An open letter to State Representative Todd Hunter

Dear Representative Hunter,

My purpose in writing is to urge you to consider the risk to your constituents by letting the fate of the many policyholders of the Texas Windstorm Insurance Association rest on a flimsy regulation that is likely to be the subject of a length court challenge. I understand your position that the statutes and regulations currently in place do not adequately share the risk of catastrophic events throughout Texas. But fundamental decisions on that matter will not be resolved by the Texas legislature before the 2014 hurricane season is well underway. You are widely considered a champion of Texas coastal interests. You have a responsibility to your constituents to think this matter through very carefully. And you need to do it now.

There is a short run emergency in the TWIA funding situation on which people, like me, and, more importantly, inland legislators might well be able to reach agreement with coastal interests on a tolerable fix.  I urge you therefore to put personalities and long-standing battles aside, and work together immediately.  You will need to plead with Governor Perry to call a short and limited special session of the Texas legislature in order to do so. I am not an expert on Texas politics, but my sense is that you will need to compromise in that request and not ask for any fundamental reforms of windstorm insurance systems; you may need to compromise further and accept a plan that at least temporarily hardens what you regard as an undue burden on the Texas coast.  The alternative, however, is so bad, that you would be doing your constituents a yet worse disservice by failure to make the request.

You asked in a recent television interview on KRIS-TV that people, and my impression from the report was that I was included, stop complaining, stop criticizing and start working together constructively.  I was a bit puzzled by this statement because I have heard such offers from you before only to find that, when I accepted, your staff informed me that your busy schedule did not permit you ever actually to talk, even by phone. Perhaps they misunderstood your desires. Not meeting is, of course, your privilege. But there is no legislative session going on right now that should prevent you from meeting now either by phone, Skype or in person. Although you and I are not likely ever to agree on the structure of windstorm insurance funding in Texas, I am definitely willing to work with you and other Texas legislators any time, any place, on either trying to find intelligent compromises or, as here, preventing absolutely needless disasters from happening.

Here’s the emergency. I know that TWIA funding is a contentious minefield, but I am going to describe it in a way on which I think everyone can agree.

1. TWIA does not and will not have enough cash on hand to pay for a significant tropical cyclone hitting Corpus Christi or other densely populated parts of the Texas coast during the 2014 hurricane season.

2. TWIA’s reinsurance is unlikely to attach at low enough levels so that it, if TWIA has difficulty borrowing, the reinsurers will provide the cash necessary to pay claims.

3. TWIA’s ability to borrow money following a tropical cyclone rests on a statute that has never been used before.

4. Lenders in the past have balked when asked whether they would loan TWIA up to $1 billion in “Class 1 Bonds” when the payback mechanism for those bonds are (heightened) premium revenues from TWIA policyholders. There is thus a substantial risk that not all of the Class 1 Bonds would be salable. The failure of Class 1 Bonds to sell, prior to 2011, would have toppled the entire post-event bonding scheme developed by the Texas legislature and would leave TWIA with no cash with which to pay claims following a significant storm.

5. In 2011, the Texas legislature considered this contingency and amended Chapter 2210 of the Texas Insurance Code to add section 2210.6136. It provides a contingency plan in the event that the Class 1 Bonds are unsalable.  The idea behind section 2210.6136 is to permit Class 2 Bonds to be issued through the Texas Public Finance Authority even if the Class 1 Bonds do not sell in full and to thereby permit Class 3 Bonds, which are repaid via assessments on insurers, to be sold if need be.

6. Given the high likelihood that Class 1 Bonds will not be fully salable and given the necessity of TWIA to borrow in order to be able to pay claims following a major storm, Texas depends on section 2210.6136 being a coherent statute, the type of statute that potential lenders believe will provide a legal basis for their claims to repayment.

7. The Texas Public Finance Authority had initial difficulty understanding section 2210.6136 based on its text and met with legislative staff in order to obtain an explanation of how it worked. TPFA described its staff and advisors as “struggling with the mechanics of financing” under section 2210.6136.

