Tropical storm Ingrid should not pose a wind threat to Texas

Tropical Storm Ingrid took shape today in the Gulf of Mexico, but if forecasters are correct, it should not pose a major wind danger to Texas or the Texas Windstorm Insurance Association. The GFS ensemble, shown here, all shows landfall in Mexico. So too do the other major hurricane models.  Of equal importance, the SHIPs intensity model, which attempts the dark art of windspeed prediction, does not show Ingrid getting much above its current 50 knot tropical storm intensity.  So, although I have raised alarm bells for some time about the resilience of the Texas Windstorm Insurance Association to a significant storm, Ingrid does not look like the one that will test the largest insurer along the Texas coast or, for that matter, other insurers.

Ingrid GFS Ensemble

Ingrid GFS Ensemble

Of course, weather forecasters haven’t been having the best year making predictions.  If Ingrid takes a more northerly track, all bets are off.

Third special session, but still no windstorm insurance reform on the agenda

Texas Governor Rick Perry called a third special session of the Texas legislature yesterday to address transportation issues in Texas but did not add windstorm insurance to the agenda items. In his statement explaining the special session for transportation, Governor Perry wrote, “Inaction is a Washington-style attempt to kick a can down the road – but everybody in Texas knows we’re rapidly running out of roads to kick that can down.” Unfortunately, this assertion applies equally well to windstorm insurance reform.  As set forth repeatedly on this blog and in the press, the failure to address this issue right now and reform the currently broken system leaves coastal residents at serious risk and threatens the state economy.

Alas.

A Catrisk Nap

Aside

Clip art perfectly made for my trip

Clip art perfectly made for my trip

I’ll be heading off for about two weeks to an English-speaking place where there are volcanos and earthquakes and even an occasional tsunami, but no hurricanes.  During that time, I’m going to hope that nothing too dramatic happens on the TWIA front and there aren’t any storms that threaten the Texas coast.  If something major does occur — Governor Perry adds TWIA to the special session agenda, Commissioner Rathgeber authorizes TWIA to get $500 million loan, a major hurricane threatens Texas, I’ll try to break away from family fun in order to keep readers informed.  But don’t expect interactive graphics or anything particularly profound while I’m away.

But, not to fear.  Catrisk will be back in full force in about two weeks, telling it like it is on the issues of catastrophic risk transfer in Texas.

Thanks to all my readers for making this past year a very successful one for this blog.

 

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.

 

Troubling news: TWIA loses $500 million in anticipated funding

The short term finances of the already shaky largest property insurer on the Texas coast took an unanticipated and significant turn for the worse Monday.  Outgoing Texas Insurance Commissioner Eleanor Kitzman rejected Monday plans of the Texas Windstorm Insurance Association to borrow $500 million via a “Bond Anticipation Note” to help pay claims this hurricane season.  The Commissioner did not reject a plan to issue post-event bonds in the event of a significant storm this season.  As a practical matter, however, it may be difficult to persuade the market to loan money to TWIA after a storm due to peculiarities in the existing law that were not ironed out during the regular session of the Texas legislature.

The refusal to permit TWIA to borrow at this time, coupled with the announced $135 million settlement earlier this week of most of the remaining lawsuits against TWIA arising out of Hurricane Ike, probably cuts in half the amount of cash TWIA would have immediately available to pay claims in the event of a storm this summer without having to rely on untested, legally questionable and potentially slow efforts at “post-event” borrowings.  The action leaves both the cash position and the long run finances of the troubled insurer in question.

My best guess is that without the Bond Anticipation Note (BAN), and including its Catastrophe Reserve Trust Fund (CRTF), TWIA probably has between $400 to $700 million in cash with which to pay claims.  That’s not much when your direct exposure is over $75 billion, your total exposure is over $80 billion and a Category 2 or 3 hit at a bad spot on the Texas coast could easily cause losses of over $2 billion. The Bond Anticipation Note would have doubled the amount of cash available to pay claims.

As it stands, and as set forth below, I now believe it is not unduly pessimistic to set the odds of a TWIA insolvency this summer at 10%. If we consider two summers until the next regular legislative session, this risk roughly doubles. Given the grave effects of a TWIA insolvency on the entire Texas economy, this is way, way too high a risk.

Cash position

To understand this, take a look a TWIA’s 2012 Annual Statement. TWIA ended 2013 with about $430 million in cash (Assets, line 5; column 1) and total admitted assets (including the cash) of about the same amount, $430 million. (Assets, line 28, column 3) It has agreed to pay about $135 million in cash to settle the bulk of the Ike lawsuits. How much that will reduce the $323 million in loss reserves (Liabilities, Surplus and Other Funds, line 1, column 1) is unclear.  Because lawsuits remain, it is unlikely to reduce those reserves down to zero.  It will, however, likely reduce TWIA’s cash position by the full $135 million in relatively short order, depending on the details of the settlement. That would leave TWIA with just $295 million in cash.

