The Texas Windstorm Insurance Association (TWIA) is now back in the catastrophe bond market and seemingly looking to maximise the opportunity with a dual series issuance of Alamo Re Ltd. (Series 2023-1 & 2023-2) cat bonds, one series offering Rule 144A notes, the other Section 4(A)2, Artemis understands.
It’s an interesting approach, to seek to issue the two types of securities at once, but with the residual market property insurer for the State of Texas having been preparing for this new catastrophe bond issuance for some weeks, alongside its reinsurance broker Gallagher Re and its Gallagher Securities division, it seems the offering must be designed to try and maximise the coverage TWIA can source from the capital markets at this time.
As we’d previously reported, TWIA was anticipating the very hard reinsurance market and so made a decision to enter the cat bond market earlier than usual in 2023.
The residual market insurer said it is wary of the costs of catastrophe bonds, in the hard market environment, but seeking overall up to $2.92 billion of reinsurance protection this year.
As a result, discussions began on this Alamo Re 2023 catastrophe bond issuance back in early February, perhaps before, and it seems the approach being taken is likely designed to try and minimise cost, where possible, while also maximising the opportunity for securing reinsurance from the cat bond market and its investor base at this time.
In this case, it seems TWIA is looking to tap the growing demand for catastrophe bond investments with an interesting dual-series approach, featuring both Rule 144a cat bond securities and Section 4(A)2 cat bond securities as well.
As with every TWIA-sponsored catastrophe bond, we understand that TWIA will use the services of global reinsurance firm Hannover Re as the ceding reinsurer to front the capital markets, while TWIA will be the reinsured party.
Hannover Re will therefore front the Alamo Re special purpose insurer, entering into a retrocessional reinsurance agreement with it, while entering into a reinsurance agreement with TWIA to pass on the protection to the Texas based insurer.
Alamo Re Ltd., the Bermuda based special purpose insurer, is looking to issue two series of notes, with at least $250 million of reinsurance coverage sought for TWIA.
Both Series of notes feature the same risk metrics, the main differences being the type of securities offered, with the Series 2023-1 Class A notes being a Rule 144a offering, the Series 2023-2 notes being a Section 4(A)2 offering.
The $250 million targeted limit will be split across the two series, so allowing TWIA to maximise on demand, for one type of securities or the other, we assume.
The only other difference is that an initial interest spread, before the risk period kicks in, is said by our sources to be higher for the Rule 144a notes. It’s also notable that the Section 4(A)2 notes are still said to have secondary transferability, which is an important consideration for investors.
Both the Series 2023-1 Class A notes and Series 2023-2 Class A notes will provide their reinsurance protection to TWIA, via Hannover Re, on an indemnity trigger and annual aggregate basis, across a three-year term running from June 1st, we’re told.
The reinsurance protection is for Texas named storms and severe thunderstorms, so the same as previous Alamo Re cat bonds have provided to TWIA.
The notes, both series, can attach after a loss of $2.965 billion to TWIA, we understand and cover a share of losses up to exhaustion at $4.508 billion, with a $50 million per-event minimum loss needed for an event to qualify.
As a result, the two series of Class A notes issued will come with initial attachment probabilities of 2.58%, an initial base expected loss of 2.05% and they are being offered to investors with price guidance in a range from 9.5% to 10.5%.
Presumably, the two Series can price differently, so allowing TWIA to test investor appetite for one format of cat bond securities over the other.
We also assume that this means TWIA could elect to drop one Series, if the other proved the more popular, or indeed issue both, to maximise the opportunity from the cat bond market at this time.
It’s a more complex approach, but one that could see TWIA benefit by providing these options to cat bond funds and investors.
In terms of the pricing, TWIA’s Alamo Re 2022 cat bond issued last May had an initial expected loss of 2.51% and the notes priced with a 7.25% spread, so the multiple on offer in 2023 is considerably higher at roughly 5 times the expected loss.
Read all about this new Alamo Re Ltd. (Series 2023-1 & 2023-2) catastrophe bond from the Texas Windstorm Insurance Association and every other cat bond transaction in the Artemis Deal Directory.
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