An Open Letter to Governor Perry

The following is a copy of a letter I am sending today to Governor Rick Perry.

Dear Governor Perry,

I am Seth J. Chandler, a 24-year resident of Harris County, Texas, and Foundation Professor of Law at the University of Houston specializing in insurance law.  I am also the author of the blog Texas Windstorm: The law and finance of insuring catastrophic risk in Texas (  I have testified on numerous occasions before the Texas legislature on regulation of windstorm risk and finance. I have also served on your Texas Health Care Policy Council under the leadership of Tony Gilman.

I am writing to alert you of a serious and urgent problem that has come to light with the funding scheme for the Texas Windstorm Insurance Association. I urge you to call a Special Session of the Texas legislature to address it immediately.  I believe that you can properly confine the agenda so that even legislators who often disagree on TWIA matters can come together to fix this particular problem. If the problem is not resolved, there is a significant probability that, following even a modest tropical storm hit on a densely populated area of the Texas coast such as Galveston or Corpus Christi, the Texas Windstorm Insurance Association would not be able to pay claims in a timely way. TWIA might have grave difficulty ever paying them.  Substantial delay in payment or non-payment of claims by the largest insurer on the Texas Coast would be a needless disaster for the entire Texas economy and would likely result in a special legislative session anyway, but in the worst possible circumstances.

The problem, in a nutshell, is section 2210.6136 of the Texas Insurance Code, which addresses how “Class 2 Bonds” issued to pay TWIA claims are to be paid back. The current Insurance Commissioner Julia Rathgeber, former Commissioner Eleanor Kitzman, the Texas Public Finance Authority and others all agree that the provision is confusing and poorly drafted.  Indeed, I know of no one who thinks that section 2210.6136 is clear.  Everyone I know who has looked at the statute says that, if interpreted as it was written, it creates an unworkable plan to pay back Class 2 Bonds.

The issue is whether the Texas Insurance Commissioner has now crafted a fix to section 2210.6136 via regulation that will stand up in an inevitable legal challenge.  I believe the answer is “no.” Commissioner Rathgeber has developed a sensible idea in her regulation that might prove the foundation for future legislative action. But her regulation is, as I believe she admits on pages 10-13 of the January 28, 2014, submission of the draft, contrary to the language of the statute.  The evidence I have seen that would justify a court in interpreting the statute contrary to its language is weak. There is thus a substantial risk that, without legislative ratification, her interpretation of the existing statute will be found an invalid exercise of law-making power and struck down by the courts. Both Texas insurers subject to a heightened assessment from TWIA and, for example, automobile insurance policyholders on the Texas coast would have standing to challenge the regulation and the extra payments they would make as a result. And even if her interpretation were ultimately to be sustained by a Court, a challenge would likely have sufficient merit to avoid early dismissal. It would likely take at least a year to resolve through the judicial system and appeals.  The specter of litigation will deter needed lenders from extending up to $1 billion in credit via Class 2 Bonds that TWIA would need to pay a major claim. In the mean time, blue roofs would cover the Texas coast as a result of unpaid claims.

I have outlined my legal opinion in more detail on my blog  You can see the most relevant entries at, and, and in an op-ed in the Houston Chronicle available here

I understand that, just based on a letter from a professor you do not know, you cannot call a Special Session of the legislature. I implore you, however, to trust me enough to seek urgent clarification from the Attorney General or from others qualified to provide legal advice.  If they say I am wrong and the Texas Insurance Commissioner’s fix is so clearly lawful that the risk of disruptive litigation is minimal, then great.  If they say that the problem can be resolved by other forms of non-legislative action, such as a formal letter from the Attorney General validating the Texas Insurance Commissioner’s action, good; let such a letter issue promptly. If not, however, I would urge you to call a Special Session before hurricane season starts again. I believe Commissioner Rathgeber’s regulations could be adapted swiftly and easily into a statute so that the matter could be resolved in a few days. Although coastal interests and inland interests do not always mesh on TWIA funding issues, it is in absolutely no one’s interest that TWIA fail due to a drafting problem.  I am thus optimistic that legislative leaders in the area such as Senators John Carona and Larry Taylor and Representatives John Smithee and Todd Hunter might be able to work cooperatively on this limited issue. Other issues involving TWIA on which consensus is less likely can be handled through more regular process.

