Lawsuit filed against TWIA for failure to assess fully for Ike

A policyholder of the Texas Windstorm Insurance Association has filed a lawsuit against that state-created entity and its current board of directors as a result of the failure of TWIA following Hurricane Ike to assess Texas insurers more fully under the law as it existed at the time. The lawsuit, filed in a state district court in Travis County (copy of lawsuit here), seeks a court order directing the current directors to assess TWIA member insurers for up to $600 million and to pay damages to the policyholder, Ramiro “Gamby” Gamboa of Corpus Christi, Texas. It is very unlikely, however, that the case will succeed in making any more money available for current policyholders of the deeply troubled largest insurer of windstorm risk on the Texas coast.

Mark Kincaid

Mark Kincaid

The plaintiff is represented in the action by Texas “Super-Lawyer” Mark Kincaid, a former head of the office of Public Insurance Counsel in Texas. The lawsuit is the latest in a series of steps by coastal interests, most visibly led by Corpus Christi State Representative Todd Hunter to find ways of buttressing the desperate finances of the Texas coast’s largest windstorm insurer. TWIA will likely respond to the lawsuit in the next three weeks or so. The members of the board of directors who have been sued will likely be notifying their Directors and Offices Liability Insurer of the suit, assuming TWIA procured such coverage for the current year, and requesting that they provide a legal defense to the claims. Whether or how Texas insurers who would be liable for the assessment in the event the lawsuit succeeds will intervene in the proceedings is not yet clear.

The major issue this lawsuit will face is that the statute that would have authorized TWIA to make the assessment was unquestionably repealed by the legislature in 2009. This blog has analyzed this issue extensively (see here and here) and concluded that the problem is likely insuperable. The short version is that in section 44(2) of H.B. 4409, the legislature in 2009, with knowledge that claims for Ike were still pending repealed sections 2210.058 and 2210.059, the provisions of the former law that would have authorized an assessment. That repeal without saving the right to assess for prior storms may have been foolish or it may have been part of some political deal involving insurers and coastal interests.  It may simply have been prophetic drafting by legislators who place a high value on the interests of Texas insurers. Unless some argument can be made that the repeal, if interpreted in the fashion I believe is required by section 311.031 of the Government Code, violates policyholder rights under the United States or Texas Constitution, or unless attorney Kincaid has some extremely clever argument up his sleeve, would appear to end the matter. I guess we shall see. In a formal opinion, the Texas Attorney General, Gregg Abbott, has rejected the argument made in the Gamboa complaint that there was anything unlawful about TWIA using premiums from years after Hurricane Ike to pay for claims arising out of that storm.

Conceivably, some lawsuit might have been filed against the then-directors of TWIA at the time it failed to assess for Ike fully but that claim does not appear to exist in this lawsuit nor have the right individuals been sued.  Moreover, such a lawsuit based on actions in 2008 and 2009 would now run into statute of limitations issues since the claims are based on alleged failures that took place more than four years ago. The absence of such a claim is, in some sense a pity for TWIA historians, since those directors had at least constructive knowledge that the time for an assessment was about to expire and might possibly have known that the $430 million assessment they did issue was going to prove woefully low to pay for Ike claims and would thus burden current and future policyholders. If the Gamboa lawsuit survives motions to dismiss and discovery proceeds, however, the just-filed lawsuit  may bring some of those issues to light. The Texas Attorney General has previously declined to respond to a request from State Representative Todd Hunter that the failure to assess was negligent.

 

 

Waiting for Godot: TWIA style

Sometimes, watching a TWIA board meeting is like watching an absurdist French play. In Waiting for Godot, Samuel Becket presents a two hour play in which the two characters Vladimir and Estragon waste away their existence waiting endlessly for “Godot,” who is clearly never coming. Substitute an Attorney General opinion authorizing an assessment against Texas insurers for Godot and at least some TWIA board members for Vladimir and Estragon and you get an almost perfect re-interpretation of the 1950s French existentialist classic.

Offering a carrot in Waiting for Godot

To be less high-falutin’, however, when the TWIA board spend hours saying they want to “delay” consideration of an assessment in 2013 of Texas Insurers for 2008’s Hurricane Ike until the Texas Attorney General opines that they have the power to do so, they are wasting time on something that will never happen.  To begin with, contrary to a myth that seems to have received its genesis at yesterday’s board meeting, the Texas Attorney General has not been directly asked (yet) whether TWIA currently now has authority to assess insurers for Ike. Of course, the TWIA board can wile away its time on whatever diversion it chooses; we all probably do that.  But when TWIA sees its exposure growing at 4% per year, acknowledges that it is barely solvent if one counts a paltry catastrophe reserve trust fund, acknowledges that its rates are not actuarially sound, and realizes that not a single of its legislative recommendations got any traction, a focus on this pipe dream rather than a relentless look at reality looks — and is — absurd.

