A statute implementing drop down of Class 3 bonds

The concept

In a post yesterday, I suggested that the Texas legislature needs to prevent a needless insurance catastrophe this summer involving the Texas Windstorm Insurance Association. The catastrophe would be triggered by the inability of the Texas Public Finance Authority to issue Class 2 Alternative post-event bonds following a significant tropical cyclone. As the current law is drafted, such an inability would cascade into an inability to issue any Class 3 post-event bonds and, unless the contract was carefully drafted in an unusual way, jeopardize the ability to collect on any of the expensive reinsurance TWIA had purchased. I thus suggested repeal of current provisions prohibiting the Class 3 bonds from dropping down. I suggested instead that these bonds be permitted to “drop down” in the event the Class 2 Alternative bonds fail to sell and that insurers be given a premium tax credit to the extent the drop down Class 3 bonds increase their subsidization of tropical cyclone losses along the Texas Gulf Coast.

Today, I want to post some statutory language that would actually implement this idea. I make this foray into statutory drafting because I regard the issue as one of extreme importance and would not like to see thousands of coastal Texans needlessly crippled financially following a significant hurricane because I did not make the effort. I am hardly expert in Texas statutory drafting but believe my skills in contract drafting, a subject I teach with some passion to students at the University of Houston Law Center, might transfer over to this domain. I also do so because I believe, perhaps naively, that this is a component of windstorm reform on which most politicians could actually agree, a matter that has become more imperative in my mind after having attended the most recent legislative hearing on windstorm reform. Of course to the extent that reform legislation is passed in the next 40 days (one day less than yesterday — tick, tick, tick) that would provide both for this summer and for hurricane seasons thereafter, the bandaid suggested here might well not be necessary.

In any event, here is some proposed language that would permit the drop down of Class 3 bonds as a bandaid for the upcoming hurricane season. Additions are underlined; deletions are struck through. The language could be added to many of the bills now pending in the legislature that reform TWIA. At the moment, the proposed legislation permits the drop down to occur at any time, but the permissible period could be restricted to calendar years 2013 and 2014. The bill might also need something like the following to ensure that it takes effect as soon as possible: “This Act takes effect immediately if it receives a vote of two-thirds of all the members elected to each house, as provided by Section 39, Article III, Texas Constitution. If this Act does not receive the vote necessary for immediate effect, this Act takes effect on the 91st day after the last day of the legislative session.”

The statutory language

Sec. 2210.6135. PAYMENT OF CLASS 3 PUBLIC SECURITIES. (a) The association shall pay Class 3 public securities issued under Section 2210.074 as provided by this section through member assessments. The association, for the payment of the losses, shall assess the members of the association a principal amount not to exceed $500 million per catastrophe year. The association shall notify each member of the association of the amount of the member’s assessment under this section.

(b) The proportion of the losses allocable to each insurer under this section shall be determined in the manner used to determine each insurer’s participation in the association for the year under Section 2210.052.

(c) Except to the extent permitted under Section 2210.6136, a member of the association may not recoup an assessment paid under this section through a premium surcharge or tax credit.

Sec. 2210.6136. ALTERNATIVE SOURCES OF PAYMENT. (a) Notwithstanding any other provision of this chapter and subject to Subsection (b), on a finding by the commissioner that all or any portion of the total principal amount of Class 1 public securities authorized to be issued under Section 2210.072 cannot be issued, the commissioner, by rule or order, may cause the issuance of Class 2 public securities in a principal amount not to exceed the principal amount described by Section 2210.073(b).

(b) The commissioner shall order the repayment of the cost of Class 2 public securities issued in the manner described by Subsection (a) as follows:

(1) in the manner described by Section 2210.612(a), in an amount equal to the lesser of:

(A) $500 million; or

(B) that portion of the total principal amount of Class 1 public securities authorized to be issued under Section 2210.072 that cannot be issued, plus any costs associated with that portion; and

(2) after payment under Subdivision (1), in the manner described by Sections 2210.613(a) and (b), in an amount equal to the difference between the principal amount of public securities issued under Subsection (a) and the amount repaid in the manner described by Subdivision (1), plus any costs associated with that amount.

(c) If Class 2 public securities are issued in the manner authorized by this section, Class 3 public securities may be issued only after Class 2 public securities have been issued in the maximum amount authorized under Section 2210.073.

Sec. 2210.6137. BACKUP ALTERNATIVE SOURCE OF PAYMENT. (a) Notwithstanding any other provision of this chapter, on a finding by the commissioner that all or any portion of the total principal amount of Class 2 public securities authorized to be issued under Section 2210.072 or Section 2210.6136 cannot be issued, the commissioner, by rule or order, may cause the issuance of Class 3 public securities in a principal amount not to exceed the principal amount described by Section 2210.074(b).

(b) The commissioner shall order the repayment of the cost of Class 3 public securities issued in the manner described by Section 2210.074.

(c) An insurer may credit the “applicable fraction” as defined in subsection (d) of an amount paid in accordance with this Section in a calendar year against the insurer’s premium tax under Chapter 221. The tax credit authorized under this subsection shall be allowed at a rate not to exceed 20 percent per year for five or more successive years beginning the calendar year that the assessments under this section are paid. The balance of payments made by the insurer and not claimed as a premium tax credit may be reflected in the books and records of the insurer as an admitted asset of the insurer for all purposes, including exhibition in an annual statement under Section 862.001.

(d) For purposes of this section, the term “applicable fraction” means the ratio of

(1) the portion of the total principal amount of Class 2 public securities authorized to be issued under Section 2210.072 or Section 2210.6136 that cannot be issued to

(2) the initial principal amount of any Class 3 public securities issued pursuant to this section.

[Special Note: This post was edited at 6:30 p.m. on Monday to address some crucial formatting errors]

Drop down Class 3 bonds: a bandaid for TWIA

A lot of ink has been spilled on this blog about fixing TWIA in the long run.  Having attended the hearing this past week in Austin and looking at my calendar, which shows 41 days until hurricane season, I am becoming less hopeful that a good long-run fix is in the works.  Moreover, two of the leading bills (S.B. 18 and H.B. 2352) do nothing to address the desperate situation for 2013.  I thus offer up the following as a minimalist bandaid for TWIA.  It will not by any means solve TWIA’s problems.  If, however, a solid solution can not be found, what I offer here may at least provide some assistance and, in my naive view, should be politically feasible. The Executive Summary is that the legislature needs to repeal the provisions prohibiting the Class 3 bonds from dropping down and instead permit them to drop down in the event the Class 2 Alternative bonds fail to sell, offering insurers a premium tax credit to the extent the drop down Class 3 bonds increase their subsidization of tropical cyclone losses along the Texas Gulf Coast.

History

I start with some history to explain the current problem.

In 2011, the legislature recognized that the system of post-event bonds it had established in 2009 as the means of recapitalizing TWIA following a significant storm was extremely vulnerable to a cascade of failures. Lenders could refuse to purchase the Class 1 bonds on whose sale higher levels of bonds legally depended and thus leave TWIA with only the money it had in its Catastrophe Reserve Trust Fund to pay the claims of its policyholders. And lenders might very well refuse because repayment of the Class 1 bonds depended on TWIA policyholders remaining with TWIA even after it raised its premiums (perhaps 25%) to pay off the bonds. So, the legislature developed this complex scheme now codified in section 2210.6136 of the Insurance Code.

Unfortunately, the fix, which appears to have been developed deep into the legislative session, suffers a risk of the same infirmity as the legislative provisions it attempted to supplement. Class 1 bonds remained theoretically available but a contingency plan was developed: the Class 2 Alternative Bond (my name). This Class 2 Alternative Bond could be sold in the event that the entire $1 billion authorized in Class 1 bonds failed to sell in whole or in part. But, as with the Class 1 bonds, the Class 2 Alternative Bonds contained in the fix depend for their repayment in significant part in extracting large sums of money from a TWIA pool of insureds (a) after a significant hurricane has struck and (b) who can and may leave the pool if insurance premiums get too high. And while coastal residents and insurers share partial responsibility for the repayment and thus reduce the size of the TWIA premium increase, it is unclear if that contribution will be enough to persuade lenders that TWIA policyholders will remain in the pool and pay enough to amortize the bonds. Moreover, the legislation provided that Class 3 bonds, which provide an additional $500 million of borrowing capacity to pay for windstorm damages, can not be sold — repeat, can not be sold — unless every dime of borrowing capacity under the Class 2 Alternative Bonds is exhausted.

The current situation

The result of all this is a potential catastrophe. If, as many observers, including the Texas Insurance Commissioner expect, the Class 1 bonds fail in whole or in part because the market won’t accept them, the Class 2 Alternative Bonds may fail too. Why? Because their repayment source is infected — not as badly, but still infected — with the same problem as the Class 1 bonds. And if the Class 2 bonds fail even a little bit, the Class 3 bonds fail. And if the Class 3 bonds fail, there may well not even be any reinsurance protection. This is so because, if TWIA is not careful and does not purchase reinsurance — at a higher price — that drops down in the event the Class 2 and/or 3 bonds don’t sell, the reinsurer isn’t obligated to pay a dime. The $100 million of policyholder money dumped into reinsurance will have been 100% wasted. (I sure hope TWIA’s lawyers and reinsurance brokers understand this last point.). And so, TWIA will have only the $180 million or so in its Ike-depleted, failure-to-properly-assess-depleted Catastrophe Reserve Trust Fund to pay claims. As my friend David Crump has pointed out, it may not even take a named tropical storm to generate damages of that magnitude to the $72 billion TWIA pool.

We thus end up with a short run problem in addition to a long run problem with TWIA. The long run problem is that the system of post-event bonds on top of a thin Catastrophe Reserve Trust Fund is extremely unstable and potentially depends on massive subsidization by people other than policyholders to prop it all up. That is a hard problem to fix. Perhaps, as been suggested here, an assigned risk plan would be a better alternative. Perhaps, as others believe, the funding structure can be made more stable with yet greater subsidization. Those are hard and politically contentious issues. I am not certain they will be ironed out this legislative session before hurricane season begins in 41 days. And, sorry to say to, but it is a bit irksome to have to bail TWIA out yet again when doing so also rescues from humiliation the legislators who have shortsightedly engineered a system that beautifully served the short run interests of their constituents by underfunding their insurer but that has predictably betrayed those same constituents long run interests. Still, one can not help feeling a bit sorry for those on the coast who may have been fooled, perhaps eagerly so, by these false heroes.

