Winds May Be Shifting as Texas Issues $500M for Insurance

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DALLAS — The Texas Public Finance Authority is preparing to issue $500 million of unrated bonds to support the Texas Windstorm Insurance Association, even as state lawmakers look for ways to eliminate the program.

Proceeds of the sale will provide liquidity and reserve funds for the windstorm insurance program, according to Lee Deviney, executive director of the TPFA, an agency that issues a large share of the state's general obligation debt and revenue bonds authorized by the legislature.

While most bonds coming from the TPFA are triple-rated, these will carry no rating and no backing by the state of Texas.

Premiums from insurance policyholders and similar revenues provide the only revenue for debt service. Hence, these bonds are identified in the preliminary official statement as speculative investments.

Texas Attorney General Greg Abbott, currently running for governor, declared last year that the state has no legal obligation to pay for any storm damage incurred by TWIA policyholders if the agency runs out of money to pay out its claims.

Abbott said that when the Legislature created TWIA it mandated that TWIA make payments on insurance claims from revenue generated by the agency.

The taxable bonds are expected to price through negotiation with a syndicate led by Bank of America Merrill Lynch the week of Sept. 22. Director Dalton Smith is lead banker on the deal with Chris Allen, senior vice president at First Southwest Co., as financial advisor.

TWIA is seeking to build its storm reserves to $3.45 billion, an amount it identifies as its upward limit in coverage. The new debt issuance, following a similar sized issue of notes in 2012, is designed to boost that reserve.

TWIA is made up of all property and casualty insurance companies authorized to write coverage in the state. The association was designed by the state legislature to be the insurer of last resort for property owners on the Texas Gulf Coast who could not otherwise obtain coverage.

The association was created by the 1971 Texas Legislature after Hurricane Celia struck the Texas coast on Aug. 3, 1970.

Under legislation passed in 2009, the association is allowed to issue up to $1 billion of bonds "per catastrophe year" to cover claims.

Six years after the last catastrophic hurricane, the debt service coverage looks fairly strong at a factor of 5.84 in 2013, up from 5.46 the year before.

However, the association is still clearing away the wreckage from hurricanes Ike and Dolly in 2008. Policyholders claimed $2.7 billion in damages, leaving the agency $183 million in the hole.

As of July 1, the association had fewer than 50 lawsuits remaining from the 9,200 filed in the wake of Dolly and Ike.

The association has reserves of approximately $100 million set aside for current and future lawsuits, according to the POS.

"The association's current strategy is to resolve all pending actions for nominal amounts but the resolution could affect the association's finances," the POS says.

The litigation over claims has set off a political tempest in the state during an election year for a new governor and lieutenant governor.

According to a deposition obtained by The Texas Tribune, the former head of the insurance association, Jim Oliver, said that two top Republican lawmakers, including current Lt. Gov. David Dewhurst, tried to pressure him into fighting more cases in court. The Republican leaders complained that the fees paid to lawyers in the settlements allowed the lawyers to donate more money to Democratic candidates in the state.

"A lot of these funds are going to the Democratic Party," Oliver recalled Dewhurst saying, per the transcript. Oliver said Dewhurst was swearing and yelling in a conference room behind the Texas Senate chamber, over which he has presided since 2003.

Dewhurst, who lost his bid for re-election this year against Republican Tea Party enthusiast and radio talk-show host Dan Patrick, told the Tribune that his goal in the meetings was not to limit funding for Democrats but to prevent settling thousands of cases that involved allegations of unfair or shabby claims processing.

Dewhurst continues to press for the elimination of the TWIA.

On Sept. 9, Dewhurst asked a state Senate committee to find a way to terminate the association.

"I've charged the Senate Business and Commerce Committee to consider options to address TWIA, which could include phasing it out," Dewhurst said in a statement. "I encourage the senators to explore ways to carefully move Texas coastal policy holders to commercial insurance carriers over time, thus avoiding a rate shock and reducing the risk of a massive financial tsunami to Texas taxpayers."

In response, the TWIA issued a statement that it will help lawmakers in any way it can in considering windstorm insurance options for policyholders along the Texas coast.

Mark Hanna, a spokesman for the Insurance Council of Texas, said insurance carriers would be willing to work with the state in looking at windstorm coverage.

TWIA premiums are maintained at low cost to the policyholder, making it difficult for so-called "voluntary" insurance providers to compete for the business on hurricane-prone coast.

TWIA was created after Hurricane Celia struck Texas in 1970 and many insurance companies quit writing policies along the coast, which led to TWIA's creation.

Development of residential and commercial properties along the coast in recent years and the withdrawal of private insurers from the coverage area since 2005 have significantly increased the association's exposure to potential losses, according to the POS.

According to studies done for the TWIA, rates would have to rise 26% for residential and 21% for commercial property for the policies to be self-sustaining.

State Rep. John Smithee, chairman of the Texas House insurance committee, told the Tribune that he agrees in principle with Dewhurst.

"TWIA, in its current state, is not a sustainable organization," he said.

At the TPFA, Deviney can offer no further guidance to potential bond buyers.

"TPFA cannot predict what a future legislature may do," he said. "The bonds will be issued pursuant to current law."

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