The Texas Windstorm Insurance Association took the advice of Rep. Mayes Middleton, R-Galveston, now Senator-elect for District 11, when it included in its Feb. 22 board meeting agenda an item to retire the 2014 public bonds. The board approved early redemption of these outstanding bonds, resulting in a savings of about $17 million through 2024.
During his remarks at the TWIA board meeting held live in Galveston at the Tremont House, with some board members attending through video conference, Middleton commended the board for pursuing the redemption of the debt that Middleton said made up about 20 percent of the cost of insurance to TWIA policyholders.
“It’s important to get rate setting correct,” said Middleton, adding that he looked forward to the interim legislative committee studying TWIA’s funding structure in the coming weeks or months, after the March primary elections.
Middleton said he expects to see lower premium as a result of TWIA retiring this high interest debt. He also said he expects even lower premium when the separation of vendors for brokering TWIA’s reinsurance and catastrophe modeling is implemented, as the legislature required through the passage of a bill he authored during the 2021 session. Middleton called reinsurance the second largest cost item paid by policyholders.
The Senator-elect appeared to be relying on a bar graph contained in TWIA’s annual report issued in mid-2021 that broke down the components of residential rates. While public securities and reinsurance made up 19.7 percent and 19.5 percent, respectively, the largest percentage of residential rates, 48.9 percent, was attributable to hurricane losses, and 14.6 percent to non-hurricane losses. Even though these percentages exceed 100 percent, the bar graph went on to show operating expense of 8.5 percent, commissions of 16.0 percent, contingency at 5.0 percent and taxes at 1.6 percent. The bar graph was being used to project the rate deficiency that would exist at year-end 2021, as the components of the rate totaled 134.1 percent.
“When TWIA’s rates are inadequate, the components will add up to more than 100 percent,” said the note on the graph.
According to a spokesperson for TWIA, when the full redemption and interim financing wipe out all bond debt, as expected by the end of 2024, the rate deficiency is expected to drop to 15 percent.
The redemption of the bonds by May 1 is possible because the TWIA board voted to eliminate the outstanding balance of the $177 million by using various fund sources. First, it is using the 2021 gain from operations of $62.9 million, which otherwise would have gone to the Catastrophe Reserve Trust Fund. Second, it is using $61.7 million from the amount available in the debt service fund as of Dec. 31, 2021.
The current January through April monthly principal deposits of about $4.5 million each to the debt service fund make up the next $18.1 million, leaving a debt balance of about $34.2 million. TWIA is currently working with Chase bank to secure interim financing for this amount, to fully retire the securities. The interim debt, which will carry a lower interest rate than the existing bonds, is expected to be retired within 12 months, said a TWIA spokesperson, meaning the debt defeasance will begin to benefit rates in 2024.
TDI approved the bond redemption prior to the board meeting. TWIA must also secure a resolution from the Texas Public Finance Authority before the early redemption can occur.
In his comments, Middleton brought another challenge to the board. He said the interim legislative committee tasked with studying TWIA’s rates would make certain that TWIA’s rates were “not just actuarially sound, but actuarially fair…. Actuarially fair, that’s what we are going for here.”
The board also received comments from two other elected officials. Rep. Alex Dominguez, D-Brownsville, urged the TWIA board to reverse its decision to increase residential and commercial rates by five percent. Dominguez reasoned that the economic hardship caused by the pandemic justified the rate rollback, adding that many Gulf Coast residents are retired and living on fixed incomes.
Rep. Todd Hunter, R-Corpus Christi, appeared by conference call and carried a similar message. Hunter said he heard negative comments about the rate hike from realtors, builders, business groups and individual rate payers. He labeled the “continual voting 5-3 against the coast” as “a little strange, odd.” He called on the board to be less insurance focused and more public focused. He called for the membership of TWIA’s Actuarial and Underwriting Committee to include representatives of rate payers.
During the regular business of the meeting, board Secretary/Treasurer Corise Morrison and Stuart Harbour, TWIA’s interim CFO, reviewed the association’s balance sheet for year-end 2021. There was a net underwriting gain of $161.7 million, less debt and other expenses, the net income for TWIA at year-end was $143.1 million. Since the year started with a $160.5 million deficit carried forward from 2020, it brought the year to an ending deficit of $26.3 million, an improved result from prior year’s indebtedness. Harbour noted that by early February 2022, TWIA realized some pension adjustments applicable to 2021, so he revised the year end deficit to $24.6 million.
Morrison said direct written premium at year-end 2021 totaled $395.1 million, which was 6.9 percent higher than 2020. The count of policies in force, 193,002, was also higher, a 4.4 percent increase over 2020. Direct losses and loss adjustment expenses for 2021 totaled $19.0 million, which was $44.0 million below the budget of $63.0 million. The lower than budgeted losses, said Morrison, reflect the 2021 reductions in estimated ultimate losses and LAE for hurricanes Ike, Harvey and other 2020 hurricane events. The relatively mild 2021 spring storm season combined to offset approximately $52 million from Hurricane Nicholas, which struck Texas as a Category 1 in mid-September.
Harbour also told the board that the 10-month installment pay arrangement with Wellington went live on Feb. 1. After an initial glitch, the system processed 204 policies in the first two weeks. The cost to TWIA for the 10-month financing plan is $115 per policy. Harbour said he expects customer take-up of the financing program to increase.
In other business the board reelected all 2021 officers for 2022: Chandra Franklin Womack, chairwoman; Georgia Neblett, vice-chairman, and Morrison, secretary/treasurer. Board member Ron Walenta told the committee that the executive offices included two coastal members and an industry representative and urged the board to consider balancing the officer positions with a member of all three groups (seacoast, inland and industry) in the future.
The board made appointments to two committees. Joining the Legislative and External Affairs Committee for the first time is Walenta, a non-seacoast representative on TWIA’s board. He joins returning committee members Mike Gerik, Tony Schrader and Neblett.
Walenta was also named to the Actuarial and Underwriting Committee. He was nominated by Neblett. Mike Gerik noted Walenta’s long career experience as a risk manager. Walenta has served as risk manager for the Dallas-Fort Worth Airport, Chili’s, and Trailways. He joins returning committee members Debbie King, Stephen Alexander, David Futterleib, Morrison, Neblett and Schrader.
The next meeting of the TWIA board will be May 17 at the Hyatt Regency in Austin. The meeting will also be available by webinar.
Editor’s note: The term “actuarially fair” may not be consistent with the statutory mission embodied in SB 1448. Part of the joint legislative committee’s job is to receive testimony from stakeholders on “funding structure and sustainability of the association.” According to a Canadian economics blog, the term “actuarially fair” means that premium is equal to claims; it makes no allowance for the administrative costs of acquiring and processing policies and claims. The interim committee is expected to conclude its work by Sept. 1, 2023.