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

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

Pre-Event Bonds

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

Reinsurance efforts

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

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

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

One additional note

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

8 thoughts on “TWIA Board tries to borrow $500 million and get $1.15 billion in reinsurance

  1. They are going to have to pay something like $30 million in interest on the bond (6% x $500 million). I assume they have money for that. It’s not as if TWIA has zero gross assets. Guy Carpenter, TWIA’s longtime reinsurance broker, was suggesting TWIA might have to pay $95-105 million for a $940 million reinsurance policy attaching at $2.3 million. My guess is that means sometime like 25% more for a $1.15 billion, or $119 million to $131 million in premiums for the bigger reinsurance policy. TWIA might be able to scrape that money together, it just means a less contribution (again) into the CRTF and a greater likelihood of having to go to the shaky post-event bonding structure if something bad happens this summer.

  2. Seth, are you sure? They lost $180 million last year on operations. I assume they are still losing money on operations and getting drained by ongoing Ike claims litigation. They already have had some non-hurricane claims losses. The Public Information requests I have received have indicated no current funds for claims. My assumption (that trick word “assumption” again)is that no money for claims is also no money for reinsurance or pre-event loans. What assets they have are getting depleted.

    I need to see the stacked gold bars in the bank to believe these folks actually have any money.

    • Not 100% sure, but … One can be insolvent and still have cash (or even gold bars). I looked again at TWIA’s end of year 2012 financial statement and it does show over $400 million in cash. The problem is that this cash is being drained rapidly by Ike claims and other expenses and that if you add up the liabilities TWIA has a negative surplus. So, although I have not seen an updated financial for 1Q 2013, my guess is that they have enough cash to buy the pre-event bond (anticipation note) and at least some reinsurance if they choose to use their assets for this purpose. But doing so will leave yet less of a cushion between their remaining assets and (a) remaining Ike obligations and (b) obligations on any new storms before one will hit the CRTF and any higher levels. What will be interesting to see is if TWIA can end up closing a deal on the BAN and on what terms given the precarious nature of the post-event funding.

  3. I am a homeowner deciding whether to renew TWIA insurance at $2900.
    Would I be paying for insurance that can not payout as promised in the case of a loss? If so, It defeats the purpose of buying insurance.
    Also, is anyone writing private hail and windstorm insurance in Jefferson County Texas. I am with Allstate and they cancelled my hail/windstorm when they pulled out of area.

    • I am not a licensed insurance agent in Texas, so I do not want to make specific recommendations on individual situations. By reading this blog and keeping up on the news, however, you, in conjunction with a good insurance agent, will be able to make the best decision for you and your family. Unfortunately, the dilemma you face is one that many on the Texas Gulf Coast need at least to be thinking about. I do not know if insurers are writing new business in Jefferson County, but actually Jefferson County is one area where TWIA, at last count, had only about 55% of the market, so I suspect there may be some alternatives. Good luck and, if anyone reading this blog, has a better answer for our friend, please feel free to stick a reply here.

  4. Pingback: Fixing TWIA for this hurricane season will require a two thirds vote

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