Original Petition - Gamboa v. TWIA

- 1 -

No. ______________ RAMIRO “GAMBY” GAMBOA, § IN THE DISTRICT COURT OF Plaintiff § § v. § § TEXAS WINDSTORM INSURANCE § ASSOCIATION, RICHARD CLIFTON § TRAVIS COUNTY, TEXAS CRAIG, STEPHEN L. ELBERT, LYNDELL § HAIGOOD, MICHAEL GERIK, RON § LAWSON, GEORGIA R. NEBLETT, § MICHAEL O’MALLEY, EUGENE “GENE” § SEAMAN, and EDWARD J. SHERLOCK, III, § Defendants § _____ JUDICIAL DISTRICT

PLAINTIFF’S ORIGINAL PETITION

TO THE HONORABLE COURT:

Plaintiff, Ramiro Gamboa, respectfully submits this original petition complaining of the

Texas Windstorm Insurance Association, Richard Clifton Craig, Stephen L. Elbert, Lyndell

Haigood, Michael Gerik, Ron Lawson, Georgia R. Neblett, Michael O’Malley, Eugene “Gene”

Seaman, and Edward J. Sherlock, III, Defendants, and would show the following:

I. Discovery Control Plan

Discovery is intended to be conducted under Level 2 of Texas Rule of Civil Procedure

190.3.

II. Parties

Plaintiff, Ramiro “Gamby” Gamboa, is an individual who resides in Corpus Christi,

Nueces County, Texas. Ramiro Gamboa is insured by the Texas Windstorm Insurance

Association.

Defendant, Texas Windstorm Insurance Association, is a pool of all property and casualty

insurance companies authorized to write coverage in Texas. TWIA provides basic wind and hail

insurance coverage for Gulf Coast property owners who might otherwise be left uninsured.

3/31/2014 12:38:21 PM Amalia Rodriguez-Mendoza

District Clerk Travis County

D-1-GN-14-000946

D-1-GN-14-000946

53RD

- 2 -

TWIA may be served with process by serving the Texas Insurance Commissioner at 333

Guadalupe, Austin, Texas 78701, by certified mail, return receipt requested, as outlined in the

Texas Insurance Code section 804.201.

Defendants Richard Clifton Craig, Stephen L. Elbert, Lyndell Haigood, Michael Gerik,

Ron Lawson, Georgia R. Neblett, Michael O’Malley, Eugene “Gene” Seaman, and Edward J.

Sherlock, III, are directors of TWIA, are sued in their capacity as directors, and may be served

by mailing to each defendant by registered or certified mail, return receipt requested, a true copy

of the citation with a copy of the petition attached thereto. They may be served by mail at their

usual place of business at the principal place of business for the Texas Windstorm Insurance

Association, 5700 South Mopac Expressway, Bldg. A, Austin, Texas 78749.

III. Venue

Venue is proper in Travis County, because it is the county of TWIA’s principal of

business.

IV. Jurisdictional Statement

Plaintiff Ramiro Gamboa seeks relief because TWIA and its board of directors have

failed to properly assess insurance companies for the excess loss resulting from Hurricane Ike, in

the amount of approximately $600 million, and have shifted that cost onto policyholders instead

of the member insurance companies.

Plaintiff seeks monetary relief of $100,000 or less and nonmonetary relief.

V. Conditions Precedent

All conditions precedent have been performed or have occurred.

- 3 -

VI. Facts

Gamby Gamboa lives near the gulf coast and owns a home in Nueces County. He is

insured by the Texas Windstorm Insurance Association (TWIA).

TWIA was established by legislative mandate to provide wind and hail insurance for gulf

coast property owners in the event of catastrophic loss, such as a hurricane. TWIA provides

basic coverage unavailable in traditional markets for consumers who might otherwise be left

uninsured. (Exhibit A, TWIA Website).

This lawsuit arises because TWIA is unlawfully imposing over $600 million in losses on

its insureds that instead should be paid by the insurers.

TWIA is a “pool” of all property and casualty insurance companies authorized to write

coverage in Texas. (Exhibit A). The membership includes every authorized property insurer in

the State of Texas, except companies excluded by law. Each member must participate in the

association writings, expenses, profits, and losses in proportion to the net direct premiums of that

member during the preceding year. (Exhibit B, TWIA Statuary Financial Statements 2007-2008,

p. 10).

On September 13, 2008, Hurricane Ike struck the Texas gulf coast, causing devastating

losses. Within days the losses were estimated at $2.5 billion, which was far more than TWIA

had reserved to pay claims. TWIA had to determine how to pay the excess loss. (Exhibit C,

TWIA minutes).

That determination is governed by law. TWIA is regulated by chapter 2210 of the Texas

Insurance Code. When Ike hit in 2008, the statute required payment of excess losses from

certain sources:

(1) premiums and other revenue;

- 4 -

(2) $100 million assessment against member insurers;

(3) the catastrophe reserve fund;

(4) $200 million member assessment; and

(5) unlimited member assessments, which could be recouped through premium tax credits.

(Exhibit D, § 2210.058). The statute did not allow TWIA to pay past losses from future

premiums.

Because of the magnitude of the loss from Hurricane Ike loss, the TWIA board was

required by law to assess the member insurers for the excess loss. TWIA’s board has failed to

comply with this legal obligation and has instead shifted over $600 million of the excess loss

from the member insurers and onto the insured policyholders.

TWIA’s board has failed to comply, even though they understand that assessing members

is required by law. TWIA’s 2008 financial statement, filed after the excess losses were apparent,

states:

The Act provides that members will share in the Association’s losses on a policy year basis to the extent of their percentage of participation during the policy year involved, as determined under the provisions of the Act and the Association's Plan of Operations. In the event of any net loss for any policy year, members participating in that policy year may be assessed for their share of the loss based upon their respective participation percentages.