8. Legislative staff explained the intent of the statute as being one under which Class 2 Bonds would be initially paid 30% from assessments on insurers and 70% via surcharges on certain coastal insurance policies but under which TWIA policyholders would be required –insofar as possible — to repay the insurers and coastal insureds up to $500 million of their bond amortization payments.

9. The Texas Department of Insurance has issued draft regulations that implement the interpretation of the statute offered by legislative staff but acknowledge in the preface the the regulations that this interpretation is impossible or difficult to reconcile with the language of the statute.

10. Insurance companies in Texas will be forced to pay more in assessments under the TDI interpretation of section 2210.6136 than under a literal reading of the statute. Certain coastal insureds will also have to pay more.

11. Insurance companies may have duties to their shareholders and/or it may be in their best economic interests to challenge regulatory interpretations of statutes that are contrary to the language of the statute and require them to pay more than they would under a literal reading of the statute. Sophisticated coastal insureds and/or those advised of the situation may likewise have an incentive to bring legal challenges to regulations requiring them to pay more than they would under the statute.

11a.  This is the one point that I acknowledge might be contestable.  It is unlikely that a court would swiftly dismiss the claims of those challenging regulations that are, at best, difficult to reconcile with the language of the statute. Those challenging the claim have a significant chance of prevailing.

12. Lenders who might otherwise loan TWIA money via Class 2 Bonds will be reluctant to do so if they are aware of items 1-10 above. They will not lend if they believe there is likely to be a length court challenge to the bond payment mechanism.

13. If lenders do not lend TWIA money, TWIA will not have enough money to pay claims following a major storm. If so, there will be devastation of TWIA insureds, great derivative harm to almost everyone on the Texas coast, and significant derivative harm to others in the Texas economy. Although the strength of interests may vary, it is not in anyone’s interest that the TWIA funding stack collapse due to a legal technicality.

I have thought about this for some time.  And the only point on which I believe some might disagree is item 11a. If you really believe that the risk of a serious challenge is extremely low, then there is no emergency. If, however, you believe as I do, that the risk of a serious challenge is significant, then indeed we have an emergency. There is a really serious risk that TWIA policyholders will not be paid any time soon following a significant storm this summer.

What bothers me most is that, unlike many problems, this one is very solvable. The Texas Insurance Commissioner, Julia Rathgeber, appointed by Governor Perry, has already come up with a solution. Simply turn the language of the law into what legislative staff believe it was supposed to say. That will require almost no effort.  One simply has to relabel the regulatory provisions she has proposed as a statute, get the legislature to pass it, and get the Governor to sign it and the situation is resolved.No more emergency.  Lenders should feel way more comfortable loaning TWIA the money.

Yes, some insurers may balk at the solution. But the very fact that one thinks they might do so is a sign that they will in fact litigate if no statute is passed and the same result occurs through an ultra vires regulation. By claiming that insurers will object to a legislative change that purports merely to clarify the status quo, one essentially acknowledges that the current situation is untenable.

And you, Representative Hunter, are likely to find the Rathgeber solution a difficult pill to swallow. It does burden the coast with 70% of the bill for Class 2 bonds. Some of your more militant constituents could be angry about this.  Here is what you need to explain to them.  I am optimistic that there will be enough reasonable people on the Coast that such an explanation will be satisfactory.  You are not bargaining from a position of strength.  The law already was intended to burden the coast with 70% of the bill for Class 2 bonds.  There is nothing knew with the proposed statute.  What it is doing is making sure that something even worse does not happen: TWIA collapsing due a technical glitch and blue roofs staying on coastal homes for a very, very long time.  You can assure your constituents that you will seek a better solution during the next regular session of the legislature but that, for now, improving the language of the statute without changing its meaning is a major improvement.