The TWIA board considers an assessment

The TWIA board considers an assessment

One reason the Texas Attorney General will not provide what some TWIA board members claim to await is that no one asked the Attorney General to do so. The only pending attorney general request for an opinion that relates to TWIA comes from Corpus Christi Texas House Representative Todd Hunter in RQ-1134-GA filed in July of 2013.  But that request does not ask whether TWIA has the authority to issue an assessment today under a statute that was repealed in 2009. Rather, it asks whether it would be “negligence and/or a failure of authority or responsibility of duties” for TWIA not to assess today. But, as anyone with a background in law knows, it is quite possible for TWIA to have the authority to do something and yet, in the exercise of its business judgment, not to be “negligent” or in breach of its duties not to do so. Unless, therefore, Attorney General Abbott, a current gubernatorial candidate, is eager to step into this highly politicized thicket and lose votes on the Texas coast, he can answer the questions posed without addressing the core issue of whether TWIA has authority to assess. Only if the Attorney General wants to go out of his way to find that TWIA is negligent in assessing today would he have an obligation to resolve the predicate question of whether TWIA has authority to do so.

Moreover, to pretend that there might really be an affirmative answer to the authority question or that, really, the matter is quite unclear is, I fear, at best an exercise in undue politeness. For reasons I have set forth before here, here and here, this is, on reflection, not a particularly close question. The statute that gave TWIA authority to make the kind of half billion dollar assessment it came within one vote of making yesterday was repealed in 2009. It was repealed — by at least one of the legislators who yesterday urged an assessment — in favor of a system that provided a different system for financing losses after a tropical storm. It was repealed in part precisely because under the old system the Texas fisc was directly jeopardized by a TWIA assessment: insurers got to credit payments of the assessment against otherwise owing premium taxes.

It is just preposterous to think that the Texas legislature, if it wanted to prevent assessments for new storms but leave assessment authority in place for old storms would have chosen simply to repeal the old law rather than place a temporal limitation on the authority to assess. It is bizarre to think that if Texas was willing to place its continuing fisc in jeopardy for old storms but not for new, it would not have done something a little more nuanced that simply repealing the old law. It is even more peculiar to suggest, as may have been done yesterday, that Texas magically preserved the ability to assess for Ike but repealed the premium tax credit so as to preserve its fisc.  If it did so, that provision of the statute must have been written in invisible ink.  If TWIA’s lawyers are, as is claimed, actually telling board members, some of whom may not want to hear it, that the matter is ambiguous, that is a failure of courage or competence over reason.

But, actually, it was not so much parallels to Samuel Beckett that troubled me most in watching the TWIA board meeting yesterday.  It was the parallel to Franz Kafka and other writers who focus on tyranny. Here’s the most troubling quote: “I would have to support this assessment because it would be good for the policyholders and that’s who we represent and that’s basically who I’d have to be in support of.”  (1:42 to 1:43 of this recording) Sorry, but at best that is a hopelessly shallow analysis.  It might be equally “good” for the policyholder if Texas insurance agents had their homes confiscated and sold to pay for Ike losses or if Michael Dell was told he had to personally recapitalize TWIA.  Although Texas insurers may have a good deal of money and it takes a little imagination to see State Farm or Allstate as the victims of tyranny, the fact that a government-sponsored entity may “need” money for some public good is not authority to reach into the bank account of anyone — insurer, wealthy person or poor person — and simply take their money without legislative authorization. That is true even if the insurance industry “got away” with paying too low an assessment back in 2008. And, since Texas courts are likely to agree with this point, it is in fact not good for policyholders to have their money wasted paying lawyers defending an indefensible position.

Footnote 1: This is not to say that asking whether TWIA was negligent in not assessing more heavily back in 2009 is a bad question or an easy question. I adhere to my view that this is a reasonable question.  I am just saying that an answer to this question will not provide guidance on whether TWIA can legally assess today.

 

 

TWIA board declines to assess insurers for Ike — for now

The board of the Texas Windstorm Insurance Association narrowly defeated a motion today that would have assessed Texas insurers $575 million for losses arising out of Hurricane Ike in 2008. Opponents of the measure — all from Texas insurance companies —  saw no urgency to an immediate assessment and, in light of what they believed was uncertain legal authority to do so under a repealed statute, wanted to await a requested legal opinion from Texas Attorney General Greg Abbott. Supporters of the measure — all representing coastal interests — asserted that an Attorney General opinion would not be definitive; in their view, the only way to determine the obligations of Texas insurers was to go ahead and demand the money, recognizing that insurers would file suit to block the assessment and that insurers would not actually pay any money until well into future hurricane seasons. The decision came after a two and a half hour closed session between the TWIA board and its attorneys.

Much other news emerged from the TWIA board meeting.

