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Collateralised participation on TWIA emerges in BSX notes

A collateralised reinsurance deal for the Texas Windstorm Insurance Association (TWIA) has resulted in the debut bond issuance from service company Kane's private cat bond platform.

TWIA is the ceding insurer of the deal, according to the listing on the Bermuda Stock Exchange (BSX).

The $9.5mn note issuance, simply named Series 1-2013, has a one-year risk period running until 5 June 2014. Kane confirmed that the deal covers US wind risk on an indemnity basis, with a zero-coupon structure.

It was the first deal launched through Kane SAC Limited Note Program, the manager's new platform, and was also the first note issued by a segregated cell company to list on the BSX.

TWIA has bought collateralised reinsurance in the past, including a cover that was transformed into a private bond. Its 2012 reinsurance programme lists Nephila's Poseidon Re as a provider as well as Solidum Re Dom.

Switzerland-based insurance-linked securities (ILS) fund manager Solidum issued the $34mn Dom notes in 2012 and it is believed this was renewed in 2013.

The reason ILS fund managers transform collateralised reinsurance into note format - so-called "cat bond lites" - is because some funds require investment holdings to be tradeable.

Some managers do this using their own transformers, but by using something like the Kane platform they can avoid setting up their own special purpose insurance vehicles to structure a deal.

These cat bond lites are thus motivated by investor needs, rather than being a private cat bond transaction initiated by the cedant. A private cat bond will typically be distributed to a wider group of ILS specialists, much as with a public cat bond, but without a rating or third party modelling analysis in order to cut costs.

Kane is not the only services company to target the market for cat bond lites and private cat bonds.

Risk transformer Tokio Solution Management and GC Securities launched their platform, Tokio Tensai, in June.

Barclays Capital also launched a private cat bond issuance platform in late 2011 and Towers Watson has completed several private bond transactions this year.

Kane Bermuda managing director Robert Eastham said the decision to list the notes on the BSX was due to investor demand for structures in a tradable format.

"Moving forward, we see this platform playing a key role in facilitating the flow of smaller transactions into the collateralised reinsurance sector," he said.

"Our goal is to reduce both time to market and structuring costs by providing a very standardised and efficient means for investors to access the reinsurance markets."

Meanwhile, the deal formed part of an expanded reinsurance spend from TWIA this year.

The organisation expanded its cat reinsurance placement for the 2013 hurricane season by 17 percent to $1bn and lowered its retention from $2.3bn to $1.7bn, the residual insurer confirmed.

TWIA had secured two options for its cat reinsurance programme by early June that would provide it with substantial limit at two potential attachment points, depending on a pre and post-event financing structure.

The first option was a single $1bn xs $1.7bn layer while the second was a larger but higher-attaching $1.25bn xs $2.2bn layer.

According to an overview by the Texas Department of Insurance released on 9 August, TWIA opted for the former.

TWIA's annual report card, issued at the end of May, estimated the premium for the layer at $106mn, equivalent to a 10.6 percent rate-on-line. The cat programme covers for windstorms within the 1-in-20 year and 1-in-50 year probability range.

Last year, TWIA bought $850mn of limit attaching at $2.3bn through reinsurance broker Guy Carpenter and paid approximately 11.3 percent rate-on-line for the cover.

The organisation has been struggling with a deficit due to Hurricane Ike claims.

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