Another confusing graphic from TWIA

At yesterday’s hearing of the House Insurance Committee, leadership of the Texas Windstorm Insurance Agency presented a packet of three graphics to the members.  These graphics joined a crucial presentation created for today’s meeting of TWIA’s board of directors that falsely identified how post-event bonds would be paid off under existing law. Together, it presents a picture of an insurer less interested in forthrightly informing legislators than in trying to preserve its troubled existence.

As discussed in blog entries yesterday, the first two of the graphics presented yesterday to the House Insurance Committee were highly confusing if not downright misleading.  The first graphic, which purported to project TWIA going from insolvent to a positive surplus position over the next two years simply assumed away the possibility of any large claims being made against TWIA. What insurer can’t improve its position when no large claims are filed? There would be little need for solvency regulation if insurers never incurred large claims.

The second graphic presented yesterday purported to show that TWIA could pay off the borrowing of $500 million it wants to make in that its underwriting profit was greater than its debt service.  Again, however, TWIA simply assumed that it would not have any large claims that would deplete its profit.  Lots of people who borrow too much on their credit cards might have been able to pay them off it nothing else had happened.  Problem is, stuff happens.  And then, the borrower can’t pay.

Today, I want to tackle the third graphic submitted to the House Insurance Committee by TWIA.  It appears to continue what may be a pattern of misleading visual information.  Here’s the picture.

TWIA's stack size with misleading information on 2008 and failure to adjust for exposure

TWIA’s stack size with misleading information on 2008 and failure to adjust for exposure

Let’s look at that left hand bar, the one for 2008.  It would appear to show that TWIA had only a $2.1 billion stack for that year.  I believe legislators were supposed to gain comfort from the fact that the stack for 2013, with or without $500 million in pre-event borrowings known as a BAN (bond anticipation note) is actually higher than that amount.

But the stack appeared to be only $2.1 billion for 2008 because TWIA staff had simply not counted the leading source of protection for TWIA that existed at that time. TWIA’s graph simply deleted the key fact: TWIA had the ability to make unlimited assessments against the insurance industry.  TWIA thus had essentially a 100% guaranty of being able to pay claims. A proper picture would have had another gray bar extending high above the purple one showing this ability to assess. The gray bar would be just like the $230 million one it made lower in the stack.  It would be just like the one I am confident TWIA would have stuck over the 2013 stack if such an ability existed today.  I can think of absolutely no good reason why this bar should have been eliminated from the graphic.

Now, it is true that TWIA disclosed in a fine print footnote to the graphic “unlimited additional funding available via reimbursable assessments.”  Do you see it?  Look after the semi-colon in the first line at the bottom. But, again, that’s relegating the central point to a footnote and leaving the big graphic in a highly misleading condition.

I’ve got two other problems, by the way, with the graphic.

Stack size is best measured relative to exposure

Comparisons of stack size can be misleading without taking exposure into consideration.  A stack of $2.7 billion might be just fine if TWIA had exposure of $20 billion whereas a bigger stack of $3.5 billion might be inadequate if TWIA had exposure of $80 billion.  Once we do this, the picture becomes a little less cheery.  In 2008, for example, when TWIA’s stack was essentially unlimited, TWIA direct exposure was $64 billion. Today, it is about $75 billion. To have a $2.1 billion stack in 2008, is roughly the same as having a $2.46 billion stack today.

There is no apparent reason to have ignored Hurricane Dolly payments

I do not understand why TWIA excluded money paid for Hurricane Dolly from the 2008 stack.  That would have made it a little higher.  I suppose the purpose was to contrast preparedness for Ike with preparedness for today’s storms.  Again, though, that seems a peculiar choice. In assessing TWIA’s ability to pay claims, a more relevant comparator is stack size at the start of hurricane season. Had TWIA done this properly the stack in 2008 — the year of Ike — would have been much higher even without consideration of TWIA’s ability at the time to make unlimited assessments.