The bandaid

What to do? Triple the minimum amount available for this summer. How?

1. Permit the Class 3 bonds to drop down. Repeal section 2210.6136(c), which currently prohibits the issuance of Class 3 bonds until all the Class 2 or Class 2 Alternative Bonds are sold. Instead, permit the Texas Insurance Commissioner to authorize sale of Class 3 bonds notwithstanding the failure of all Class 2 or Class 2 Alternative Bonds to sell if, in the opinion of the Commissioner, the failure to do so would reduce the amount available to pay claims of TWIA policyholders.

2. To the extent that Class 3 bonds drop down, make the assessments that are required to repay them simply a no-interest loan from insurers to the state rather than an outright payment. This can and has been done by making providing a premium tax credit for the assessments.  I dislike this philosophically because it is less transparent than simply taxing Texans and potentially reduces the amount available for government programs, but it is one way to raise money. To do this will require repeal of section 2210.6135(c) of the Insurance Code and perhaps some other statutory tinkering. The idea, however, is that to the extent an extra obligation has been imposed on the insurers of the state, it is one they should bear only as a vehicle for fronting money rather than in any ultimate sense. I believe sensible insurers should be willing to go along with this alteration. Moreover, as the state bears actual responsibility for up to $500 million, the costs of having the rest of the state subsidize TWIA will be more apparent to the electorate. It will thus be a great — albeit costly — learning opportunity.

Will this solve the TWIA problem for 2013. Absolutely not. This is a bandaid on a gaping wound. $680 million ($180 million in CRTF plus $500 million in dropped down Class 3) is not nearly enough to protect TWIA policyholders from even a minor tropical cyclone. Even $1.68 billion ($180 million in CRTF plus $500 million in Class 2 Alternative plus $500 million in dropped down Class 3 plus maybe $500 million in incredibly costly reinsurance) is not enough. At its current $72 biliion girth, TWIA at a minimum needs a $5 billion stack. But if you don’t have the time, will or ability to do major surgery, a bandaid is better than watching the patient bleed dry in front of you.  So, if the long run problem can not be solved before the start of hurricane season, or if the long run fix starts only in 2014, this extra money this bandaid creates for 2013 should be sorely appreciated when the wind and water starts roiling in the Gulf.

Catrisk at the Texas Capitol again

I’m here at the Texas Capitol to testify on HB 2352.  There’s a rumor it is going to be amended before committee consideration.  I’m hoping it is improved.  Two initial observations:

1) Texas is truly blessed to have a gorgeous capitol building.

2) I sure hope our legislators are getting serious.  There are just 45 days until the start of hurricane season.  Texas does not have a viable plan to handle this summer and it does not have a viable plan yet to handle the period thereafter.

15.00

So, nothing happened on windstorm insurance on the floor of the Texas Senate today.  The one thing perhaps everyone could agree on is that time is running out to change anything in this regular session of the 83rd Legislature.

12.40

They are recessing until 2:15.  The Senate Business and Commerce meeting will have a meeting at Chairman Carona’s desk during the recess.  I have no idea what they will discuss.

Unfortunately, my day job is likely to prevent me from keeping even half an eye on the Senate for the next several hours, so you are all on your own for a bit.

12.20

Might be oyster and shrimp lunch time because nothing has happened on the Senate floor for quite some time.  Oh, wait. They just started up again.  But they are just reading and referring House bills to Senate committees.

11.58

Senate back considering bills, but not (yet) S.B. 1700.  The current one, on toll road conversion, is generating some actual comment.

11.31

They are into announcements rather than bill consideration.  But the chair indicates there may be additional bills to be heard today.

11.20

Senator Royce West certainly gets his colleagues’ attention by saying he was adding billion to the cost of a bill on digitizing filings in civil lawsuits.  Just kidding.

10.51

Senator Larry Taylor, sponsor of SB 1700, is now speaking, but not on Windstorm Insurance. Instead, he is talking about CSSB 1560 involving easements.

10.49

Chair says, “Members, that concludes the morning call.” Looks as if they are now taking up substantive bills.

Screenshot_5_15_13_11_46_AM

10.40

Oyster and shrimp lunch for legislators being discussed.  No Windstorm bill yet.

11.42

Senate recesses until 11 a.m. Wednesday, May 15, 2013.  Still no S.B. 1700.

11.22

Reading and referring various bills to committees.  Does this mean voting on bills out of committee is over for today?

11.03

Actual debate on the floor. Not about windstorm insurance but about the right to marry.  And not about gay marriage but about photo identification. Should one need photo identification as a prerequisite to marriage?

10.44

Not that it has anything to do with windstorm insurance, but an interesting bill for insurance junkies on subrogation rights and the “make whole doctrine”.  H.B. 1869.  I’ll have to read it.

10.35

Now calling bills for review.  So the procedure seems to be

1) Suspend regular order of business so that the bill can be considered “out of order”; Vote on this.

2) Floor amendments offered and voted on.

3) Move passage to third reading.

4) Motion to suspend the 3 day delay between second and third reading

5) Third reading of bill (just caption)

6) Motion for final passage.  Roll call vote.

10.09

Session begins.

10.01

Upbeat music now playing heralding the possible start of session.  Also, please note that due to some issue with my liveblogging software, the time stamps are an hour off.  So, if this says 10:02 I believe it means 11:02.

09.58

Nothing happening.  Various people milling around.  No sound, but I am hoping that is because the microphones are off rather than any issues with my Internet feed.

13.35

Motion to adjourn until tomorrow. Passes.  So no S.B. 1700 today. #SB1700 #TWIA

13.34

Motions being heard to suspend Senate rules to permit announcements of urgent committee meetings.  No sign of S.B. 1700.

13.31

I get the sense that if you watched this Internet broadcast for a few days you might actually understand Senate procedure pretty well.

13.26

Wow, things move fast once they get to the Senate floor.  My sense is that everything is negotiated out ahead of time off the floor.  Still no sign of S.B. 1700.  We are hearing reading and referral of various bills.

16.09

The TWIA board today decided not to decide whether to consent to a receivership, tabling the idea until its May meeting.  That leaves the ball back in the court of Texas Insurance Commissioner Eleanor Kitzman, who can try to throw TWIA into receivership without TWIA’s consent.

A symbolic representation of the actions of TWIA's board today

A pictographic representation of the actions of TWIA’s board today

This is also the end of the live blog experiment.  It went well until my feed went out.  Next on the agenda, hearings in Austin on SB 1089 that would “fix” TWIA by placing more of the burden on people who don’t have real estate on the coast.

14.50

Alas, I must deal with reality and stop watching the blank screen.  If they’re still on when I return, I’ll live blog some more.  Otherwise, we’ll skip the play by play and go to some analysis at the end of the day.  Thanks for viewing.

14.24

While we’ve been waiting, I got a phone call from another attorney who had evidently been retained to examine the possibility of TWIA making an assessment under the old law.  Looks like that attorney, examining the issue independently, was likewise extremely dubious about making an assessment under 2210.058. #twia. Lots of hurt, but I still don’t see any cavalry coming over the hill.

14.21

No longer getting the error message and the little timer at the bottom says 2:25, so maybe my feed is back but they are still speaking to their attorneys.  Would not be surprised if this took a lot of discussion since they will basically be consenting to putting themselves out of business. #twia

14.07

Just got a tweet saying they are still in closed session.  So there is some hope that the video feed will emerge from what may be mere hibernation.  I am also advised that the audience has, quite literally, been left in the cold. #overairconditioning #twia

14.00

Still no connection to the TWIA video server.

13.45

I fear I have lost my feed of the meeting. Getting the mysterious Error 0-3222 message.

13.39

One of the matters brought up by Greg Smith of the Coastal Task Force was whether TWIA was being treated equivalently to the Texas FAIR plan, a sister government-sponsored insurance company. He contended, I believe, that the FAIR plan was likewise insolvent but was not being put into receivership.  This issue was also brought up by TWIA with TDI, but the TDI representative said she did not know if the FAIR plan was insolvent.

So, although I can’t find a 2012 financial statement on the Web for the FAIR plan (hmm?), I can find a 2011 financial. It apparently shows that the FAIR plan was million in the red. It may be, however, that TDI thought that the FAIR plan could work its way out of this negative position.  Whether that occurred, I don’t know either.

Oh. Seeing some action on the video screen for the meeting.

13.29

I just posted an excerpt of the letter from Rep. Deshotel. I now see, by the way, that the letter was signed by State Representatives Joe Deshotel (District 22), Craig Eiland (District 23), Abel Herrero (District 34), Todd Hunter (District 32), Eddie Lucio III (District 38) and Allan Ritter (District 21). This is the only thing even close to a legal argument I have found explaining how TWIA could recapitalize and avoid receivership by assessing insurers under the old statute. But, as the letter concedes, former Commissioner Geeslin did not actually say that TWIA could assess the insurance industry under the old law (although he does, I agree, come close to doing so).  But this is what good old Latin-liking lawyers call an “ipse dixit.”  That’s the fancy term for, “because I said so.”  It’s not a legal argument.  There is no evidence that former Commissioner Geeslin confronted section 44(2) of HB 4409 and had a theory for how the word “repeal” does not mean exactly what it says.  Section 2210.058 of the old law was the provision that permitted insurer assessments — and that statute was repealed four years ago in HB 4409.

Now, the more interesting question — one also raised by some of the public comment —  is whether the State Representatives are trying to set up some kind of lawsuit against someone for failure to assess adequately while the old law was in effect.  Such a lawsuit, however, is problematic in that, even if it prevails, which would likely be an uphill struggle, how is anyone going to pay a judgment?  Moreover, I suspect TWIA board members will find at least qualified immunity from suit, will be able to argue that they thought the assessment was adequate, and will question standing and duties.  Don’t count on such a lawsuit fixing TWIA ever — and certainly not in the short run. And short, in this context, means at least three hurricane seasons’ worth.

13.18

The Deshotel letter key paragraph

The Deshotel letter key paragraph

13.15

So, let’s go to the halftime report.

We need to separate out the harm caused by TWIA being insolvent from TWIA being put into receivership.  TWIA’s insolvency is a real problem in that it means, if the accountants are correct, that TWIA does not have enough money to pay claims and that it does not anticipate enough money to do so through the end of this year even if there is no significant storm. It is just fascinating that this singular fact does not appear to bother any of the speakers from the coast who came to the hearing today. Instead, the focus is on receivership.  Why? Do they think that grab law, which is the alternative to receivership, is an improvement?

