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urgency to an immediate assessment and, in light of what they believed was uncertain legal authority to do so under a repealed statute, wanted to await a requested legal opinion from Texas Attorney General Greg Abbott.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

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.]

Senator Taylor blasts TWIA board for not enforcing the law

On Monday, at a special meeting of the House Insurance Committee, State Senator Larry Taylor blasted the decision of the board of the Texas Windstorm Insurance Association not to enforce laws requiring policyholders repairing their property to follow applicable building codes.  Senator Taylor complained vociferously that the continued disregard of the Texas Insurance Code, particularly in favor of policyholders that TWIA had paid off in litigation involving Hurricane Ike in 2008, represented a failure of TWIA to mitigate further damages to the Association. That criticism was heeded only partly Tuesday by the the TWIA board when it voted not to cancel policies that had been issued without legal authority but only to decline to renew them. The TWIA board further decided not to begin non-renewals as soon as possible but to wait instead until January of 2014 — after the 2013 storm season — before even beginning the to decline renewals.

TWIA’s position is difficult to understand. Based on comments both at the hearing Monday and the Board meeting Tuesday, TWIA officials appear to acknowledge that they have issued policies — apparently several thousand — they are not authorized to issue.  Their excuse has been compassion — that it may have been difficult in the aftermath of Hurricane Ike to bring properties up to the higher code.  But, as with the insurable interest doctrine, insurers who issue policies in violation of the law generally have a right not to pay on claims brought under them and thus, presumably, to cancel them. Cruel as it may seem, that’s the traditional way of vindicating many public policy concerns. The TWIA board did not receive any public legal advice saying it would violate any laws by simply canceling the policies forthwith. Property insurance, unlike life insurance, is not burdened with incontestability laws.

The problem with the compassion excuse is that the TWIA board is being “compassionate” spending other people’s money. Adherence to building codes greatly reduces losses.  So when TWIA’s losses are heightened due to the failure of some policyholders to make repairs up to code (for years), it ends up burdening all those who have to pay for TWIA’s losses.  This group includes other TWIA policyholders who do comply with the law, sometimes at considerable expense. These policyholders have responsibility for paying off any Class 1 bonds that are issued.   It also includes coastal residents who do not have TWIA policies but who will be surcharged following the issuance of some Class 2 Bonds, and insureds throughout Texas who will likely see rate increases when insurers are assessed to pay for Class 2 and Class 3 bonds.

The decision of TWIA’s board may also give rise to legal disputes down the road. Presumably the reason the legislature insisted on compliance with building codes was to reduce future losses to TWIA and to reduce thereby the risk that non-TWIA policyholders would have to pay post-event bonds. So, when the TWIA board declines for a lengthy period to enforce that law, they unlawfully expand the potential exposure of these third parties.  Might not some of the better advised third parties, such as large insurance companies, seize upon clear violations of state underwriting laws as a basis for declining to pay at least part of any assessment made against them? Might they not plausibly argue that some percentage of their assessment liability should be withheld due to violations of law?  Alternatively, might they not bring a cause of action against the TWIA board for breach of duty? And might even the threat of these legal challenges make it yet more difficult to market the post-event bonds in the first place. TWIA has handed those responsible for repaying these bonds an excuse not to do so.

Perhaps only the Texas Department of Insurance is entitled to compel TWIA to follow the law and some future court will find that no private rights of action exist. Perhaps some future court will hold that the statutory restrictions on underwriting were not intended to benefit third parties such as member insurers.  But, I would not be so sure. It strikes me that there is a pretty strong argument to the contrary. I remain mystified as to why TWIA would create yet more problems for itself by continuing “compassion” for people who have, for years, declined to bring their properties up to code, particularly when they were given money to do so in Ike settlements. I likewise wonder if the Texas Department of Insurance, which has significant operating authority over TWIA, might urge it act far more promptly and with far less “compassion” in shedding itself of exposure the legislature prohibited it from assuming.

 

 

News from the TWIA board meeting

I’ll have a fuller post later and the meeting is still in progress (in closed session), but here are the headlines thus far.