(Exhibit B, p. 10).

In that same report, TWIA’s independent auditors state: “The Association has authority

to assess certain property and casualty insurers underwriting business in the State of Texas under

Texas Insurance Code Section 21.49 for losses incurred during 2008.” (Exhibit B, p.5).

Consistent with this legal authority, TWIA’s executive director, Jim Oliver, requested

that the board of directors make an assessment of $830 million from the insurance carriers under

- 5 -

the 2008 TWIA statutory funding structure. Mr. Oliver noted that with cash from the trust fund

and reinsurance this assessment would allow TWIA to pay claims up to $2.5 billion. (Exhibit

C).

At the time, TWIA was governed by a nine-member board of directors. A majority were

aligned with insurers. At the September 17, 2008, meeting the four coastal representatives on the

board voted for the $830 million assessment, but the five insurance industry representatives did

not vote for the full assessment. The insurance company representatives would only approve a

$430 million assessment. (Exhibit C).

In 2009, the Legislature amended the statute to change the method for paying excess

losses, but the amendments were not retroactive. The language on payment of excess losses was

amended to provide for payment of excess losses from available reserves and amounts in the

trust fund. After that, losses are paid from three levels of public securities: Class 1, up to $1

billion, to be repaid from premium revenue; Class 2 up to $1 billion, to be repaid 30% from

member assessments and 70% from premium surcharges on insurance policies; and Class 3 up to

$500 million to be repaid from member assessments. (Exhibit E).

This change authorizes using current and future premium income to pay past losses,

where the old statute did not allow this. There is nothing in the new statute that applies it

retroactively to an existing loss like Hurricane Ike.

Under this new funding scheme, TWIA’s policyholders are liable to pay an extra $700

million added to their policy premiums in any catastrophe year. (Exhibit F, p. 10).

After the 2009 amendments, TWIA continued to acknowledge that the excess loss from

Hurricane Ike would be paid by insurance company assessments under the old law. TWIA’s

2009 annual statement said: “The Association has authority to assess certain property and

- 6 -

casualty insurers underwriting the business in the state of Texas under Texas Insurance Code

Section 21.49 for losses incurred in 2008.” (Exhibit F, p. 10). Under that authority, TWIA did

in fact assess its members. TWIA’s report explained:

Prior to the enactment of HB 4409 in 2009, member companies were assessed to the extent that the Association's Board of Directors determined that available funds were not sufficient to satisfy the obligations of the Association. During 2009 and 2008, the Association assessed its members approximately $905,000 and $530 million, respectively.

(Exhibit F, p. 13).

The TWIA Board was specifically advised that current and future premiums could not be

used to pay the excess Hurricane Ike loss. On March 21, 2011, Texas Insurance Commissioner

Mike Geeslin wrote a letter to TWIA, as the result of a legislative inquiry that specifically asked,

“could the Association use current premium income to pay for Hurricane Ike and Dolly losses?”

After analyzing the 2009 legislation (HB 4409), the Commissioner determined that assessments

were proper, instead of using current premium income. Commissioner Geeslin wrote:

As the losses from Hurricane Ike and Dolly are obligations and liabilities that existed prior to the effective date of HB 4409, we believe the funding mechanism for such losses is contained in Chapter 2210 before it was amended by HB 4409 (i.e. assessment of the companies) ... [.] It appears that current premium dollars should not be used to pay claim losses from Hurricane Ike and Dolly.

(Exhibit G).

TWIA’s general manager John Polak wrote a memo to the Board raising the issue. No

action was taken. (Exhibit H, p. 3).

At the June 28, 2011, Board meeting, an audit was presented, and TWIA’s auditing

company noted: “In the event of a net loss in any policy year prior to January 1, 2009, members

participating in that policy year may be assessed for their share of the loss based upon their

respective participation percentages.” No action was taken by the Board to assess members.

(Exhibit H, p. 3).

- 7 -

Instead, the Board allowed TWIA to unlawfully use premiums for post-2008 years to pay

Ike claims. Commissioner Geeslin again wrote to the TWIA Board, on August 12, 2011,

addressing the assessment issue. He wrote:

In my letter to the Board of Directors (Board) dated March 21, 2011, I expressed concerns related to the proper use of current premium dollars and requested that the Board address that issue as well as the 2008 Hurricane Ike losses. I understand that those issues are still outstanding and that the Board is seeking legal guidance.

Also, of substantial interests are issues related to the resolution of

Hurricane Ike losses and funding. These include, but are not limited to, the potential assessment of member companies for 2008 losses, and accounting for 2009 through 2011 annual premium dollars that have been used to pay Ike claims. How these matters are resolved will have an impact on the level of public trust of TWIA ... I believe that at the next Board meeting, the Board should have all available information from counsel and TWIA staff necessary to vote on and resolve these issues.

(Exhibit I).

After that, assessment ceased to be discussed at board meetings throughout 2012. As a

result, several concerned coastal legislators wrote to the new Texas Insurance Commissioner,

Eleanor Kitzman. These included Joe Deshotel, Craig Eiland, Abel Herrero, Todd Hunter, Eddie

Lucio, III, and Allan Ritter. All the TWIA board members were sent copies of the letter, which

stated:

What the Board should do, as has long been advocated by Mike Geeslin, the previous Insurance Commissioner, as well as coastal members of the Board, is assess the insurance companies under the law applicable to insurance policies in effect in September 2008.