The best arguments against receivership were that it might hurt the ability to obtain a Bond Anticipation Note secured by the potential for Class 1 securities being issued and that it might possibly hurt issuance of Class 2 and 3 securities. But the empirical evidence on this point is awfully thin.  It is not clear that a BAN could be issued anyway or that a post-petition receivership would hurt rather than help short term bond creditors.

The other thing that I think is clear is that the TDI Commissioner is going to act swiftly here.  She has a first mover advantage and does not need the TWIA board’s cooperation. TWIA’s board can cooperate, which might matters go more swiftly and less expensively, or it can make some short term political hay by opposition.  But what would it really accomplish except make some people who have demonized the incumbent insurance commissioner feel better in the short run?

The other matter I wonder about is seeing this as just one move in the Austin chess game about how TWIA is going to be restructured or depopulated.  Does the fact that it is in receivership help the argument to move towards an assigned risk plan as in HB 18? And maybe that is what this is all about.  If TWIA has “failed,” then the case for propping it up may look weaker and the case for going to something significantly different, a market oriented assigned risk plan may look stronger.

And, by the way, we are now on minute 10 of the 5 minute break.

13.04

TWIA goes into a closed session at 2:05. Apparently just a 5 minute break.  Except that in my experience one should add a zero to declared break times.   Anyway, we are done with Round 1.

13.03

TDI: Why is receivership in best interests in policyholders. TWIA does not have enough assets to pay its liabilities. Current claimants may not get claims paid fully. Make sure that actual damages being sustained are given priority. [Over what? Extra-contractuals?]

TDI: We are ready to move quickly in court. But stakeholders can have input through court process. File your plan and set a hearing.  At TDI, we try to be ready for all scenarios. [i.e. they are writing a plan]/

 

13.00

TWIA: Who is this rehabilitator? Why does TDI think that the rehabilitator can do a better job than this board.

TDI: Insurance Commissioner appointed as receiver but a competitive bid to find a manager. We can get someone on an interim emergency basis.  There are better statutory remedies in receivership. [Like not pay claims in full!]

12.58

TDI: Rehabilitation stays and centralizes lawsuits [just like federal bankruptcy].

TWIA: What can we assume with Class 1 bonds in designing reinsurance program. Looks encouraging that we can get a 0 million BAN to help reinsurance. But receivership would make that harder said the TPFA folks [I think I have this comment correctly] TPFA said it had offer from Bank of America, though at a higher price tag. [This is an important issue]

TDI: We would be moving in and out quickly. TDI  has concerns about ability to issue BAN anyway given negative surplus. [Darned straight].

12.55

TWIA: Effect on mortgages and covenants

TDI: Freddie and Fannie accept residual market insurance.  Ratings relate to private insurers.  [So is she saying all is well with mortgagees].

TWIA: What about residual markets in rehab.

TDI: Can’t predict what they would do. They have had conversations.

12.53

TWIA: Why now?

TDI: 4th quarter statement. Additional litigation that created a negative surplus. And no realistic opportunity to earn its way out. Rehabilitation would not inhibit vital reform measures on the table.

TWIA: Impact on reinsurance purchase? And post-event bonds?

TDI: Receivership can definitely create challenges. We will get a plan on file very quickly. Receivers can purchase reinsurance. The goal would be to get out of rehabilitation quickly. [Don’t bet on this occurring]. Work with bond market and see what we could do. [Vague]

 

12.51

TWIA: What happens to this board if TDI puts TWIA in receivership?

TDI: Board would be suspended and the rehabilitator would operate with the power of the Board. Board could be reconstituted after emergence.

TWIA: We’ve been in administrative oversight.  We have limited authority. Why the need for this board to consent?

TDI: Things move quicker when there is consent. If rehabilitation were consented to, there would be less disruption. On the same day, the AG can go to court, enter a rehabilitation application and enter a rehabilitation order almost simultaneously. We would soon have a rehabilitation plan. Fears would be quelled. If we have a contest, there will be more uncertainty and delay. At TDI, lack of disruption is important.

TWIA: A lot of the testimony we have heard today about nervousness of bankers etc. — at least there would be a plan to take care of it.

TDI: Yes.

12.48

TDI: Being back to zero balance would be enough to get it out of receivership.

TDI (Jamie Walker). Based on projections for TWIA income there will still be negative surplus at the end of this year.  And this is in case there are no “hiccups” [like a hailstorm?].

TWIA: Is the FAIR plan insolvent? It too has a negative surplus.

TDI: I don’t know.

12.46

TDI: Rates would be continued under the current statute, unless laws are specifically changed.  [TDI being very careful and lawyerly in its answers.  Lawyerly used as a positive adjective here].

TWIA: What would be the standard to get TWIA out of rehabilitation given that TWIA is not generally supposed to have surplus.

TDI: TWIA is not required to have an excess of surplus. TDI lawyer specifying basis for receivership. Insufficient assets, not an inability to pay bills.

12.43

TWIA: that paints a pretty rosy picture.  What other states did you look at?

TDI: More than 25 states have this law.  Modeled it after NAIC act.

TDI: Rehab has not been used in the residual market before.

TDI: Process depends on specific case. If something were to happen, we would move very expeditiously. Move to rehabilitation. Rehab order by the court. Rehabilitator would file a rehab plan within one year, but it could be done in a matter of days. How were claims going to be paid and what the process would be.

12.41

TDI has no specific comment, but available to answer questions.

TWIA Board now asking questions. Receivership has a stigma. Could TDI  talk through pros and cons of receivership?

TDI: Two types of receivership. Rehabilitation and liquidation. Rehab akin to a Chapter 11 in bankruptcy. Purpose is to revitalize an insurer so it can go into the marketplace. Company can pay claims, issue policies, without market disruption.

12.38

Public comment over. Moving on. Consideration of following topics: Review options for addressing financial condition of Association.  Including receivership. Notes representation from TDI.

12.37

Eddie Cabazos — Item on agenda to go into closed session. Is that not a violation of the open meeting act? [No.]

Answer — The Open Meetings law requires final action to be taken in open session. but advice of counsel can cause a closed session.

12.35

Tom Tagliabue, Government relations person for the City of Corpus Christi. Also opposed to receivership.

12.35

Joe Vega, Mayor of City of Port Isabel [again apologies for misspelling of names].  Will hurt small businesses.

Mr. William Goldsten, Corpus Christi — Negative economic impacts to engineering and construction profession along the Gulf Coast. [You know, these are probably all fine people, but that is not the issue.  The issue is whether receivership is the best way to address TWIA insolvency.  The fact that the legislature is in session is relevant, but not dispositive.  Grab law is the alternative to receivership.  Receivership is really a code word for insolvency.  In law school, we call this argumentative technique, “fighting the hypothetical] It will create chaos along the coast. #twia. Reduce the discrimination against the coast.

12.31

Eric Sandberg, Texas Banker’s Association — We need to have viable insurance in place, particularly from a regulatory standpoint.

12.30

Eric Sanburg, Texas Banker’s Association — skipped

David Garza, Cameron County.  [Ever get the sense this might be a bit one-sided presentation of commentary?  Looks like the coast, whose ox appears gored, has gotten its political act together whereas diffuse other constituencies have not]. Receivership is not the answer.  Let the legislature do its job. If we don’t get adequate results from this legislative session, do what it takes to make us solvent.  Our bankers and mortgage holders are nervous. [Let alone homeowners and businesses!]

12.27

Foster Edwards, the Corpus Christi Chamber of Commerce. CCCofC has been working with TWIA staff for years. A “bonehead idea, frankly.” Expressed well in letter on page E4 of packet, signed by four state representatives. [Is this the Deshotel letter that I just posted to this blog.]

12.24

Mr. Perkins with the Coastal Windstorm Taskforce: Mayor of Ingleside. We speak with one voice in opposition to go into receivership.  Again the argument that assessments are available.  [Has it occurred to anyone to actually read the statute?]  Development will be hurt. [Maybe industry could pay people extra to help purchase insurance?] Let the legislature do its job. Create a transition from TWIA to some other entity but not an instant effect on the market.

12.22

Charlie Zahn, Coastal Windstorm Taskforce: Close to matching up bills for final consideration by Senate. [Really?]  Legislative process needs to take care of this issue. Receivership implies TWIA does not have the ability to pay its bills in the future. You don’t have the basis for receivership. Trust fund in place.  You have the ability to assess. [HOW??] We are a viable entity. #twia. Already had a negative impact on Texas coast, including banks. [Probably true] Can they continue to provide mortgage loans. [Yes, a legitimate concern.  But is it receivership that is causing the problem or the insolvency.]

12.18

Greg Smith, Coastal Taskforce: Question of solvency should be judged as a residual carrier, not as a private insurer.  There are other residual carriers that are much worse off than TWIA.  National Flood, New Jersey FAIR Plan and Louisiana FAIR plan are worse off. Yet no question about their solvency. Will send messages to other carriers across the nation.  Rating agencies say you don’t have to have positive surplus.  [The everyone is doing it defense?]

12.16

Anne Vaughan, Port Aransas Chamber of Commerce [my apologies for any misspelled names]. Oppose what is “nothing more than an insane idea.” [Why is it insane to put an insolvent entity into receivership? Kubler-Ross stages of grief comes to mind. Denial. Anger] Has unconfirmed Commissioner of Insurance thought this through? TWIA is our only source of insurance. [But if it were not, one would never know if TWIA premiums were too low]

12.13

TWIA board member distinguishing between comments of TWIA and comments of TDI.

12.12

Joe McComb of Nueces County: Precinct 4.  The fun part of Nueces County. I do know people are concerned about coverage.  If they’ve got TWIA, they’ve shopped coverage and they have no alternative.  Worried that the decision has been made. [Yup]  Give legislature 60 days to solve this problem.  Good part of having a crisis is that the legislature is in session.  Place faith in elected officials. It will take 60-120 days to implement receivership anyway.  [Most persuasive speaker so far].

12.09

Keith McMullen with Port Aransas: Mayor of Port Aransas. Please don’t pursue receivership. Don’t case doubt on insurance market on the coast. Already created nervousness.

12.08

Schlitterbahn Waterpark representative speaks:  How will receivership impact existing contracts with lenders and vendors? TWIA receivership creates uncertainty that will chill business. [True, but what is the alternative if TWIA is insolvent? — SJC]. Before TWIA placed in receivership, other funding alternatives should be explored. [Like what? Assessments?]  My editorial comments are in brackets.