1. A TWIA board member (Alice Gannon, I believe) acknowledges that if TWIA does not get new Texas Insurance Commissioner Julia Rathgeber to reverse a decision of her predecessor refusing to authorize $500 million in borrowings via a Bond Anticipation Note, TWIA will not have money to pay claims promptly in the event of even a modest storm.  I do not have an exact quote, but at minute 46 of the hearing she says something to the effect of “Without the BAN, it is highly likely we would not be able to pay claims in timely fashion.” Other board commentary indicates it will take 3 to 6 months to sell post-event bonds, assuming they could be sold at all. TWIA will be meeting with Commissioner Rathgeber this Friday (June 21, 2013) to try to persuade her to reverse former Commissioner Eleanor Kitzman’s decision.

2. TWIA has acquired $1 billion in reinsurance with an attachment point of $1.7 billion.  It has the right until July 15 to increase its reinsurance to $1.25 billion but increase its attachment point of $2.2 billion.

3. As feared, TWIA’s financial condition is already having an effect. Premium finance companies are refusing to lend more than $16,000 to pay TWIA premiums. Lenders don’t want to try to bring claims for unearned premiums against an insolvent insurer.

4. TWIA actually has only $340 million in cash after having paid much of the recent $135 million Ike settlement.  It believes it will have $400 million in cash by August and through the end of the year.

5. TWIA will ask the Texas Department of Insurance to permit it to change accounting practices so that it can count the Catastrophe Reserve Trust Fund on its books as its assets.  Doing so would move TWIA from being seen as having a negative surplus to perhaps having a positive surplus.

6. TWIA will not cancel over 2,000 policies that it has knowingly issued in violation of provisions of the Texas Insurance Code governing compliance with building codes.  Instead, starting in January, after this year’s hurricane season it will decline to renew such policies as they come up for renewal.  This refusal to enforce the law was the subject of sharp criticism yesterday from State Senator Larry Taylor and may give rise to claims by those assessed to pay for post-event bonds that TWIA’s exposure was unlawfully increased.

7. TWIA did not vote to consent to imposition of a receivership.

8. TWIA will not try to assess insurers based on a law that was repealed in 2009. It acknowledges that that there are “uncertainties” as to whether it has authority to do so and that actually collecting such assessments would be difficult.

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.

 

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

 

S.B. 1700 dead; Texas coast in grave danger

Senator Larry Taylor, sponsor of S.B. 1700, the only significant bill on windstorm reform to get through a legislative committee and at least have the chance of being approved, announced this evening that his efforts to get his bill passed have been frustrated by the Texas Trial Lawyers’ Association and the attorney with the largest share of the Ike cases, Steve Mostyn. I did not agree with much in S.B. 1700. It had many problems. But if this means that there will be no reform this legislative session of dysfunctional Texas insurance against tropical cyclones, I agree very much with Senator Taylor that this is a sad day indeed.

Here’s a copy of his press release.

Larry Taylor press release conceding defeat

Larry Taylor press release

There will be time in the next few days to discuss why certain trial lawyers may have objected to the bill but, from my perspective, the important is not whether the trial lawyers have a legitimate concern or whether, indeed, their objections are the only cause of the bill’s defeat.  Why, for example, did Steve Mostyn oppose it if the offensive provision had been removed? In some sense, however, this really doesn’t matter. The important issue is what on earth is Texas going to do about hurricane insurance until the 84th legislature two hurricane seasons from now.

Miracles?

There is, I suppose, a remote chance that the House could pass some minimalist bill that fixed the worst parts of the current scheme and try to ram it through the Senate.  I sure hope that happens. But I am not certain that there is the requisite level of support for such a scheme nor am I sure that there is time.  I do recall Representative John Smithee, chair of the House Insurance Committee, saying at a hearing that he did have a bill filed that had little content but that could be used as kind of an all purpose vehicle for TWIA reform.  But, again, I have doubts that there is the will or the time to get something passed before the end of the regular session.

There is also, I suppose, the possibility that Governor Rick Perry would add windstorm finance to a special legislative session.  But I have heard no rumor that such is contemplated.  And there is, I suppose, the possibility, that Texas is just counting on using its rainy day fund to pay for what could be a very rainy day on the coast of Texas this summer or next.  But I do not know whether such a use would be countenanced by the political powers or, since this is partly a self-inflicted wound, whether it should be used in that fashion.