I remain happy to work with your staff, the Texas Insurance Commissioner, legislators and their staff to do anything I can to help explain the issue and suggest resolutions. My other credentials are attached to this letter.

Sincerely yours,

Seth J. Chandler

Please note.  The views expressed here are my own and do not necessarily reflect those of the University of Houston.


Documents show Texas agencies hiding problems with TWIA funding

Documents obtained pursuant to a public records request from David Crump, a private citizen with a longstanding interest in Texas insurance finance, show the Texas Department of Insurance and the Texas Public Finance Agency have both been aware since September of 2011 of potentially fatal problems with the laws that are supposed to permit the Texas Windstorm Insurance Association to borrow money following a significant hurricane strike along the Texas coast and pay claims. The Texas legislature, instead of fixing problems with the statute during its 2013 session, however, so that its language conformed with its purported intent, chose to leave the statute as it was.  As a result, the ability of TWIA to pay claims following a significant strike will apparently depend this summer on a highly creative interpretation of the law at odds with the words actually used in the statute. It is an interpretation almost certain to breed serious court challenges.  The documents uncovered by Mr. Crump show the origins of this legal theory and efforts by the Texas Public Finance Authority to convince the former Texas Insurance Commissioner Eleanor Kitzman to change proposed regulations that might, the TPFA believed, revealed its own uncertainty as to the legitimacy of the legal theory they had developed.

The uncovered documents, which are in an archive available here, further suggest the desperate situation of the Texas Windstorm Insurance Association going into this hurricane season and the problems policyholders will face following a significant hurricane strike.  They show that both TDI and TPFA are fully aware of a serious problem with the law under which TWIA operates but have apparently persuaded themselves that they have a fix. An examination of actual Texas law in lights of the documents just uncovered show, however, that the fix, although not as strange as might initially be thought, is still highly questionable. Continued reliance on an untested fix jeopardizes both on TWIA policyholders and the Texas economy. Continued sale of policies by TWIA without more forceful disclosure of a fundamental issue in its funding scheme is, frankly, irresponsible.

Executive Summary

TWIA, the largest windstorm insurer on the Texas coast, does not have enough money to pay claims following a major storm.  It will have to borrow.  But documents have now come to light showing that Texas agency heads have been aware for years that there is a serious bug in that statute that may prevent the borrowing from being successful.  The legislature has not fixed the problem.  Instead, the agencies have cobbled together a very dubious legal theory that would permit TWIA to borrow.  Their efforts are likely to fail.  First, the legal theory asks courts to completely ignore the language of the statute and instead rely on what some legislators may say they actually intended.  Courts don’t usually go along with that. Second, even if ultimately the agencies’ interpretation of the statute would prevail, the matter is likely to be tied up for a long time in litigation; TWIA policyholders will likely go unpaid in the interim.  Documents uncovered by a public records request show Texas officials were aware of the problem, and, without adequate evidence, persuaded themselves to think they had solved it.  They also tried to prevent evidence of their internal doubts about the problem from getting before the public or lenders.  This failure to disclose and this failure to consider the serious problems with their “fix” is not responsible.

The Documents

The issue revolves around an obscure provision in the Texas Insurance Code, section 2210.6136, enacted in 2011 in H.B. 3 that was supposed to fix a bug in the 2009 version of the statute. That bug involved the absence of any provision in the statute for how post-event bonding would work and how TWIA would thus pay claims if Class 1 Bonds, the first layer of borrowings, were unmarketable because creditors didn’t trust the repayment source: heightened obligations on TWIA policyholders already bruised by a storm.  The higher layers of bonds couldn’t be tapped under the 2009 law unless all the Class 1 bonds had sold. The idea of H.B. 3 was to provide a Plan B. Unfortunately, as I think everyone could agree, section 2210.6136 (shown below) was drafted in, at best, an extremely confusing way.

