TWIA targets $1.9bn of cat bonds & reinsurance, seeks pricing for extra $1bn

The Texas Windstorm Insurance Association (TWIA) will aim to secure $1.9 billion of protection before the hurricane season from a mix of catastrophe bonds and traditional reinsurance, but its Board also directed its broker to secure pricing for an extra potential $1 billion placement.

The Texas Windstorm Insurance Association (TWIA) secured $2.1 billion of reinsurance protection for the 2020 storm season, with its $400 million Alamo Re II Pte. Ltd. (Series 2020-1) catastrophe bond issuance placed as part of the renewal.

Last year, that was added to $1.1 billion of fresh reinsurance from traditional and other markets including ILS funds, or collateralised players, as well as $600 million of still in-force catastrophe bonds, from $400 million of Alamo Re Ltd. (Series 2018-1) cat bonds and $200 million of Alamo Re Ltd. (Series 2019-1) cat bonds.

That $2.1 billion of reinsurance and cat bonds sat on top of a $2.1 billion layer of funding from TWIA’s Catastrophe Reserve Trust Fund, member assessments on insurers and pre or post-event debt funding sources, to give TWIA $4.2 billion of funding for the 2020 wind season.

So catastrophe bond made up $1 billion of TWIA’s funding for 2020.

This year, for the 2021 hurricane season, TWIA’s required statutory funding level needs to support a 1-in-100 year probable maximum loss of $4.03 billion.

To meet this, the statutory funding will remain flat at the same $2.1 billion as the prior year, meaning the main cat bond and reinsurance program will shrink slightly to $1.9 billion for 2021.

At a meeting held yesterday, TWIA’s Board directed its staff to place a combination of catastrophe bonds and traditional reinsurance amounting to $1.9 billion in aggregate for the coming wind season.

Right now, TWIA has $1 billion of catastrophe bonds in-force, from the most recent $400 million Alamo Re II Pte. Ltd. (Series 2020-1)  issuance, the $400 million of Alamo Re Ltd. (Series 2018-1) cat bonds and $200 million Alamo Re Ltd. (Series 2019-1) cat bonds.

However, the $400 million Alamo Re 2018-1 cat bonds are scheduled for maturity at the end of May, so in reality TWIA has just $600 million of catastrophe bond supported reinsurance coverage ready for the 2021 hurricane season.

That leaves the Association needing $1.3 billion of fresh cat bonds or reinsurance to reach its statutory funding target, which will need to be placed this year.

We understand that a new Alamo Re Pte. catastrophe bond is expected and preparations are said to be being made, according to our sources.

It will be interesting to see what mix of cat bonds and reinsurance TWIA opts for when it comes to market with its renewals this year, as it could be telling on pricing.

Of course, with TWIA’s latest cat bond issuance vehicle domiciled in Singapore, there could be savings to be made by diverting more of the limit to the cat bond market, given the Singapore ILS grant may support its efforts.

However, there is a chance TWIA purchases an extra $1 billion of reinsurance for 2021 as well, as its Board has directed its reinsurance broker Guy Carpenter to secure pricing information for a potential purchase of an additional $1 billion in reinsurance.

That would take TWIA’s total funding for the 2021 storm season to $5 billion, a new high.

TWIA explained that, in order for this to happen and its reinsurance to take its total funding above the 1:100 Probable Maximum Loss, it will need to be paid for through member company assessments.

That additional purchase, which would take TWIA’s 2021 reinsurance and cat bond renewal to $2.9 billion in size, would result in a much better protected TWIA and as a result Texas’ wind exposed property owners.

Clearly, rates may be up on last year’s reinsurance renewal for TWIA, not least after the busy hurricane season in 2020, but also as reinsurance and cat bond pricing has generally firmed since then.

However, the cat bond market currently offers good value to sponsors seeking to lock-in reinsurance protection over multiple years and with the added benefits of the Singapore ILS grant scheme it will be interesting to see whether TWIA could look to secure its largest cat bond issuance to-date in 2021, $400 million being its previous largest.