12.06

Jim Rich of Beaumont Chamber of Commerce: Very concerned about receivership. Notes importance of coast to economy. Wants a legislative solution. Let the legislative process work.  [But what if nothing happens? — SJC]

12.03

Public comment limited to 3 minutes with a timer. No more than 30 minutes to public comment period before moving to the rest of the agenda.

12.01

Calling roll

11.59

If you can see this it is a part of Rep. Deshotel’s letter.   It’s the first inkling of any legal theory behind the idea that TWIA can still asess for Ike.  Don’t expect insurers to buy it.geeslin assessment theory

11.55

Meeting is beginning.  One can see people milling on the video.

11.53

Channel 12 News (Beaumont) reports that State Representative Joe Deshotel has issued a press release opposing placement into receivership. Add him to the list of people whom I believe are mistaken on the law.  Here’s what he says in his letter:

If the Board would simply follow the law in place for these 2008 policies by assessing the insurance companies and moving the premium money to the Trust Fund, which currently has 8 million, TWIA would have over 5 million, which is hundreds of millions more (50%) than the Trust Fund has ever had!

11.50

Rick Spruill of the Corpus Christi Caller posted a preview of today’s meeting about 20 minutes ago.

11.46

In theory, you should also be able to follow this blog on Twitter using the hashtag #twia

11.40

Here some issues I expect to hear discussed at the meeting:

1) Is TWIA really as insolvent as its annual statement asserts (i.e. 3 million in the hole).  There are occasionally discretionary choices that get made in insurance accounting.  And there are occasionally mistakes.  Does anyone have a credible argument that TWIA is not seriously insolvent?

2) Assuming TWIA is insolvent, what, if anything, is the real alternative to a receivership?  When an entity is insolvent, as TWIA apparently is, that means some creditors can not be paid in full. If you fail to create an orderly process to pay claims, it means that the entity gets taken apart piecemeal and that different creditors are randomly (or systematically) treated worse than they should be. This is why we have insolvency law and (in most instances) bankruptcy law. Why should TWIA be treated differently?

3) Is there any authority as several coastal politicians have maintained to help TWIA out by assessing insurers for losses attributable to Hurricane Ike?  This blog has repeatedly maintained here, here and here that there is no such legal authority and that the old legal authority, section 2210.058 of the Insurance Code, was repealed in 2009.  Let’s see if there is anything more than denial or bluster behind the claim that TWIA can assess insurers without there being a new storm that would justify the issuance of public securities?

Hearing has started. Todd Hunter presents the bill to the committee.  Apparently there is a substitute.  Foster Edwards of the Corpus Christi Chamber of Commerce now testifying for the bill.

Keith McMullen, Mayor of Port Aransas, testifies in favor of the bill. “Give the coast of Texas a long term viable solution.” Chairman John Smithee agrees. We are all looking for a sustainable program.

James Rich from the Greater Beaumont Chamber of Commerce.  They make a lot of the gasoline and jet fuel used east of the Rockies. It’s where the wealth of this state is generated. They need affordable and reliable insurance. Willing to compromise but looking at what is good for the state of Texas.

SJC — Like the word “compromise.” That’s what will be needed.

Marie Robb. Galveston is building back fortified. We need one that is reliable and affordable.

Greg Smith from the Coastal Task Force. Share chairman’s concerns with funding. How the bill would behave. Went back to 1891 to present. Used the AIR model. See how it would perform in the future. In no case did we exceed the balances. Will cover up to a 250 year PML. Before that most of the burden is on the coast. His bill does not require premium increases. Class 1 goes to 1.5 billion. Funding source is much firmer, Greg Smith claims. Craig Eiland doing a direct examination of this witness. Greg Smith now testifying how CRTF is to be funded.

SJC — Glad they did a test but not sure how they did it.

Very interesting.  It sounds as if HB 2352 has been significantly revised.

I testified. I’ll try to provide video at a later time.

———–

Back in Houston again.  I’ll try to say something intelligent tomorrow. The short version, however, is that there are 45 days to go and Texas is not close to a solution to the coastal catastrophic risk problem. This is going to take focus, compromise and leadership.

 

Colorado State publishes 2013 tropical storm risk for Texas

Colorado State University (CSU) has published one of its predictions for tropical cyclones along the Gulf Coast. Historically, the April predictions of this group aren’t very good. The statistical correlation between April prediction and summer reality is only 0.09. This result is  only a little better than chance.  Still, CSU’s work does provide some information on the risk facing our Texas coast. Its method is better, for example, than basing the current year on the number of named storms in the previous 2 years. By June 30, the predictions of this group for the remainder of hurricane season get a lot better. Unfortunately, the prediction for this hurricane season is that it will be worse than normal. That’s particularly troubling given that the leading insurer of windstorm risk in Texas has been found insolvent by its auditors and there is no legislative proposal currently gaining a lot of traction that addresses 2013 risk.

The interactive widget below shows the probability of named storms, hurricanes and intense hurricanes for each of the Texas counties for 2013 based on the April predictions of CSU. You can get the data underlying the widget here. For techies and statisticians, I’m assuming, along with CSU and many others, that the distribution of tropical cyclone landfall comes from the “Poisson family.”

[WolframCDF source=”http://catrisk.net/wp-content/uploads/2013/04/csu-april-2013.cdf” CDFwidth=”600″ CDFheight=”540″ altimage=”http://catrisk.net/wp-content/uploads/2013/04/overview-getplayer_off.png”]

A hat top to the Houston Chronicle’s Eric Berger for bringing this forecast to my attention.

A simulation of H.B. 2352 and S.B. 1089

H.B. 2352, a bill to reform the Texas Windstorm Insurance Association (TWIA) from Corpus Christi Representative Todd Hunter, is scheduled for hearing in the Insurance Committee of the Texas House this Tuesday afternoon at 2 p.m. I do not know yet if my teaching obligations will permit me to travel to Austin and testify, but if they do, here is about what I will say. It’s based on a Mathematica simulation of 100 sets of 100 years of storms and draws on work I’ve discussed here, herehere and here.

My name is Seth Chandler. I am a law professor at the University of Houston Law Center and author of the blog catrisk.net, which addresses the law and finance of catastrophic risk with a focus on Texas. The views expressed here are my own and do not necessarily reflect those of the University of Houston.

I have attempted to simulate the effects of H.B. 2352 and its companion bill S.B. 1089. The details of that simulation, including the source code, are available in the written submission made to the committee and available at catrisk.net. Basically, I have run 100 100 year storm simulations using models calibrated to mimic those used by AIR and RMS, the two leading modeling companies on which TWIA has relied. Should members of the committee or staff have any questions on the technical details of the model or how variants of the law would affect the conclusons here, I am willing to try to assist.

Based on that research I find that over the initial 20 years of H.B. 2352 with a runoff, and assuming TWIA does not purchase reinsurance, TWIA policyholder premiums will cover about 68% of the losses suffered during that time period. The remaining losses will be paid 6% from replenishment of the catastrophe reserve fund, 8% from class A bonds, 5% from class B bonds, and 9% from class C bonds. Troublingly, 4% of the losses have no identified source of funding. If one assumes instead that TWIA purchases reinsurance at the top of the bonding stack in an amount equal to 1.4% of its direct exposure, as it has done in the past, TWIA policyholder premiums and reinsurance paid for by TWIA policyholder premiums cover a total of 61% of losses suffering during that time period. The remaining losses will be paid 8% from replenishment of the catastrophe reserve fund, 10% from class A bonds, 6% from Class B bonds, and 11% from class C bonds. The percent of losses that have no identified source of funding has decreased, but still rests at 3%. These numbers are, of necessity approximate, and they indeed vary based on a variety of assumptions that need to be made. I have not had the luxury of a large amount of time in which to refine the analysis. In general, however, I believe they accurately reflect the benefits and burdens of H.B. 2352 and S.B. 1089.

This simulation attempts to quantify the benefits and risks to TWIA policyholders created by H.B. 2352 as well as the burden it places on those not receiving direct benefit from TWIA policies. Personally, I do not like what occurs if H.B. 2352 were used to prop up a $72 billion TWIA. The concentration of correlated risk in that entity inevitably makes it an expensive proposition in which the organization either pays exorbitant prices to reinsurers or continues to run the risk of an inadequate stack of protection against larger storm. I believe there is much to the idea of significantly depopulating TWIA with an assigned risk plan or similar mechanism that decorrelates the risk by forced pooling with non-windstorm risk throughout Texas.

If, however, you want to persist with a large propped up TWIA but want to avoid otherwise inevitable biennial fights, it is crucial that the bonding limits contained in this bill with respect to Class A, B and C securities be stated not as absolute numbers, $1 billion, $900 million, $2.75 billion but, as you have wisely done in this bill with the CRTF, percentages of some measure of overall risk to the pool, perhaps direct exposure. Without this modification, the risk grows of storms overwhelming TWIA’s bonding capacity.

Finally, for reasons I have outlined elsewhere I persist in my view that wealthy people on the coast receive subsidized property insurance from poor people away from the coast. This bill continues that inequity although it masks the subsidization by terming what amounts to regional and statewide property taxes as premium surcharges or assessments on insurers. I would thus suggest that the bulking up of the CRTF that takes place in the early years of the HR 2352 plan be made less by non-TWIA policyholders on the coast and assessments on insurers, but more heavily by TWIA policyholders themselves, who will, notwithstanding the benefit that each part of Texas bestows on the other, be the primary beneficiaries of the CRTF protection.

 

I’m showing below a condensed version CDF on which this analysis depends.  You can get the full version here. If you don’t see anything substantive, you need to download the free CDF player so that you can interact within your browser with the model I have created.

[WolframCDF source=”http://catrisk.net/wp-content/uploads/2013/04/HB-2352-Analysis.cdf” CDFwidth=”600″ CDFheight=”1600″ altimage=”http://catrisk.net/wp-content/uploads/2013/04/overview-getplayer_off.png”]

Some further caveats and comments

  1. I am fully aware that this work done on short notice by an individual and not one certified as an actuary, though I do believe I have the skills to produce what I have done. As I have written elsewhere, the Texas legislature should seriously consider establishing an insurance think tank to help it with issues like this.
  2. The premiums in this model are static.  There is some possibility that as the size of the catastrophe reserve fund grows and TWIA is better able to handle storms without resort to post-event bonding, the premiums could decline.
  3. The basic problem with TWIA is that its risk is correlated.  If it were decorrelated, the premiums policyholders pay would likely be adequate to cover its losses and no cross subsidization would be needed.  The problem is that TWIA needs to build up its catastrophe reserve fund to the point where it is no longer dependent on the risks of post-event bonding or the expense of reinsurance.  Until it does this, a system that bundles up correlated risk is going to remain either really expensive or run a risk of insolvency.