  1. The board voted to increase premiums 5% on both residential and commercial properties next year.
  2. The board heard that earlier plans to attempt to raise $500 million in pre-event securities — a bond anticipation note (“BAN”) — now appeared unlikely to continue. The board was advised that it would take 60 days to actually consummate the borrowing and that would now put receipt of funds past the peak of hurricane season. The board instead unanimously authorized the TWIA staff to pursue swiftly additional liquidity via a $200 million line of credit and $250 million in borrowing that, for reasons not made clear, would not be considered a pre-event security, and that would be secured by proceeds from any Class 2 or Class 3 securities that would be issued following a major storm. Costs on the line of credit and the additional borrowing were said to be much lower than would have been the case for the BAN.
  3. Although TWIA has thus far faced no storms of consequence this year, it anticipates being able to contribute only $15 million more to its $180 million catastrophe reserve trust fund that forms the first line of defense against any substantial claims.  This low contribution is apparently due to continuing expenses from Hurricane Ike. It also means, however, that even with a continuing spate of good luck this year from a thus -far quiet Gulf of Mexico, TWIA will go into next hurricane season perilously undercapitalized.
  4. Despite all the talk about depopulating TWIA, it continues to grow rapidly.  Exposure grew at 4% this past year and policies at 3%.  TWIA staff said they believed this trend would continue.  The substantial rate of growth is continuing notwithstanding what one board member described as concern among bankers and other lends in the area as to whether TWIA could stand up to a major storm. Since TWIA’s funding mechanisms are stated in constant dollars and not as percentages of exposure, this continued growth further weakens TWIA’s ability to withstand moderate or severe storms.
  5. The board voted 8-1 to approve a statement by one of its board members indicating the issue of whether to assess for Hurricane Ike was still open.
  6. Texas Insurance Commissioner Julia Rathgeber expressed a narrow view of her authority to supervise TWIA.  When asked whether TDI would need to approve any assessment against insurers, Commissioner Rathgeber said she viewed her authority as limited to whether TWIA had followed proper practices and procedures and that she would not second guess its decisions. When asked whether that meant TDI was neutral on assessing insurers, Commissioner Rathgeber said she would need to speak with TDI attorneys.
  7. The 4-4-1 vote came despite pleas from some coastal interests that board members from insurance companies recuse themselves based on a conflict of interest. Opponents of the recusal plea noted that the arguments might equally well apply to persons “representing” coastal interests and that, in any event, the legislature had specifically set up a board with interest group representation.

Catrisk will have more on the eventful TWIA board meeting later in the week.

Todd Hunter asks a good question

Todd Hunter at a recent town hall meeting on windstorm insurance

Todd Hunter at a recent town hall meeting on windstorm insurance

There is at least one thing Representative Todd Hunter (Corpus Christi, Texas) and I agree on: I am not a member of his fan club.  This blog has frequently criticized Representative Hunter for what I regard as his misguided views on windstorm insurance.  Frankly, neither he nor I appear to appreciate each other’s “style.” But, give credit where credit is due.  He has now actually asked a very good question.

In a letter last Friday to Texas Attorney General Greg Abbott, Representative Hunter asked for an opinion stating whether a failure by the Texas Windstorm Insurance Association to assess private insurance companies fees to shore up its ability to pay claims amounts to negligence.  I raised the same issue several months ago in a prior blog post. Were the Attorney General to opine positively, it could open the door to legal action against the board of directors of TWIA or its officers during the critical 2008-2009 time period after Hurricane Ike and before HB 4409 repealed a statute under which TWIA might have issued further assessments against member insurers to shore up its finances. If it were to turn out either that any of the board members or officers has significant funds or if anyone responsible for any of their misdeeds either by operation of law or through an insurance contract has money, it could ultimately help bring some desperately needed additional funds into the largest windstorm on the Texas coast.

The problem with the preceding paragraph, however, is the number of “ifs” it contains.  First, the Texas Attorney General would need to opine positively.  I’m not saying it couldn’t happen. But he might well opine that this was a factual question on which he had no legal opinion.  He might opine that he lacked the facts on which to render an opinion.  He might remind Representative Hunter (who obviously knows this point) that negligence is not the same thing as strict liability. A realization in hindsight that the assessments were too low is not the same thing as a failure to make assessments that were plainly reasonable at the time such a decision would have been made.  Defendants in such a lawsuit would surely argue that making such an assessment and increasing the size of the Ike pie would just have made TWIA a stronger lawsuit magnet and left no more money for future claims. None of these responses would be particularly helpful to Representative Hunter.

Second, to make such a lawsuit more than a show trial or truth commission, someone needs to have actual money.  I don’t know for sure, but it would strike me as unlikely that any of the board members or officers have $400 million in assets upon which execution is practical. And while some of the large corporate entities affiliated with the board members would likely have that kind of cash, tagging the corporation for any sins of these board members will be a challenge. TWIA probably has some form of liability insurance to protect its board of directors, but until we see the policy it is hard to know what it covers or how much protection it would offer. In any event, no defendant is likely to write a check right away to the plaintiff in such a lawsuit . In any money ever comes in, it will likely be years from now — a long time for claimants against an insolvent TWIA to wait for payment that repairs their hurricane-damaged roof.

Third, one should expect to see defenses of statutory immunity and the statute of limitations raised.  Under section 2210.106 of the Texas Insurance Code, officers and directors have at least some immunity from damage lawsuits for many forms of ordinary negligence. And the statute of limitations for breach of fiduciary duty in Texas is four years. If that statute runs from the time of the original assessment, a lawsuit now is too late.  If it runs from the date that section 44 of HB 3 was signed into law and eliminated TWIA’s former ability to assess, the deadline would appear to be July 19, 2013, leaving precious little time in which to file such suit. (Hint, hint?)