There are, of course, other solutions.  You could, for example, try to flip responsibility for Class 2 Bonds such that 70% of the burden is on insurers and only 30% on the coast.  There are lots of other mechanisms for spreading the risk of windstorm farther inland. But do you really think you will reach agreement on such a significant reform during a special session when you were unable to do so last session? The one “focal point equilibrium,” the one thing on which you and inland representatives might agree is to make the statute actually say what, supposedly, various staff members said it intended.

Finally, I suppose it is possible that you believe that the rest of Texas will come in and rescue the coast if TWIA collapses and that you should not accept a solution that solidifies a current scheme that you think is fundamentally unfair.  All I can say is that this is very high risk poker. Trying to resolve TWIA funding after a major storm in some special session of the legislature is likely to stalemate and also likely to result in statutes that are actually worse for the coast than the status quo. The process is not likely to be swift and the emotional and financial stress on the coast while the matter being debated is extraordinarily ugly.

As I indicated in a somewhat similar open letter to Governor Perry this past week, I know that you can not trust me on critical item 11a. But you are a lawyer and you certainly know lots of open minded lawyers.  You also know, I suspect, lots of insurance representatives.  Ask them if they believe the regulation enacted by the Texas Insurance Commissioner on which the TWIA funding stack depends is unlikely to be challenged in court.  Ask them if they believe such challenges would survive, for example, a motion to dismiss. Or go find institutional lenders.  See if they would be willing to lend if they got wind that insurers or some coastal interests might challenge the pay back mechanism.  If all you get are assurances that the University of Houston professor is off his rocker or just scaring people, then, fine, ignore me.  I am sincerely sorry for what would be a false alarm.  My strong suspicion, however, is that these people are going to tell you that I have a serious point.

One way or another you need — right now, before hurricane season hits full swing — to be assured that lenders will loan TWIA funds on Class 2 Bonds when the Class 1 Bonds can’t issue.  Maybe there are ways of getting this other than a special session of the legislature. I am not sure what these methods would be.  But until you have that, as a champion of the Texas coast, you need to be on the front lines, making common cause with whomever you can, saying that this provision of the law needs to be fixed by the Texas legislature right now.



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.

Insurance Commissioner tries to fix fatal bug in windstorm statute

Whether policyholders of the Texas Windstorm Insurance Association get paid following a significant storm during the coming summer of 2014 is likely to depend on a difficult legal question: whether the Texas Insurance Commissioner has the power to write regulations that clearly alter the language of a statute enacted by the Texas legislature where she believes, with reason, that the statute as written makes no economic sense.  The good news is that the new Texas Insurance Commissioner, Julia Rathgeber, agrees with an argument first propounded on this blog: there is a serious “bug” in the provisions of the Texas Insurance Code governing issuance of securities to pay for losses following a significant storm. That bug could jeopardize the entire system of post-event bonding that is supposed to cover for the shocking lack of cash TWIA, the largest windstorm insurer in Texas, actually has available to pay claims. Recognizing a problem exists is, after all, usually the first step for a cure.  It’s certainly better than pretending the problem doesn’t exist and hoping no injured party or judge will notice. The problem, however, is that it is not clear that the Commissioner, acting alone and without legislative action, has the power to cure this problem in a way that could cost other Texans considerable sums of money.

Matters would be far better if all sides in the enduring controversy over TWIA funding could agree to a minimalist statutory fix before the 2014 hurricane season begins.  The stakeholders could then then ask Governor Perry for a short special session to enact the fix as law.  The Governor might accommodate if almost all legislators agreed to the fix and the agenda were kept narrow.  Commissioner Rathgeber’s regulations contain one possible fix.  A blog entry I put forth last spring contains some others. None would “cure TWIA” — that’s a very hard problem that will likely take at least a legislative session. But at least the statutory scheme would function as well as was hoped for by the legislature. Right now it resembles a bad computer program that is about to crash from a giant bug if nature ever pushes the “Hurricane Key.” Unfortunately, for reasons that will be discussed below, it looks like getting agreement on even a simple statutory fix will be difficult.