(Exhibit H, p. 1). The legislators noted that TWIA had spent approximately $316 million dollars in

premiums from 2009, 2010, 2011, and 2012 to resolve 2008 Hurricane Ike claims and had set

aside an additional $330 million from premiums to pay for the remaining claims. They requested

- 8 -

that the Board take action to assess the member companies and put $600 million in the trust fund.

(Exhibit H, p. 4).

Ultimately, at the August 13, 2013, meeting the Board decided against assessments,

leaving the Ike claims to be paid from post-Ike premiums. The Board deadlocked, with the four

insurance industry board members voting not to assess the insurers. (Exhibit J, p. 6-8).

Thus, this lawsuit is necessary to compel TWIA and its Board to comply with their legal

duty to assess the insurers for the excess loss from Hurricane Ike.

Policyholders are harmed by the unlawful use of current premiums to pay 2008 Ike

claims. Because TWIA and the board have used post-2008 premiums to pay Ike claims, the

balance in the trust fund set aside for future claims is depleted. Every dollar of current premium

that is diverted to pay 2008 Ike claims is a dollar that won’t be available to pay future claims.

Further, under the new funding system, when the reserved funds are insufficient TWIA

issues bonds – 70% of which are repaid by a premium assessment on policyholders. Every

dollar spent on Ike claims means that current and future policyholders pay premium assessments

a dollar sooner.

In addition, current premiums are higher because they have to be used to fund the reserve

that has been unlawfully depleted to pay Ike claims.

The insurance companies profit to the same extent that policyholders are harmed, because

the policyholders are paying the insurers’ debt.

VII. Declaratory Judgment

Plaintiff brings this suit for a declaratory judgment under Tex. Civ. Prac. & Rem. Code

sections 37.004 and 37.009. Plaintiff asks the Court for a declaration that TWIA and its board

are required to assess member insurers for the excess loss from Hurricane Ike under the law as it

- 9 -

existed in 2008. Declaratory relief is necessary because the Defendants have violated their

statutory duties regarding payment of excess losses, by paying the 2008 Ike loss with later

premiums.

VIII. Breach of Contract

The law as it existed in 2008 was incorporated into each policy issued by TWIA. By the

failure to assess insurers and the decision to instead use policyholder premiums to pay losses for

Hurricane Ike, resulting in premium overcharges to Plaintiff, TWIA has breached its contract

with Plaintiff. Plaintiff’s claim was presented to Defendants, and they failed to act for more than

thirty days.

IX. Mandamus Relief

TWIA and its board members have a nondiscretionary legal duty to assess member

insurers for the 2008 Hurricane Ike loss. Plaintiff and others have demanded performance.

TWIA and its board have refused. Plaintiff therefore seeks a writ of mandamus compelling

TWIA and its board members to perform their legal duty to assess members.

X. Damages

As a direct result of Defendants’ conduct Plaintiff has suffered actual damages, which he

is entitled to recover.

XI. Attorneys’ Fees

Pursuant to Texas Civil Practices & Remedies Code sections 38.001 and 37.009, Plaintiff

seeks recovery of his reasonable and necessary attorneys’ fees and court costs.

XII. Jury Demand

Plaintiff requests that a jury decide this case, as allowed by Texas Rule of Civil

Procedure 216. The appropriate jury fee has been paid.

- 10 -

XIII. Prayer

Plaintiff respectfully prays that the Defendants be cited to appear and answer and that

upon final trial Plaintiff have judgment as follows:

a. declaratory relief;

b. mandamus relief;

c. monetary relief for actual damages caused by TWIA’s conduct;

d. prejudgment and postjudgment interest as provided by law;

e. reasonable attorneys’ fees;

f. court costs; and

g. such other and further relief to which Plaintiff may be justly entitled.

Respectfully submitted, /s/ Mark L. Kincaid

_______________________________________ MARK L. KINCAID State Bar No. 11431300 SUZETTE E. SELDEN State Bar No. 24056292 GEORGE BROTHERS KINCAID & HORTON, L.L.P. 114 West 7th Street, Suite 1100 Austin, Texas 78701 (512) 495-1400 (512) 499-0094 fax ATTORNEYS FOR PLAINTIFF

3/25/14, 3:17 PMHome | Texas Windstorm Association | TWIA

Page 1 of 2http://www.twia.org/Home.aspx

COASTAL STORM ACTIVITY

If your property has been damaged byrecent wind or hail storm eventsplease call your agent or the TexasWindstorm Insurance Association at800-788-8247 and follow prompts toreport your claim as soon as possible. Once we are aware of your claim wewill assign an adjuster who willcontact you as quickly as possible. Ifnecessary, please make any minorrepairs to protect your property fromfurther loss and keep receipts for anywork. Please do not begin makingpermanent repairs until a TWIAassigned adjuster has contacted youand inspected your property. Onceyou have reported the loss you maybe assured we will process your claimas quickly as possible.

Policyholders

TWIA offers a Policyholder Portal thatprovides our policyholders directaccess to information about theirclaims. You can get claim informationsuch as loss payments issued,replacement depreciation holdbacks,and contact information for youradjuster and agent. To register forand use this portal, be sure to haveyour policy number and claim numberhandy.

Policyholder User Guide

Adjusters

Follow these links to information foradjusters about TWIA claimsprocessing.

Agents

The Agents section of this website isdesigned to help agents conductbusiness with TWIA.

When a storm is impending or recent,click the "Agent Alerts" button belowfor the latest updates from TWIA.

Use the "Agent Login" button to enterthe Agent Portal, where agents canquote TWIA coverages, submit policyapplications, or file TWIA claims onbehalf of their clients.