It will be interesting to see how Attorney General Abbott responds to this request.  As I have suggested, the matter is not an open and shut case and bad decisions in hindsight does not negligence make. Still, there has always been something troubling about the process and chronology here.  TWIA, over which insurers have had substantial control, making assessments against insurers that are lower than that requested by its managers and that turned out to be low all the while watching or, more troublingly yet, possibly participating in, a statute that cuts off the ability of TWIA to assess for Ike. Representative Hunter deserves credit for asking the Attorney General to take a look at the legality of actions that are in part responsible for the predicament in which TWIA and its policyholders now find themselves.

Here’s a link to the letter from Representative Hunter. AG Opinion Request

Return of the Vampire Argument

One of the amazing things about debates over the Texas Windstorm Insurance Association is the extent to which, like vampires, some arguments never die. It doesn’t matter how meritless the argument is, it doesn’t matter how thoroughly it has been beaten back in the past by logic or legislation. It just keeps being brought out of its grave when needed by advocates.  Many of these arguments are pernicious because they distract from the real issues facing Texas and because they divert attention from study of the real solutions.  They provide red meat for zealots but do absolutely nothing to solve their problems. Until, however, coastal residents drive a stake through the heart of them by driving their proponents out of office, they are likely to persist.

One of the more amazing of these vampire arguments is that the Texas Windstorm Insurance Association can make an assessment today against Texas insurers for damages caused by Hurricane Ike based on a statute that was repealed in 2009.  And yet, according to the Corpus Christi Caller, coastal legislators such as Corpus Christi’s Todd Hunter are again casting about looking for someone in authority who might believe this particular fantasy. This time the argument has been hurled at the new Teas Insurance Commissioner, Julia Rathgeber. According to a Corpus Christi Caller article of July 3, “[c]oastal lawmakers again are reaching out to Texas Insurance Commissioner Julia Rathgeber to seek about $400 million in assessments for insurance companies to help replace funds paid for claims in the wake of Hurricane Ike.”  I will be stunned if Commissioner Rathgeber does anything other than send of a polite message that she does not believe such an assessment to be possible. It hardly creates the business friendly environment that her boss, Governor Perry, desires when businesses can be threatened with arbitrarily having hundreds of millions of dollars taken away from them based on the ghost of a former statute. A swift and unambiguous “no” from the Commissioner will be at least put the vampire back in its coffin for a while and permit more serious approaches to TWIA’s insolvency to be examined.

Why do I use such strong language in denigrating the argument.  Mostly because I can read. There is no statute today authorizing assessments against TWIA member insurers unless a post-event bond has been issued.  That hasn’t happened. Government can’t just come in and take private property  — even the money of insurance companies — unless there’s a constitutional law that justifies the taking. That’s one of the things that separates us from a tyranny. So the only conceivable basis in for an assessment is the old law, former section 2210.058 of the Insurance Code, which was used back in 2008 to assess insurers for Hurricane Ike.

The problem is that this law was repealed by section 44 of H.B. 4409, which was enacted in 2009 after Hurricane Ike basically destroyed TWIA. Here it is:

Section 44 of HB 4409

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.

There it is in black and white.  I’m not sure how it could be any clearer.

So the only argument coastal legislators might have left to keep this vampire out of its coffin is that, somehow, the word “repeal” doesn’t really mean repeal. And the only sliver of hope in that regard would appear to be section 311.031 of the Government Code. It reads

Sec. 311.031.  SAVING PROVISIONS. (a) Except as provided by Subsection (b), the reenactment, revision, amendment, or repeal of a statute does not affect:…

(2)  any validation, cure, right, privilege, obligation, or liability previously acquired, accrued, accorded, or incurred under it.

I suppose the legislators’ argument is that the “assessment” was an obligation or liability previously acquired, accrued, accorded or incurred.” But this argument, which a law professor might briefly admire for its creativity, fails because the possibility that TWIA might assess insurers more for Ike is not a liability or obligation. 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. Thus, if Allstate had not paid its assessment under the 2008 assessment, the fact that the statute permitting assessments was repealed would not relieve Allstate of its obligation to pay the pre-existing assessment.  It would, however, prevent TWIA from creating new liabilities for Allstate to pay.

Moreover, think about it. If the legislature wanted to preserve TWIA’s ability to assess after 2009 for storms that occurred before that time but not afterwards, you would not repeal the statute.  Instead, it would far more direct and far clearer simply to amend the statute to limit the set of storms for which assessments would be permitted.

Now, perhaps the strategy of coastal legislators such as Todd Hunter is to keep asking Commissioner Rathgeber for lots of things in the hopes that she will, as a compromise, give them the one thing that might possibly make sense, a pre-event bond. But, really,  pre-event bonds should rise or fall on their own merits. Granting them or not should not depend on legislators asking for things that are plainly illegal, such as confiscating the property of insurers.

I understand why coastal legislators are upset.  Their strategies in the 83rd legislature failed. It is, despite the protestations of some to the contrary who want to pro-development illusion that the band can keep playing on, a “crisis situation.” Although they are not the only parties at fault, these legislators have contributed to the horrible risk now confronting their constituents. And Governor Perry has thus far resisted calling a special session of the legislature to repair the damage. These legislators likely will (and should) be held responsible by their constituents if a tropical cyclone bankrupts TWIA. And, they are right that, with the benefit of hindsight, TWIA policyholders would be better off if TWIA had issued a greater assessment for Ike while its statutory authority to do so was still in force.