Texas Insurance Commissioner Julia RathgeberAs a result of the Commissioner’s questionable authority to enact the changes she wants and the likelihood that a coastal resident hurt by her fix would challenge it in court (and refuse to pay in the interim), absent legislative action, it is unlikely that TWIA will have any ability swiftly to pay significant claims this summer. By “significant”, I mean those generated  by a respectable storm that causes insured losses in excess of TWIA’s cash position ($200 million to maybe $400 million) and whatever reinsurance, if any, drops down low enough to pay claims right above the cash reserve.  Lenders who just might otherwise be willing to advance TWIA money based on anticipated revenue from premium surcharges may be unwilling to do where there is no secure statutory basis for demanding at least some of the surcharges in the first place.

The problem

Let’s go through the problem that the Commissioner’s proposed regulations is intended to solve. The Commissioner actually outlines it quite well in her explanation of the proposed regulations now undergoing hearings, but I think my explanation is a bit more direct. The basic idea is that, following a tropical storm that wipes out TWIA’s cash position, TWIA can go to the borrowing market.  It can request issue three types of securities cleverly named Class 1, Class 2 and Class 3. The securities are actually issued by the Texas Public Finance Authority (TPFA), not TWIA itself. Even though TPFA issues the securities, under section 2210.615(a) of the Insurance Code they are explicitly not backed by the full faith and credit of Texas. Texas taxpayers are not on the hook to repay the borrowings if the statutory mechanism fails.

What distinguishes the three securities TWIA may issue when it runs out of money is mainly the source of repayment.  To oversimplify just a bit, Class 1 is to be repaid by TWIA policyholders through “net premium and revenue.” Class 2 is to be repaid 30% by assessments on the insurers that compose TWIA (people who write property/casualty insurance in Texas) and 70% via premium surcharges on most property insurance policies written on the Texas coast. This latter group includes not only TWIA policies but also non-TWIA homeowner or wind insurance policies, business fire insurance, personal automobile policies, and commercial automobile policies. Class 3 is to be repaid by assessments on the insurers that compose TWIA. Class 1 can be up to $1 billion. Class 2 can be up to $1 billion; and Class 3 can be up to $500 million. And the borrowings are supposed to take place in sequence.  No Class 3 before all Class 2 has been issued.  No Class 2 before all Class 1 has been issued.

There’s a big “however,” however. What happens if lenders are worried that TWIA policyholders won’t be able to pay enough in premium surcharges to amortize the loan?  In 2011, the legislature recognized this possibility and came up with a plan. You can find it in section 2210.6136 of the Texas Insurance Code, which the most recent regulatory proposal cites frequently. To the extent that the Class 1 bonds would not sell, what I have called “Class 2 Alternative” bonds can be issued. According to the statute — and this is the bug — the first $500 million (or, in some cases less) is to be repaid the same way Class 1 bonds are to be repaid: using premiums from TWIA policyholders.  The remainder of the $1 billion in Class 2 Alternative bonds are to be repaid the way ordinary Class 2 bonds are to be repaid.

The problem, as the Commissioner has recognized, is that, if the Class 1 Bonds won’t sell because lenders don’t trust TWIA policyholders to have the money to amortize the bonds, it is unlikely that they will trust “Class 2 Alternative” bonds that have exactly the same payment source. As the official explanation of the proposed regulations states, the statute has “the effect of treating class 2 public securities issued under Insurance Code §2210.6136 as class 1 public securities, which are repayable by premium and revenue assessments.

The paradox is well stated by the Commissioner:

If the association [TWIA] can issue Class 2 public securities that are to be repaid by premium, then this means the association is capable of issuing class 1 public securities. This eliminates the need for having an alternative to issue class 2 public securities when class 1 public securities.  It is not feasible to read the statute to require TPFA to issue all of the class 1 public securities it can based on the association’s net premium and other revenue, and then expect TPFA to issue additional public securities using the same funding sources simply because the name of the public security has changed.  Such a reading would render Insurance Code §2210.6136 meaningless.