Section 2210.6136 of the Texas Insurance Code

Section 2210.6136 of the Texas Insurance Code

The documents show recognition by the key Texas agencies that section 2210.6136 had not provided a clear fix for a problem that was becoming ever more apparent.  There was a significant likelihood that the triggering event — the credit market not accepting the Class 1 Bonds — would occur.

The documents thus show a September 13, 2011 meeting (six weeks after Governor Perry signed the law and two weeks before the new law would take effect) between the TPFA, which would be the agency issuing the bonds required for TWIA to pay claims, and staff from the heavy hitters on the House and Senate committees that had addressed the bill. The matter in question was new section 2210.6136 of the Texas Insurance Code, which had been intended to give TWIA a new “Plan B” in case, as it was being told was likely, the Class 1 Bonds that were supposed to form the first layer of protection were partly or entirely unmarketable.  In a letter summarizing the meeting and sent to both its participants and leaders at the Texas Department of Insurance and TWIA, TPFA admits that its “staff and advisors have struggled with the mechanics of financing under that section.” It then sets forth, however, an imaginative theory of how section 2210.6136 could be interpreted in a fashion that would make Class 2 Bonds marketable.

The documents likewise show concern by the TPFA on May 22, 2012 that the Texas Insurance Commissioner, Eleanor Kitzman, was drafting rules for TWIA that exposed the fragility of the interpretation in which TPFA apparently acquiesced following the September 2011 meeting.  Commissioner Kitzman had done this — responsibly — by offering two alternative ways of implementing post-event bonding in the proposed regulations. The first method implemented the theory of 2210.6136 that TPFA had acquiesced to (or possibly embraced) following the September 2011 meeting with legislative staff. That theory was contained in what was section 5.4126 of the proposed regulations. The second method was contained in section 5.4131 of the proposed regulations and provided a “Plan C” for what would happen if the Texas Attorney General determined the Plan B bonds could not be issued under 5.4126 or if there was litigation challenging issuance of securities under 5.4126.

On seeing that Commissioner Kitzman had revealed possible problems with TPFA’s construction of the statute, TPFA Executive Director Robert Coalter wrote a letter to Kitzman questioning her actions.

Also, offering two alternative interpretations in proposed rules introduces the notion that there is legal uncertainty surrounding the issuance of debt pursuant to Section 2210.6136 and this type of uncertainty generally is undesirable to potential investors. Accordingly, for these reasons as further supported below, TPFA requests that the Department eliminate the alternative offered under Section 5.413 I when publishing the rules for comment.

If the Rules support more than one construction for the authority to drop down to the issuance of Class 2 public securities, the alternatives may cause the OAG [Office of the Attorney General] to question the construction of the law and request a court interpretation before it can issue an opinion approving the public securities thereby delaying the issuance for a significant period.


Finally, the documents show an internal “informal draft” of the regulations file stamped May 22, 2012, that delete the alternative financing mechanism that might expose the fragility of TPFA’s saving interpretation of the statute. It is not clear whether this document was developed by TPFA, TDI or others.

In any event, what is currently being circulated in 2014 by the current Texas Insurance Commissioner, Julia Rathgeber, contains no mention of any alternative or any possibility that the Class 2 Bonds might not be lawfully issued. Instead, in a section now numbered 5.4127, it embraces TPFA’s creative reconstruction of the statute. Not surprisingly, TPFA’s March 10, 2014, comments on the proposal contain no objection to Commissioner Rathgeber’s ideas on how to construe section 2210.6136 of the Insurance Code.

The Problem

Unfortunately, although the economic lives of hundreds of thousands of Texans rest on this issue, it is not an easy one to explain. I dread being asked to explain it in a 30 second sound bite. But here’s my best try.

The issue is who has to pay back the money TWIA will need to borrow to pay claims following a significant hurricane in which cash on hand and the depleted Catastrophe Reserve Trust Fund (CRTF) are exhausted.  If there is one other thing everyone can agree on, it is that TWIA does not have enough cash on hand or money in the CRTF to pay for many Category 2 or higher strikes that would hit a densely populated area of the Texas coast such as Galveston or Corpus Christi. It will need to borrow. If TWIA does not have the ability to borrow, those claims are likely to go unpaid for a lengthy period of time. Indeed they may go unpaid forever.  It is crystal clear that the state of Texas has no legal obligation to pay policyholders in the event of TWIA’s insolvency. And if there is legal doubt about who has to pay back loans TWIA would take out, creditors are very unlikely to loan TWIA money in the first place.

