TWIA to begin cat bond & reinsurance renewal, needs ~$1bn more for 2024

The Board of the Texas Windstorm Insurance Association (TWIA) approved its staff to begin the process of renewing both catastrophe bonds and reinsurance for 2024 yesterday, with the understanding that around $1 billion more in reinsurance funding may be needed in 2024.

As we reported earlier this month, TWIA was expected to need to buy more reinsurance and risk transfer in 2024, as its exposure growth has been significant.

It had also been advised to get into the catastrophe bond market sooner, than later, in order to renew a maturing $500 million issuance.

A motion was put to the Board of TWIA, the not-for-profit wind and hail insurer of last resort for the state of Texas, yesterday, asking for approval to begin this process and the need for more reinsurance funding, from whatever sources, was highlighted again.

On the exposure front, TWIA has been rapidly assuming new policies over the last year, while exposure is growing fast thanks to construction and inflationary factors as well.

TWIA’s policies in‐force and direct liability have increased 27% and 57%, respectively, over the last two years, driven both by insurer insolvencies and the challenged state of the private insurance market on the coast, the Board heard.

In the year to September 30th 2023, exposure rose by 26.2% and premium by 26.6%, with 242,888 policies in-force at that time and $91.9 billion in exposure on the TWIA books.

Policies in-force are projected to reach nearly 265,000 by the end of 2024, with direct written premiums of just over $815 million.

There has been an increase in the Catastrophe Reserve Trust Fund (CRTF), one of TWIA’s sources of funding, but this lags the growth in policy count so is not particularly significant.

The CRTF is projected to grow to $461 million by the end of 2024, up from the current $278 million.

As a result, the TWIA Board heard of the need to secure funding to a projected $5.635 billion for 2024, well up on the $4.508 billion funded to in 2023.

With that extra billion dollars in funding required, the CRTF not expanding rapidly and other financing sources static, reinsurance and risk transfer is the focus for TWIA.

Projections suggest at least $977 million more in reinsurance will be needed for 2024 and staff said this would likely be a billion dollar increase, once the final exposure figures are known.

The Board heard that as the only flexible and variable portion of TWIA’s funding is its reinsurance and catastrophe bonds, that is where the focus must lie for 2024.

TWIA’s Chief Actuary Jim Murphy explained to the Board at yesterday’s meeting, “The only lever that we can pull, the only adjustment that we can make, to meet our statutory requirements to hit that 1-in-100 year PML in funding, is reinsurance.

“Given the growth that we expect to see in our PML next year, we could easily see the reinsurance going up a billion dollars from last year, because our PML’s we expect to be going up more than a billion dollars.”

He explained that he is confident the increase in reinsurance will be needed for 2024, as it is “the only thing that can increase to get us to that 100-year PML.”

TWIA’s staff met with reinsurers in October and has been in discussions with its reinsurance broker Gallagher Re already.

On the state of the market, Murphy said that the reinsurance market remains a lot harder than a few years back, but said that conditions are not getting any worse at this time.

Murphy said, on the larger reinsurance purchase needed, “I think that we are cautiously optimistic that we will be able to fill our requirements and get everything done. It will be difficult, it’s a large increase in the total amount of reinsurance that we will need to be purchasing from last year to this year.”

So he said the staff are asking for specific approval to begin this process, to ensure capacity can be secured and the expiring catastrophe bond can be renewed.

Murphy explained, “We expect that we will need to purchase a lot of additional reinsurance when the board makes its final decision in February and we’re asking for specific authorisation to begin that process now, in advance.

“We know for example, we will need to replace $500 million of an expiring catastrophe bond. There’s a lot of administrative work that goes along with the issuing of the catastrophe bonds that we would like to get started right away, basically, so that we are ready to act when the board does make its final decision.”

TWIA’s 2023 reinsurance program consisted of $2.24 billion of reinsurance limit, with TWIA’s catastrophe bonds making up the biggest share at $1.2 billion, the rest being traditional reinsurance.

For 2024, it appears TWIA could buy somewhere around $3.3 billion, across traditional reinsurance and cat bonds.

Of the $1.2 billion of catastrphe bonds TWIA currently has outstanding, $500 million mature just prior to the 2024 hurricane season, meaning only $700 million of cat bonds will definitely be in-force.

This has led TWIA to consider an early foray into the catastrophe bond market, well in-advance of its renewal date.

At the meeting yesterday, TWIA’s Board approved a motion to allow the staff to begin this process.

The motion stated, “Given the continuing hard market conditions, the need to replace $500 million of expiring catastrophe bonds in 2024, and a potentially significant increase in the overall size of the reinsurance program due to TWIA exposure growth, Gallagher is recommending that the reinsurance planning and purchasing process begin as soon as possible. To that end, they recommend the TWIA board authorize commencement of the reinsurance placement process at the December 12 meeting, at least in terms of a catastrophe bond transaction to replace the expiring 2021 Alamo Re bonds.”

The TWIA Board, “Resolved, that TWIA staff is authorized and directed to engage Gallagher Securities and others as recommended by the broker to begin the process of placement of the June 1, 2024 – May 31, 2025 reinsurance program.”

So, now that process can begin and the first target will likely be setting the timing for a new catastrophe bond issuance, to replace the maturing notes and potentially to upsize on that as well.

TWIA’s Board will likely be motivated to lock-in multi-year reinsurance for 2024, as should there be a major storm event next hurricane season, the following year’s renewal would likely be an even harder and more costly affair.

Therefore, securing more catastrophe bond cover in 2024 could prove appealing, especially when cat bond market capacity is currently very efficient for the higher-layer needs of a coastal risk focused exposure portfolio, such as TWIA’s.

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