Of course, it’s a little more complicated.  I don’t have access to TWIA’s financial statements for the first quarter of 2013 or thereafter. TWIA has likely earned some cash since January 1, 2013. It has been earning and collecting premiums, although it has had to pay off about $50 million on a thunderstorm in Hitchcock.  So, let’s be generous and credit TWIA with about $120 million more in new cash. This brings a guesstimate of its cash levels back up to around $415 million.

The problem is that not all of this cash is available to pay policyholder claims.  Some of it will be used to pay for operations, for commissions, and for other matters, including the Ike claims not resolved earlier this week.  So, I would be surprised if someone were to audit TWIA today and found it had more than $400 million in cash available to pay claims before resort to the CRTF. I would not be surprised if the number actually came out in the $300 million range.  And both of these figures will be reduced by $100 million or so less if TWIA succeeds in its plan to purchase reinsurance.

So, without the hoped-for borrowings, TWIA might have had $300 million to pay claims out of operating funds and another $180 million out of its CRTF.  TWIA might have had a total of $500 million.  (If the settlement came out of the CRTF rather than operations, the total would stay the same).  If the BAN had been approved, at least in the short run before TWIA had to pay the loan back, TWIA might have had $1 billion.  Both sums are, of course, grossly inadequate to deal with the $80 plus billion in TWIA exposure. Nonetheless, $1 billion in cash would have left TWIA in a better short run position.

Long run finances

Perhaps the greater impact, however, of the BAN ban is on the ability of TWIA to sell post-event bonds following a storm.  We’ve been through this matter before on this blog, but it is worth repeating because it is so very important.  The short version is, however, that there is a significant risk that very little in post-event bonds will actually be able to be sold.  And, thus, TWIA may very well have less than $1 billion with which to pay claims even after borrowing.  I would not be surprised if it ended up with as little $700 million.  The probability of such losses occurring this summer would be about 7-9% if this were a normal hurricane season.  If, as climate experts agree, however, this proves to be a bad hurricane season the probability of TWIA going broke and unable to pay claims fully could rise to 10-14%.

Here’s the longer version.  I, by the way, am not alone in my alarm on this matter. TWIA itself raised the issue in its submission to the Texas legislature.  the Texas Public Finance Authority (TPFA) had trouble last year trying to help TWIA borrow. And several of the pieces of proposed legislation this session would have fixed this particular problem.  But all of these bills failed during the regular session. Governor Perry has thus far resisted calls that he add windstorm insurance reform to the agenda for a special legislative session.

if there is a storm that pierces the CRTF, TWIA will need to rely on post-event Class 1 bonds.  But, unless something has changed, per the Texas Public Finance Authority they won’t sell, at least not up to $1 billion authorized.  But if the Class 1’s don’t fully sell, then TWIA/TPFA is prohibited from selling the regular Class 2 bonds. (Section 2210.073). Instead, we go to the Class 2 Alternatives under section 2210.6136.  But if less than $500 million of Class 1 bonds have sold — which is likely to be the case —  the first $500 million of the  Class 2 bonds  are paid in the same problematic way as the Class 1 bonds (surcharges on TWIA policyholders).  (Section 2210.6136(b)(1)). And there is a serious question as to whether anyone will loan TWIA money on those terms. Why? Because as soon as substantial policy surcharges are issued on TWIA policies, some TWIA policyholders will either find other insurance, reduce the sizes of their policy, or simply choose to go bare.  This is particularly likely if a storm has impoverished many TWIA policyholders. And if enough TWIA policyholders reduce their premiums, the percent surcharge will need to go up to compensate in order to pay off the bonds.  But if the surcharge rate goes up, more TWIA policyholders will drop out.  And, we get into a death spiral.

But here’s the catch.  Under section 2210.6136(c), if TWIA/TPFA can’t sell every dollar of the $1 billion in Class 2 Alternatives, then TWIA/TPFA can not issue the class 3 bonds of $500 million.  The statute is crystal clear on this point.  And this means that TWIA has no Class 1 bonds, no Class 2 bonds, little or no Class 2 Alternative bonds and no Class 3 bonds.  The system has completely collapsed in a cascade of failures.  TWIA basically has no money beyond cash on hand, and the CRTF. That means policyholders will not be paid in full.  If the storm is bad enough, they won’t be paid even half of their legitimate claims.

Reinsurance — assuming that TWIA can get it — will not help a lot. The reinsurance will not kick in until losses exceed the “reinsurance attachment point.”  But the reinsurance attachment point is likely to be set on the false assumption that the post-event securities will succeed.  So, for losses less than the reinsurance attachment point, the reinsurance won’t pay at all.  TWIA will be just as bankrupt as if it did not have reinsurance at all.  Actually, it will be more bankrupt because  it will have paid $100 million in premiums.  And even if the storm is so bad that the reinsurance kicks in, there is still a gap between the top of the CRTF plus any post-event bonds and the reinsurance attachment point.  So, TWIA won’t have enough money to pay claims fully.