The table below taken from internal TWIA documents also produced in response to a public records request by Mr. Crump shows the potential magnitude of TWIA losses.  TWIA is projected at best to have $400 million in internal resources (cash on hand plus CRTF money) to pay claims.

TWIA's internal estimate of losses from Category 2 or 3 hurricanes

TWIA’s internal estimate of losses from Category 2 or 3 hurricanes

The Conflicting Theories about the TWIA statute

There appear now to be two mutually exclusive theories about who has to pay back certain moneys TWIA would need to borrow to pay claims.  Both relate to section 2210.6136 of the Texas Insurance Code and the “Class 2 Bonds” that will need to be issued in an amount up to $1 billion if the unpaid claims following a tropical cyclone are greater than the amount that can be raised via “Class 1 Bonds.” These are both scenarios where, in some sense, TWIA policyholders have escaped at least part of their statutory responsibility for the first billion in losses of borrowings engaged in by TWIA after a storm.

There are three concepts which are useful in understanding the statute: I will call them the “Escaped Amount,” the “Capped Escaped Amount” and the “Residual Amount.”

  • The Escaped Amount is the amount that the TWIA policyholders escape having to pay over time because TWIA can’t borrow the maximum amount it needs in Class 1 Bonds for which the TWIA policyholders would ordinarily be liable. You can see this concept manifesting itself in section 2210.6136(b)(1)(B) of the statute.The idea here is that TWIA policyholders are supposed to take responsibility for the first $1 billion in losses above the Catastrophe Reserve Fund and that they escape that responsibility if TWIA can’t borrow.
  • The “Capped Escaped Amount” is the lesser of $500 million and the Escaped Amount.  You can see this concept manifesting itself in section 2210.6136(b)(1) of the statute. The cap is in section 2210.6136(b)(1)(A). So, if TWIA can borrow only $200 million in Class 1 Bonds because creditors won’t loan them any more, the Escaped Amount is $800 million and the Capped Escape Amount is $500 million. If TWIA can borrow $700 million in Class 1 Bonds, the Escaped Amount is $300 million and the Capped Escape Amount is also $300 million.
  • The Residual Amount is simply the difference between the amount TWIA borrows from Class 2 creditors and the Capped Escaped Amount. This concept is found in section 2210.6136(b)(2) of the statute. So, if TWIA borrows $900 million in Class 2 Bonds and TWIA borrowed only $300 million in Class 1 bonds to pay for $1.2 billion in losses above the Catastrophe Reserve Trust Fund, then the Escaped Amount is $700 million, the Capped Escaped Amount is $500 million and the Residual Amount is $400 million.

Under one theory, which I will call the “Actual Words of the Statute Theory,” Class 2 creditors are supposed to first be paid back the Capped Escaped Amount by TWIA policyholders.  The repayment is accomplished by TWIA raising premiums on its policyholders and using the money to pay off the borrowings. The Residual Amount, if any, is paid off by assessments on insurers doing business in Texas (30%) and premium surcharges on a wide variety of coastal insurance policies (70%). Thus, under the Words of the Statute Theory, the TWIA policyholders don’t really escape responsibility from a failure of the Class 1 bonds to sell fully; they just make the payments for Class 2 Bonds rather than Class 1 Bonds, although the recapture of this Escaped Sum is limited to $500 million. And if the TWIA policyholders simply can’t pay this sum, it becomes the problem of the Class 2 creditors who loaned TWIA the money in the first place. No one else is responsible. The diagram below attempts to illustrate this theory.

