In a meeting on Monday, Mar. 25, the board of directors of Texas’ insurer of last resort in coastal areas was expected to discuss the organization’s dire financial condition and the possibility of placing the organization into receivership.
According to the agenda posted on its website, the board of the Texas Windstorm Insurance Association will “Review options for addressing the current financial condition of the Association and alternatives including supervision, conservation and rehabilitation in receivership.”
TWIA’s financial condition has been severely compromised by claims and subsequent claims litigation resulting from Hurricane Ike in 2008. The organization has been under supervision of the Texas Department of Insurance since early 2011.
Texas Insurance Commissioner Eleanor Kitzman has publicly acknowledged that TWIA’s financial condition is “unsustainable,” and TDI issued the following statement regarding the upcoming board meeting to discuss rehabilitation: “TDI has long had serious concerns about TWIA’s precarious financial condition. TWIA remains under administrative oversight by TDI and we will continue to take all actions necessary within our authority to protect TWIA’s policyholders. TWIA’s operations are not affected at this time.”
Still, many observers believe placing the organization into receivership is premature.
David VanDelinder, executive director of the Independent Insurance Agents of Texas, sent a letter to TWIA’s board stating that IIAT believes the placement of “TWIA in formal receivership is unwarranted at this time and detrimental to the insurance marketplace.”
There are proposals currently being considered in the Texas Legislature that “would provide immediate liquidity for TWIA and long-term, stable funding,” VanDelinder said. Lawmakers should be given time to act on these proposals, he added.
“Receivership at this time would only confuse policyholders who have no other options for windstorm insurance, and interrupt the flow of commerce on our coast unnecessarily,” VanDelinder said.
“While receivership may be a prudent course of action at some point, we believe that all current funding sources should be exhausted first and elected officials should be given time to address the situation.”
State Rep. Todd Hunter, R-Corpus Christi, recently told the Austin American Statesman that placing TWIA into receivership “should be the last possible step.”
In a list of frequently asked questions posted on its website, TDI said: “Rehabilitation is similar to a reorganization in bankruptcy, because the goal of the proceeding is for the entity to eventually be released from the proceeding and continue its operations.”
Two months before the start of hurricane season, which begins June 1, TWIA is around $183 million in the red. TDI stated that based on the association’s 2012 annual statement, released on Feb. 28, “TWIA is now insolvent. TWIA’s liabilities exceed its assets by $183 million. Allowing TWIA to continue to operate in this condition could place new policyholders in jeopardy, and could further threaten the current policyholders.”
TDI said TWIA’s “insolvency is the direct result of litigation stemming primarily from Hurricane Ike. The total overall loss from Hurricane Ike is now over $2.5 billion.”
In a March 20 meeting, TWIA’s actuarial committee voted to go forward with a proposal from Bank America/Merrill Lynch, which would provide the association with a bank anticipation note up to $500 million in pre-event funding, according to Bob Coulter, executive director of the Texas Public Finance Authority.
At the meeting, Chris Allen, a financial advisor to the TPFA, said the Bank of America “proposal is very similar to the one we received last year and actually ended up issuing. The difference this year is they do expect it to go unrated. It would be a private placement … it’s a six-month term. So it would begin in June and would have a maturity date of December 1, at which time there would be a step up rate, very similar to last year.”
TPFA representatives acknowledged, however, that the BofA/Merrill Lynch arrangement would be jeopardized if TWIA were to go into receivership.
TWIA’s ability to place reinsurance would also be uncertain in the case of receivership.
Under rehabilitation, TWIA would still be able to issue and renew policies, and existing policies would remain in effect.
In most cases, pending lawsuits against TWIA would be stayed under rehabilitation, TDI said.
As for existing and outstanding claims, “A Rehabilitation Plan would provide the process for handling claims, which would include a process requiring claimants to submit proofs of claims. All claims would then be processed by the Rehabilitator,” according to TDI.
Reported by Stephanie K. Jones, the South Central/Midwest Editor for Insurance Journal