The bottom line, however, is that TWIA did not make an extra assessment for Ike and the time to have done so has long run out. And even if the 1% chance materialized that a court would ultimately order insurers to pay based on a new Ike assessment, the lengthy court fight involved would delay receipt of funds well into the next legislative session.  Honestly, all that bringing this vampire argument out of the coffin again accomplishes is to diminish the credibility of those who will need every ounce of it if they are persuade fellow legislators to engage in sensible, needed reform of the Texas Windstorm Insurance Association.

Attorney General: Texas not obliged to pay for excess TWIA losses

You heard it here first.  As I wrote back in July of 2012, if the Texas Windstorm Insurance Association does not have enough money to pay its claims, the State of Texas has no obligation to pay its unpaid claims to policyholders. This was confirmed this week by Texas Attorney General Greg Abbott in an opinion letter written to Texas State Representative (and Chair of the House Insurance Committee John Smithee).  The bottom line of the letter  providing the formal opinion of the Texas Attorney General is reprinted below. Here is a link to the full opinion.

The bottom line of Attorney General Abbott's opinion

The bottom line of Attorney General Abbott’s opinion

The Attorney General’s opinion should hardly have been necessary given the obviousness of the proposition. It is, as I suggested, not a matter over which people — particularly lawyers who can read a statute — could reasonably disagree. Perhaps the weight of the Texas Attorney General behind the proposition will, however, put to rest claims by some coastal legislators that the matter was debatable.  The AG opinion likewise vindicates Texas Insurance Commissioner Eleanor Kitzman who made the same assertion last year and who, for thereby calling into question the financial stability of TWIA, was threatened with a criminal investigation by Texas State Representative J.M. Lozano. Perhaps Representative Lozano will now issue an apology?

So, TWIA policyholders take note.  As it stands, there is no cavalry coming over the hill when a tropical cyclone empties TWIA.  Your insurer will not have money to pay your claim in full.  The State of Texas will not pay your claim. The Texas Property and Casualty Insurance Guarantee Association will not pay your claim. No one with money will have legal responsibility to pay your claim under your TWIA policy. You are very likely to be under a blue tarp and coping with a ruined house for a long time. Unless and until the legislature acts, whether in a special session or a regular session two years hence, the restoration of your property and your life may well depend on the kindness of strangers.

Photo of Katrina survivors in the Houston Astrodome

The kindness of strangers the last time a major hurricane left many people homeless

Alice Gannon’s remarkable speech

At yesterday’s meeting of the TWIA Board of Directors, Alice Gannon, a director of TWIA, and its Secretary/Treasurer made a remarkable speech.  It’s remarkable because it is the first time I have heard a TWIA member at a public meeting be honest about at least some of the problems they face.  It’s also remarkable in that it is still not fully grappling (except perhaps elliptically) with the depth of the predicament in which the state’s largest coastal windstorm insurer finds itself. I might add that the speech is also remarkable for the silence that follows.  Notwithstanding the invitation of the chair to do so, there are no follow up questions by the other board members regarding Ms. Gannon’s assertions.

Screen capture of the TWIA board meeting

Screen capture of the TWIA board meeting. Ms. Gannon is at the right.

You can watch it yourself here starting at about minute 39:30 of the recording and lasting until about minute 43:30.  I’m going to provide first a transcript of what she said. I’ve also included a question posed by Mike Gerik and her response.  I’m then going to provide an annotated version of the same colloquy.  My annotations are in italic font and enclosed in square brackets. By the way, I’m not a professional stenographer, but I’ve tried to be careful to capture precisely what she said.

Alice Gannon’s Speech: A Transcript

So, the current financing structure for TWIA includes Class 1 bonds, which theoretically could be a billion dollars as authorized by statute. The problem since day one with the TPFA looking at it and talking to the investment bankers, etc., about it is that the revenue stream to support paying back that bonds is not considered adequate to support a billion dollars of bond.And, depending on any point in time, and conditions, we’ve had estimated  all the way from zero is what we could get if and when we had an event and went to the market to get the bonds all the way up to, really, five to six hundred million is the most that I’ve ever heard discussed. With the bond — One of the advantages of the bond anticipation notes is we have the partner, I think it’s Citibank — Citibank or Bank of America? — Bank of America, I apologize — who apparently is willing to assume that we could get $500 million post event on bonds and so are offering this bond anticipation note, obviously getting some return on that. So, that way we have the certainty, and then even if we are not able to issue $500 million of bonds, we still have that can be translated into a 5 year loan, so we have the assurance that we have that $500 million at that spot.

So, that gives us the comfort then going to place our reinsurance we can assume $500 million of that layer, ‘cause the higher up you can place your reinsurance for the same amount of premium, the more total reinsurance you could get.  In the particular case before us now, we are talking about an additional $250 million of coverage that we could get with the same premium dollars if we can assume we have that $500 million of the Class 1 bonding level.  So, that’s a big advantage.