Actual Words of the Statute Theory

Actual Words of the Statute Theory

Under a second theory, which I will call the “Suretyship Theory,” TWIA policyholders owe the Capped Escaped Amount to the Class 2 creditors just as under the “Actual Words of the Statute Theory,” but they have Texas insurers and other coastal policyholders acting as sureties. If the TWIA policyholders can’t pay, the Class 2 creditors are still likely to have their loans repaid.  That is because Texas insurers and coastal policyholders pay off the Class 2 creditors on a 30/70 basis. Some of these payments may be as sureties on the Capped Escape Amount obligation of the TWIA policyholders; other payments will be made as part of the Residual Amount.  If TWIA policyholders ever have the money, the sureties get repaid by the policyholders via what the law calls “subrogation.”  The one catch is that this “subrogation right” of the surety is limited to the Capped Escaped Amount. Under this theory, if the TWIA policyholders can’t pay the Capped Escaped Amount, the Class 2 creditors should still be made whole; it is the member insurers and the coastal insurers who will be paying more than they ordinarily would. This theory, if it had a basis in the statute, would thus make it far more likely that institutions would actually lend TWIA the money it needs to pay claims.

The diagram below attempts to illustrate this more elaborate theory. The subrogation lines are dashed to indicate that these payments may never materialize.

Suretyship Theory

Suretyship Theory

The documents show that TPFA and, apparently, TDI have persuaded themselves that the Suretyship Theory is correct and have now written regulations (5.4127) that would codify it. This has caused a bit of tumult since it means that coastal policyholders are likely to pick up a larger financial share for a serious hurricane — particularly if the TWIA policyholders don’t/can’t pay them back. TPFA, which initially had serious questions about section 2210.6136, obtained statements from staff for key Texas legislators such as Senator John Smithee, Senator John Carona and Representative Larry Taylor that would appear to support the Suretyship Theory. As discussed below, both TDI and TPFA have seized on the word “repayment” instead of “payment” in the statute (2210.6136(b)) to prove that suretyship was contemplated.  Both have further  reasoned that, because the Actual Words of the Statute Theory will not, in fact, work, the Suretyship Theory, peculiar as it is in light of the words of the statute, must in fact be correct. They have essentially adopted the view of Sherlock Holmes: “when you have eliminated the impossible, whatever remains, however improbable, must be the truth.”


As I will now discuss, however, there are serious problems with the Suretyship Theory.  If that is what the legislature intended, the statute makes no sense.  Moreover, the idea that creditors will lend money on the basis of the Suretyship Theory — even if it were ultimately proven correct — seems highly fanciful. This, of course, is exactly why Commissioner Kitzman had suggested a Plan C in her draft regulations so that at least there would be no regulatory vacuum in the event courts did not accept the imaginative and non-textual interpretation of 2210.6136 developed by TPFA.  And, finally, if indeed everyone meant the Suretyship Theory, surely it would not be difficult to call a very brief Special Session of the Texas Legislature to clarify the statute and avoid difficult litigation following a major storm that gravely delays payments to TWIA policyholders whose homes have been devastated. Failure to reform the statute if everyone agrees there was just a mistake in writing it down is irresponsible where people’s lives and homes are at stake.

The Statute Makes No Sense if Suretyship was intended

If, however, Texas had intended a suretyship, there was a far simpler way to draft it.  Here is about what section 2210.6136 would likely have said. It is far simpler than the scheme set forth in the real section 2210.6136.

Sec. 2210.6136. ALTERNATIVE SOURCES OF PAYMENT. (a) Notwithstanding any other provision of this chapter, 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). In such event, the liability of each entity responsible for payment shall be only as a surety to the extent of the Capped Escaped Sum but as under section 2210.613 to the extent of the Residual Sum.

(b) As used in this section,

     (1) the term “Escaped Amount” means 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;

     (2) the term “Capped Escaped Amount” means the lesser of the Escaped Amount and $500 million; and

     (3) The term “Residual Amount” means an amount equal to the difference between the principal amount of public securities issued under Subsection (a) and the Capped Escaped Amount plus any costs associated with that amount

(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.

