Texas’ insurer of last resort for coastal hurricane coverage has bundled some of its risk exposure into $700-million cat bond.
Alamo Re 2015-1 is the second cat bond sponsored by the Texas Windstorm Insurance Association and the year-to-date’s largest in the 144A market, according to a release from various participants.
The deal is split into two tranches, both rated by Fitch Ratings. A $300-milion A piece is rated B+’ and has a three-year, expected maturity. A $400-million B piece is rated BB-’ and has a four-year, expected maturity.
The former priced at 590 basis points over the Treasury money market benchmark, the latter at a spread of 460 basis points.
With this deal, TWIA has sponsored $1.1-billion in cat bonds outstanding, the fourth highest volume of capacity placed by a property and casualty insurer.
Alamo 2015-1 is exposed to named storms’ in an area stretching across 14 coastal counties in Texas, in addition to a small area of Harris County, where Houston is located. The bulk of the coverage is residential.
Bond holders in the A notes start to see losses once the annual losses from qualified storms reach $2.6 billion, a threshold known as the attachment level. Their entire investment is wiped out at the exhaustion level’ of $3.2 billion. The A tranche, then, covers 50% of this $600-million layer of coverage.
B-note holders get hit when annual losses from qualified storms total $4 billion and lose everything at the $4.8-billion level. This also translates to 50% coverage for this layer.
The losses incurred from each named storm must reach $50 million to count towards aggregate total, according to Fitch Ratings.
The rating agency based the probability that total covered losses would reach the attachment level on modeling by AIR Worldwide.
GC Securities served as sole structure and bookrunner on the deal.
Reinsurance company Hannover Ruck SE acts as the deal’s “transformer,” which basically means it sits between the sponsor and Alamo Re, passing along the premiums to the vehicle, which feed into the coupon payments for the bondholders.
Alamo’s maiden cat bond, for $400 million, came out nearly a year ago, having been upsized from $350 million initially.
The TWIA was established in 1971 as insurance costs spiked following the devastation caused by Hurricane Celia in August, 1970.