 

The destructive power of legislative fantasies

While fantasies may have their place in literature or otherwise, they are an unhealthy basis on which to premise legislative hearings. By distracting legislators from the real work that needs to be done before the end of session and providing false hope to constituents who need to take real action before the start of hurricane season, they are at least as destructive as any hurricane. That’s why the Corpus Christi Caller’s account this morning of yesterday’s meeting of the Texas Senate Committee on Business and Commerce should profoundly disturb residents of the Texas coast who depend on a viable windstorm insurance system. It should equally disturb those throughout the State of Texas whose fates are intertwined with their coastal friends. The meeting unfortunately perpetuates the absurdities of the meeting of the Texas Windstorm Insurance Association board that took place on Monday in which false villains were created and the very legislators who voted for the scheme that contributes to the current deplorable state of coastal windstorm insurance attempt through distraction to escape accountability.

Let’s identify the distracting fantasies.

Fantasy 1. TWIA can escape insolvency by assessing Texas insurers in 2013 for Hurricane Ike.

We’ve been through this before on this blog but let’s do it again now that we have an idea of the opposing arguments. The statute authorizing TWIA to assess insurers under former section 2210.058 of the insurance code was repealed in 2009 by section 44(2) of HB 4409. I’ll reprint that statute at the bottom of this post so you can see for yourself. Government can’t just take people or business’ property for the purpose of enriching others, no matter how worthy the cause, based on a repealed statute.  That’s called tyranny, and it is a violation of, among other things, the same Fifth Amendment protections that prevents the state from taking your house away to pay for worthy state expenditures and the same section 17 of the Bill of Rights contained in the Texas Constitution in which our state’s belief in those same principles is enshrined.

Until Monday, I had not heard a single argument opposed to the proposition that section 2210.058 no longer justified assessments against insurers. And, until I heard the contrary arguments, I was not prepared to say with 100 percent certainty that I was correct. But in light of a letter from several state representatives submitted to the TWIA board and made public Monday and in light of Representative Eiland’s reported comments at the hearing yesterday, we now appear to know the arguments of those who would contradict this apparently evident proposition. All I can say is, “that’s your best shot?” Here’s what they are apparently saying. If there are other arguments that I am missing, bring them on.

Argument 1: The potential to assess insurers is an “obligation, or liability previously acquired, accrued, accorded, or incurred under [a repealed statute] and is thus saved from repeal by section 311.031 of the Texas Government Code.” This argument misunderstands the nature of an obligation and a liability. An obligation or liability refers to something already existing.  Thus, if State Farm did not pay an assessment already imposed prior to the repeal, HB 4409 did not eliminate the already existing powers to force State Farm to pay. But at the time when the repeal took effect, there was no “obligation,” there was no “liability” to pay an assessment based on Hurricane Ike beyond the $430 million the TWIA board did assess in 2008. The fact that TWIA might have made an assessment is no more an “obligation” or a “liability” than a tax that the legislature might have but did not impose or a penalty that a court might have but did not impose.

Argument 2: There is some sort of contractual right on the part of 2008 policyholders to an assessment. I teach contracts and I like creative arguments.  But there is no such contractual right.  I’ve looked at TWIA contracts and there is absolutely nothing in those contracts creating a right to an assessment. Zero. Would a Texas legislator please show the public a TWIA contract containing a right to an assessment.

It is particularly galling, I might add, to contend, as Representative Eiland apparently did at the hearing yesterday, that TWIA policyholders deserve such a right (even if they don’t actually have one?) because of the premium they paid. In fact, precisely because of actions by legislators such as Craig Eiland,TWIA policyholders were not asked to pay a premium that would permit their insurer to be capitalized adequately and that might have provided better protection against hurricanes such as Ike. Instead, those legislators forced TWIA policyholders to become dependent on the TWIA board — a politically constituted body significantly chosen from the insurance industry — exercising their discretion to assess Texas insurers adequately in the event of a major storm.

Now, it may (or may not) be that the TWIA board breached some sort of duty to policyholders by failing to assess. A letter sent by coastal legislators earlier this week contains a disturbing account of board inaction. Unfortunately, however, the choice not to include a right to an assessment in the contract takes the matter out of contract claims against TWIA itself and put it into the murky area of fiduciary duty claims against TWIA board members. And, with fiduciary duty rather than contract providing the source of rights, the remedies become far more limited. Yes, you can sue a board member for breach of fiduciary duty, but section 2210.106 of the Insurance Code promised those board members immunity from suit unless one can show bad faith, intentional misconduct, or gross negligence.  And even if you get over this qualified immunity hurdle, I doubt there are too many board members who have $400 million lying around, the additional amount that TWIA officials recommended be assessed to pay for Ike.

Fantasy 2. Going into receivership would make it harder for TWIA to borrow money either before a hurricane or after a hurricane.

A lot of people at the TWIA board meeting Monday testified about the terrible problems that would be created if TWIA were thrown into receivership: sending the wrong signals, threatening continued development, threatening mortgage covenants, and threatening  the Texas economy (even national security) by challenging energy production on the Eagle Ford Shale. Unfortunately, these people have confused treatment with either symptoms or disease.  It is fine to be angry about cancer, but anger at being treated for cancer after a positive test comes back is misplaced indeed. And it’s insolvency here that is causing the problems and that is going to cause more problems. Receivership is a treatment for the disease of insolvency (here a disease caused by a combination of legislative dysfunction, human greed and fallibility, and a Category 2 hurricane that hit in a particularly vulnerable spot). In fact, although perhaps the matter could be deferred for a week or two to get plans in order, receivership makes a lot of sense. It would likely, as Representative Taylor appears to recognize, actually help most TWIA policyholders.

Here’s why.

Reason 1: Without receivership, there will be even less money available to pay claims for any hurricanes that hit this season. TWIA is being picked apart by claims for Hurricane Ike that are still pending.  Projections are that, even if no serious hurricane hits, TWIA will have even less money by the time the year ends. Thus, if Tropical Storm Barry or Hurricane Rebekah hits this season, there is going to be even less money around to pay the new claimants.  This is particularly true, if, as many fear, the recapitalization structure envisioned by the current Texas Insurance Code, is not going to work and if one of the bills pending in the legislature continues not to address issues for 2013. Those whose houses are decimated this summer by a storm are very much going to wish that someone through TWIA into receivership this spring so that 2008 policyholders and 2013 policyholders were treated more equally. So equity among TWIA claimants is one good reason for a receivership.

Reason 2: The recapitalization structure envisioned by the current Insurance Code may well  be more likely to work with a receivership than without one. Someone who lends money to TWIA now has to be concerned that their claims will be paid out of the same pot as Ike claimants or other TWIA creditors. Given TWIA’s insolvency, that is worrying. It’s likely to cause lenders to demand a particularly high rate of interest if they are willing to lend at all.  Although I am not certain of this, if Texas receivership is like federal bankruptcy, post-receivership financing even in a rehabilitation case can be separated out and given a higher priority that other claims.  That appears to be true in Texas insurance liquidation (section 443.154(j)) and I would be surprised if it were not true in a rehabilitation as well. Now, if the rehabilitation failed, such a refinancing might hurt existing (Ike) claimants of TWIA, and one can see how they might oppose a cavalier refinance on that basis, but if one wants to give TWIA some hope or making it through another hurricane season, giving new lenders some additional protection makes a lot of sense.  I don’t see how that can be done absent a receivership.

Reason 3: The parade of horribles brought forth by representatives of the coast at the hearing Monday was mostly about the problems created by insolvency, not by receivership.  Mortgage companies who have imposed covenants to maintain insurance on their borrowers don’t care as much about whether the insurer is in receivership as whether that insurer has enough money to pay claims that threaten their collateral. And, yes, workers in the Eagle Ford Shale and elsewhere will be hurt if their windstorm insurance premiums go up and their corporate employers don’t respond with higher wages, but what happens to premiums is not particularly dependent on a receivership.  It is dependent on an understanding of why TWIA went insolvent and the proposals pending in Austin to reform TWIA.

At best, the argument against receivership is thatTWIA, a so-called “residual market” carrier, was not really “insolvent” in the same way a private insurer would be if its liabilities exceeded its assets. That’s because, this point proceeds, TWIA has a statutory right to recapitalize through assessment and surcharge that other insurers do not following a major disaster.  So, it is true that, at least for a while TWIA will be able to pay its bills. But inability to pay bills is not and should not be the only basis to justify a receivership.  Another reason is equal treatment of claimants.  The recapitalization mechanism was never very solid and is now so dubious that there is a serious question whether TWIA can treat current policyholders fairly.

Fantasy 3: Resolutions of the receivership issue and assessment issue are very important.

Receivership is an issue, but it is not the main issue. It will just determine at the margin how current and future TWIA claimants get paid and may have some effect on solvency this summer.  Even an assessment of another $400 million or $500 million to fully pay for Ike, though it would help current TWIA claimants, will do little to fix the most fundamental problems with that entity, which include its perpetual undercapitalization and the instability and unfairness of its funding mechanisms. Even with an assessment and with or without a receivership, the current law means that TWIA is running a very substantial risk of going insolvent this year from another serious storm. Or, in plain English, if you own property on the coast and it is hit by a tropical cyclone this summer, there is a troubling chance TWIA will not actually be able to pay what it owes you and you may have trouble rebuilding.

The main issue is how to address windstorm insurance on the coast both for the coming hurricane season and thereafter. There are two serious proposals before the legislature. One basically proposes depopulating TWIA and moving toward a market-based system backstopped by an assigned risk plan for those areas in which the market fails to provide insurance close to some affordability threshhold. Under this system, although people across Texas very definitely help, coastal policyholders bare most the burden of the risk posed to their property. Coastal propertyholders get the benefits of owning real estate near the Texas coast, but they also pay for it. The second proposal continues to force people — poor people and rich people alike, Amarillo residents, El Paso residents and Nacogdoches residents — to subsidize risk along the coast even more than has been done before. While this system at least reduces the risk of a hurricane leaving insureds with claims only against an insolvent insurer, it sends bad signals to the development market and, gallingly, frequently transfers money from the poor to the wealthy. I have my own views on how that debate should come out but respect the view of others.  I just wish it was that debate that was preoccupying the Texas legislature and not a judicial remedy for addressing the existing insolvency.