Search

Home Policyholders Adjusters Agents House Bill 3 Employment News Contact Us

Adjuster Bulletins

Adjuster Events & Workshops

TWIA

The Texas Windstorm InsuranceAssociation (TWIA) was establishedby legislative mandate to providewind and hail insurance for Texas GulfCoast property owners in the event ofcatastrophic loss. We provide "basic"coverage unavailable in traditionalmarkets for consumers who mightotherwise be left uninsured.

TWIA Instructions and Guidelines Manual

Agent Bulletins

Coverage & Eligibility

E-Quote Help

Hurricane Binding Procedures

More about TWIA

About TWIA

News & Upcoming Events

Helpful Links

NEW: A special meeting of the Board ofDirectors of Texas Windstorm InsuranceAssociation is scheduled for Monday,March 31 at 1:00 pm at 5700 SouthMoPac Bldg A, Austin, TX 78749. Pleaseclick here for the agenda. Please clickhere to follow the meeting via audio link.(Note: Silverlight installation required.)

TWIA Disavows Culture of RacismTWIA Releases Newly DiscoveredPotentially Offensive Emails to LitigatorSteve Mostyn.

TWIA Clearinghouse Feasibility Study

SB1702 eQuote Agent Bulletin

TWIA Annual Report Card - June 1, 2013

Residential / Commercial AdjusterCertification

TWIA Claims Key Performance Indicators- January 2014

TWIA Board of Directors' Biennial Report- December 2012

TWIA Customer Care Survey - Claims

TWIA Customer Care Survey - Policies

Information Regarding the PublicInformation Act

TDI

Crown Weather

NOAA (National Hurricane Center)

Weather Underground

Texas FAIR Plan Association

Commercial Replacement Cost Calculator

Residential Replacement Cost Calculator

Wellington Premium Finance (formerlyknown as CG Premium Finance, Inc.)

http://www.twia.org/

http://www.twia.org/Policyholders.aspx

http://www.twia.org/Portals/0/Documents/PolicyHolderUserGuide.pdf

https://portal.twia.org/policyHolderPortal/default.jsf

http://www.twia.org/Claims/tabid/54/Default.aspx

http://www.twia.org/Agents.aspx

http://www.twia.org/Agents/AgentAlerts.aspx

https://portal.twia.org/twia/do/login

http://www.twia.org/Home.aspx


http://www.twia.org/Adjusters.aspx


http://www.twia.org/HouseBill3.aspx

http://www.twia.org/Employment.aspx

http://www.twia.org/News.aspx

http://www.twia.org/ContactUs.aspx

http://www.twia.org/Adjusters/AdjusterBulletins.aspx

http://www.twia.org/Claims/AdjustorEventsandPrograms/tabid/60/Default.aspx

http://www.twia.org/AboutTWIA/tabid/56/Default.aspx

http://www.twia.org/Agents/DocumentsDownloads.aspx#Instructions_and_Guidelines

http://www.twia.org/LinkClick.aspx?link=95&tabid=53

http://www.twia.org/Agents/CoverageEligibility.aspx

http://www.twia.org/Agents/EQuoteFAQsManuals.aspx

http://www.twia.org/Portals/0/Documents/Hurricane_Binding_Procedures.pdf

http://www.twia.org/AboutTWIA/tabid/56/Default.aspx

http://www.twia.org/LinkClick.aspx?link=56&tabid=53

http://www.twia.org/Portals/0/Documents/AgendaTWIABOD033114.pdf

http://www.twia.org/Portals/0/Documents/TWIA_Releases_New_Emails.pdf

http://www.twia.org/LinkClick.aspx?fileticket=8X8PhX9bGKU%3d&tabid=53

http://www.twia.org/Portals/0/Documents/SB1702_EQuote_Agent_Bulletin.pdf

http://www.twia.org/Portals/0/Documents/2013_TWIA_Annual_Report_Card.pdf

http://test.twia.org/Adjusters/AdjusterEventsTraining.aspx

http://www.twia.org/Portals/0/Documents/Claims_KPI_January_2014.pdf

http://www.twia.org/Portals/0/Documents/TWIA%20Biennial%20Report%20December%202012.pdf

https://www.research.net/s/TWIA

https://www.surveymonkey.com/s/XJ79CML

http://www.twia.org/Portals/0/Documents/PIC_Announcement.pdf

http://www.tdi.texas.gov/

http://www.crownweather.com/?page_id=29

http://www.nhc.noaa.gov/

http://www.wunderground.com/

http://www.texasfairplan.org/

https://bvslight.msbexpress.net/TexasWindstorm/

https://rctlite1.msbexpress.net/TexasFair/

http://www.cgpremiumfinance.com/

cgonzalez

Typewritten Text

cgonzalez

Typewritten Text

EXHIBIT A

cgonzalez

Typewritten Text

3/25/14, 3:17 PMHome | Texas Windstorm Association | TWIA

Page 2 of 2http://www.twia.org/Home.aspx

5700 S. Mopac Expy | Bldg. A | Austin, TX 78749 | (512)899-4900 | Underwriting Fax (512) 899-4950 | Claims Fax (512) 899-4953© 2009 Texas Windstorm Insurance Association, All Rights Reserved |Privacy & Legal Information

known as CG Premium Finance, Inc.)

