The Texas’ coast good fortune continues in 2013 although it may now be coming at the expense of our neighbors to the east. Tropical Storm Karen is now headed for landfall, possibly as a tropical storm and possibly as a non-major hurricane, between New Orleans and the Florida panhandle. Although any tropical storm or hurricane can cause significant property damage, wind shear and drier air are apparently likely to prevent Karen from becoming another Katrina and causing enormous insured losses.
Tropical Storm Ingrid took shape today in the Gulf of Mexico, but if forecasters are correct, it should not pose a major wind danger to Texas or the Texas Windstorm Insurance Association. The GFS ensemble, shown here, all shows landfall in Mexico. So too do the other major hurricane models. Of equal importance, the SHIPs intensity model, which attempts the dark art of windspeed prediction, does not show Ingrid getting much above its current 50 knot tropical storm intensity. So, although I have raised alarm bells for some time about the resilience of the Texas Windstorm Insurance Association to a significant storm, Ingrid does not look like the one that will test the largest insurer along the Texas coast or, for that matter, other insurers.
Of course, weather forecasters haven’t been having the best year making predictions. If Ingrid takes a more northerly track, all bets are off.
Gone. Fizzled. Wind shear. Have a great weekend, everyone.
Good news. The 8 p.m. runs are done and they show growing agreement on what the future holds for Invest 92L. It looks like Houston and the northern coast of Texas are unlikely to be hit. From an insurance perspective, this is important because this is where most of TWIA’s exposure is situated. Landfall of something ranging from a tropical depression to a high end tropical storm is more likely closer to the Texas-Mexico border. None of the forecasts I have studied are indicating any sort of major hurricane or event that should cause major wind damage. Indeed, the probability of this thing ever becoming getting the “Fernand” name are now down to 50%.
The HWRF model points to a a strong tropical storm or category 1 hurricane hitting the Brownsville/Matamoros area on Monday. The GFDL model shows a weak tropical storm hitting a lightly populated area south of Corpus Christi late Monday night. The LBAR model shows something — for some reason the wind speed data is gone — hitting around Port Aransas and Rockport but sooner that the other models suggest, perhaps late Sunday night or early Monday morning. The NAM model shows a hit on Corpus Christi but a storm not even windy enough to be a tropical storm.
Now, all of this could change. And the Brownsville/Harlingen area needs to stay on alert. But I don’t think anyone needs to be making runs to Home Depot for plywood tonight.
The 2 p.m. Computer Model Hurricane Forecasts are in and virtually all of them show what is now “Invest 92L” but what may become “Fernand” hitting the Texas coast in the next few days. One of the projections (GFDL) shows it hitting Corpus Christi. Another model (LBAR) shows it hitting the most populated part of the Texas Coast around Galveston. It’s too early to say whether Invest 92L will develop into a tropical cyclone — forecasters have been giving it about an 60% chance of doing so — or, if it does, how it will intensify over the world’s largest bathtub, the the Gulf of Mexico, but it would not be a bad time for those at risk from tropical storms, particularly those who have windstorm insurance provided by the undercapitalized (negative surplus) Texas Windstorm Insurance Association, to start thinking about preparations.
The best information I’ve seen on intensity comes from http://wx.hamweather.com/tropical/2013/atlantic/invest92L/modelsmap_zoom2.html. They’ve got three forecasts that show intensity. The GFS model predicts a very weak depression hitting Corpus Christi on Tuesday, nothing to be concerned about. The HWRF model, a newer but possibly less reliable version of GFS, shows a category 1 Hurricane Fernand going into Mexico. The GFDL model shows a tropical storm Fernand meandering into Corpus Christi on Tuesday. There is no intensity information that I can find for the LBAR model that implicates the highly populated Galveston/Matagorda area, backed up by the Houston megalopolis.
So, no, Katy need not evacuate yet – nor need anyone else. There isn’t enough to go on yet. This is not the long-track hurricane like Ike or Rita that has been more common recently along the Texas coast and that has, at the end, been a bit easier to predict. This “thing” is a little closer to what became Hurricane Alicia in 1972. It began life in a similar area but intensified rapidly as it made a fairly quick path towards the Texas coast. On the other hand, there are certainly lots of “things” out in the Gulf that have looked life 92L but have fizzled or gone places other than Texas. Catrisk will keep you posted.
Sometimes, watching a TWIA board meeting is like watching an absurdist French play. In Waiting for Godot, Samuel Becket presents a two hour play in which the two characters Vladimir and Estragon waste away their existence waiting endlessly for “Godot,” who is clearly never coming. Substitute an Attorney General opinion authorizing an assessment against Texas insurers for Godot and at least some TWIA board members for Vladimir and Estragon and you get an almost perfect re-interpretation of the 1950s French existentialist classic.