 

 

 

TWIA leadership further confuses House Insurance Committee

Associated Press reports are successfully repeating the message the Texas Windstorm Insurance Association leadership sought to convey at today’s special meeting of the House Insurance Committee: “Coastal Group Expects Surplus” is the headline, for example, that the Houston Chronicle attaches to the AP report.  Unfortunately for TWIA policyholders or any legislators misled by today’s presentation, the surplus scenario is essentially a picture of the best possible world in which no significant storms affect the largest windstorm insurer on the Texas coast.  Thus, while the graphic is not false, all it really does is confirm that insurance companies, even ones with premiums that do not reflect risk, make money  if they never have any large claims. It is not, however, an accurate depiction of reality.

Here’s the happy picture that TWIA wants the world to see. Surplus goes in a predictable linear way from that troublesome negative (red) $183 million in the fourth quarter of 2012 to a cheerier (blue) positive $211 million by the fourth quarter of 2014. That’s the picture presented by TWIA lawyer David Durden, TWIA chief actuary James Murphy and Pete Gise, TWIA’s comptroller at yesterday’s special meeting of the House Insurance Committee.  It is a picture that will make unquestioning TWIA policyholders breathe a sigh of relief, lessen pressure to reform TWIA, forestall efforts to place the insolvent insurer into receivership and let those who profit from the band playing on continue to do so for a time.

A misleading projection of TWIA finances

A misleading projection of TWIA finances

But look carefully at the fine print in the foonotes for this graphic. “Surplus amounts include operational expenses, non-catastrophe losses, projected changes in Ike reserves, and state sales tax refunds.”  What’s not included?  TWIA doesn’t say in the graphic, but I can tell you.  What TWIA does not include is the main thing TWIA was set up to handle and for which it needs catastrophe reserves: large losses from tropical cyclones.  (I’m also not sure they are taking account of reinsurance premiums, which now consume more than 20% of TWIA premiums). In other words, TWIA could have shown roughly the same “projected” increase in surplus  in any year it chose, ranging from the year before Hurricane Ike to the year before Hurricane Alicia. And TWIA would have been equally misleading in doing so.

And what is the probability that over the next two hurricane seasons TWIA will incur no tropical cyclone expenses. Assuming we have normal hurricane seasons over the next two years– which itself is rather optimistic given the unanimous forecasts of weather experts — the probability is about 1/3. Even with the most optimistic estimates of Texas hurricane frequency, the probability that the TWIA graph accurately projects reality is less than half. So, yes, less than half the time, the graphic produced by TWIA might be accurate.

The majority of the time, however, the TWIA graphic will be wrong. And some of the time it will be seriously wrong. This is exactly why every actuary who has consulted for TWIA or TDI in recent times has noted that TWIA takes in too little revenue relative to expenses to sustain a surplus. On average, in any two year period during which TWIA suffers a significant loss (i.e. a loss greater than $50 million), the average total loss during that time period is well over $500 million. Such losses would in fact significantly increase the deficit TWIA now suffers from. This is based on the Compound Poisson Distribution discussed on this blog as a way of modeling annual losses to TWIA and emulating the sophisticated work of state-of-the-art storm modelers such as AIR and RMS.  The Mathematica code proving this point is shown at the bottom of this post.

When we actually take possible storm losses into account, the two year position of TWIA is likely to be worse or no better than it is today.

I’ve tried in this blog to stay away from accusations of bad faith.  People have honest disagreements and different values.  And I have had respect for people doing what must be difficult work at an insurer with little money.  And this graphic did, after all, have a footnote from which one knowledgable in the area might recognize that the graphic was missing critical information. And TWIA did disclose at the hearing — after a lengthy exposition of the graphic — that their graphic assumes no storm losses.  But to me it is like presenting a graphic projecting how well the Astros are likely to do this year based on how they do during their best periods without taking into account the fact that they also suffer a lot of losing streaks. It is, at best, an insulting partial truth, one that I hope reporters,  legislators and, tomorrow, the TWIA Board of Directors, are smart enough to see through.