Here’s what Representative Craig Eiland reportedly said yesterday:

“I see no way you could ever say that’s there no assessment authority with TWIA based on the contractual rights the 2008 policyholders have for the premium they paid for the coverage they purchased,” he said. “Why are we dancing around the question? If we go into receivership the judge is going to assess the companies and have an answer. Why are we not trying to have an answer? Before you make the decision that we cannot assess, how about go assess and find out the final answer.”

 

Text of section 44 of HB 4409 (found here)

 SECTION 44.  The following laws are repealed:
             (1)  Subdivisions (5) and (12), Section 2210.003,
Insurance Code;
             (2)  Sections 2210.058 and 2210.059, Insurance Code;
             (3)  Sections 2210.205 and 2210.206, Insurance Code;
             (4)  Sections 2210.356, 2210.360, and 2210.363,
Insurance Code; and
             (6)  Subchapter G, Chapter 2210, Insurance Code.

Live Blog of the TWIA Meeting of March 25, 2013

I appear to have a good feed from the TWIA meeting. Right now, it just says, “waiting for presentation.”  So, if the TWIA servers hold up under what I expect will be a heavier-than-usual load and I can successfully navigate a new live blogging plug in for WordPress, I should be able to comment on this meeting as it goes on.

15.00

So, nothing happened on windstorm insurance on the floor of the Texas Senate today.  The one thing perhaps everyone could agree on is that time is running out to change anything in this regular session of the 83rd Legislature.

12.40

They are recessing until 2:15.  The Senate Business and Commerce meeting will have a meeting at Chairman Carona’s desk during the recess.  I have no idea what they will discuss.

Unfortunately, my day job is likely to prevent me from keeping even half an eye on the Senate for the next several hours, so you are all on your own for a bit.

12.20

Might be oyster and shrimp lunch time because nothing has happened on the Senate floor for quite some time.  Oh, wait. They just started up again.  But they are just reading and referring House bills to Senate committees.

11.58

Senate back considering bills, but not (yet) S.B. 1700.  The current one, on toll road conversion, is generating some actual comment.

11.31

They are into announcements rather than bill consideration.  But the chair indicates there may be additional bills to be heard today.

11.20

Senator Royce West certainly gets his colleagues’ attention by saying he was adding billion to the cost of a bill on digitizing filings in civil lawsuits.  Just kidding.

10.51

Senator Larry Taylor, sponsor of SB 1700, is now speaking, but not on Windstorm Insurance. Instead, he is talking about CSSB 1560 involving easements.

10.49

Chair says, “Members, that concludes the morning call.” Looks as if they are now taking up substantive bills.

Screenshot_5_15_13_11_46_AM

10.40

Oyster and shrimp lunch for legislators being discussed.  No Windstorm bill yet.

11.42

Senate recesses until 11 a.m. Wednesday, May 15, 2013.  Still no S.B. 1700.

11.22

Reading and referring various bills to committees.  Does this mean voting on bills out of committee is over for today?

11.03

Actual debate on the floor. Not about windstorm insurance but about the right to marry.  And not about gay marriage but about photo identification. Should one need photo identification as a prerequisite to marriage?

10.44

Not that it has anything to do with windstorm insurance, but an interesting bill for insurance junkies on subrogation rights and the “make whole doctrine”.  H.B. 1869.  I’ll have to read it.

10.35

Now calling bills for review.  So the procedure seems to be

1) Suspend regular order of business so that the bill can be considered “out of order”; Vote on this.

2) Floor amendments offered and voted on.

3) Move passage to third reading.

4) Motion to suspend the 3 day delay between second and third reading

5) Third reading of bill (just caption)

6) Motion for final passage.  Roll call vote.

10.09

Session begins.

10.01

Upbeat music now playing heralding the possible start of session.  Also, please note that due to some issue with my liveblogging software, the time stamps are an hour off.  So, if this says 10:02 I believe it means 11:02.

09.58

Nothing happening.  Various people milling around.  No sound, but I am hoping that is because the microphones are off rather than any issues with my Internet feed.

13.35

Motion to adjourn until tomorrow. Passes.  So no S.B. 1700 today. #SB1700 #TWIA

13.34

Motions being heard to suspend Senate rules to permit announcements of urgent committee meetings.  No sign of S.B. 1700.

13.31

I get the sense that if you watched this Internet broadcast for a few days you might actually understand Senate procedure pretty well.

13.26

Wow, things move fast once they get to the Senate floor.  My sense is that everything is negotiated out ahead of time off the floor.  Still no sign of S.B. 1700.  We are hearing reading and referral of various bills.

16.09

The TWIA board today decided not to decide whether to consent to a receivership, tabling the idea until its May meeting.  That leaves the ball back in the court of Texas Insurance Commissioner Eleanor Kitzman, who can try to throw TWIA into receivership without TWIA’s consent.

A symbolic representation of the actions of TWIA's board today

A pictographic representation of the actions of TWIA’s board today

This is also the end of the live blog experiment.  It went well until my feed went out.  Next on the agenda, hearings in Austin on SB 1089 that would “fix” TWIA by placing more of the burden on people who don’t have real estate on the coast.

14.50

Alas, I must deal with reality and stop watching the blank screen.  If they’re still on when I return, I’ll live blog some more.  Otherwise, we’ll skip the play by play and go to some analysis at the end of the day.  Thanks for viewing.

14.24

While we’ve been waiting, I got a phone call from another attorney who had evidently been retained to examine the possibility of TWIA making an assessment under the old law.  Looks like that attorney, examining the issue independently, was likewise extremely dubious about making an assessment under 2210.058. #twia. Lots of hurt, but I still don’t see any cavalry coming over the hill.

14.21

No longer getting the error message and the little timer at the bottom says 2:25, so maybe my feed is back but they are still speaking to their attorneys.  Would not be surprised if this took a lot of discussion since they will basically be consenting to putting themselves out of business. #twia

14.07

Just got a tweet saying they are still in closed session.  So there is some hope that the video feed will emerge from what may be mere hibernation.  I am also advised that the audience has, quite literally, been left in the cold. #overairconditioning #twia

14.00

Still no connection to the TWIA video server.

13.45

I fear I have lost my feed of the meeting. Getting the mysterious Error 0-3222 message.

13.39

One of the matters brought up by Greg Smith of the Coastal Task Force was whether TWIA was being treated equivalently to the Texas FAIR plan, a sister government-sponsored insurance company. He contended, I believe, that the FAIR plan was likewise insolvent but was not being put into receivership.  This issue was also brought up by TWIA with TDI, but the TDI representative said she did not know if the FAIR plan was insolvent.

So, although I can’t find a 2012 financial statement on the Web for the FAIR plan (hmm?), I can find a 2011 financial. It apparently shows that the FAIR plan was million in the red. It may be, however, that TDI thought that the FAIR plan could work its way out of this negative position.  Whether that occurred, I don’t know either.

Oh. Seeing some action on the video screen for the meeting.

13.29

I just posted an excerpt of the letter from Rep. Deshotel. I now see, by the way, that the letter was signed by State Representatives Joe Deshotel (District 22), Craig Eiland (District 23), Abel Herrero (District 34), Todd Hunter (District 32), Eddie Lucio III (District 38) and Allan Ritter (District 21). This is the only thing even close to a legal argument I have found explaining how TWIA could recapitalize and avoid receivership by assessing insurers under the old statute. But, as the letter concedes, former Commissioner Geeslin did not actually say that TWIA could assess the insurance industry under the old law (although he does, I agree, come close to doing so).  But this is what good old Latin-liking lawyers call an “ipse dixit.”  That’s the fancy term for, “because I said so.”  It’s not a legal argument.  There is no evidence that former Commissioner Geeslin confronted section 44(2) of HB 4409 and had a theory for how the word “repeal” does not mean exactly what it says.  Section 2210.058 of the old law was the provision that permitted insurer assessments — and that statute was repealed four years ago in HB 4409.

Now, the more interesting question — one also raised by some of the public comment —  is whether the State Representatives are trying to set up some kind of lawsuit against someone for failure to assess adequately while the old law was in effect.  Such a lawsuit, however, is problematic in that, even if it prevails, which would likely be an uphill struggle, how is anyone going to pay a judgment?  Moreover, I suspect TWIA board members will find at least qualified immunity from suit, will be able to argue that they thought the assessment was adequate, and will question standing and duties.  Don’t count on such a lawsuit fixing TWIA ever — and certainly not in the short run. And short, in this context, means at least three hurricane seasons’ worth.

13.18

The Deshotel letter key paragraph

The Deshotel letter key paragraph

13.15

So, let’s go to the halftime report.

We need to separate out the harm caused by TWIA being insolvent from TWIA being put into receivership.  TWIA’s insolvency is a real problem in that it means, if the accountants are correct, that TWIA does not have enough money to pay claims and that it does not anticipate enough money to do so through the end of this year even if there is no significant storm. It is just fascinating that this singular fact does not appear to bother any of the speakers from the coast who came to the hearing today. Instead, the focus is on receivership.  Why? Do they think that grab law, which is the alternative to receivership, is an improvement?

The best arguments against receivership were that it might hurt the ability to obtain a Bond Anticipation Note secured by the potential for Class 1 securities being issued and that it might possibly hurt issuance of Class 2 and 3 securities. But the empirical evidence on this point is awfully thin.  It is not clear that a BAN could be issued anyway or that a post-petition receivership would hurt rather than help short term bond creditors.

The other thing that I think is clear is that the TDI Commissioner is going to act swiftly here.  She has a first mover advantage and does not need the TWIA board’s cooperation. TWIA’s board can cooperate, which might matters go more swiftly and less expensively, or it can make some short term political hay by opposition.  But what would it really accomplish except make some people who have demonized the incumbent insurance commissioner feel better in the short run?

The other matter I wonder about is seeing this as just one move in the Austin chess game about how TWIA is going to be restructured or depopulated.  Does the fact that it is in receivership help the argument to move towards an assigned risk plan as in HB 18? And maybe that is what this is all about.  If TWIA has “failed,” then the case for propping it up may look weaker and the case for going to something significantly different, a market oriented assigned risk plan may look stronger.

And, by the way, we are now on minute 10 of the 5 minute break.

