TWIA may consider early cat bond redemption, as reinsurance funding need for 2026 evolves

At a Board meeting of the Texas Windstorm Insurance Association (TWIA) yesterday, members discussed the evolution of the property insurer of last resort’s funding under new state legislation, concluding that it may result in TWIA opting to reset and perhaps even redeem early some of its catastrophe bonds.

Recall that, recent legislative changes enacted in Texas have halved the state mandated calculation for the amount of loss funding TWIA is required to have in place, from a 1-in-100 year minimum, down to a 1-in-50 year, which could result in less reinsurance and catastrophe bonds being purchased in 2026.

The changes to the funding needs of Texas’ windstorm insurer have a bearing on how much overall capital resources it is required to have in place, although it still has the flexibility to purchase more protection than the 1-in-50 year PML level if it wanted to.

For 2025, the 1-in-100 year PML was set at $6.227 billion using a blend of catastrophe risk models, set as 50% Aon’s Impact Forecasting, 25% Moody’s RMS, and 25% CoreLogic’s RQE.

On that basis and after accounting for the other funding sources, it meant TWIA needed to have roughly $4.227 billion of reinsurance in-force for the 2025 hurricane season, including its catastrophe bonds that remained in-force.

Looking ahead to 2026 funding needs, the Board was told yesterday that it is likely to fall between $4 billion and $5 billion.

Using the same blend of models as was used for the current year and including a 10% growth factor for exposure, the figure for 2026 could be a projected $4.16 billion. That’s total funding, across all sources.

So it is possible that TWIA could approach the 2026 wind season needing less in overall funding than it secured in reinsurance and cat bond risk transfer for 2025, a significant reduction.

Of course, the insurer may elect to buy more than the statutory minimum, but that remains to be seen.

Discussing what this means for TWIA’s catastrophe bond program, Jim Murphy, Chief Actuary, explained that the cat bonds do provide some flexibility to the insurer.

Cat bonds typically feature an annual reset provision that allows updated exposure information to be considered and a sponsor to elect to reset the level at which its cat bond coverage attaches, within certain bounds. Investors are compensated accordingly, with a higher or lower spread, depending on how a bond’s expected loss is changed with a reset.

Murphy explained to the TWIA Board, “There is a gap of between $2.5 to $3.5 billion dollars from that 50 Year PML to 100 year PML, which is where we have been funded in the past, and our reinsurance programme that we have in place now includes catastrophe bonds, which is effectively reinsurance sold to investors.

“It’s backed by cash from the investors, rather than the credit of a reinsurance company, but it functions similarly to reinsurance, but it’s placed on a multi year basis.

“So we have catastrophe bonds currently in place that are scheduled to continue into 2026 and we will need to make adjustments on those catastrophe bonds, depending on the decisions that the board makes.

“Because we had bonds up to the 100 year PML that we may no longer need. So there’s some ability to kind of move them down the funding stack, but there’s also the possibility that we may decide that we don’t need the catastrophe bonds and have to cancel them early. All of that subject to decisions that will be made probably six months from now.”

Any adjustments that need to be made to TWIA’s outstanding catastrophe bonds must be made by March 31st and the TWIA Board felt that it would be prudent to assess funding needs earlier, given the change to the PML funding requirement.

As a result, TWIA’s Board charged its Actuarial and Underwriting Committee to meet later this year in order to make a recommendation to it on funding for the 2026 hurricane season.

Catastrophe modelling service provider Aon will present a modelled view, with some projections to account for growth to help the Committee make a recommendation to the TWIA Board on funding and therefore also potential reinsurance and cat bond needs for 2026.

After which a decision may be taken on funding for 2026 much earlier than we’ve seen in prior years, to assist with setting a strategy for how TWIA resets its catastrophe bonds, considers whether it needs to redeem any cat bonds early and plans for any additional reinsurance purchases it needs to make next year.

At this time, TWIA has a significant $2.45 billion of catastrophe bonds in-force.

Of those, $900 million of cat bond protection across two tranches of Alamo Re notes are scheduled to mature in early June 2026, which means for its funding purposes next year TWIA will need to consider what to do with $1.55 billion of in-force cat bond backed reinsurance.

Currently, some of those catastrophe bonds extend their coverage right up to the 1-in-100 year probable maximum loss level in TWIA’s funding and reinsurance tower.

While they each have reset provisions available to TWIA, it remains to be seen whether they can be adjusted enough to fall beneath the 1-in-50 year PML for 2026, once that figure is set.

If they cannot be reset to beneath whatever level of PML the TWIA Board decides to fund up to for 2026, they will likely need to be redeemed early instead.

We won’t understand the outcome of those decisions until that funding decision and the strategy for risk transfer is set for next year, but we may begin to get indications on that in 2025 given the earlier meetings now being planned to start discussing the modelled projections of PML for next year.

Murphy said, “The total amount of reinsurance the Board chooses to buy will influence how we adjust those bonds, so practically speaking from a staff perspective it would be very nice if we had an idea of the total reinsurance purchase by that March 31st date.”

It’s also worth considering that if sufficient cat bond coverage can be reset to fit within a shorter funding tower for 2026, it will also have a bearing on how much in traditional reinsurance is required, perhaps shrinking that purchase meaningfully next year.

Overall, the reduction in funding need is likely to reduce the amount of reinsurance required, reducing the cost to TWIA. But a smaller funding tower could also mean funding levels prove insufficient if a major storm, or series of storms struck Texas, which could leave the state more exposed to making up any difference required to fund the resulting claims.

TWIA has been directly sponsoring catastrophe bonds since 2014 and remains one of the largest sponsors in our cat bond market sponsor leaderboard.