Office of Public Insurance Counsel

FEMA

TWIA Plan of Operation

Social Media Disclaimer

http://www.twia.org/PrivacyLegal.aspx

http://www.cgpremiumfinance.com/

http://www.opic.state.tx.us/

http://www.fema.gov/

http://info.sos.state.tx.us/pls/pub/readtac$ext.ViewTAC?tac_view=5&ti=28&pt=1&ch=5&sch=E

https://twitter.com/TXWindstormIns

http://www.twia.org/Portals/0/Documents/socialmedia.pdf

3/25/14, 3:17 PMAbout TWIA

Page 1 of 2http://www.twia.org/AboutTWIA/tabid/56/Default.aspx

About TWIA

Search

Home Policyholders Adjusters Agents House Bill 3 Employment News Contact Us

Member Companies

TWIA & TDI

Public Financial Information

About TWIA

TWIA's Purpose

When Hurricane Celia struck the Texas coast on August 3, 1970, many insurancecompanies ceased to write business in this region. To protect consumers, the statestepped in and in 1971 created the Texas Catastrophe Property Insurance Association(now called the Texas Windstorm Insurance Association).

Texas Windstorm Insurance Association (TWIA) is a 'pool' of all property and casualty(P&C) insurance companies authorized to write coverage in Texas. TWIA provides basicwind and hail insurance coverage for Gulf Coast property owners who might otherwisebe left uninsured. Because TWIA is the provider of last resort, we do not try to expandour customer base or actively compete against private insurance providers. Chapter2210 of the Texas Insurance Code defines the structure of TWIA.

Mission Statement

The Texas Windstorm Insurance Association (TWIA) is the state's insurer of last resortfor wind and hail coverage in the fourteen (14) coastal counties and parts of HarrisCounty (east of Highway 146). TWIA provides wind and hail coverage when insurancecompanies exclude it from their homeowners and other property policies sold to coastalresidents. TWIA employees are committed to promote hurricane safety and education,together with the development and enforcement of coastal building codes, in an effortto save lives and property. We strive to achieve the highest standards of personal andbusiness ethics and, in a positive working environment, are dedicated to providingefficient, friendly and effective customer service.

Coverage

TWIA is similar to other insurance carriers in that we have a written contract thatspecifies the extent and restrictions of the insurance coverage we provide. We collectpremiums and pay valid claims. Our policies are distributed to policyholders owningproperty in 14 first-tier counties (and parts of Harris County) along the Texas Gulf Coastthrough insurance agents, brokers and direct writers.

Traditional, for-profit insurance companies must assess risk differently than we do.Generally, when estimated risk is low, traditional markets provide windstorm coveragefor high-risk areas. They may withdraw from this territory after catastrophic lossesoccur. When risk is higher and traditional markets withdraw, TWIA absorb policies nolonger written by other carriers. Because we are a provider of last resort, it is very likelythat we will not have the most extensive coverage or the lowest prices.

Employees

TWIA employees are committed to promoting hurricane safety and education and thedevelopment and enforcement of coastal building codes in an effort to save lives and

http://www.twia.org/

http://www.twia.org/Home.aspx


http://www.twia.org/Adjusters.aspx


http://www.twia.org/HouseBill3.aspx

http://www.twia.org/Employment.aspx

http://www.twia.org/News.aspx

http://www.twia.org/ContactUs.aspx

http://www.twia.org/AboutTWIA/MemberCompanies.aspx

http://www.twia.org/AboutTWIA/TWIATDI.aspx

http://www.twia.org/AboutTWIA/PublicFinancialInformation.aspx

http://www.statutes.legis.state.tx.us/Docs/IN/htm/IN.2210.htm#2210.001

http://www.twia.org/Agents/CoverageEligibility.aspx

http://www.twia.org/Employment/tabid/57/Default.aspx

3/25/14, 3:17 PMAbout TWIA

Page 2 of 2http://www.twia.org/AboutTWIA/tabid/56/Default.aspx

5700 S. Mopac Expy | Bldg. A | Austin, TX 78749 | (512)899-4900 | Underwriting Fax (512) 899-4950 | Claims Fax (512) 899-4953© 2009 Texas Windstorm Insurance Association, All Rights Reserved |Privacy & Legal Information

development and enforcement of coastal building codes in an effort to save lives andproperty. We strive to achieve the highest standards of personal and business ethics in apositive working environment and are dedicated to providing efficient, friendly andeffective customer service.

Agents for Insureds

One way that TWIA differs from other carriers is that we do not have agents contractedto sell policies for us. By state statute, agents properly licensed through the TexasDepartment of Insurance (TDI) represent the insured (and not TWIA) in the insurance-buying transaction for coverage placed with TWIA. This also means agents have nobinding authority on behalf of TWIA, and only TWIA employees can bind coverage onbehalf of the TWIA.

Board of Directors

TWIA is governed by a 10-member board of directors. The board meets on a quarterlybasis.

http://www.twia.org/PrivacyLegal.aspx

http://www.twia.org/Agents/tabid/55/Default.aspx

http://www.tdi.texas.gov/

"

Texas Windstorm Insurance Association

I-~~~, ~-_._ - __ ~~_ -- --- - --- --- ". - . -.

Statutory Financial Statements Years Ended December 31, 2008 and 2007

ct ..... Calhoun, Thomsof1+/Vlatza, LLP Certified Public Accoun t ants

l I

~ I ;

!

!

