The board of directors of Texas’ property insurer of last resort for wind and hail in the state’s coastal counties in February set a goal of $4.2 billion in catastrophe funding for 2020. At a meeting of the Texas Windstorm Insurance Association’s board on May 12, TWIA Chief Financial Officer Jerry Fadden said the association would meet that goal via a combination of catastrophe bonds and traditional reinsurance, earnings, funds in TWIA’s Catastrophe Reserve Trust Fund (CRTF), debt and member assessments.
Fadden said the CRTF was funded at the end of March 2020 at $176.152 million, an amount that includes approximately $60 million the association added to the fund on March 30. At the end of the first quarter of 2020, TWIA had cash and short term investments of $554.4 million, which has since been reduced by the payment of $45 million that the board previously authorized to partially redeem the series 2014 bonds. The association used those bonds to pay claims from Hurricane Harvey, which hit the state in late August 2017.
‘This facility is an important part of our funding structure and we are now in the process of documenting it with the intention to close by June 1st.’
He also told the board that, as it has done annually in advance of hurricane season, the association is working on securing a $500 million line of credit for the 2020. The line of credit begins June 1 and typically is terminated at the end of December.
Fadden said at this point the cost of securing the credit is significantly higher than it has been in past years. The higher “pricing condition seems to be prevalent in the market … not specific to TWIA, but we seem to bearing the cost of relatively challenging credit markets” due to the COVID-19 crisis, he said. Basically, the cost is twice what the association paid last year, but Fadden anticipated that pricing for next year would likely decrease to a more reasonable level.
Still, Fadden said, “this facility is an important part of our funding structure and we are now in the process of documenting it with the intention to close by June 1st.” The board approved a resolution to secure the line of credit.
For the 2020 hurricane season, $2.1 billion of the planned total $4.2 billion in funding TWIA would come from TWIA’s earnings, money in the CRTF and “alternating layers of debt and member assessments as provided by statute,” Fadden said.
The association also will retain $600 million in catastrophe bonds that were issued in 2018 and 2019, and add another “catastrophe bond with a target size of approximately $200 million, so we would have a total of $800 million catastrophe bonds in the 2020 program,” he said. The remaining $1.2 billion required would come from the traditional reinsurance market.
In response to severely tightened market conditions, the Texas Legislature created TWIA in 1971 to provide wind and hail insurance for properties in coastal counties. Despite being established by the legislature, TWIA is not a state agency and does not receive funds from the state.
Most property insurers authorized to do business in Texas are required to be association members. TWIA’s board in December voted to assess member insurance companies an additional $90 million for losses from Hurricane Harvey. Member insurers had previously been assessed $282 million for Harvey losses.
Prior to the December 2019 quarterly meeting, staff had recommended a 5% increase in rates for both residential and commercial properties. That recommendation received intense negative feedback from policyholders, coastal legislators, governmental boards and businesses along the Gulf Coast who said they have yet to fully recover from the considerable damage wrought by Harvey.
TWIA’s 2019 Rate Adequacy Analysis indicated its rates were inadequate by as much as 42%. The board declined to vote on a rate increase in December and did not consider rates at its Feb. 18 meeting. TWIA has said it will defer consideration of rates until the next statutorily required rate filing in August 2020.
The average yearly cost of a TWIA residential policy is $1,600, according to information provided on the association’s website.
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