Instead of this structure, however, the real section 2210.6136 contains no mention of suretyship and no mention of the fact that Texas insurers and coastal insureds are supposed to pay back the entirety of the amount borrowed using Class 2 bonds. The word surety or guarantor never appears. The word “reimburse” likewise never appears. Instead, the statute has a complex two-part structure in which it firsts describes how much is to be paid back pursuant to the mechanism in section 2210.612 of the statute — under which TWIA policyholders are liable — and how much is to be paid back pursuant to the mechanism in section 2210.613 of the statute — under which Texas insurers and coastal insureds are liable.  Section 2210.6136(b)(2) makes absolutely no sense as a suretyship arrangement because it would be calling for the surety to pay itself — something that can never happen. In short, it is as almost as plausible to interpret 2210.6136 to contain an unstated desire to have all Texans repay Class 2 Bonds — after all, this too would “solve” the funding problem — as it is to interpret it to contain some sort of suretyship relationship.

The counterarguments

So, given all this, how could TPFA and TDI come to the conclusion that 2210.6136 in fact embraces a suretyship theory?  Their best argument is the (Sherlock) Holmesian one that the statute cannot possibly mean what it says.  I have noted this problem myself. If TWIA policyholders don’t have enough resources to pay off Class 1 bonds, which are on a 14-year repayment schedule, how are they going to have enough resources to pay off Class 2 bonds on a 10-year repayment schedule?  Here is what the Robert P. Coalter, Executive Director of the TPFA wrote to then Texas Insurance Commissioner Eleanor Kitzman on May 22, 2012, in a letter just revealed as a result of Mr. Crump’s Public Records request.

“To construe Section 2210.6136(b)(l) such that the Class 2 public securities ordered to be issued under Section 221 0.6136(b) are to be paid by net premium and other revenues would render Section 2210.6136 ineffective. In the construction of a statutory provision, there is a presumption that such provision is effective. It is an impossibility for Class 2 public securities secured by net premium and other revenue to be issued following the inability to issue Class 1 public securities secured by such net premium and other revenue under Section 2210.612. Put another way, if Class 1 public securities cannot be issued under Section 2210.612, how can Class 1 public securities disguised as Class 2 public securities be issued under Section 2210.6136?”


TPFA then bolsters this point by stating that statutes should be interpreted in the public interest and that it would very much not be in the public interest for TWIA to be unable to  borrow money following a major storm.

Here’s the difficulty.  It is true that section 2210.6136 is a very bad law if it is interpreted as it was written. It is bad for precisely the reasons identified by Mr. Coalter and, actually, by current Texas Insurance Commissioner Julia Rathgeber more recently. But, if Holmes maxim governs, a court could find that it was impossible for a legislator that meant to create a suretyship relationship to have said so using the words contained in section 2210.6136 and therefore that the improbable theory — that the legislature just drafted a dopey law — must be embraced. Moreover, is it really “impossible” that if the Class 1 bonds failed, the Class 2 bonds repaid from the same source would fail as well?  Perhaps during the time period after it was learned that the Class 1 bonds would fail, the situation of TWIA policyholders improved so that they could repay Class 2 bonds.  Or perhaps Class 2 bonds secured partly by payments from insurers would attract lower interest rates than Class 1 bonds secured only by payments from policyholders.  Likely? No.  Impossible?  I am less sure.

The TPFA mustered two additional arguments for its suretyship theory in that critical letter to Kitzman.  The first rested on a distinction between the use of the word “repayment” in describing an obligation under section 2210.6136 and the use of the word “payment” in describing obligations under other provisions calling for repayment of bonds.  According to the TPFA, “In giving the ordinary meaning to the use of the words “pay” or “paid” and “repayment,” one could conclude that repayment means the reimbursement of an amount initially paid.”  Well, I suppose one could, but the TPFA ignores the fact — indeed cuts it out of its letter — that section 2210.6136 actually uses the term “payment” in section 2210.6136(b)(2) to describe this alleged reimbursement obligation.  If repayment meant reimbursement then, in describing the obligation, presumably such a careful legislature would again use the term “repayment” rather than the term “payment.” Moreover, in three other sections of the Chapter addressing Texas Windstorm Insurance (2210.056, 2210.609 and 2210.6165) the legislature uses “repayment” to describe things that are clearly not reimbursement obligations. In short, the legislature appears to have used payment and repayment synonymously.  You just can’t conclude much of anything based on a one-time use of the word “repayment” in one part of section 2210.6136.