! L

! I •

~ ____ ~ _____________ ~. ___ l

cgonzalez

Typewritten Text

EXHIBIT B


Statutory Financial Statements Years Ended December 31,2008 and 2007

Texas Windstorm Insurance Association ·

Accountants' letter of qualifications

Independent auditors' report

Statutory financial statements Statements of admitted assets, liabilities, surplus and other funds Statements of income Statements of changes in surplus and other funds Statements of cash flows Summary of significant accounting policies Notes to statutory financial statements

Independent auditors' report on supplemental material

Supplemental material Summary investment schedule Supplemental investment risk interrogatories Reinsurance interrogatories

Contents

3-4

5

6 7 8 9

10-13 14-25

26

27-28 29

30-32

2

ctm Calhoun, Thomson+fv1atza, LLP Certified Public Accountants

Accountants' Letter of Qualifications

Board of Directors Texas \Vindstonn Insurance Association

9500 ArboTl:tum Blvd., Suite 120 A .. "tin J Texas 78759

Phone: 512.439.8400 Fax! 512.439 .8401

www.ct:mtlp.com

We have audited, ' ill accordance with auditing standards generally accepted in the United States of America, the statutory financial statements of TexasWindstonn Insurance Association (the "Association") for the years ended December 31, 2008 and 2007, and have issued Ollr repolt thereon dated June 23, 2009. Tn C01U1ection therewith"ve advise yqu as follows:

a. We are independent cel1itled public accountants with respect to the Association and confonl1 to the standards of the accounting profession as contained in the Code of Professional Conduct and pronouncements of the American Institute of Celtifled Public Accountants, and the Rules of Professional Conduct of the Texas Board of Public Accountancy.

b. The engagement partner and engagement manager, who are certified public accountants, have 16 years and 11 years, respectively, of experience in pliblic accounting and are experienced in auditing insurance enterprises. Members of the engagement team, most of whom have had experience in auditing insurance enterprises and most of whom are certified public accountants, were assigned to perform taskS conunensurate with their training and experience.

c. \Ve understand that the Association intends to file its audited statutory financial statements and our report thereon with the Texas Department of Insurance and that the Insurance Conunissioner of that state \V'ill be relying on that infonnation in monitoring and regulating the statutory financial condition of the Association.

While \\;e understand that ail objective 0 f issuing a report on the statutory tlmmcial statemellts is to satisfy regulatory requirements, our audit was not planned to satisfy alJobjectives or responsibilities of insurance regulators. In this context, the Association and Insurance Conunissioner should understa11d that the objective of an audit of statutory financial statements in accordance with auditing standards generally accepted in the United States of America is to fonn an opinion and issue a report on whether the statutory financial statements present fairly, i:n all material respects, the admitted assets, Liabilities, surplus and other funds, results of operations and cash nows in confonuity with accoullting practices prescri.bed or pennitted by the Texas Department of Insurance. Consequently, under auditing standards generally accepted in the United States of America, we have the responsibility, within the inherent limitations of the auditing process, to plan and perfoml our audit to obtain ['easonable assurance about whether the statutory financial statements are free of material misstatement, whether caused by eITor or fraud, and to exercise due professional care in the conduct of the audit. The concept. ofselective testing of the da,ta being audited, which involves judb'111eilt both as to tllenUlnber of transactions to be audited and the areas to be tested, has been generally accepted as a valld and sufticienl basis for an auditor to express an opinion oil financial statements. Audit procedures that are etfective for detecting eITors, if they exist, may be ineffective for detecting misstatemerits resulting from fraud. Because of th~ characteristics of fraud, parlicularly those illvolving concealment and falsified documentation (including forgery), a properly phmned and perfonned audit may not detect a material misstatement resulting from fraud. In addition, an audit does not address the possibility

3

that material misstatements resulting from fraud may occur in the. future. AlsQ, our use of professional juclb'1llent and the assessment of materiality for the purpose of our audit means that maHcrs may exist that would ba\'e been assessed differently by the Insurance Commissioner.

It is the responsibility of the management of the Associa tion to adopt sound accounting policies, to mailliaillan adequate and effective system of accollnts, ~ll1d to establish and maintam an internal control structure that \\"iLl, among other things. prm-ide reasonable, but not absolute. · assurance that assets are safeguardeclagainst loss from unauthtmzed use or disposition 3ndtbat transa,ctions are executed in accordance with management's authorization and recorded properly to permit the preparation of financial statements in conformity with accounting practices prescribed or permitted. by the Texas' Depm1ment of Insurance ,

The Insurance Commissioner should ex.ercise due diligence to obtain whale\ er other infonnatiol1 thal m<lf bo.! 11e~ essary for the purpose of monitoring and regulating the statutory financial position of insurers and should not rely solely upon the lIldependent auditor's report,

d_ We will retain the workpapersprepared iIi the conduct oC our audit until the Texas Department of Insurance has tIled a Repon ofEx.lmination cO\ ering 2008, but not ionger than se\.'ell years , After notification to the AssocitJ.tion, we will make the workpapers a\-aiLable for review by the Texas Depm1ment of Insurance at the oftlccs of the instlrer, at oUr offices, at the InsuranCe Department or at any other reasonable place designated by the Insurance Commissioner: Furthermore,. in the conduct of the aforementioned periodic revlew by the Texas Department of Insurance, photocopies of pertinent audit working papers may be made (under the control of the accountant) and such copies may bereta ined by the Texas Department of Insurance,

e. Theengagelttent partn.er has served in that capacity \\ith respect to the .Associatio[l since 200-1-, is licensed by the Te;.;.as Board of Public Accountancy, and is a i11ember in good standing of the· AmeJ;ican Institute of Certified Public Accountants ,

f. To the best of our knowleclge and belief, we are il1 compliance with rlle requirements of section 7 of the NAIC's Model Rufe (Regulatibn) Requit' ing: AlUlUal Audited Financial Reports regarding qualifications of independent ce11ified public accountants,

This letter is intended solely for the inf0l111atiOlland use of the Texas Department ofInsuranceand is not intendecl to be and should notbe used by anyone other than these specified pa~ties ,

~ f .

