Texas’ attorney general says the state is under no obligation to pay outstanding claims for the insurer of last resort for coastal properties should that organization not have sufficient funds to pay its bills.

In a published opinion answering a question posed by state Rep. John Smithee of Amarillo, Attorney General Greg Abbott said the statute governing the operation the Texas Windstorm Insurance Association lays out the methods by which TWIA may go about raising funds to pay outstanding losses. Relying on the state’s coffers is not one of them.

“With the enactment of chapter 2210 of the Insurance Code, the Legislature established the exclusive methods through which excess losses shall be paid by TWIA,” Abbott’s opinion states.

“Nothing in the subchapter provides for funding by the State or through the State’s general revenue. Thus, the Legislature has elected not to create a legal obligation on behalf of the State to pay unfunded losses that cannot be paid through the methods described in chapter 2210,” according to Abbott.

TWIA has been struggling to shore up its finances after being inundated by claims and lawsuits resulting from Hurricane Ike in 2008.

The group is authorized to issue “up to $2.5 billion in public securities per catastrophe year,” Abbott said. However, debt payments on any catastrophe bonds must come from TWIA’s revenue stream generated through sources such as insurance premiums and investment income.

The financing structure includes the ability to issue up to $1 billion in Class 1 bonds, but financial markets apparently do not view TWIA’s financial condition as adequate to support that amount.

To mitigate the uncertainty surrounding the potential need to issue Class 1 bonds, TWIA is seeking to place a bond anticipation note (BAN) in the amount of $500 million from Bank of America in order to assure the bond market that the association would be able to pay off that amount in post-event bonds. If $500 million in Class 1 bonds were still not available to TWIA, even with the BAN in place, that instrument could be translated into a 5-year loan.

The problem with the BAN is that TWIA needs the approval of the Texas insurance commissioner in order to place it. Former Commissioner Eleanor Kitzman nixed the idea but current Commissioner Julia Rathgeber has said she will reconsider the plan.

“We continue to work with the Texas Department of Insurance and the Texas Public Finance Authority to explore all available funding options, including the BAN,” TWIA said in a statement emailed to Insurance Journal.

TWIA has been under TDI supervision since early 2011.

During a June 18 meeting of TWIA’s legislative and external affairs committee, the organization’s chief actuary, Jim Murphy, said with the BAN in place, TWIA “will have secured $3.45 billion of projected funding. Sources of that funding are: the CRTF [catastrophe reserve trust fund] and a small contribution from our own premiums; $500 million from the BAN itself; $1 billion in Class 2 bonds and $500 million of Class 3 bonds. That would take us up to $2.2 billion at which point the reinsurance would attach.”

Whether the BAN is place governs the amount of reinsurance available to TWIA. With the BAN, the association would be able to purchase $1.25 billion in reinsurance for the $106 million TWIA’s board authorized for that purchase. Without it, only $1 billion would be available.

With $3.45 billion in available funding, TWIA would be just short of being able to cover projected losses from a 70-year storm, Murphy said.