What now?

And so, to my amazement, Texas is apparently choosing to to face the 2013 hurricane season — and perhaps the 2014 hurricane season too – with 62% of the property on the coast insured against tropical cyclones by an insurer that has been called insolvent by the Texas Insurance Commissioner, Eleanor Kitzman. The insurer has at in its Catastrophe Reserve Trust Fund at best 1/20th of the amount it should have if it wants to self-fund claims and has very doubtful ability to recapitalize itself in a significant way using post-event bonds.

As I told Fox TV today in a part that didn’t make the air this means two things for people on the coast. (1) People with insurance from the Texas Windstorm Insurance Association need to shop very aggressively for alternative forms of windstorm insurance.  They can’t just go to Allstate and State Farm and the usual suspects There are many insurers in Texas.  Many won’t write on the coast.  But maybe some of them will.  Even if it costs more, it may well be worth the peace of mind if and when a storm brews in the Gulf of Mexico this summer.  (2) People and businesses with TWIA policies should behave as if their policies have upwards of 30% coinsurance. That means taking every imaginable step both now to get their properties as resistant to hurricane damage as possible and to take every last minute precaution to reduce loss if a storm comes.

For my part, I’m going to keep watch on the extent to which TWIA succeeds in increasing its capitalization through a Bond Anticipation Note and through reinsurance.  I’ll try to dig further into the ability of TWIA to sell post-event bonds. And I’ll keep watch to see if any legislative cavalry is coming over the hill.  Right now, however, all is very silent in this calm before the storm.

Texas Senate Watch — Day 3

We’ll see if S.B. 1700 can make it a vote in the Texas Senate today.  The past two days of failure in that regard suggest its sponsors do not yet have the votes.  Perhaps with some substantial floor amendments, it might make it today.  I’ll be watching as best I can but, since I suspect most of the action will take place behind closed doors and the Senate proceedings will be but a quick ratification of what has been worked out in private, no guarantees I will be watching at exactly the right moment.  Corpus Christi Caller report Rick Spruill @Caller_Rick is also watching today, so that’s an alternative source of news.

Or, of course, you can just watch the proceedings yourself here.

Note: Timestamps on the post are off by one hour either due to a bug in WordPress or a lack of understanding on my part about how to set  some option.  Sorry.

15.00

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

12.40

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

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

12.20

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

11.58

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

11.31

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

11.20

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

10.51

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

10.49

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

Screenshot_5_15_13_11_46_AM

10.40

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

11.42

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

11.22

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

11.03

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

10.44

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

10.35

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

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

2) Floor amendments offered and voted on.

3) Move passage to third reading.

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

5) Third reading of bill (just caption)

6) Motion for final passage.  Roll call vote.

10.09

Session begins.

10.01

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

09.58

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

13.35

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

13.34

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

13.31

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

13.26

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

16.09

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

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

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

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

14.50

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

14.24

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

14.21

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

14.07

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

14.00

Still no connection to the TWIA video server.

13.45

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

13.39

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

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

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

13.29

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

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

13.18

The Deshotel letter key paragraph

The Deshotel letter key paragraph

13.15

So, let’s go to the halftime report.

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

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

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

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

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

13.04

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

13.03

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

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

 

13.00

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

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

12.58

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

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

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

12.55

TWIA: Effect on mortgages and covenants

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

TWIA: What about residual markets in rehab.

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

12.53

TWIA: Why now?

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

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

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

 

12.51

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

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

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

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

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

TDI: Yes.

12.48

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

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

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

TDI: I don’t know.

12.46

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

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

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

12.43

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

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

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

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

12.41

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

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

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

12.38

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

12.37

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

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

12.35

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

12.35

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

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

12.31

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

12.30

Eric Sanburg, Texas Banker’s Association — skipped

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

12.27

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

12.24

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

12.22

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

12.18

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

12.16

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

12.13

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

12.12

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

12.09

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

12.08

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

12.06

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

12.03

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

12.01

Calling roll

11.59

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

11.55

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

11.53

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

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

11.50

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

11.46

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

11.40

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

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

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

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