13.04

TWIA goes into a closed session at 2:05. Apparently just a 5 minute break.  Except that in my experience one should add a zero to declared break times.   Anyway, we are done with Round 1.

13.03

TDI: Why is receivership in best interests in policyholders. TWIA does not have enough assets to pay its liabilities. Current claimants may not get claims paid fully. Make sure that actual damages being sustained are given priority. [Over what? Extra-contractuals?]

TDI: We are ready to move quickly in court. But stakeholders can have input through court process. File your plan and set a hearing.  At TDI, we try to be ready for all scenarios. [i.e. they are writing a plan]/

 

13.00

TWIA: Who is this rehabilitator? Why does TDI think that the rehabilitator can do a better job than this board.

TDI: Insurance Commissioner appointed as receiver but a competitive bid to find a manager. We can get someone on an interim emergency basis.  There are better statutory remedies in receivership. [Like not pay claims in full!]

12.58

TDI: Rehabilitation stays and centralizes lawsuits [just like federal bankruptcy].

TWIA: What can we assume with Class 1 bonds in designing reinsurance program. Looks encouraging that we can get a 0 million BAN to help reinsurance. But receivership would make that harder said the TPFA folks [I think I have this comment correctly] TPFA said it had offer from Bank of America, though at a higher price tag. [This is an important issue]

TDI: We would be moving in and out quickly. TDI  has concerns about ability to issue BAN anyway given negative surplus. [Darned straight].

12.55

TWIA: Effect on mortgages and covenants

TDI: Freddie and Fannie accept residual market insurance.  Ratings relate to private insurers.  [So is she saying all is well with mortgagees].

TWIA: What about residual markets in rehab.

TDI: Can’t predict what they would do. They have had conversations.

12.53

TWIA: Why now?

TDI: 4th quarter statement. Additional litigation that created a negative surplus. And no realistic opportunity to earn its way out. Rehabilitation would not inhibit vital reform measures on the table.

TWIA: Impact on reinsurance purchase? And post-event bonds?

TDI: Receivership can definitely create challenges. We will get a plan on file very quickly. Receivers can purchase reinsurance. The goal would be to get out of rehabilitation quickly. [Don’t bet on this occurring]. Work with bond market and see what we could do. [Vague]

 

12.51

TWIA: What happens to this board if TDI puts TWIA in receivership?

TDI: Board would be suspended and the rehabilitator would operate with the power of the Board. Board could be reconstituted after emergence.

TWIA: We’ve been in administrative oversight.  We have limited authority. Why the need for this board to consent?

TDI: Things move quicker when there is consent. If rehabilitation were consented to, there would be less disruption. On the same day, the AG can go to court, enter a rehabilitation application and enter a rehabilitation order almost simultaneously. We would soon have a rehabilitation plan. Fears would be quelled. If we have a contest, there will be more uncertainty and delay. At TDI, lack of disruption is important.

TWIA: A lot of the testimony we have heard today about nervousness of bankers etc. — at least there would be a plan to take care of it.

TDI: Yes.

12.48

TDI: Being back to zero balance would be enough to get it out of receivership.

TDI (Jamie Walker). Based on projections for TWIA income there will still be negative surplus at the end of this year.  And this is in case there are no “hiccups” [like a hailstorm?].

TWIA: Is the FAIR plan insolvent? It too has a negative surplus.

TDI: I don’t know.

12.46

TDI: Rates would be continued under the current statute, unless laws are specifically changed.  [TDI being very careful and lawyerly in its answers.  Lawyerly used as a positive adjective here].

TWIA: What would be the standard to get TWIA out of rehabilitation given that TWIA is not generally supposed to have surplus.

TDI: TWIA is not required to have an excess of surplus. TDI lawyer specifying basis for receivership. Insufficient assets, not an inability to pay bills.

12.43

TWIA: that paints a pretty rosy picture.  What other states did you look at?

TDI: More than 25 states have this law.  Modeled it after NAIC act.

TDI: Rehab has not been used in the residual market before.

TDI: Process depends on specific case. If something were to happen, we would move very expeditiously. Move to rehabilitation. Rehab order by the court. Rehabilitator would file a rehab plan within one year, but it could be done in a matter of days. How were claims going to be paid and what the process would be.

12.41

TDI has no specific comment, but available to answer questions.

TWIA Board now asking questions. Receivership has a stigma. Could TDI  talk through pros and cons of receivership?

TDI: Two types of receivership. Rehabilitation and liquidation. Rehab akin to a Chapter 11 in bankruptcy. Purpose is to revitalize an insurer so it can go into the marketplace. Company can pay claims, issue policies, without market disruption.

12.38

Public comment over. Moving on. Consideration of following topics: Review options for addressing financial condition of Association.  Including receivership. Notes representation from TDI.

12.37

Eddie Cabazos — Item on agenda to go into closed session. Is that not a violation of the open meeting act? [No.]

Answer — The Open Meetings law requires final action to be taken in open session. but advice of counsel can cause a closed session.

12.35

Tom Tagliabue, Government relations person for the City of Corpus Christi. Also opposed to receivership.

12.35

Joe Vega, Mayor of City of Port Isabel [again apologies for misspelling of names].  Will hurt small businesses.

Mr. William Goldsten, Corpus Christi — Negative economic impacts to engineering and construction profession along the Gulf Coast. [You know, these are probably all fine people, but that is not the issue.  The issue is whether receivership is the best way to address TWIA insolvency.  The fact that the legislature is in session is relevant, but not dispositive.  Grab law is the alternative to receivership.  Receivership is really a code word for insolvency.  In law school, we call this argumentative technique, “fighting the hypothetical] It will create chaos along the coast. #twia. Reduce the discrimination against the coast.

12.31

Eric Sandberg, Texas Banker’s Association — We need to have viable insurance in place, particularly from a regulatory standpoint.

12.30

Eric Sanburg, Texas Banker’s Association — skipped

David Garza, Cameron County.  [Ever get the sense this might be a bit one-sided presentation of commentary?  Looks like the coast, whose ox appears gored, has gotten its political act together whereas diffuse other constituencies have not]. Receivership is not the answer.  Let the legislature do its job. If we don’t get adequate results from this legislative session, do what it takes to make us solvent.  Our bankers and mortgage holders are nervous. [Let alone homeowners and businesses!]

12.27

Foster Edwards, the Corpus Christi Chamber of Commerce. CCCofC has been working with TWIA staff for years. A “bonehead idea, frankly.” Expressed well in letter on page E4 of packet, signed by four state representatives. [Is this the Deshotel letter that I just posted to this blog.]

12.24

Mr. Perkins with the Coastal Windstorm Taskforce: Mayor of Ingleside. We speak with one voice in opposition to go into receivership.  Again the argument that assessments are available.  [Has it occurred to anyone to actually read the statute?]  Development will be hurt. [Maybe industry could pay people extra to help purchase insurance?] Let the legislature do its job. Create a transition from TWIA to some other entity but not an instant effect on the market.

12.22

Charlie Zahn, Coastal Windstorm Taskforce: Close to matching up bills for final consideration by Senate. [Really?]  Legislative process needs to take care of this issue. Receivership implies TWIA does not have the ability to pay its bills in the future. You don’t have the basis for receivership. Trust fund in place.  You have the ability to assess. [HOW??] We are a viable entity. #twia. Already had a negative impact on Texas coast, including banks. [Probably true] Can they continue to provide mortgage loans. [Yes, a legitimate concern.  But is it receivership that is causing the problem or the insolvency.]

12.18

Greg Smith, Coastal Taskforce: Question of solvency should be judged as a residual carrier, not as a private insurer.  There are other residual carriers that are much worse off than TWIA.  National Flood, New Jersey FAIR Plan and Louisiana FAIR plan are worse off. Yet no question about their solvency. Will send messages to other carriers across the nation.  Rating agencies say you don’t have to have positive surplus.  [The everyone is doing it defense?]

12.16

Anne Vaughan, Port Aransas Chamber of Commerce [my apologies for any misspelled names]. Oppose what is “nothing more than an insane idea.” [Why is it insane to put an insolvent entity into receivership? Kubler-Ross stages of grief comes to mind. Denial. Anger] Has unconfirmed Commissioner of Insurance thought this through? TWIA is our only source of insurance. [But if it were not, one would never know if TWIA premiums were too low]

12.13

TWIA board member distinguishing between comments of TWIA and comments of TDI.

12.12

Joe McComb of Nueces County: Precinct 4.  The fun part of Nueces County. I do know people are concerned about coverage.  If they’ve got TWIA, they’ve shopped coverage and they have no alternative.  Worried that the decision has been made. [Yup]  Give legislature 60 days to solve this problem.  Good part of having a crisis is that the legislature is in session.  Place faith in elected officials. It will take 60-120 days to implement receivership anyway.  [Most persuasive speaker so far].

12.09

Keith McMullen with Port Aransas: Mayor of Port Aransas. Please don’t pursue receivership. Don’t case doubt on insurance market on the coast. Already created nervousness.

12.08

Schlitterbahn Waterpark representative speaks:  How will receivership impact existing contracts with lenders and vendors? TWIA receivership creates uncertainty that will chill business. [True, but what is the alternative if TWIA is insolvent? — SJC]. Before TWIA placed in receivership, other funding alternatives should be explored. [Like what? Assessments?]  My editorial comments are in brackets.

12.06

Jim Rich of Beaumont Chamber of Commerce: Very concerned about receivership. Notes importance of coast to economy. Wants a legislative solution. Let the legislative process work.  [But what if nothing happens? — SJC]

12.03

Public comment limited to 3 minutes with a timer. No more than 30 minutes to public comment period before moving to the rest of the agenda.

12.01

Calling roll

11.59

If you can see this it is a part of Rep. Deshotel’s letter.   It’s the first inkling of any legal theory behind the idea that TWIA can still asess for Ike.  Don’t expect insurers to buy it.geeslin assessment theory

11.55

Meeting is beginning.  One can see people milling on the video.

11.53

Channel 12 News (Beaumont) reports that State Representative Joe Deshotel has issued a press release opposing placement into receivership. Add him to the list of people whom I believe are mistaken on the law.  Here’s what he says in his letter:

If the Board would simply follow the law in place for these 2008 policies by assessing the insurance companies and moving the premium money to the Trust Fund, which currently has 8 million, TWIA would have over 5 million, which is hundreds of millions more (50%) than the Trust Fund has ever had!

11.50

Rick Spruill of the Corpus Christi Caller posted a preview of today’s meeting about 20 minutes ago.

