The source of TWIA’s $800 million in cash on hand

In a previous post, I indicated that TWIA thought it would have $800 million in cash immediately available to pay claims. I was a bit skeptical of this number. But, an article in today’s Insurance Journal, a reputable trade publication, details that the money would come $300 million (0.3 billion) from real cash on hand and $500 million (0.5 billion) from a “bond anticipation note.” The latter is basically bridge financing that one can obtain quickly. The BAN would be repaid, one assumes, from Class 1 securities that TWIA would issue shortly thereafter.

Now, here’s the rub. According to the Insurance Journal article (which may not be fully reflecting what was said on this point), Commissioner Eleanor Kitzman believes that, with this BAN, TWIA would have $4 billion available to pay claims. Here’s the math. $4.15 billion = $0.3 billion real cash on hand + $0.5 billion BAN + $1 billion Class 1 + $1 billion Class 2 + $0.5 billion Class 3 + $0.85 billion reinsurance. If that’s what Commissioner Kitzman said, I have concerns because it looks like the math rests on double counting. $0.5 billion of the Class 1 securities couldn’t be used to pay claimants because it would have to be used to pay off the BAN. I am pretty confident that the BAN investors wouldn’t lend the money otherwise. Plus, according to other statements made at the last TWIA board meeting, it appears that TWIA might not be able to issue successfully the full $1 billion of Class 1 securities authorized. Readers of this blog will understand why that might be. And if all this is true, TWIA doesn’t have $4.15 billion, it has $3.15 billion. Here’s why.

$3.15 billion = $0.3 billion real cash on hand + $0.5 billion BAN + $0.5 billion Class 1 – $0.5 billion used to pay off BAN + $1 billion Class 2 + $0.5 billion Class 3 + $0.85 billion (hopefully collectible) reinsurance.

I hope we never have to figure out whether the difference in accounting is material or not. In the mean time, though, it might be prudent for TWIA and TDI to clarify the numbers.

Note: since the time of this blog entry I have had some private communications that lead me to believe the “best” number — and no one knows for sure — is probably between $3.15 and $3.65 billion. ┬áIt depends in part on how much in Class 1 securities can actually be sold.