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urgency to an immediate assessment and, in light of what they believed was uncertain legal authority to do so under a repealed statute, wanted to await a requested legal opinion from Texas Attorney General Greg Abbott.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.

Texas Insurance Commissioner still mulling bond anticipation notes

Texas Insurance Commissioner Julia Rathgeber has not reached a decision yet on whether to accede to the request of the Texas Windstorm Insurance Association and others that she overturn the refusal of her predecessor Eleanor Kitzman to borrow about $500 million to help pay any claims that the financially troubled insurer might have  this summer. A response by TWIA to a public information request states that “TWIA is working with the Texas Department of Insurance and the Texas Public Finance Authority to explore all funding options, including the BAN [bond anticipation notes].” According to TWIA, it has not heard anything further from lenders about whether they are still willing, in light of rising market interest rates, to enter into a BAN deal on the same terms as they apparently were this spring. The failure to obtain a reversal likely means, as TWIA Board Member Alice Gannon candidly acknowledged at a June board meeting, that TWIA would not be able to pay many claims in timely fashion should a significant storm occur during the remainder of the 2013 hurricane season.

Although Commissioner Rathgeber has not made a decision yet, in some sense the absence of a decision comes close to an upholding of her predecessor’s determination. One of the touted advantages of the BAN had been that it would have permitted TWIA to purchase reinsurance that attached at $2.2 billion of losses and provided an extra $250 million worth of reinsurance. Right now, the attachment point on its $1 billion of reinsurance stands at $1.7 billion, creating what TWIA hopes (unrealistically perhaps) is a $2.7 billion stack of protection. But the election to go to the higher level attachment point appears to have expired on July 15.  So, unless a new deal with the reinsurers can be struck, that advantage of pre-event borrowing seems to have disappeared. Moreover, it is not clear that a bond anticipation note can be obtained on the same terms as were available in the spring when interest rates were lower. Renegotiating the terms of a BAN will take some time even if Rathgeber ultimately overturns the decision in whole or in part.  (I say in part because some of the arguments against a BAN have less force if the amount borrowed were, say $100-$200 million rather than $500 million). Each day that goes by with the Kitzman decision in force is a day deeper into the heart of hurricane season in which TWIA is particularly vulnerable.

One possible reason for the Rathgeber delay is the relationship between the BAN and the desire of many to shrink TWIA. Many believe that TWIA’s problems would be more manageable if it’s maximum exposure were reduced to the levels that existed before Hurricane Ike or even earlier. They believe TWIA’s problems become progressively more intractable as ever more people develop the Texas coast based on an assumption of continued subsidized rates.  If TWIA borrows money that requires it to repay various fixed sums, it is going to depend on its premium base not shrinking much.  Indeed, if I were a lender I might want various covenants protecting me from a depopulation of TWIA. I would at least price that risk into the interest rate charged. Borrowing money via a bond anticipation note therefore makes it more difficult for any special session of the legislature to develop a plan substantially to reform TWIA.  Thus, although the prospects of such a special session on windstorm insurance reform seem rather dim at present, Governor Perry has not taken it entirely off the table. Commissioner Rathgeber, who likely has her pulse on the mood of the legislature and the governor, may well be balancing the timing of any decision with beliefs on the prospects for reform.

Great news or the calm before the storm?

Great news or the calm before the storm?

Of course, the one good piece of news is that the Gulf of Mexico has, contrary to most predictions, been quiet so far this summer. As a result, TWIA’s financial situation has not been tested. Indeed, it should be running a solid profit for the past few months. Unfortunately, someone might have made the same observation about the first half of the tornado season in the midwest this spring.  Remember all those articles expressing puzzlement about where all the tornados were?  You can find some here, here and here. As residents of Granbury, Texas, Moore, Oklahoma, El Reno, Oklahoma and others can attest, however, predictions about long run climactic events can not be based on a few months of experience. Whether or not TWIA gets to borrow $500 million or some lesser some based on a decision later this summer by Commissioner Rathgeber, the state and TWIA’s policyholders need to hope that Hurricanes 2013 is not like Tornados 2013 in which all was quiet for the first half of the season, only to see historically devastating outbreaks during the second half.