By David Bull

Feb 25 - (The Insurer) - The board of the Texas Windstorm Insurance Association (TWIA) has directed its staff and reinsurance broker Gallagher Re to buy cat bond and traditional limit up to its 100-year probable maximum loss $(PML)$ set for the 2025-2026 contract year at $6.227 billion.

That implies the reinsurance limit purchased for the June 1 incepting cover will need to total $4.227 billion, with a retention in place of $2.0 billion consisting of statutory funding from debt and assessments.

The retention is down from $2.44 billion on the expiring cover because the residual insurer’s catastrophe reserve trust fund (CRTF) has been all but exhausted by payouts for Hurricane Beryl.

Public indications of reinsurance purchasing and commentary around them from residual insurers such as TWIA and Florida's Citizens Property Insurance Corporation are seen as early bellwethers for renewal conditions at mid-year in relation to US wind-exposed business.

The TWIA PML was approved at $6.227 billion after a compromise among board members to use a blended output across the model vendors used by Aon, which works with TWIA on risk modelling.

Discussions during the board meeting had also focused on the balance to be found between securing enough reinsurance and rebuilding the CRTF.

The PML is based on a weighting of 50% to the 100-year PML output from Aon’s own Impact Forecasting model, and 25% each to Moody’s RMS and CoreLogic’s RQE models.

The PML uses long-term assumptions from the models and includes loss adjustment expenses modelled at 15% of the loss.

TWIA’s board voted to approve Gallagher Re to pursue the placement of its reinsurance program to the 100-year PML as required by statute “on the most favorable terms that can be achieved in the market”.

The PML set for the upcoming hurricane season’s cover is lower than the record $6.5 billion established last year despite significant exposure growth during the expiring contract term.

In a presentation, Aon said that exposure on TWIA’s portfolio was up 19.6% from November 20, 2023, to a total of $125.29 billion at November 30, 2024.

The exposure growth is driven by residential, at 22%, with minimal change in its commercial book.

Back in December, TWIA’s board approved a $485 million budget line item for ceded reinsurance and cat bond spend this year, up 22% from the figure in 2024.

For 2024, the residual insurer had $4.05 billion of reinsurance and cat bond limit, with $2.1 billion of Alamo Re cat bonds and around $1.95 billion of traditional reinsurance.

TWIA actuary Jim Murphy said at Tuesday’s board meeting that conversations had already started with Gallagher Re and its catastrophe bond arm Gallagher Securities ahead of the 2025 placement.

The last time TWIA had to call on its reinsurance was after Hurricane Ike in 2008, when it received $5.1 billion of recoveries.

It then chose not to buy reinsurance for the next two years.