And, as Pete [Gise] said, the other huge advantage is that you have that $500 million cash on hand. And he did refer to the three different scenarios they ran, the $700 million for a tropical storm/hurricane event or  a one and half billion or a three billion dollars. And in all three of those, the way the cash flow would be expected to pay out, with the bond anticipation note, we would be able to pay our claims in a timely fashion. However, I believe it’s also true that without the bond anticipation note, it’s highly likely we would not be able to pay our claims in a timely fashion.

And, for me, that is the most compelling reason to spend the money of the cost of the bond anticipation note. I think it would be tragic if we have — I mean to the people involved it’s not moderate — but a moderate event of $700 million and we’re telling our policyholders, our claimants, ‘We owe you the money. We agree we owe you the money and we’ll pay it as soon as we can, but that’s going to be a while.  And I just think that would be tragic.  And that’s why I think it is absolutely worthwhile to spend the expected expense associated with that bond anticipation note to get it. And I applaud your efforts to lay that out more clearly to our new commissioner in hopes that she will agree.

Question from Chair Mike Gerik: Alice, could you before you turn off your mike, we keep missing why there would be a delay, because it takes time to issue bonds and maybe how long that’s going to take and that’s the period of time we wouldn’t have the money if we don’t have the BAN.

Gannon: Well, there’s two. Number one is from what I understand from TPFA, they’re estimating three to six months before you could actually sell those bonds and have the cash ready to pay claims.  And that of course is assuming you could with Class 1 get $500 million. There’s a real risk that especially in whatever conditions might exist post event, that the bond market might not buy $500 million worth and then you’re short forever if you will of that piece until the legislature would take action to find money somewhere else for us.

 The Annotated Alice: [My comments in brackets and italics]

So, the current financing structure for TWIA includes Class 1 bonds, which theoretically could be a billion dollars as authorized by statute. [True] The problem since day one with the TPFA looking at it and talking to the investment bankers, etc., about it is that the revenue stream to support paying back that bonds is not considered adequate to support a billion dollars of bond.  [True. The problem is that TWIA would need to raise premiums 20-25%, which would reduce the size of TWIA, which would result in yet higher premium increases, which would further reduce the size of TWIA, which would put the organization into a death spiral. That’s why lenders won’t buy $1 billion of Class 1 bonds in which the repayment mechanism is TWIA premiums] And, depending on any point in time, and conditions, we’ve had estimated  all the way from zero is what we could get if and when we had an event and went to the market to get the bonds all the way up to, really, five to six hundred million is the most that I’ve ever heard discussed.  [Ms. Gannon makes clear that TWIA is never going to be able to sell $1 billion in Class 1 bonds.  This is critical because this is the very fact that triggers section 2210.6136 of the Texas Insurance Code. We’ve talked elsewhere on this blog about the serious problems that section 2210.6136 creates for TWIA. ] With the bond — One of the advantages of the bond anticipation notes is we have the partner, I think it’s Citibank — Citibank or Bank of America? — Bank of America, I apologize — who apparently [Is Bank of America still willing to do even 10%, that I take it is why Ms. Gannon used the ‘apparently’ caveat] is willing to assume that we could get $500 million post event on bonds and and so are offering this bond anticipation note, obviously getting some return [Yes, a hefty 10%] on that. So, that way we have the certainty, and then even if we are not able to issue $500 million of bonds, we still have that can be translated into a 5 year loan, so we have the assurance that we have that $500 million at that spot. [True. That’s one of the key arguments in favor of TWIA borrowing money that will be challenging to repay.]

So, that gives us the comfort then going to place our reinsurance we can assume $500 million of that layer, ‘cause the higher up you can place your reinsurance for the same amount of premium, the more total reinsurance you could get. [True] In the particular case before us now, we are talking about an additional $250 million of coverage that we could get with the same premium dollars if we can assume we have that $500 million of the Class 1 bonding level.  So, that’s a big advantage. [I agree. This is the second argument in favor of going ahead and borrowing, even at 10% and even though it will be a challenge to pay it back.  There are, however, contrary arguments.]

