TWIA has just submitted its 2013 report card to the legislature. I hope the House Insurance Committee calls TWIA leaders on the carpet for it. In addition to exhibiting a “band played on” mentality that fails to note the grave situation facing the organization and its policyholders, it contains a graphic purporting to explain its projected funding that is simply wrong because it reflects a grave misunderstanding of the laws that govern it.
Here’s the graphic. It is found on page 23 of the annual report.
The problem is the turquoise area.
First, notice a few things.
TWIA has written off the Class 1 bonds. They do not appear on the graphic. TWIA has apparently acknowledged that not even one dime of post-event Class 1 Bonds can be sold. The reason they have done so is that the market does not believe TWIA policyholders and their premium dollars will provide a sustainable basis for repayment of bonds.
TWIA believes it has just $200 million in premiums and its Catastrophe Reserve Trust Fund to pay claims. This is less than this blog has given TWIA credit for.
TWIA believes, as we suggested earlier, that it will have $1 billion in reinsurance that will attach at $1.7 billion and that the premiums will be $106 million (a little more than we thought).
But now notice the problem. It’s the turquoise area labeled “$1 billion Class 2 Post Event Bonds.” Notice the repayment source. “Repaid by Non-Recoupable Assessments to Pool (30%) and Surcharges to Catastrophe Area P & C Policyholders (70%).” This is wrong, wrong, wrong. This source of bond repayment can not be used under Texas law when, as will occur here, the Class 1 Bonds are resold.
Doubt me? Read section 2210.6136 of the Texas Insurance Code.
Sec. 2210.6136. ALTERNATIVE SOURCES OF PAYMENT. (a) Notwithstanding any other provision of this chapter and subject to Subsection (b), on a finding by the commissioner that all or any portion of the total principal amount of Class 1 public securities authorized to be issued under Section 2210.072 cannot be issued, the commissioner, by rule or order, may cause the issuance of Class 2 public securities in a principal amount not to exceed the principal amount described by Section 2210.073(b).
How those Class 2 bonds are to be repaid is set forth in section (b) of the same statute.
(b) The commissioner shall order the repayment of the cost of Class 2 public securities issued in the manner described by Subsection (a) as follows:
(1) in the manner described by Section 2210.612(a), in an amount equal to the lesser of:
(A) $500 million; or
(B) that portion of the total principal amount of Class 1 public securities authorized to be issued under Section 2210.072 that cannot be issued, plus any costs associated with that portion; and
(2) after payment under Subdivision (1), in the manner described by Sections 2210.613(a) and (b), in an amount equal to the difference between the principal amount of public securities issued under Subsection (a) and the amount repaid in the manner described by Subdivision (1), plus any costs associated with that amount.
Thus, the method is not the 70/30 split that would be used if the Class 1 bonds had been sold and set forth in section 2210.613 of the Texas insurance Code. Instead, because the TWIA policyholders would not yet have been burdened as much as that section contemplated, the TWIA policyholders pay the first $500 million under section 2210.6136 and only then is the 70/30 split invoked on the remaining possible $500 million authorized in Class 2 securities. You can read more about this issue here and elsewhere in this blog.
And here, we can see the problem. If the market won’t lend TWIA money for Class 1 securities because it does not trust in the ability of TWIA policyholders to repay, why would it lend TWIA money for functionally identical securities that just say “Class 2 on them”? Thus, TWIA should not be counting on being able to sell Class 2 securities. And certainly not on being able to sell more than $500 million. The turquoise area should just be labeled, just as Chairman John Smithee suggested in his warning letter of May 29, 2013, to Governor Perry: “GAP.”
And the situation is worse. It’s why Chairman Smithee spoke of a $1 billion gap. For not only should the turquoise area be labeled GAP. But the gray area above it for Class 3 securities should also be labeled GAP. Read section (c) of the (in)famous section 2210.6136. It states:
(c) If Class 2 public securities are issued in the manner authorized by this section, Class 3 public securities may be issued only after Class 2 public securities have been issued in the maximum amount authorized under Section 2210.073.
If the Class 2 Alternative securities described in sections (a) and (b) don’t sell in full, then the Class 3 securities can not be sold AT ALL.
Thus, the graphic in question misleads the legislature by falsely asserting that TWIA will be able to sell Class 2 securities backed by a different pool of money than in fact will be used and by failing to note that the ability sell Class 3 securities is contingent on being able to sell every dime of $1 billion in securities whose repayment source is one that market appears already to have rejected.
Kind of a serious problem, yes? Let us hope the legislature gets to the bottom of this at the hearing today and TWIA is forced to issue a corrected report.