The final argument TPFA advances is legislative history. Here is what TPFA says in its May 22, 2012 letter to Commissioner Kitzman.

Legislative history may be considered in construing a statute, whether or not the statute is considered ambiguous on its face. TPFA staff met with representatives of Representative Smithee, Representative Larry Taylor, Senator Carona and Senator Jackson who affirmed that the use of the words “pay” and “repay” in Section 2210.6136 was purposeful to provide a manner whereby the Association could access the markets to obtain financing if Class 1 public securities cannot be issued in the amount authorized under Section 2210.072, and still ensure that as much as possible of the first one billion dollars of losses were ultimately paid by premium and other revenue. Thus, the new Section 2210.6136 authorized the Commissioner to order the issuance of Class 2 public securities payable from premium surcharges and member assessments as provided in Section 2210.613; furthermore, requires that the Association repay the policyholders and members for premium surcharges and member assessments assessed to pay the drop down Class 2 public securities in the amounts specified in Section 221 0.6136(b)(1 ).


This analysis is one-sided and shallow.  Yes, there is language in some Texas cases indicating that legislative history can be used if the plain language of a statute would lead to absurd results. But it is also true that this is to be done only in the most extreme cases and that different judges have different thresholds of absurdity before they embrace the separation of powers problems inherent in essentially fabricating law. Moreover, before courts decide to ignore the language of the statute, there needs to be”room for construction,” a reasonable alternative, and no way of interpreting the statute consistent with its text. To quote an earlier Texas Supreme Court case, Simmons v. Arnim, 220 S.W. 66, 70 (Texas 1920),

Courts must take statutes as they find them. More than that, they should be willing to take them as they find them. They should search out carefully the intendment of a statute, giving full effect to all of its terms. But they must find its intent in its language, and not elsewhere. They are not the law-making body. They are not responsible for omissions in legislation. They are responsible for a true and fair interpretation of the written law. It must be an interpretation which expresses only the will of the makers of the law, not forced nor strained, but simply such as the words of the law in their plain sense fairly sanction and will clearly sustain.

Or, as the Texas Supreme Court said as recently as 2009, “Enforcing the law as written is a court’s safest refuge in matters of statutory construction, and we should always refrain from rewriting text that lawmakers chose ….” Entergy Gulf States, Inc. v. Summers, 282 S.W.3d 433, 443 (Tex. 2009). See also, City of Round Rock v. Rodriguez, 399 S.W.3d 130, 140  (Tex.  2013) (“it would be a usurpation of our powers to add language to a law where the [L]egislature has refrained” and citing numerous cases on the topic);  J. Woodfin Jones, The Absurd-Results Principle of Statutory Construction in Texas, 15 Rev. Litig. 81 (Winter 1996).

The “legislative history” offered here to support the TPFA/TDI construction of the statute is not of a traditional sort: statements made by legislators to other legislators before the bill was enacted.  Statements of some legislators — even key legislators — after the fact about what they think a bill meant is deeply problematic because their theory was not presented for other legislators to consider.  As United States Chief Justice William Rehnquist summarized matters in Public Employees Retirement System of Ohio v. Betts, 492 U.S. 158 (1989), “We have observed on more than one occasion that the interpretation given by one Congress (or a committee or Member thereof) to an earlier statute is of little assistance in discerning the meaning of that statute.”  Justice Willett of the Texas Supreme Court has recently written that legislative history, even when permissibly used, “hits rock bottom” when considering post-enactment commentary on a bill. See Ojo v. Farmers Group Ins., 356 S.W.3d 421, 444, note 30 (Tex. 2011)(concurrence).

Moreover, here we don’t even have comments from the legislators themselves.  We have only reconstructed hearsay from staffers based on what they think their bosses meant and likely based on leading questions from a TPFA that had already constructed its theory. That is weak legislative history, possibly beneath rock bottom.  How much these staffers or the legislators for whom they work would recall anything as a result of litigation in 2014 or 2015 about events in 2009 and how much of that testimony would survive cross examination is very much open to doubt.