The code

Mean[Total /@Map[Max[# – 50000000, 0] &,

DeleteCases[Partition[RandomVariate[CompoundPoissonDistribution[0.54,WeibullDistribution[0.42, 177000000]], 10000], 2, 1], {0,

0}], {2}]]

Interest rates on the Bond Anticipation Note were potentially 10%

Officials from the Texas Windstorm Insurance Association and the Texas Public Finance Agency revealed today at a special meeting of the House Insurance Committee that TWIA would have had to pay interest rates of 10% for 5 years in order to pay off borrowings of $500 million it had sought to obtain via a “Bond Anticipation Note.” These sky-high interest rates would have forced TWIA to pay about $132 million per year for more than five years or over 25% of its gross premiums.  The 10% rate that would be paid following a storm is significantly higher than the 4-6% that was previously being quoted and explains rumors that the rate was in fact higher than 4-6%.  There are two rates.  The low one, as it turns out,  would have applied only if there were no storm and TWIA paid the money back at the end of hurricane season.

The revelation about the interest rates that the lender would charge if TWIA actually used the money to pay claims better explains the decision of outgoing Texas Insurance Commissioner Eleanor Kitzman to refuse to let TWIA borrow the money. (It also explains how badly the market regards TWIA’s finances). Paying 25% of premiums for debt service would likely have prevented TWIA from making any substantial contribution to its Catastrophe Reserve Trust Fund. This level of debt service might have required significant premium hikes in order to keep the operation going.

Texas Insurance Commissioner Julia Rathgeber

Texas Insurance Commissioner Julia Rathgeber

If the interest rate on the bond anticipation notes can not be negotiated lower — and interest rates appear to be slightly rising in the economy — the difficulty of amortizing the debt will likewise make it difficult for TWIA and coastal legislators to succeed in their efforts to get new Texas Insurance Commissioner Julia Rathgeber to overturn the decision   Apparently, Ms. Rathgeber is not willing to explicitly overturn the Kitzman decision, but has left the door slightly open to further pleadings brought under a theory that circumstances have changed.

TWIA tips its hand

At the hearing today, TWIA representatives previewed some of the arguments they will likely make to Commissioner Rathgeber later this week in order to revive its efforts to borrow.  Perhaps the most telling of these is that getting $500 million in loans would do more than double the amount of cash TWIA actually has to pay claims.  That’s a big deal in and of itself.  But it would also permit TWIA to purchase $250 million more in reinsurance because that reinsurance could now attach at a higher level. It thus raises the money available to pay claims not by $500 million but by $750 million. A second argument is that the number of Ike claims being filed has come down drastically, which creates less uncertainty about TWIA’s financial situation.

Unfortunately for proponents of the BAN and those who would like an easy fix to TWIA’s financial plight, this information does not appear either terribly new or particularly relevant. Commissioner Kitzman may well have known of the reinsurance differential at the time she made her decision and certainly could have surmised that at least some significant differential would exist.  And I can not imagine that people expected many more Ike claims to be filed more than 4.5 years after the storm at a time when most statutes of limitation have likely run.

Unless the new facts lower interest charges, what really has changed?

The more fundamental problem, however, is that these facts — even if new — do not change the debt equation. I really doubt the market will charge TWIA lower interest rates because of a reduced number of new Ike claims. And how does someone earning $450 million or so a year in premiums and that expects at most to make $200 million or so a year in underwriting profit that is supposed to be salted away into a Catastrophe Reserve Trust Fund, really afford to spend over 60% of that profit on debt service?  TWIA made a stab at such an answer in its presentation to the House Insurance Committee today, contrasting what it estimated as $127.5 million in amortization payments to what it hoped would be $220 million in “underwriting gain.” But, as the footnotes to this presentation conceded, this underwriting gain assumed no non-catastrophe losses. Significant losses in even one of the years over which the bond is supposed to be retired might well cause TWIA to default.