And, as Pete [Gise] said, the other huge advantage is that you have that $500 million cash on hand. And he did refer to the three different scenarios they ran, the $700 million for a tropical storm/hurricane event or  a one and half billion or a three billion dollars. And in all three of those, the way the cash flow would be expected to pay out, with the bond anticipation note, we would be able to pay our claims in a timely fashion. [I would not be so sure with respect to the $1.5 billion storm or the $3 billion storm.  This is where I believe Ms. Gannon and others are not coming to grips — at least in public — with the central problem. As Ms. Gannon acknowledges, it is doubtful the market will buy $500 million in Class 1 post-event bonds that are paid for by TWIA policyholders. But that makes it even less likely they would buy Class 2 bonds that TWIA policyholders have to pay back over 10 years where TWIA policyholders are already burdened, under the BAN, by a 5 year, $130 million per year obligation that already constitutes 20-25% of their premiums.  How on earth are TWIA policyholders collectively going to come up with an additional $82 million per year for 10 years (assuming 10% interest) to pay off $500 million more in Class 2 bonds?  A lot of people are going to drop TWIA under those circumstances.  And when they do, the death spiral of TWIA begins.  And, yet, under section 2210.6136 of the Insurance Code, you can’t get anyone else to pay for bonds unless the TWIA policyholders become so obligated.  So, particularly if you’ve already encumbered yourself by borrowing $500 million short term at 10%, it it will be extremely difficult to issue any more post-event bonds.  TWIA won’t just have the money short term.  It won’t have it at all.  Ever.]  However, I believe it’s also true that without the bond anticipation note, it’s highly likely we would not be able to pay our claims in a timely fashion. [Wow.  At last someone acknowledges that TWIA has a serious, serious cash flow problem.  Like someone in desperate financial straits, TWIA has a choice of encumbering itself with a payday loan (short term, high interest) and having enough cash to pay for a small storm, but basically preventing itself from borrowing funds to pay for a large storm, or having a slightly increased chance of going to the market post-event and borrowing to pay for a large storm.  There are no good options.  In light of the failure of the Texas legislature to amend the statute during the regular session and Govenor Perry’s decision not to add windstorm reform yet to any special session agenda, what Commissioner Julia Rathgeber will be revisiting is which of the bad options is less awful. Maybe when she confronts this fact, she will urge Governor Perry to change course?]

And, for me, that is the most compelling reason to spend the money of the cost of the bond anticipation note. I think it would be tragic [I agree] if we have — I mean to the people involved it’s not moderate — but a moderate event of $700 million and we’re telling our policyholders, our claimants, ‘We owe you the money. We agree we owe you the money and we’ll pay it as soon as we can, but that’s going to be a while.  And I just think that would be tragic.  And that’s why I think it is absolutely worthwhile to spend the expected expense associated with that bond anticipation note to get it. [Maybe.  Ms. Gannon has made a strong case. The problem is, however, that it’s only part of the story.  As I mention above, the BAN may be the poisoned chalice in that it will likely make almost 100% certain that TWIA will not be able to borrow additional funds post event in order to pay claimants.  It thus leaves a permanent gap between storms of $700 million and storms of $2.2 billion, at which point the reinsurance would kick in.  That’s a big gap.] And I applaud your efforts to lay that out more clearly to our new commissioner in hopes that she will agree.

Question from Chair Mike Gerik: Alice, could you before you turn off your mike, we keep missing why there would be a delay, because it takes time to issue bonds and maybe how long that’s going to take and that’s the period of time we wouldn’t have the money if we don’t have the BAN. [Surely this can not really be something that the other board members are missing! I assume the Chairman is just asking Ms. Gannon to emphasize the point again.]

Gannon: Well, there’s two. Number one is from what I understand from TPFA, they’re estimating three to six months before you could actually sell those bonds and have the cash ready to pay claims.  And that of course is assuming you could with Class 1 get $500 million. [Is Ms. Gannon actually agreeing with me? It’s possible.  Is she saying that, with Class 1 pre-event (converted) bonds already issued, you could not get $500 million in Class 2 bonds under section 2210.6136.  If so, I apologize for saying she doesn’t get it.  She’s just being a little terse.] There’s a real risk that especially in whatever conditions might exist post event, that the bond market might not buy $500 million worth and then you’re short forever [Yes, but short what?  I say you are short $1.5 billion in Class 2 bonds and Class 3 bonds.  Is Ms. Gannon agreeing with that or does she just think you are short $500 million. Of course, either way it is bad] if you will of that piece until the legislature would take action to find money somewhere else for us. [Assuming that they would, which should not be a foregone conclusion.  And, trust me, the legislature is not going to act instantly on any such request nor, I suspect, will the money be without strings and some repayment obligation.]

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.

 

 

 

Texas Public Finance Authority: Class 1 Bonds Won’t Sell

Thanks to a friend, we have new evidence today about how much money TWIA hopes to have to pay claims this summer.  The Texas Public Finance Authority, which has to deal with sober realities like the bond market, told the TWIA board back in March that its Class 1 post-event bonds won’t sell.  Since Texas Insurance Commissioner Eleanor Kitzman blocked issuance of pre-event bonds that TWIA sought as a substitute, that means that in the very best case, TWIA will have about $2.7 billion.  But even this rests on a House of Cards argument that is likely to topple and leave TWIA policyholders in the lurch.  Here’s why.

The document in question are the minutes of the Texas Windstorm Insurance Association meeting of March 21, 2013. It sheds some light on TWIA’s own thinking at that time about how much money it was going to have to pay claims. The first clue is contained in the excerpt below.

TWIA board minutes

TWIA board minutes acknowledging reinsurance would attach at $1.8 billion

Notice how TWIA says that if it does not approve — or, one assumes, is denied permission to get — the $500 million Bond Anticipation Note — the reinsurance would attach at $1.8 billion. Now why would TWIA pick such a low number?  In the past they have spoken about reinsurance attaching at around $3 billion.  The next excerpt explains it.  It rests on the advice of Bob Coalter, Executive Director of the Texas Public Finance Authority. Look at this excerpt.