June 23 , 2009

" 'x ,. .~ .. . ! : \

-'.,\ I I I .

/ 1'\ )\ '7J r -~ _ '. ' I / I P .,....---(

4

ctm Calhoun} Thomson+Matza, LLP Certified FLcbUc Accountants

Independent Auditors' Report

Board of Directors Texas \Vindstorm Insurance Association Austin, Texas

9500 Arbr,eturn Blvd., Suit", 120 Austin} Texas 7 ~75S

Phone, 512.439.8400 Fax: 512.4J9.0401

www.etmUp.eom

We have audited the accompanying statutory statements of adll1itted assets, liabilities,surplus aild other funds of Texas Windstonl1 Inst~raLlce Association (the "Association") as of Decetnber31, 2008 and 2007 and the related statutory statements of income and changes in surplus and other funds, alld ·cash flml/s for the years then ended. These financial statements are the responsibility of the Association's management. Our responsibility is to express an opinion on these financial statements based on our audits.

\Ve conducted our audits.in accordance with auditing standards generally accepted in the United States of America. Those standards require that \veplan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. . Annudit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressinganopinioll on the ctTectiveness of the Association's internal control over financial reponing. Accordingly, we express no>such opinion. An auditalsoinc1udes examining. on a test basis, evidence supporting the amounts and disclosures in the fin::ltlcial statements, assessing the accounting principles used and significant estimates made by lrtnnagemelit, as ,,"ell as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As desclibedmore fully in the Summary of Significant Accounting Policies ~ "Basis of Accounting", these financial statements were prepared in conformity with accounting practices prescribed orpennitted by the Texas Department of Insurance, which is a comprehensive basis of accounting other than accounting principles generally accepted in the United States of America.

On September 13, 2008 Hurricane Ike struck the gulf coast of Texas. Claims attributable to this hurricane contributed greatly to the Association's $190.6 1l1i II ion net loss for 2008. The Association has authority to assess certain property and casualty insurers underwriting business in the state of Texas under Texas Insurance Code Section 21.49 for losses incurred during 2008. However, if another major claim eyent occurs in the future, itcould have a seyere impact on the finam:ial condition of the Association.

In our opinion, the staMOl), nnancial statements refetTed to above present fairly, in all material respects, the admitted assets, Liabilities, surplus and other funds of the Texas Windstonl1 Insurance Association at December 31, 2.008 and 2007, and the results of its operations and its cash flows for the years then ended, on the basis of accounting described in the Summary of Significant Accounting Policies - "Basis of Accounting".

This report is intended solely for the infonnation and use by the Board of Directors alld the management of Texas \Vindstoml Insurance Association and for filillg with the Texas Depaltment oflnsurance and is not intended to be and should not be used by anyone other than these specified panies. Howe\.·er, this report is a matter of public retonl .and its distribution is notlimited.

} .' r"'· , , '-'--- "---

5


Statutory Statements of Admitted Assets, Liabilities, Surplus and Other Funds

December 31, 2008 2007

Admitted Assets

Cash and short-term investments $ 831,456,183 $ 214,201,564 Receivable from affiliate 485,334 108,559 Premiums receivable 292,178 135,598 Furniture and equipment, net 1,530,373 971,744 Federal income tax recoverable 4,671,812 530,000 Member assessments receivable 3,2421804 965

$ 841,678,684 $ 215,948,430

Liabilities, Surplus and Other Funds

Liabilities: Loss and loss adjustment expenses $ 395,196,680 $ 10,575,903 Other expenses payable 891,316 264,950 Other taxes, licenses and fees 1,058,346 2,759,400 Unearned premiums, net of ceded unearned premiums (7,058,946) 80,694,900 Advanced premiums 10,063,456 7,637,661 Ceded reinsurance premiums payable, net of ceding commissions 91,506,250 39,594,372 Funds held under reinsurance treaties 540,542,325 Amounts withheld or retained for account of others 90,438 171,471 Statutory fund ~ayable 74,335,805

Total liabilities 1,032,289,865 216,034,462

Commitments and contingencies (Notes 7, 8,9, 12 and 13)

Surplus and other funds: Unassigned deficit {190,611,181} {86,032}

$ 841 ,678,684 $ 215,948,430

See accompanying summary of significant accounting policies and notes to statutory financial statements.

6


Statutory Statements of Income

Years ended December 31, 2008 2007

Underwriting income: Premiums earned $ 321,936,632 $ 264,889,629 Premiums ceded {253,130z140} {l29,047,383~

Net 2remiums earned 68,806,492 135,842,246

Deductions: Losses and loss expenses incurred 1,215,124,201 17,985,165 Other underwriting expenses incurred:

Commissions 32,821,433 33,691,750 General expenses 14,742,468 12,182,633 Premium and maintenance taxes 6,195,001 5,893,571

Total underwriting deductions 1,268,883,103 69,753,119

Net underwriting (loss) gain (1,200,076,611) 66,089,127

Investment income: Net investment income earned 6,009,349 8,857,683

Other income: J\ssessmentincome 530,000,000 Statutory fund income 469,281,450 Other {2,284} 2,890

Total other income 999,279,166 2,890

Net (loss) income before statutory fund cost and federal income tax (benefit) expense (194,788,096) 74,949,700

Statutory fund cost 74,335,805

Net (loss) income before federal income tax (benefit) expense (194,788,096) 613,895 Federal income tax {benefit} eX2ense {4,141,812} 610,000

Net ~loss~ income $ p90,646,284~ $ 3,895


7


Statutory Statements Changes In Surplus and Other Funds

Balance at January 1,2007 Net income Change in deferred income taxes Change in nonadmitted assets