Also, a question.  Do the operating profit figures quoted in the graphic below include reinsurance premiums?  If not, the graphic is misleading.

 

TWIA shows how it could pay off a BAN

TWIA shows how it could pay off a BAN

A BAN could impede fundamental reform

The other issue that legislators will need to consider before they take sides in the BAN debate is the extent to which a BAN conflicts with the goal of making TWIA smaller.  Once TWIA takes on fixed debt obligations, shrinking TWIA becomes all the more difficult. With $82 billion in exposure, bond payments of $127-133 million take up 62% of one’s underwriting profit. With, say, $50 million in exposure as a result fo reform efforts, they take up 100% of one’s underwriting profit.  Thus, to the extent legislators are seeking the “grand solution” that makes TWIA smaller, reliance on a BAN makes that goal even more difficult to achieve. Legislators would likely need to find a substantial amount of cash from somewhere to pay off the BAN ahead of time.

There are some significant short run upsides to TWIA acquiring $500 million right now to deal with its short run finances. It is indeed hard to understand why one would deny a desperate insurer the ability to borrow money.  But the revelations from today’s hearing suggest that, just as payday loans can trap borrowers with short run needs into a cycle of indebtedness with only bad outcomes, so too with borrowings by desperate government created insurers. Until one way addresses the fundamental problem — too little income and too little in assets defending too much exposure, borrowing at high interest rates is a very risky path out of trouble.  For this reason, persuading the new insurance commissioner that TWIA can successfully discharge this large a debt and pay its other expenses — all while retaining the flexibility to endure fundamental reform — will be a tough sell indeed.

 

 

 

TWIA report card shows giant error on law

TWIA has just submitted its 2013 report card to the legislature. I hope the House Insurance Committee calls TWIA leaders on the carpet for it.  In addition to exhibiting a “band played on” mentality that fails to note the grave situation facing the organization and its policyholders, it contains a graphic purporting to explain its projected funding that is simply wrong because it reflects a grave misunderstanding of the laws that govern it.

Here’s the graphic.  It is found on page 23 of the annual report.

Screenshot_6_17_13_10_28_AM

 

The problem is the turquoise area.

First, notice a few things.

TWIA has written off the Class 1 bonds.  They do not appear on the graphic.   TWIA has apparently acknowledged that not even one dime of post-event Class 1 Bonds can be sold.  The reason they have done so is that the market does not believe TWIA policyholders and their premium dollars will provide a sustainable basis for repayment of bonds.

TWIA believes it has just $200 million in premiums and its Catastrophe Reserve Trust Fund to pay claims.  This is less than this blog has given TWIA credit for.

TWIA believes, as we suggested earlier, that it will have $1 billion in reinsurance that will attach at $1.7 billion and that the premiums will be $106 million (a little more than we thought).

But now notice the problem.  It’s the turquoise area labeled “$1 billion Class 2 Post Event Bonds.”  Notice the repayment source. “Repaid by Non-Recoupable Assessments to Pool (30%) and Surcharges to Catastrophe Area P & C Policyholders (70%).” This is wrong, wrong, wrong.  This source of bond repayment can not be used under Texas law when, as will occur here, the Class 1 Bonds are resold.

Doubt me?  Read section 2210.6136 of the Texas Insurance Code.

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).

 

How those Class 2 bonds are to be repaid is set forth in section (b) of the same statute.

(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.

 

Thus, the method is not the 70/30 split that would be used if the Class 1 bonds had been sold and set forth in section 2210.613 of the Texas insurance Code.  Instead, because the TWIA policyholders would not yet have been burdened as much as that section contemplated, the TWIA policyholders pay the first $500 million under section 2210.6136 and only then is the 70/30 split invoked on the remaining possible $500 million authorized in Class 2 securities. You can read more about this issue here and elsewhere in this blog.