Texas Public Finance Authority: Post-event Class 1 Bonds are doubtful

Texas Public Finance Authority: Post-event Class 1 Bonds are doubtful

“Mr. Coalter stated that TWIA could not reasonably rely on $500 million in class 1 bonds if the Association waited for post-event approval.” That’s prety clear. And it’s why, I am confident, why TWIA sought the pre-event Bond Anticipation Notes. And it explains very well the $1.8 million attachment point for the reinsurance.  TWIA likely thinks it will have $300 million in its Catastrophe Reserve Trust Fund and operating expenses; that’s a number that has been batted around in conversation.  It thinks it will have $1 billion in Class 2 Alternative Bonds under section 2210.6136 added by H.B. 4409 in 2011.  And it thinks it will have $500 million in Class 3 Bonds. That totals $1.8 billion, which is precisely where the reinsurance would attach.

So, if TWIA could get, say, $900 million of reinsurance for its authorized $100 million to attach at $1.8 billion, it would have $2.7 billion to pay claims this summer, one Ike’s-worth.  So, with some rounding, it could, I suppose be said that TWIA has $3 billion, but that’s a bit of an exaggeration.

In any event, let us not, however, quibble about a trifling $300 million.  Let’s instead focus our energies on scrutiny of TWIA’s logic of even thinking that it will have the $1.8 billion in funds at which the reinsurance could attach.  I say that the very reasons the TPFA is giving TWIA for why TWIA’s Class 1 Bonds won’t sell apply almost equally to the Class 2 Alternative Bonds.  Why?  See the next paragraph. In the mean time, recognize that the Class 3 bonds can not legally be sold unless TWIA/TPFA can sell $1 billion of Class 2 Alternative Bonds. If TPFA can only sell, say, $600 million in Class 2 Alternative Bonds, then TPFA can not sell Class 3 Bonds at all, and TWIA’s funding stack would be $900 million, not $1.8 million.  Yes, TWIA might have reinsurance that attached at $1.8 million, but for losses between $900 million and $1.8 million there would be no money. So, for a $1.5 million storm, TWIA would only have enough money to pay policyholders 60 cents on the dollar ($300 million in CRTF + $600 million in Class 2 Alternative Bonds all divided by $1.5 million in claims). And for a $3 billion storm, TWIA would likewise have 60 cents on the dollar. ($300 million in CRTF + $600 million in Class 2 Alternative Bonds + $900 million in reinsurance all divided by $3 billion in claims).

Why the Class 2 Alternative Bonds Are Almost As Bad As The Class 1 Bonds

OK, so why do I say — and why by the way did TWIA suggest in its report to the legislator — that the Class 2 Alternative Bonds are problematic?  Why did several bills in the legislature this session seek to abolish them?  Because their repayment source is largely the same problematic mammoth levy on TWIA policyholders that they might not well be able to pay. Here is section 2210.6136(b) of the Texas Insurance Code. It’s the key to understanding the urgency in calling a special session of the Texas legislature.

(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;

 

So, if the “portion of the total Principal amount of Class 1 public securities … that can not be issued” is, as TWIA itself has been told likely to be well north of $500 million, then the first $500 million of the Class 2 Alternative Bonds described in section 2210.6136 are to be paid off in the “manner described by Section 2210.612(a)” of the Texas Insurance Code.  But what section 2210.612(a) calls for is for the bonds to be paid out of TWIA premiums: “The association shall pay Class 1 public securities issued under Section 2210.072 from its net premium and other revenue.” And it is precisely because potential lenders have indicated their doubts that TWIA premiums could sustain the amortization payments that TWIA has been told it can’t sell the Class 1 bonds. I don’t see any reason why the market would be any more trusting of bonds that have “Class 2” labeled on them when they won’t buy similarly sourced bonds with a “Class 1” label on them.

What we have then is, as I said, a House of Cards. In order for TWIA to even have $2.7 billion in its stack, here is what would have to happen: (1) before a storm, TWIA gets $900 million in reinsurance that attaches at $1.8 billion; and (2) after a storm, all $1 billion of the Class 2 Alternative Bonds sell notwithstanding their problematic repayment source. If I were a betting man, I would not place the odds of that House of Cards staying intact very highly.  And when it tumbles, it will not be only be TWIA policyholders on the Texas coast who get hurt, but the economy of Texas as well.

Footnote for Experts

Some might object to my analysis on grounds that the repayment sources for the Class 2 Alternative Bonds set forth in section 2210.6136 are not identical to those set forth for the Class 1 bonds.  That’s true, but I don’t think it matters.  Read 2210.6136(b) carefully.

(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.

 

The first $500 million in Class 2 Alternative bonds come from TWIA revenue (premiums). As the passage I’ve highlighted indicates, it’s only after that first $500 million is exhausted — and TWIA pays what some likely thought was its fair share — that others have to chip in.  Someone from those other payors (coastal non-TWIA policyholders and, more likely, the insurance industry) negotiated for that in 2011. The fact that those higher in the stack have money to pay won’t give any comfort to lenders who depend in substantial part on the dubiously sourced lower part.  And this is why I persist in saying that if the Class 1 Bonds can’t be sold, the Class 2 Alternative Bonds are in serious jeopardy too.