Why would Commissioner Kitzman do such a thing?

I’m not privy to her reasoning or all the facts, but there are concerns we have outlined before about pre-event borrowing such as a Bond Anticipation Note.  The problem with loans is that you have to pay them back — and at interest.  Thus, in the long run, particularly if interest rates rise or if TWIA is deemed high risk and thus charged high rates even now, borrowing perpetuates your insufficient capitalization.  Whatever the benefits in the short run — and there may have been many here that incoming Commissioner Julia Rathgeber will want to examine — it is not the ideal long run solution for insurance risk. It may well be that Commissioner Kitzman refused as her final act to be complicit in the bandaiding of TWIA in the hopes that a sufficiently obvious problem would spur the Governor to call a special session and the legislature to develop a sustainable fix.  If so, let us hope that gamble proves correct.

 

Senator Taylor: S.B. 1700 dead

A press release issued by Senator Larry Taylor this evening reports with great frustration that S.B. 1700 has been killed off. The cause of death has nothing to do with the issues previously discussed on this blog. Instead, the fatal blow has come from trial lawyers, who do not like provisions in the bill that would make it harder for Ike claimants and future claimants to recover large damages.

We will blog more on this later this evening, but you heard it here first. This death has immense significance for Texans both on and off the coast.

 

 

Live blog of Texas Senate on S.B. 1700 — or, as it turns out, not

This is a placeholder in the event the Texas Senate takes up S.B. 1700 this afternoon.  No guarantees that anything will be here, but matters seem to move swiftly in the Texas Senate, so I am setting things up ahead of time.

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?

TWIA Board tries to borrow $500 million and get $1.15 billion in reinsurance

The TWIA board met Friday.  I could not listen in on the meeting so my information is very limited.

Pre-Event Bonds

It appears that TWIA is going to seek $500 million in pre-event bonds for the 2013 hurricane season in order to augment its skimpy $180 million catastrophe reserve fund.  Although the total of $680 million is inadequate to address the $70 billion plus in total insured value, it is still an improvement over the $180 million that might be the only certain funding.  My AIR/RMS derived hurricane models  (CompoundPoissonDistribution[0.54, WeibullDistribution[0.42, 177000000]]) suggest this reduces the probability that TWIA will be unable to pay claims in full for hurricanes this year down from 14% to about 9%.  Yes, TWIA may be paying a high interest rate to engage in this sort of borrowing, and from what I understand the borrowing has yet to be consummated, but this is a significant step.

Reinsurance efforts

I also understand from a Rick Spruill Twitter post that TWIA is going to seek $1.15 billion in reinsurance.  What I can’t tell you right now is

  • at what level will the reinsurance attach, i.e. atop the Class 3 as I have recommended or inserted between Class 2 and Class 3 as a Guy Carpenter presentation suggested might occur
  • will the reinsurance “drop down” in the event any of the post-event bonds underlying it can not be sold; if not this reinsurance may well be worthless
  • what premium will TWIA pay for this reinsurance; TWIA in the past has paid very high rates for reinsurance that probably had higher attachment points
  • will the market in fact sell TWIA this much reinsurance; reinsurance capacity is not unlimited
  • is the reinsurance per occurrence or per year; it matters a lot if we have multiple storms
  • if per occurrence, what right of reinstatement will TWIA have and at what price

These are all very important questions in assessing the extent to which TWIA policyholders are at risk for this summer while the Texas legislature considers alternative short and long run fixes.

One additional note

Although the decrease from 14% risk of failure to a 9% risk of failure is significant, one must recognize that over a long period of time, 9% risks materialize.  There is, for example, an 85% chance that a 9% risk will materialize at some point during a 20 year period.  So, getting funds up to $680 million is a positive development, it is not by any means a long run solution.

The TWIA Status Chart

Aside

IssueAnswer
IssueAnswer
Days until the start of hurricane season1
Days until the end of the legislative session0
Next hearing of Senate Business and Commerce Committee None scheduled
Next hearing of House Insurance CommitteeNone scheduled
Size of Catastrophe Reserve Trust Fund$180 million
Bond Anticipation Notes (pre-event bonds)None. Approval refused by Commissioner Eleanor Kitzman
Reinsurance sought$1.15 billion at an attachment of $2.2 billion (not yet obtained)
Probability of TWIA losses in 2013 exceeding size of Catastrophe Reserve Trust Fund and Bond Anticipation NotesTWIA Estimate: 7.7% My Estimate: 10%-- could be higher if forecasts of active-hyperactive hurricane season prove accurate Estimates for 2013 and 2014 seasons are between 15-18% assuming no growth in Catastrophe Reserve Trust Fund
Bills enacted addressing TWIA problems for 2013 hurricane seasonNone
Bills enacted addressing TWIA problems for hurricane season past 2013S.B. 1702 (still requires signature of Governor Perry and does very little)

Last updated 5/30/2013