And here, we can see the problem.  If the market won’t lend TWIA money for Class 1 securities because it does not trust in the ability of TWIA policyholders to repay, why would it lend TWIA money for functionally identical securities that just say “Class 2 on them”?  Thus, TWIA should not be counting on being able to sell Class 2 securities.  And certainly not on being able to sell more than $500 million. The turquoise area should just be labeled, just as Chairman John Smithee suggested in his warning letter of May 29, 2013, to Governor Perry:  “GAP.”

And the situation is worse. It’s why Chairman Smithee spoke of a $1 billion gap.  For not only should the turquoise area be labeled GAP.  But the gray area above it for Class 3 securities should also be labeled GAP.  Read section (c) of the (in)famous section 2210.6136.  It states:

(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.

If the Class 2 Alternative securities described in sections (a) and (b) don’t sell in full, then the Class 3 securities can not be sold AT ALL.

Thus, the graphic in question misleads the legislature by falsely asserting that TWIA will be able to sell Class 2 securities backed by a different pool of money than in fact will be used and by failing to note that the ability sell Class 3 securities is contingent on being able to sell every dime of $1 billion in securities whose repayment source is one that market appears already to have rejected.

Kind of a serious problem, yes? Let us hope the legislature gets to the bottom of this at the hearing today and TWIA is forced to issue a corrected report.

 

Smithee’s urgent warning to Governor Perry

I’ve decided that Representative John Smithee’s letter of May 29, 2013, to Texas Governor Rick Perry is of sufficient importance that I should just simply reprint it right here. It contains an urgent warning that TWIA is likely to have a $1 billion gap and will not be able to pay claims promptly for even a low severity storm.  No links to click.  Just read it.

John Smithee warns Governor Perry that TWIA likely has a $1 billion gap and will not be able to pay claims promptly for even a low severity storm

John Smithee warns Governor Perry that TWIA likely has a $1 billion gap and will not be able to pay claims promptly for even a low severity storm

If you want to understand why John Smithee is saying this, read entries in this blog such as this one and this one.

House Insurance Committee to hold special hearing today on TWIA finances

The House Insurance Committee will meet this morning (June 17, 2013) to “hear invited testimony relating to the current financial condition of the Texas Windstorm Insurance Association.” Here’s the link you need to watch the hearing live. http://www.house.state.tx.us/video-audio/

The decision to hold a special hearing comes in the wake of the decision of Texas Governor Rick Perry not to add windstorm reform to the agenda of the special session and the failure of the legislature to pass any significant legislation reforming the finances of the troubled windstorm insurer.  We have now learned that House Insurance Committee Chairman, Rep. John Smithee, had added his name to a plea to Governor Perry to add windstorm insurance reform to the agenda.  In a letter of May 29, 2013, and published here (for the first time, I believe), he said that what he regarded as a “prudent and sound decision” by outgoing Texas Insurance Commissioner Eleanor Kitzman to disapprove $500 million in loans via a Bond Anticipation Note (BAN) to TWIA “raises significant concerns regarding TWIA” and presented a $1 billion gap in TWIA’s finance structure.” Smithee further wrote:

“Without availability of the $500 million BAN, there appears to be a legitimate concern regarding TWIA’s liquidity to pay losses in the 30-90 days following a 2013 storm of even low to moderate severity.”

 

As this blog has indicated on many occasions, the problem, however, goes even beyond liquidity.  As will likely be discussed at today’s hearing, there is a serious question as to whether TWIA, under the current finance structure, will in fact ever be able to get significantly more than the piddly amount of cash it now has on hand in order to pay claims following a storm of moderate severity.

Here’s a copy of the full Smithee letter. It is the most stark assessment to date by a legislator of the serious problem facing Texas.