My point, anyway, is not to establish that the Suretyship Theory adopted by TPFA and TDI is a sure fire loser. My point is to establish that the public needs to be told about the problem. The original presentation of legal argument as to why it should be accepted was one-sided and shallow. The arguments in favor of the suretyship approach continue to be sufficiently problematic that it is a fantasy to imagine that persons hurt by it — such as coastal businesses and legislators who end up being converted into sureties with doubtful subrogation rights — will not be able tie matters up in litigation for a protracted period of time.  TPFA and TDI may have persuaded themselves that they have the best interpretation of the statute, but what creditor is going to be willing to lend $1 billion when the payment (or repayment) source is open to this level of doubt.   And, yes, the documents uncovered by Mr. Crump speak periodically about a comfort letter coming from the Office of Attorney General, but I (a) am not aware that such a letter has been issued; (b) have concerns as to whether the AG would issue such a letter; and (c) fear that such a letter, even if it were issued, might not provide adequate comfort to lenders when the final issue, after all, will be determined by the courts.


The real argument in favor of doing nothing, however, and simply accepting the Suretyship Theory now being promulgated by TDI is that it is a pretty good bluff.  Even if the theory is nonsensical, is there a court in Texas which, when the alternative is TWIA going insolvent, would have the guts to say that the law should be interpreted as it was written and that, if the legislature was aware of the issue and did nothing, the remedy is throw the rascals out and/or vote for relief after the fact under a new law? Perhaps not.  But given the pleas that will be made by individuals and businesses along the Texas coast who will be additionally burdened by the TDI Suretyship interpretation of section 2210.6136 and the attractiveness of the Actual Words of the Statute Theory, that is hardly a certainty. Moreover, given the internal doubts that have surfaced about the interpretation of section 2210.6136 — and the very real basis for those doubts — the responsible thing to do is to warn TWIA insureds about the problem. Yes, warnings about people’s homes and insolvent insurers are scary, but that is better I believe than burying one’s doubts in favor of a dubious and untested interpretation of a critical statute. It is not responsible for TWIA to bury the problem, for insurance agents to fail to disclose, or, frankly, for insurance regulators to be as quiet as they have been. Note to Governor Perry: neither your legacy nor your career will be helped by blue roofs on coastal houses as litigation grinds through the courts regarding 2210.6136 and the legislature deadlocks on now to proceed.

Finally, if indeed everyone indeed agrees on what was intended, would it not be the far more responsible thing, instead of playing poker with the judiciary, to just get a stronger hand by having a very brief special session of the Texas legislature — right now — and conform the law to its supposed intent? I know the Suretyship Theory if enacted into a clear law in a special session of the Texas legislature would not be ideal for many people along the Texas coast.  I know many along the coast would like the burden shared more widely across the Texas.  But that is a battle those interests will never win before the start of the 2014 hurricane season.  If they really believe in coastal solidarity, as it is sometimes termed, they should recognize that the current system is very likely to fail TWIA insureds following a large storm and that a fix after a storm will be very difficult.  In the few weeks remaining, they should not let perfection be the enemy of the good.

Texas Insurance Commissioner still mulling bond anticipation notes

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

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

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

Great news or the calm before the storm?

Great news or the calm before the storm?

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

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.

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.




Smithee’s urgent warning to Governor Perry

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

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

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

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

Good news: TWIA looks to have reinsurance for this summer

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

Continue reading

I answer a reader’s question about Bond Anticipation Notes

One of the nice things about WordPress is that it tells you what searches are being used to find your blog.  For whatever reason, I’ve been getting a bunch of searches recently that ask who pays — or would have paid — for the $500 million class 1 Bond Anticipation Notes (BAN) issued to cover windstorm losses in Texas. So, let’s answer that question.

The short answer is that TWIA policyholders would have been obligated to repay the loan, with interest.

Continue reading

TWIA Cash Position Not Improving

 $443 million in cash and short term assets

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

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

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

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

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

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

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

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.