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TWIA seeking new second season cover

The Texas Windstorm Insurance Association (TWIA) is considering options for a new second season cover as it looks set to cut back its use of traditional reinsurance and catastrophe bonds for its 2018 cat programme.

The residual insurer and its broker Guy Carpenter met reinsurers in Bermuda and London in late February and March to assess pricing and availability of cover to meet its statutory requirement to buy to a 1-in-100-year return period.

Last month TWIA's board of directors passed a motion that allocated a risk transfer budget of $110mn, in line with its 2017 spending.

The move authorised the purchase of $1.1bn of new limit in the form of traditional reinsurance and 2018 cat bonds.

Any budgeted sums left over would be used to purchase some form of second season coverage to kick in next year if the insurer is hit by hurricane losses in 2018.

If second season cover is not available, then any remaining money would instead be used to top up this year's tower with whatever traditional reinsurance or cat bond limit could be purchased.

Last month the carrier of last resort for Texans revealed that it had raised its Hurricane Harvey ultimate loss estimate to $1.446bn from $1.132bn.

The loss tally remains well short of the $2.8bn attachment point on TWIA's 2017 reinsurance structure but has wiped out its $800mn premium and catastrophe reserve trust fund (CRTF).

The association's expiring funding structure included $1bn of traditional reinsurance and a $400mn Alamo Re 2017 cat bond, both of which were placed last year above the $2.8bn attachment point.

It also incorporated $700mn of Alamo Re cat bonds issued in 2015.

Below the $2.8bn attachment point the structure was supported by a combination of member assessments, public securities and the premium and CRTF.

The full tower effectively provided ground-up funding resources of $4.9bn, above the modelled 1-in-100-year probable maximum loss (PML) of $4.3bn, based on blended outputs from modellers RMS and AIR Worldwide.

This year's proposed structure is based on a 1-in-100-year PML of $3.9bn, and would top out at $4.3bn, including a 10 percent factor for loss adjustment expenses - if TWIA sticks with initial plans to only place new limit of $1.1bn (see chart).

The lower modelled PML is based on further de-risking of TWIA, with the policy count having fallen to 227,000 from 254,000, including a reduction of 11,000 through depopulation initiatives.

The 2018 structure will include $400mn of multi-year Alamo Re 2017 cat bonds reset to attach at $2.0bn and $400mn of Alamo Re 2015B cat bonds reset to attach at $3.9bn.

It will also feature $400mn of second season reinsurance that can be applied to the 2018 tower after the CRTF was wiped out by Harvey.

The dual-trigger contract was structured such that reinsurers would provide the capacity in year two subject to erosion of the CRTF in year one.

The association spent $13mn of its $110mn 2017 budget on the second season cover.

But with no CRTF in 2018, a similar second season cover would have to be structured using different trigger points, with TWIA and its broker likely to consider a range of options, including multi-year placements for a portion of limit, or even a non-reinsurance liquidity solution.

At TWIA's 6 February board meeting, Guy Carpenter managing director Tad Delk described a property cat reinsurance market that remained favourable for accounts without loss experience, with rates typically flat to up 5 percent at renewal.

He presented four options together with pricing expectations for the traditional reinsurance and cat bond limit, based on buying limit to create a ground-up structure topping out at last year's $4.9bn level, or at three lower points: $4.6bn, $4.3bn or $3.9bn.

The $4.3bn proposed structure authorised by the TWIA board would cost between $86mn and $95mn for the $1.1bn of traditional reinsurance and cat bond limit that would need to be purchased, Delk estimated.

At the midpoint that would leave just under $20mn in the budget to buy some form of second season cover.

Alternatively, if TWIA spent the full $110mn on 2018 limit, the ground-up structure would top out at about the same $4.9bn level as the expiring tower.

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