Smithee Governor TWIA call

 

The op-ed I just pulled

As discussed in the previous post, Governor Rick Perry decided today not to add windstorm insurance to the agenda for a special session of the Texas legislature.  Among the lesser effects of this decision is that it moots out an op-ed piece I had pending with the Austin American Statesman. Here’s what I would have said and why I have problems with the Governor’s decision.

The op-ed

Texas Can’t Wait Much Longer for Windstorm Insurance Reform:

By Seth J. Chandler

This hurricane season is looking very bad for property owners on the Texas Gulf Coast.  That’s not just because climate experts are predicting more storms than average but also because the coast’s largest windstorm property insurer, the state-sponsored Texas Windstorm Insurance Association (TWIA), is on the edge of insolvency.  Unfortunately, Texas Governor Rick Perry hasn’t been able to get from “certainly possible” to an urgent “yes” in answering calls to add windstorm insurance reform to the agenda for a special session of the Texas legislature.

The problem with waiting is that TWIA is broke and its funding model is broken. As it stands there may end up being only a paltry $1 billion to pay claims. That sum is inadequate to cover the $2 billion or far higher losses that might be sustained when an insurer with $80 billion in potential exposure collides with a Category 2 or higher storm. And for every day that now goes by with no special session and no bill passed by a two thirds majority of both Houses, that’s one more day deeper into this hurricane season in which the Texas coast is at risk.  Indeed, given the interdependencies in the Texas economy, an inability of TWIA to pay claims would place the entire state economy in jeopardy.

Why such little cash?  As a result of dubious management, underfunding before Hurricane Ike, and 2009 legislation that cut off TWIA’s former ability to soak Texas insurers and inland policyholders for large losses, TWIA just didn’t have what it took to shrug off Hurricane Ike claims. And, given the way it currently spends money and the modern risk of hurricanes to an ever developing Texas coast, TWIA’s premiums just aren’t enough to let it escape a cycle of perpetual underfunding. The situation is sufficiently bad that the Texas Insurance Commissioner wouldn’t even let TWIA prop itself up by borrowing $500 million now, ahead of a storm.

Borrowing after a storm — the current plan — is likewise in doubt. Soundings of the market suggest little appetite to lend TWIA money based on shaky sources of repayment such as massive surcharges on TWIA policyholders. And a bug inserted into the law as the 2011 session makes things worse. The inability of TWIA to market bonds at one level is likely to prevent it from marketing bonds — even ones that might otherwise be salable — at other levels.

Texas legislators wrestled this session with numerous fixes but the result was impasse. Disagreements about how much of a subsidy inland Texans should provide TWIA insureds, coupled with the time-tested Texas tangle about damages in lawsuits against insurers, meant that few bills could escape committee and no bill actually made it to a vote.

What could break the impasse? Coastal legislators must recognize that it is simply not sustainable to keep the market out forever and ask inland insureds, who have problems of their own, to pay heavily and in perpetuity for the special risks found on the Texas coast. It doesn’t matter whether that is done directly with surcharges or indirectly through assessments or forcing insurers to sell policies at a major loss along the coast. The alternative of providing coastal insureds with lower-priced insurance that does not pay when the time comes does their coastal constituents no favors.  Inland legislators must recognize that it will take some time to wean the coast off the existing system.  And everyone should realize that the law about how much “extracontractual damages” victims of insurer misconduct should receive does not matter all that much when the insurer can not pay even its contractual obligations. If a long term solution can not be reached, at least bugs in the current statute can be eliminated.

Pity the Governor and Texas legislators who, after a storm leaves blue tarps on unpaid policyholders roofs and forces inland Texans to pick up the pieces, explain that they were awaiting the perfect time for legislative action or holding out for something a little better.