To be less high-falutin’, however, when the TWIA board spend hours saying they want to “delay” consideration of an assessment in 2013 of Texas Insurers for 2008′s Hurricane Ike until the Texas Attorney General opines that they have the power to do so, they are wasting time on something that will never happen. To begin with, contrary to a myth that seems to have received its genesis at yesterday’s board meeting, the Texas Attorney General has not been directly asked (yet) whether TWIA currently now has authority to assess insurers for Ike. Of course, the TWIA board can wile away its time on whatever diversion it chooses; we all probably do that. But when TWIA sees its exposure growing at 4% per year, acknowledges that it is barely solvent if one counts a paltry catastrophe reserve trust fund, acknowledges that its rates are not actuarially sound, and realizes that not a single of its legislative recommendations got any traction, a focus on this pipe dream rather than a relentless look at reality looks — and is — absurd.
One reason the Texas Attorney General will not provide what some TWIA board members claim to await is that no one asked the Attorney General to do so. The only pending attorney general request for an opinion that relates to TWIA comes from Corpus Christi Texas House Representative Todd Hunter in RQ-1134-GA filed in July of 2013. But that request does not ask whether TWIA has the authority to issue an assessment today under a statute that was repealed in 2009. Rather, it asks whether it would be “negligence and/or a failure of authority or responsibility of duties” for TWIA not to assess today. But, as anyone with a background in law knows, it is quite possible for TWIA to have the authority to do something and yet, in the exercise of its business judgment, not to be “negligent” or in breach of its duties not to do so. Unless, therefore, Attorney General Abbott, a current gubernatorial candidate, is eager to step into this highly politicized thicket and lose votes on the Texas coast, he can answer the questions posed without addressing the core issue of whether TWIA has authority to assess. Only if the Attorney General wants to go out of his way to find that TWIA is negligent in assessing today would he have an obligation to resolve the predicate question of whether TWIA has authority to do so.
Moreover, to pretend that there might really be an affirmative answer to the authority question or that, really, the matter is quite unclear is, I fear, at best an exercise in undue politeness. For reasons I have set forth before here, here and here, this is, on reflection, not a particularly close question. The statute that gave TWIA authority to make the kind of half billion dollar assessment it came within one vote of making yesterday was repealed in 2009. It was repealed — by at least one of the legislators who yesterday urged an assessment — in favor of a system that provided a different system for financing losses after a tropical storm. It was repealed in part precisely because under the old system the Texas fisc was directly jeopardized by a TWIA assessment: insurers got to credit payments of the assessment against otherwise owing premium taxes.
It is just preposterous to think that the Texas legislature, if it wanted to prevent assessments for new storms but leave assessment authority in place for old storms would have chosen simply to repeal the old law rather than place a temporal limitation on the authority to assess. It is bizarre to think that if Texas was willing to place its continuing fisc in jeopardy for old storms but not for new, it would not have done something a little more nuanced that simply repealing the old law. It is even more peculiar to suggest, as may have been done yesterday, that Texas magically preserved the ability to assess for Ike but repealed the premium tax credit so as to preserve its fisc. If it did so, that provision of the statute must have been written in invisible ink. If TWIA’s lawyers are, as is claimed, actually telling board members, some of whom may not want to hear it, that the matter is ambiguous, that is a failure of courage or competence over reason.
But, actually, it was not so much parallels to Samuel Beckett that troubled me most in watching the TWIA board meeting yesterday. It was the parallel to Franz Kafka and other writers who focus on tyranny. Here’s the most troubling quote: “I would have to support this assessment because it would be good for the policyholders and that’s who we represent and that’s basically who I’d have to be in support of.” (1:42 to 1:43 of this recording) Sorry, but at best that is a hopelessly shallow analysis. It might be equally “good” for the policyholder if Texas insurance agents had their homes confiscated and sold to pay for Ike losses or if Michael Dell was told he had to personally recapitalize TWIA. Although Texas insurers may have a good deal of money and it takes a little imagination to see State Farm or Allstate as the victims of tyranny, the fact that a government-sponsored entity may “need” money for some public good is not authority to reach into the bank account of anyone — insurer, wealthy person or poor person — and simply take their money without legislative authorization. That is true even if the insurance industry “got away” with paying too low an assessment back in 2008. And, since Texas courts are likely to agree with this point, it is in fact not good for policyholders to have their money wasted paying lawyers defending an indefensible position.
Footnote 1: This is not to say that asking whether TWIA was negligent in not assessing more heavily back in 2009 is a bad question or an easy question. I adhere to my view that this is a reasonable question. I am just saying that an answer to this question will not provide guidance on whether TWIA can legally assess today.