The domino effect

The problem is even deeper, however, than this passage indicates. As I have previously noted and as the Commissioner’s explanation confirms: “TPFA cannot issue the class 3 public securities until after TPFA has issued $1 billion in class 2 public securities on behalf of the association for that catastrophe year.” In other words, if the Class 1 bonds fail, the Class 2 Alternative Bonds are likely to fail too.  And if the Class 2 Alternative Bonds fail, the Class 3 Bonds fail. There’s a domino effect. TWIA ends up with no cash to pay claims and no ability to borrow at all!

So, this is the disaster waiting for Texas if it does nothing.  It is the disaster the Commissioner is trying to avoid. Her proposal is effectively to rewrite section 2210.6136 of the statute and make all of the Class 2 Alternative Bonds payable the same way regular Class 2 Bonds would be repaid: 30% by assessments on the insurers that compose TWIA (people who write property/casualty insurance in Texas) and 70% via premium surcharges on most property policies written on the Texas coast.  To quote section 5.4127(a) of the proposed regulations:

(a) All Public Security Obligations and Public Security Administrative Expenses for Class 2 Public Securities issued under §5.4126 of this division (relating to Alternative for
Issuing Class 2 and Class 3 Public Securities) must be paid 30 percent from member assessments and 70 percent from premium surcharges on those Catastrophe Area insurance policies subject to premium surcharge under Insurance Code §2210.613.


The proposed regulations potentially rescue TWIA policyholders from disaster.  They provide a more plausible source of repayment and they don’t result in the Class 3 securities succumbing to the domino effect.

The Bên Tre analogy

There is only one problem.  The Commissioner has destroyed section 2210.6136 in order to save it. The law would be little different under the Commissioner’s proposal than if the legislature had never bothered with section 2210.6136 in 2011 and just kept things the way they were in 2009, except to say that Class 2 bonds can be issued first if the Class 1 bonds can’t be fully issued.  The two different subparts of section 2210.6136 elaborately specifying how each part of the money is to be repaid would appear to be unnecessary.

The legal issue

I’m not going to opine today on whether the Commissioner is within her rights in undoing a legislative enactment whose sense is indeed difficult if not outright impossible to discern. But this isn’t the somewhat simpler case of the Commissioner fixing a clearly omitted “not” in a statute or correcting some punctuation.  This is undoing an entire provision when the legislature has been alerted to the problem and has chosen to do nothing about it. Although a Texas court can choose to interpret a statute contrary to its actual words where doing so clearly fulfills the intent of the legislature, it must do so cautiously.  As set forth by the Texas Supreme Court in Presidio Independent School Dist. v. Scott, 309 S.W.3d 927 (Tex. 2010), “We thus construe the text according to its plain and common meaning unless a contrary intention is apparent from the context or unless such a construction leads to absurd results.” There are many cases, including Texas Department of Protective and Regulatory Services v. Mega Child Care, Inc., 145 S.W.3d 170 (Tex. 2004), that say about the same thing. Indeed, in my brief research I had to go back to 1898 and the case of Edwards v. Morton, 92 Tex. 152 (1898) to find a case in which the highest court found the requisite level of absurdity to exist. Perhaps there are more recent cases that some quick research did not disclose but I suspect there will not be many.

The United States Supreme Court summarizes prevailing judicial attitudes well on the subject.

Courts have sometimes exercised a high degree of ingenuity in the effort to find justification for wrenching from the words of a statute a meaning which literally they did not bear in order to escape consequences thought to be absurd or to entail great hardship. But an application of the principle so nearly approaches the boundary between the exercise of the judicial power and that of the legislative power as to call rather for great caution and circumspection in order to avoid usurpation of the latter. Monson v. Chester, 22 Pick. (Mass.) 385, 387. It is not enough merely that hard and objectionable or absurd consequences, which probably were not within the contemplation of the framers, are produced by an act of legislation. Laws enacted with good intention, when put to the test, frequently, and to the surprise of the lawmaker himself, turn out to be mischievous, absurd, or otherwise objectionable. But in such case the remedy lies with the lawmaking authority, and not with the courts.