11.46

In theory, you should also be able to follow this blog on Twitter using the hashtag #twia

11.40

Here some issues I expect to hear discussed at the meeting:

1) Is TWIA really as insolvent as its annual statement asserts (i.e. 3 million in the hole).  There are occasionally discretionary choices that get made in insurance accounting.  And there are occasionally mistakes.  Does anyone have a credible argument that TWIA is not seriously insolvent?

2) Assuming TWIA is insolvent, what, if anything, is the real alternative to a receivership?  When an entity is insolvent, as TWIA apparently is, that means some creditors can not be paid in full. If you fail to create an orderly process to pay claims, it means that the entity gets taken apart piecemeal and that different creditors are randomly (or systematically) treated worse than they should be. This is why we have insolvency law and (in most instances) bankruptcy law. Why should TWIA be treated differently?

3) Is there any authority as several coastal politicians have maintained to help TWIA out by assessing insurers for losses attributable to Hurricane Ike?  This blog has repeatedly maintained here, here and here that there is no such legal authority and that the old legal authority, section 2210.058 of the Insurance Code, was repealed in 2009.  Let’s see if there is anything more than denial or bluster behind the claim that TWIA can assess insurers without there being a new storm that would justify the issuance of public securities?

Catrisk will try to live blog the TWIA meeting on March 25, 2013

I’m going to try to live blog the meeting of the Texas Windstorm Insurance Association scheduled for 1 p.m. in Austin.  I’ll be doing it remotely since my day job is going to prevent me from traveling to the site of the meeting.  So, if my Internet connection holds up and the TWIA server stays strong, I’ll be providing “instant analysis,” with all its advantages and pitfalls tomorrow.  A first for me and this blog.

Here’s the agenda for the meeting.

 

 

Could the guaranty fund help TWIA policyholders?

We’ll know more in the coming days, but, if I am right in believing that the Texas Windstorm Insurance Association is about to be placed into receivership, there is a substantial chance that the claims of at least some TWIA policyholders and other TWIA creditors will not be paid in full.  The Texas Department of Insurance admits as much in paragraph 10 of its recently issued FAQ. Now, ordinarily when a Texas property insurer goes insolvent and is placed in receivership, the Texas Property and Casualty Guaranty Association comes in and pays at least part of the unpaid portion of legitimate policyholder claims. So, the question is, could TPCIGA help out TWIA policyholders? And thereon rests a complex statutory thriller.

We start with the statute creating and regulating TPCIGA, the exciting Chapter 462 of the Texas Insurance Code. Let’s take a look at what claims are protected by TPCIGA.  That’s found in section 462.201.  Here it is.

Sec. 462.201.  COVERED CLAIMS IN GENERAL. A claim is a covered claim if:

(1)  the claim is an unpaid claim;

(2)  the claim is made under an insurance policy to which this chapter applies that is:

(A)  issued by an insurer authorized to engage in business in this state; or

(B)  assumed by an insurer authorized to engage in business in this state that issues an assumption certificate to the insured;

(3)  the claim arises out of the policy and is within the coverage and applicable limits of the policy;

(4)  the insurer that issued the policy or assumed the policy under an assumption certificate issued to the insured is an impaired insurer; and

(5)  the claim:

(A)  is made by a liability claimant or insured who is a resident of this state at the time of the insured event; or

(B)  is a first-party claim for damage to property that is permanently located in this state.

Most of this statute should be easily satisfied by TWIA policyholders.  It will relate to property permanently located in Texas. It will be unpaid (or they wouldn’t be complaining). It has to actually be covered by and within the limits of the policy.  It’s not as if you get a better insurance policy from TPCIGA than you got from your impaired insurer. But there are two tricky bits that I’ve highlighted in orange: (1) it has to relate to an insurance policy to which this chapter (462) applies and (2) the insurer that issued the policy has to be an impaired insurer.  Let’s turn to each of those in turn.

Leaf to section 462.004 of the statute.  It reads, in excerpted form,

Sec. 462.004.  GENERAL DEFINITIONS. In this chapter:

(5)  “Impaired insurer” means a member insurer that is:

(A)  placed in:

(i)  temporary or permanent receivership or liquidation under a court order, including a court order of another state, based on a finding of insolvency; or

(ii)  conservatorship after the commissioner determines that the insurer is insolvent; and

(B)  designated by the commissioner as an impaired insurer.

(6)  “Member insurer” means an insurer, including a stock insurance company, a mutual insurance company, a Lloyd’s plan, a reciprocal or interinsurance exchange, and a county mutual insurance company, that:

(A)  writes any kind of insurance to which this chapter applies under Sections 462.007 and 462.008, including reciprocal or interinsurance exchange contracts; and

(B)  holds a certificate of authority to engage in the business of insurance in this state.

 

So, in order to be an impaired insurer you have to be a “member insurer” (and be in receivership).  But what’s a member insurer?  If you were a stock insurance company, a mutual insurance company, a Lloyd’s plan or some other things, the matter would be easy. You’d be in.  But TWIA isn’t one of those things.  It’s just TWIA. But that’s not the only way to qualify.  See the word “includes.”  That generally means that the items listed are not the exclusive way to qualify.  If TWIA meets the conditions in parts (A) and (B) it should qualify as a “member insurer,” which, you will recall, is what we need before TWIA policyholders can seek protection from TPCIGA.

Now we are deep into the plot. Does TWIA write “any kind of insurance to which this chapter [462] applies under Sections 462.007 and 462.008?

We’re going to skip section 462.008.  Trust me, it has absolutely no relevance.  So, let’s focus instead on section 462.007.  It reads:

Sec. 462.007.  APPLICABILITY IN GENERAL; EXCEPTIONS.

(a) Except as provided by Subsection (b), this chapter applies to each kind of direct insurance.

(b)  Except as provided by Subchapter F, this chapter does not apply to:

(1)  life, annuity, health, or disability insurance;

(2)  mortgage guaranty, financial guaranty, or other kinds of insurance offering protection against investment risks;

[stuff that clearly does not apply omitted]

(8)  a transaction or combination of transactions between a person, including an affiliate of the person, and an insurer, including an affiliate of the insurer, that involves the transfer of investment or credit risk unaccompanied by the transfer of insurance risk, including transactions, except for workers’ compensation insurance, involving captive insurers, policies in which deductible or self-insured retention is substantially equal in amount to the limit of the liability under the policy, and transactions in which the insured retains a substantial portion of the risk; or

(9)  insurance provided by or guaranteed by government.

Assume for the moment that TWIA policies are “direct insurance.” If so, then Chapter 462 applies unless there’s an exception in subsection (b) of 462.007.  It’s quite clear that exceptions (1)-(8) do not apply.  TWIA is not selling ocean marine insurance. But there is this exception 9.  It says that the chapter does not apply to “insurance provided by or guaranteed by government.” Is TWIA provided by or guaranteed by government? Protestations of some notwithstanding, it is abundantly clear that TWIA policies are not (except conceivably for TPCIGA itself!) guaranteed by government. But might TWIA policies be insurance provided by government?!

And we have now reached the crucial moment in our mystery thriller.  Is TWIA insurance government provided insurance?  If it is, TWIA is not a member insurer and, as such, is not an impaired insurer, and, as such, is not the sort of insurer with respect to which TPCIGA offers policyholders any protection.

I would not laugh at someone who suggested that TWIA was not a government insurer.  It is, to be sure, a government-chartered insurer. Unlike Allstate, State Farm and the rest of the gang, TWIA does business not by satisfying general incorporation and licensure statutes but as a result of a special act of the legislature. But is not the federal or state government itself acting as an insurer. Moreover, a court that recently confronted the issue as to whether TWIA was entitled to sovereign immunity appears to have left the issue open.

Unfortunately, this argument, though not frivolous, runs into several obstacles.  First, I believe TWIA has treated itself and TPCIGA has treated it as if TWIA were a government insurer.  That’s because being a member insurer creates many duties. Chief among those duties is to pay assessments when other insurers go insolvent and TPCIGA has to pay claims. (Check out section 462.151). Non-members don’t have to pay assessments. TPCIGA issued assessments to members in 2001, 2002, 2003 and 2006. (see here). My belief — and if I am wrong it is strong evidence that I am wrong — is that TWIA did not pay any of these assessments and was not asked to do so.  Here, for example is the TWIA financial statement for 2006/2007. I don’t see anywhere that it shows a TPCIGA assessment.

Second, I’m not aware of instances where Texas itself acts as an insurer other than on its own property. So if insurer just meant instances where the state itself is an insurer the exception in the statute would have no application.  There are canons of statutory interpretation that say you try not to construct statutory provisions so that they have no purpose. Instead, I suspect, the term “insurance provided by government” means insurance provided by government created entities such as TWIA, the Texas Fair Plan and entities such as TPCIGA itself.

At the end of the day, then, if you asked me, I would say TPCIGA is unlikely to come to the rescue of TWIA policyholders.  I would not say, however, that this is an open and shut case.  I do suspect, however, that the exclusive protection of TWIA policyholders is instead  the funding mechanism set up in Chapter 2210 of the insurance code and whatever amendments may come thereto.  Unfortunately, that’s not looking very good right now and, absent legislative rescue, is going to look abysmal in the event our Texas coast is socked with a significant storm this rapidly approaching hurricane season.

TWIA Financial Statement appears to confirm insolvency

I have received a copy of the 2012 TWIA financial statement.  You can see it at the link at the bottom of this post. If you look on page 3 of the document, line 37, you will see the figure $182,979,043 in parentheses. In accounting notation, parentheses denote  a negative number.  The balance sheet looks even a little worse  if one consults page 14 of the financial statement.  There it appears to say that if one uses national standards for insurance accounting, the NAIC SAP basis, rather than Texas-specific rules, TWIA is $217,188,190 in the hole. This is considerably worse than in 2011, when its surplus was a negative $7,381,879.

Screenshot_3_22_13_6_26_PMThe income statement isn’t pretty either.  TWIA’s net income in 2012 was a negative $180 million. (Page 4, line 20). And, on a cash flow basis, it looks as it TWIA lost $47 million in cash in 2012. (page 5, line 18).

Anyway, although I do know a tad and wish I knew more, and although I am definitely not expert in the arcane field of insurance accounting, it does look as if there is support for the contention that TWIA is insolvent.

2012 Annual Statement. (Obtained from Texas Department of Insurance via Elizabeth Christian & Associates Public Relations)