TWIA cat bond reset & renewal underway, reinsurance discussions begin

The staff of the Texas Windstorm Insurance Association (TWIA) are working with reinsurance broker Gallagher Re and its capital markets unit Gallagher Securities, to reset its existing $700 million of catastrophe bonds, renew a soon to mature $400 million cat bond deal, and begin discussions with reinsurers about its renewal needs.

As we’d previously reported, TWIA set its minimum PML for 2023 at roughly $4.5 billion, including LAE.

With a stated retention target of $2.265 billion of statutory capital, TWIA needs to secure a minimum of $2.243 billion of reinsurance and cat bond coverage to run through 2023 at the 1-in-100 PML, while its Board also agreed to get quotes on another ~$700 million to potentially take its claims paying capacity to $5.2 billion, dependent on cost and affordability.

TWIA has $1.1 billion of Alamo Re catastrophe bonds in-force, but a $400 million piece of that is slated to mature before the 2023 hurricane season, so that means $700 million are really set to be in-force through the 2023 hurricane season.

Those $700 million are made up of $500 million of Alamo Re Ltd. (Series 2021-1) cat bonds and $200 million of Alamo Re Ltd. (Series 2022-1).

Speaking during a TWIA Board meeting today, Jim Murphy, Chief Actuary, explained that, “We’re looking at resetting the existing catastrophe bonds, to align with our current CRTF levels and the revised PML.”

The Alamo Re cat bonds, like almost every other cat bond deal, have a variable reset feature, allowing their attachment to be raised within certain bounds, while their expected loss and the coupon paid to investors gets adjusted to compensate accordingly.

The $400 million Alamo Re II Pte. Ltd. (Series 2020-1) cat bond that matures before the wind season is targeted for a renewal.

We understand from our sources that TWIA will likely opt to use the same issuance vehicle for this, Alamo Re II based in Singapore. That would allow TWIA to benefit from any grant available from the Monetary Authority of Singapore, which would lower issuance costs a little for the sponsor.

Murphy said that, “We’ve begun work in issuing a replacement catastrophe bond, to replace the expiring cat bond,” so that process is now underway and a new Alamo Re II cat bond could hit the market at any time.

Finally, Murphy also said that, “We’ve begun setting up meetings to discuss with reinsurers, our plans for the reinsurance renewal this season.”

As we previously reported, TWIA’s staff were wary of the potential cost of catastrophe bond coverage in 2023, having seen the increase in spreads witnessed at the end of last year.

But, with some cat bonds now executing more favourably for their sponsors, such as Ariel Re’s latest that looks set to price down, suggesting a more balanced market equilibrium is now being found, while investment managers are forecasting a chance of new cat bond market records being set, with many saying clients are looking to deploy more capital into cat bonds, perhaps a cat bond could actually prove to be a more cost-effective solution for TWIA than had been thought possible even just a few weeks back.

The market is moving exceptionally fast right now and as inflows come in, if a new issuance is well-timed and hits the market with all the right terms and disclosures investors and managers are looking for, there is a chance they could be very well-received and benefit from optimal execution, in this higher priced coverage environment.

TWIA intends for the new catastrophe bond for 2023 to sit alongside its other catastrophe bonds and traditional reinsurance.

With around $1.543 billion of new cat bonds and reinsurance needed for 2023, just to get to the 1-in-100 year PML level, it’s going to be interesting to see how the mix falls and whether the cat bonds could actually take a bigger slice than expected, if investor appetite is as strong as some of our sources are suggesting.

As ever, TWIA will buy traditional reinsurance and cat bonds in the most cost-effective mix, so if cat bond market conditions are conducive, we could see more than the $400 million maturing bond being purchased.

We’ll update you as and when more details on TWIA’s cat bond and reinsurance renewal process come to light.

You can read about all of TWIA’s Alamo Re catastrophe bonds it has ever sponsored in the Artemis Deal Directory.