Crooks v. Harrelson, 282 U.S. 55 (1930) (Sutherland, J.)

Clearly, what is good for the judiciary is probably good for the Insurance Commissioner as well. Commissioner Rathgeber no matter how outstanding her intentions and no matter how irksome her opposition will have an uphill battle defending her reconstruction of the statute governing the Texas Windstorm Insurance Association. She will surely face hostile judges when, contrary to the literal language of the statute, she seeks to impose an additional surcharge on some coastal Texas homeowner with insurance on a run down car who never bought a TWIA policy and indeed doesn’t even have a home to insure.

Residents of the coast have apparently caught on (see here, here and here) that the proposed regulatory change theoretically hurts them.  Under the statute as written, even if there were more than $1 billion in losses awaiting payment, insureds on the coast would be responsible for only 70% of about $500 million.  With the regulatory change, they are responsible for 70% of up to $1 billion.  So, basically, the non-TWIA insureds on the coast are objecting to helping their TWIA friends on the coast because they don’t think it’s their responsibility.


In a world of perfect political information, we might now see a battle between coastal residents, the non-TWIA policyholders battling the Commissioner’s proposal while the TWIA policyholders support it.  To date, however, such a lack of “coastal solidarity” has emerged.  And it is not clear what the alternative is. Where do political figures whipping up opposition to the Rathgeber plan think the money is going to come from if the Commissioner’s regulations are struck down, the goofy statute upheld as written, and TWIA finds itself following a significant storm with no money in the till? Surely they are still not marketing the elaborate fantasy that the current TWIA board can now assess insurers more money to pay for Hurricane Ike in 2008. If they really cared about the coast, they might agree to defer a fight about the perfect way to fund TWIA for a bit, and agree to a statutory fix that at least got rid of a fatal bug in the existing law which, if triggered, will devastate TWIA policyholders to be sure, but also those on the coast and off it who depend on a vibrant coastal economy.


TWIA board declines to assess insurers for Ike — for now

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

Much other news emerged from the TWIA board meeting.

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

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

Texas Insurance Commissioner still mulling bond anticipation notes

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

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

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

Great news or the calm before the storm?

Great news or the calm before the storm?

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

Return of the Vampire Argument

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

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

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

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

Section 44 of HB 4409

SECTION 44.  The following laws are repealed:

(1) subdivisions (5) and (12), Section 2210.003, Insurance Code;

(2) Sections 2210.058 and 2210.059, Insurance Code;

(3) Sections 2210.205 and 2210.206, Insurance Code;

(4) Sections 2210.356, 2210.360, and 2210.363, Insurance Code; and

(6) Subchapter G, Chapter 2210, Insurance Code.

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

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

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

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

I suppose the legislators’ argument is that the “assessment” was an obligation or liability previously acquired, accrued, accorded or incurred.” But this argument, which a law professor might briefly admire for its creativity, fails because the possibility that TWIA might assess insurers more for Ike is not a liability or obligation. The fact that TWIA might have made an assessment is no more an “obligation” or a “liability” than a tax that the legislature might have but did not impose or a penalty that a court might have but did not impose. Thus, if Allstate had not paid its assessment under the 2008 assessment, the fact that the statute permitting assessments was repealed would not relieve Allstate of its obligation to pay the pre-existing assessment.  It would, however, prevent TWIA from creating new liabilities for Allstate to pay.

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

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

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

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

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.