 

Perry to Coast: No Special Session on Windstorm

It looks like the Texas Coast and the rest of Texas is going to have to live with the deeply troubled public insurance scheme now in place for windstorm risk along the Texas coast.  That’s because Texas Governor Rick Perry announced today that he will not be adding any more items to the agenda for a special session of the Texas legislature.  His decision, coupled with the inability of the Texas legislature to agree  on any sort of reform, has the potential to wreak havoc.  There is a major risk — best estimated at about 20% — that the largest insurer on the Texas coast, the Texas Windstorm Insurance Association,  will fail at some point during the 2013 and 2014 hurricane seasons. Such a failure would leave policyholders with unpaid claims and consequent difficulty undertaking repairs. It would force the rest of Texas to choose between an expensive bailout that could have been avoided or forcing people on the Coast to reap the consequences of decisions sown by their political leaders that they failed vigorously enough to oppose in a sensible way.

CBS news in Dallas provides the following explanation of the decision.

Governor Rick Perry said Thursday he won’t be adding any more items to the special legislative session, noting that with just 12 days to go, there’s too little time left for lawmakers to handle a larger workload. *** Originally, the agenda only included approving new voting maps for congressional and legislative elections. But Perry this week added passing funding for major transportation infrastructure projects, mandatory life sentences for teens convicted of murder and even the thorny issue of further restricting abortion in Texas to the agenda.   “I think everything that can be added to the call has been added to the call from the standpoint of a timing issue,” he said after signing the so-called “Merry Christmas Bill,” which sailed through the Legislature and protects the rights of students and teachers to use religious greetings and symbols in public schools statewide.

This is not the post in which to assess blame, though I promise one is coming. It is, instead, a time for sadness and reflection.  What is wrong with our state and our leadership that we can not manage to fix a relatively basic problem?

Premium Finance Issues

It won’t take a major storm for the repercussions of today’s decision to be felt.  Already there are mutterings and possibly action among some insurance premium finance companies that they will not loan people money to purchase TWIA policies. The finance companies don’t want to get stuck with unpaid claims for premium refunds in the event TWIA is placed into insolvency proceedings.

Lending Issues

 

Although the band may play on for a little while longer, lenders along the coast are also going to face  a difficult reality.  Sober lenders will likely start taking a serious look at the extent to which they want to lend money on the basis of collateral (homes, businesses) that are insured on TWIA paper but that be little more than a pile of unrepaired sticks and an expensive claim in state receivership proceedings following a significant storm. And, with the failure of legislative action to correct the problem, new Texas Insurance Commissioner Julia Rathgeber will face difficult decisions. She has to decide whether to place TWIA right now into some sort of insolvency proceedings so that its limited funds are not further siphoned off.  She also has to decide whether to reverse the decision of her predecessor to deny TWIA the ability to borrow money to raise cash.

Psychological Issues

 

And there is yet another consequence lilkely to be felt soon.  When you are uninsured or incompletely insured, it does not take an actual loss to cause great stress.  Informed people, particularly in the densely populated areas of the Texas coast such as Galveston where the affects of a TWIA insolvency are most likely to be felt, are going to lose a lot of sleep this summer.  The glimmer of hope that things would get fixed either during the regular legislative session or during a special session has just evaporated. Now, every time something enters the Gulf of Mexico, our friends on the coast with TWIA policies  have to worry not just about the emotional and financial losses that inevitably come from storm loss. They also have to be concerned about the significant possibility that their losses may not be as insured as they hoped. They have to worry that they may be living under a blue tarp (or worse) for a very long time.

Is there a ray of hope?

Only a sliver. It was important that TWIA got reinsurance that attached at a low value.  That appears to have happened.  But that (still expensive) reinsurance will do limited good if TWIA can’t sell its bonds after a storm to raise cash. If not, there will be a large gap between TWIA cash and the reinsurance. Maybe we will learn something about that possibility soon.  One of the many problems with post-event bonds as a vehicle for catastrophic risk transfer, however, is that you can’t tell for sure whether you will have enough money to pay claims until those dark days following the catastrophe.

