetings in early February.
Ideally, a first Alamo Re catastrophe bond for 2023 can therefore be priced by the end of February, Gallagher Securities has proposed.
Importantly, this will also give time for TWIA to come to market with a second Alamo Re catastrophe bond, should market conditions prove conducive to do so in 2023.
By getting out early TWIA can avoid what is typically a busy point of the cat bond issuance year, while also gaining early insights into capital markets pricing of reinsurance, likely alongside early indications for traditional reinsurance.
That would allow TWIA to make an informed decision as to whether to sponsor a second cat bond in 2023, perhaps making the capital markets an even larger piece of its overall reinsurance needs for the next hurricane season.
Of course, TWIA is likely to require more reinsurance next year anyway, as not only have its exposures increased year-on-year, but there is also inflation to content with.
As we explained in an article in November, TWIA’s reinsurance needs could increase to close to $3 billion in 2023, meaning more coverage is required as the 1-in-100 year grows due to increased in-force policy exposure and inflationary pressures.
With the $400 million cat bond maturing, we’d imagine TWIA will be hoping to renew that much cover from the cat bond market at least.
But, like every other reinsurance cedent, conditions across reinsurance and ILS markets are challenging, making the advice from Gallagher Re to get out early all the more relevant.
Update: TWIA’s Board approved a resolution to begin the catastrophe bond sponsorship process early, to set meetings in order to ascertain the 1-in-100 year level the insurer will need to buy reinsurance to for 2023, and to commence the reinsurance placement process early as well.
Gallagher Securities will go to market with a catastrophe bond designed to replace the maturing 2020 issuance.
As a result, it will target an earlier, likely February, issuance of an Alamo Re catastrophe bond and may look to a second issuance in 2023, if market conditions are conducive.