The board of the Texas Windstorm Insurance Association narrowly defeated a motion today that would have assessed Texas insurers $575 million for losses arising out of Hurricane Ike in 2008. Opponents of the measure — all from Texas insurance companies — saw no urgency to an immediate assessment and, in light of what they believed was uncertain legal authority to do so under a repealed statute, wanted to await a requested legal opinion from Texas Attorney General Greg Abbott. Supporters of the measure — all representing coastal interests — asserted that an Attorney General opinion would not be definitive; in their view, the only way to determine the obligations of Texas insurers was to go ahead and demand the money, recognizing that insurers would file suit to block the assessment and that insurers would not actually pay any money until well into future hurricane seasons. The decision came after a two and a half hour closed session between the TWIA board and its attorneys.
Much other news emerged from the TWIA board meeting.
- The board voted to increase premiums 5% on both residential and commercial properties next year.
- The board heard that earlier plans to attempt to raise $500 million in pre-event securities — a bond anticipation note (“BAN”) — now appeared unlikely to continue. The board was advised that it would take 60 days to actually consummate the borrowing and that would now put receipt of funds past the peak of hurricane season. The board instead unanimously authorized the TWIA staff to pursue swiftly additional liquidity via a $200 million line of credit and $250 million in borrowing that, for reasons not made clear, would not be considered a pre-event security, and that would be secured by proceeds from any Class 2 or Class 3 securities that would be issued following a major storm. Costs on the line of credit and the additional borrowing were said to be much lower than would have been the case for the BAN.
- Although TWIA has thus far faced no storms of consequence this year, it anticipates being able to contribute only $15 million more to its $180 million catastrophe reserve trust fund that forms the first line of defense against any substantial claims. This low contribution is apparently due to continuing expenses from Hurricane Ike. It also means, however, that even with a continuing spate of good luck this year from a thus -far quiet Gulf of Mexico, TWIA will go into next hurricane season perilously undercapitalized.
- Despite all the talk about depopulating TWIA, it continues to grow rapidly. Exposure grew at 4% this past year and policies at 3%. TWIA staff said they believed this trend would continue. The substantial rate of growth is continuing notwithstanding what one board member described as concern among bankers and other lends in the area as to whether TWIA could stand up to a major storm. Since TWIA’s funding mechanisms are stated in constant dollars and not as percentages of exposure, this continued growth further weakens TWIA’s ability to withstand moderate or severe storms.
- The board voted 8-1 to approve a statement by one of its board members indicating the issue of whether to assess for Hurricane Ike was still open.
- Texas Insurance Commissioner Julia Rathgeber expressed a narrow view of her authority to supervise TWIA. When asked whether TDI would need to approve any assessment against insurers, Commissioner Rathgeber said she viewed her authority as limited to whether TWIA had followed proper practices and procedures and that she would not second guess its decisions. When asked whether that meant TDI was neutral on assessing insurers, Commissioner Rathgeber said she would need to speak with TDI attorneys.
- The 4-4-1 vote came despite pleas from some coastal interests that board members from insurance companies recuse themselves based on a conflict of interest. Opponents of the recusal plea noted that the arguments might equally well apply to persons “representing” coastal interests and that, in any event, the legislature had specifically set up a board with interest group representation.
Catrisk will have more on the eventful TWIA board meeting later in the week.
Most mornings I wake up and, after checking the fate of certain baseball teams and world peace, neither of which have had good months, wander over to the Weather Underground and see if anything is going on in the tropics. It’s been very quiet recently. Does this mean that the experts have been wrong and Texas, among others, is going to escape 2013 without significant storm damage? Does this mean TWIA will be able to make it at least one more year without running out of money? Has the failure of Texas to address windstorm insurance reform during the past regular legislative session or over the course of three special sessions been, in fact, a brilliant allocation of time?
Unfortunately, the experts say the absence of much tropical activity thus far this summer doesn’t matter that much. The National Weather Service and Climate Prediction Center says we most likely have 9-15 named storms ahead of us in the Atlantic, 6-9 hurricanes and 3-5 major (Category 3-5) hurricanes. The August 2 forecast from Colorado State University, which for reasons unknown to me is a leader in this area notwithstanding the rarity of tropical moisture affecting Fort Collins, predicts 14 named storms, 8 hurricanes and 3 major hurricanes remaining. CSU sees a 43% chance for at least one hurricane hitting Texas in the remainder of the hurricane season and a 16% chance of a major hurricane impact. Tropical Storm Risk, a private organization affiliated with University College London and with close ties to the insurance and reinsurance industries, reports in its August forecast a a 50% probability that this hurricane season will be the top “tercile,” which means that it will be worse than 2/3 of other hurricane seasons in terms of “Accumulated Cyclone Energy,” a proxy for the destructive power of hurricanes when they hit land.