Good news: TWIA looks to have reinsurance for this summer

According to industry publication The Insurance Insider, TWIA has secured the rights to $1 billion in reinsurance attaching at $1.7 billion.  TWIA also has the option of instead obtaining a larger $1.25 billion in reinsurance but with a higher $2.2 billion attachment point.  Both policies apparently cost about the same, likely around $100 million or about 23% of TWIA’s available cash. Purchase of the reinsurance, while helping to protect the struggling state-sponsored insurer for this summer, will, however, reduce TWIA’s ability to increase its internal Catastrophe Reserve Trust Fund. Purchase will thus keep Texas’ largest coastal windstorm nsurer dependent on this expensive form of protection.

Continue reading

TWIA Cash Position Not Improving

 $443 million in cash and short term assets

In a recent blog entry, I attempted to estimate the amount of cash the Texas Windstorm Insurance Association had in its operating account.  I said TWIA’s cash position was likely to be between $400 million to $700 million after the recent Ike settlement of $135 million was taken into account. Thanks to a public information request from Fox 26 TV’s Greg Groogan we now have a better fix.  If anything, I was a little optimistic.

TWIA has $443,453,000 in cash and short term investments, little changed from its position at the start of the year.  Its assets are down to $444,342,000.  But those figures are before  consideration of the $135 million Ike settlement, the so-called “Mostyn settlement.” They are also before TWIA spends an anticipated $100 million or so (in cash) on reinsurance, The figures are both from the end of April, 2013. If funding of the Ike settlements comes from operating funds or TWIA succeeds in obtaining reinsurance, that figure will likely be lower shortly.  If the Ike settlement instead comes from the Catastrophe Reserve Trust Fund, that $180 million fund will be significantly depleted.

The rest of the story on the TWIA cash position and finances

There are at least two other pieces of information that will be useful in assessing TWIA’s position as hurricane season moves forward. They may also help Governor Perry get from “certainly possible” to “yes” in considering requests that he convene a special session of the Texas legislature to address windstorm insurance reform.  What happened to the effort to spend $100 million or so on reinsurance?  Did they acquire it and on what terms?  Second, what has happened to the effort to prepare for post-event bonding now that former Commissioner Eleanor Kitzman authorized TWIA to do so?  Unless both of those efforts are particularly successful, however, I stand by my assertion that TWIA may well have little more than $1 billion in actual cash to pay claims on $80 billion worth of exposure. Moreover, the reinsurance doesn’t do as much good as it could, if TWIA can’t sell all of its authorized post-event bonds.

So, in this case, no news — or no new news — is bad news. If something like Hurricane Ike hit — a Category 2 storm in a populated area — TWIA policyholders might get only 40 cents or so for each dollar of legitimate claims. There would be no protection from the Texas Property & Casualty Guaranty Association. There would be no lawful obligation of the state to help out. Instead Texas would be left with a hope.  Perhaps the state legislature would meet swiftly and agree on a plan (with a 2/3 majority) to come up with billions of dollars  to help bail out a devastated coast.  As I recently said to reporter Groogan in response to Senator Larry Taylor’s understandable expression of such a hope:  “Good Luck.”

Footnote 1: Say what one will about TWIA and its history, I have again found them to be responsive over the past year to public information requests.  That helps build some trust.

Footnote 2: Remember State Representative Craig Eiland’s claims that TWIA could and should assess insurers today for Hurricane Ike losses and buttress in Catastrophe Reserve Trust Fund?  I’ve found a longer statement of his position here.  It’s such a mixed picture.  On the one hand,  outgoing Representative Eiland has great information on the timeline. He presents a forceful case that TWIA had the information that would have justified a larger assessment on the insurers for Ike under the old law before a 2009 law took effect.  He is right that TWIA would look a lot stronger today with $780 million in its CRTF rather than the $180 million it has today. What Representative Eiland still lacks, however, is any legal theory under which such an assessment could occur today.  As has been discussed here at length, the law under which assessments were authorized was repealed — Representative Eiland sadly joining others who voted to do so.