Perry to Coast: No Special Session on Windstorm

It looks like the Texas Coast and the rest of Texas is going to have to live with the deeply troubled public insurance scheme now in place for windstorm risk along the Texas coast.  That’s because Texas Governor Rick Perry announced today that he will not be adding any more items to the agenda for a special session of the Texas legislature.  His decision, coupled with the inability of the Texas legislature to agree  on any sort of reform, has the potential to wreak havoc.  There is a major risk — best estimated at about 20% — that the largest insurer on the Texas coast, the Texas Windstorm Insurance Association,  will fail at some point during the 2013 and 2014 hurricane seasons. Such a failure would leave policyholders with unpaid claims and consequent difficulty undertaking repairs. It would force the rest of Texas to choose between an expensive bailout that could have been avoided or forcing people on the Coast to reap the consequences of decisions sown by their political leaders that they failed vigorously enough to oppose in a sensible way.

CBS news in Dallas provides the following explanation of the decision.

Governor Rick Perry said Thursday he won’t be adding any more items to the special legislative session, noting that with just 12 days to go, there’s too little time left for lawmakers to handle a larger workload. *** Originally, the agenda only included approving new voting maps for congressional and legislative elections. But Perry this week added passing funding for major transportation infrastructure projects, mandatory life sentences for teens convicted of murder and even the thorny issue of further restricting abortion in Texas to the agenda.   “I think everything that can be added to the call has been added to the call from the standpoint of a timing issue,” he said after signing the so-called “Merry Christmas Bill,” which sailed through the Legislature and protects the rights of students and teachers to use religious greetings and symbols in public schools statewide.

This is not the post in which to assess blame, though I promise one is coming. It is, instead, a time for sadness and reflection.  What is wrong with our state and our leadership that we can not manage to fix a relatively basic problem?

Premium Finance Issues

It won’t take a major storm for the repercussions of today’s decision to be felt.  Already there are mutterings and possibly action among some insurance premium finance companies that they will not loan people money to purchase TWIA policies. The finance companies don’t want to get stuck with unpaid claims for premium refunds in the event TWIA is placed into insolvency proceedings.

Lending Issues


Although the band may play on for a little while longer, lenders along the coast are also going to face  a difficult reality.  Sober lenders will likely start taking a serious look at the extent to which they want to lend money on the basis of collateral (homes, businesses) that are insured on TWIA paper but that be little more than a pile of unrepaired sticks and an expensive claim in state receivership proceedings following a significant storm. And, with the failure of legislative action to correct the problem, new Texas Insurance Commissioner Julia Rathgeber will face difficult decisions. She has to decide whether to place TWIA right now into some sort of insolvency proceedings so that its limited funds are not further siphoned off.  She also has to decide whether to reverse the decision of her predecessor to deny TWIA the ability to borrow money to raise cash.

Psychological Issues


And there is yet another consequence lilkely to be felt soon.  When you are uninsured or incompletely insured, it does not take an actual loss to cause great stress.  Informed people, particularly in the densely populated areas of the Texas coast such as Galveston where the affects of a TWIA insolvency are most likely to be felt, are going to lose a lot of sleep this summer.  The glimmer of hope that things would get fixed either during the regular legislative session or during a special session has just evaporated. Now, every time something enters the Gulf of Mexico, our friends on the coast with TWIA policies  have to worry not just about the emotional and financial losses that inevitably come from storm loss. They also have to be concerned about the significant possibility that their losses may not be as insured as they hoped. They have to worry that they may be living under a blue tarp (or worse) for a very long time.

Is there a ray of hope?

Only a sliver. It was important that TWIA got reinsurance that attached at a low value.  That appears to have happened.  But that (still expensive) reinsurance will do limited good if TWIA can’t sell its bonds after a storm to raise cash. If not, there will be a large gap between TWIA cash and the reinsurance. Maybe we will learn something about that possibility soon.  One of the many problems with post-event bonds as a vehicle for catastrophic risk transfer, however, is that you can’t tell for sure whether you will have enough money to pay claims until those dark days following the catastrophe.

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.

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