Now, all of this would not matter if predictions made in August had little value. After all, although it is seldom reported, predictions made in winter or spring about the forthcoming hurricane season are little better — and sometimes worse — than a blind prediction that the season will be average. Unfortunately, by the time August rolls around, and as shown in the graph below, there is enough climate data for experts to make pretty reliable predictions. It’s these predictions on which the popular press should be focusing. So, the fact that these experts — and others — are persisting in their prediction of a bad hurricane season are worrying. 14 storms over the 113 days left in “hurricane season” means one could see about a storm a week in the near future.
Credits, by the way, to Dr. Jeff Masters, of the Weather Underground for writing an excellent blog entry from which much of the material here has been adapted.
Texas Governor Rick Perry called a third special session of the Texas legislature yesterday to address transportation issues in Texas but did not add windstorm insurance to the agenda items. In his statement explaining the special session for transportation, Governor Perry wrote, “Inaction is a Washington-style attempt to kick a can down the road – but everybody in Texas knows we’re rapidly running out of roads to kick that can down.” Unfortunately, this assertion applies equally well to windstorm insurance reform. As set forth repeatedly on this blog and in the press, the failure to address this issue right now and reform the currently broken system leaves coastal residents at serious risk and threatens the state economy.
Texas Insurance Commissioner Julia Rathgeber has not reached a decision yet on whether to accede to the request of the Texas Windstorm Insurance Association and others that she overturn the refusal of her predecessor Eleanor Kitzman to borrow about $500 million to help pay any claims that the financially troubled insurer might have this summer. A response by TWIA to a public information request states that “TWIA is working with the Texas Department of Insurance and the Texas Public Finance Authority to explore all funding options, including the BAN [bond anticipation notes].” According to TWIA, it has not heard anything further from lenders about whether they are still willing, in light of rising market interest rates, to enter into a BAN deal on the same terms as they apparently were this spring. The failure to obtain a reversal likely means, as TWIA Board Member Alice Gannon candidly acknowledged at a June board meeting, that TWIA would not be able to pay many claims in timely fashion should a significant storm occur during the remainder of the 2013 hurricane season.
Although Commissioner Rathgeber has not made a decision yet, in some sense the absence of a decision comes close to an upholding of her predecessor’s determination. One of the touted advantages of the BAN had been that it would have permitted TWIA to purchase reinsurance that attached at $2.2 billion of losses and provided an extra $250 million worth of reinsurance. Right now, the attachment point on its $1 billion of reinsurance stands at $1.7 billion, creating what TWIA hopes (unrealistically perhaps) is a $2.7 billion stack of protection. But the election to go to the higher level attachment point appears to have expired on July 15. So, unless a new deal with the reinsurers can be struck, that advantage of pre-event borrowing seems to have disappeared. Moreover, it is not clear that a bond anticipation note can be obtained on the same terms as were available in the spring when interest rates were lower. Renegotiating the terms of a BAN will take some time even if Rathgeber ultimately overturns the decision in whole or in part. (I say in part because some of the arguments against a BAN have less force if the amount borrowed were, say $100-$200 million rather than $500 million). Each day that goes by with the Kitzman decision in force is a day deeper into the heart of hurricane season in which TWIA is particularly vulnerable.
One possible reason for the Rathgeber delay is the relationship between the BAN and the desire of many to shrink TWIA. Many believe that TWIA’s problems would be more manageable if it’s maximum exposure were reduced to the levels that existed before Hurricane Ike or even earlier. They believe TWIA’s problems become progressively more intractable as ever more people develop the Texas coast based on an assumption of continued subsidized rates. If TWIA borrows money that requires it to repay various fixed sums, it is going to depend on its premium base not shrinking much. Indeed, if I were a lender I might want various covenants protecting me from a depopulation of TWIA. I would at least price that risk into the interest rate charged. Borrowing money via a bond anticipation note therefore makes it more difficult for any special session of the legislature to develop a plan substantially to reform TWIA. Thus, although the prospects of such a special session on windstorm insurance reform seem rather dim at present, Governor Perry has not taken it entirely off the table. Commissioner Rathgeber, who likely has her pulse on the mood of the legislature and the governor, may well be balancing the timing of any decision with beliefs on the prospects for reform.
Of course, the one good piece of news is that the Gulf of Mexico has, contrary to most predictions, been quiet so far this summer. As a result, TWIA’s financial situation has not been tested. Indeed, it should be running a solid profit for the past few months. Unfortunately, someone might have made the same observation about the first half of the tornado season in the midwest this spring. Remember all those articles expressing puzzlement about where all the tornados were? You can find some here, here and here. As residents of Granbury, Texas, Moore, Oklahoma, El Reno, Oklahoma and others can attest, however, predictions about long run climactic events can not be based on a few months of experience. Whether or not TWIA gets to borrow $500 million or some lesser some based on a decision later this summer by Commissioner Rathgeber, the state and TWIA’s policyholders need to hope that Hurricanes 2013 is not like Tornados 2013 in which all was quiet for the first half of the season, only to see historically devastating outbreaks during the second half.