Balance at December 31, 2007 Net loss Change in deferred income taxes Change in nonadmitted assets Other

Balance at December 31, 2008

Unassigned Deficit

$ (86,032) 3,895

403,463 (407,358)

(86,032) (190,646,284 )

62,063,302 (61,945,055)

2,888

$ (190,611,181)

8


Statutory Statements of Cash Flows


Cash from operations: Premiums collected, net of reinsurance $ 35,374,591 $ 154,062,109 Net investment income 6,009,349 8,857,683 Miscellaneous income 999,282,054 Benefit and loss related payments (739,995,536) (18,377,944) Commissions, expenses paid and aggregate write-ins for

deductions (144,883,952) (131,470,728) Federal income taxes 2aid (4, 140,000}

Net cash from 02erations 155,786,506 8,931,120

Cash from financing and miscellaneous sources: Other cash 2rovided 461,468,113 65,856,521

Net cash from financing and miscellaneous sources 461,468,113 65,856,521

Net change in cash and short-term investments 617,254,619 74,787,641 Cash and short-term investments, beginning of year 214,201,564 139,413,923

Cash and short-term investments, end of year $ 831,456,183 $ 214,201,564

See accompanying summary of significant accounting policies and notes to statutoryflnancial statements.

9


Summary of Significant Accounting Policies

Nature of Business Texas Windstorm Insurance Association (the "Association") was created by the Texas Legislature when it enacted Article 21.49 (the "Act"), as amended, of the Texas Insurance Code. The purpose of the Act is to provide a method whereby adequate windstorm, hail and fire insurance may be obtained in certain designated counties located in the gulf coast region of the State of Texas. Presently, only windstorm and hail coverage is provided by the Association. The membership of the Association includes every property insurer authorized to write property insurance in the State of Texas, except companies that are excluded by law. The Act provides that members will share in the Association's losses on a policy year basis to the extent of their percentage of participation during the policy year involved, as determined under the provisions of the Act and the Association's Plan of Operations. In the event of a net loss for any policy year, members participating in that policy year may be assessed for their share of the loss based upon their respective participation percentages.

Basis of Accounting The accompanying financial statements have been prepared on a statutory basis in accordance with accounting practices prescribed or permitted by the Texas Department of Insurance. Prescribed statutory accounting practices include state laws, regulations and general administrative rules applicable to all insurance companies domiciled in the State of Texas and the National Association of Insurance Commissioners' ("NAIC") Accounting Practices and Procedures Manual. Permitted statutory practices include practices not prescribed but allowed by the Texas Department of Insurance.

A difference between Texas prescribed practices and NAIC statutory accounting practices, as they relate to the Association, is that furniture, labor-saving devices, machines, and all other office equipment may be an admitted asset depreciated in full not to exceed 5 years. NAIC statutory accounting practice classifies these assets as non-admitted. The effect of admitting these assets is as follows:

December 31, 2008 2007

Unassigned deficit, as reported $ (190,611,181) $ (86,032) Effect of Texas prescribed practices:

Admitted furniture and equipment (405,614) (370,530) Effect of Texas 2ermitted 2ractices

Unassi~ned deficit, NAIC SAP basis $ p91,016,795~ $ ~456,562~

10



Significant differences between statutory accounting practices and accounting principles generally accepted in the United States of America (ltGAAPlt), as they relate to the Association include the following:

a) Certain assets designated as "non-admitted assets" are charged directly against surplus rather than capitalized and charged to income as used. These include certain fixed assets, prepaid expenses and other assets.

b) Loss and loss adjustment expense reserves are presented net of related reinsurance rather than on a gross basis.

c) Commissions and other acquisition costs relating to issuance of new policies are expensed as incurred rather than deferred and amortized over the period covered by the policies.

d) Defined pension liability excludes non-vested employees' rather than including vested and nonvested employee obligations.

e) The statement of cash flows represent cash balances, cash equivalents and short-term investments with initial maturities of one year or less rather than cash and cash equivalents with initial maturities of three months or less.

f) Deferred income taxes are limited by an admissibility formula as opposed to using the "more likely than not" standard. Also, changes in the net deferred income taxes are reflected in the statutory statements of changes in surplus and other funds rather than reflected in the statement of income.

Use of Significant Estimates The preparation of financial statements in accordance with statutory accounting practices requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Short-Term Investments Short-term investments are recorded at cost which approximates market value. These short-term investments are comprised solely of United States government securities.

Furniture, Equipment and Depreciation Furniture and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful life of3-5 years.

11



Income Taxes The provision for federal income taxes is computed in accordance with Subchapter L of the Internal Revenue Code.

The Association utilizes the balance sheet approach in computing its provision for deferred income taxes. Accordingly, deferred income taxes arise from the temporary differences in the valuation of certain assets and liabilities as determined for fmancial reporting purposes, and the benefits expected to be realized from the use of capital loss carry forwards. Such temporary differences relate primarily to the discounting of loss and loss adjustment expense reserves, the recognition of unearned premiums and capital losses in excess of gains. The admissibility of deferred tax assets is limited by an admissibility formula developed by the NAIC.

Premiums All policies issued by the Association have a maximum term of one year from date of issuance. Premiums earned are taken into income over the periods covered by the policies whereas the related acquisition costs are expensed when incurred. Unearned premiums, net of deductions for reinsurance, are computed on a pro-rata basis over the term of the policies.

Loss and Loss Adjustment Expense Reserves Loss and loss adjustment expense reserves are based upon claim estimates for (1) losses for cases reported prior to the close of the accounting period, (2) losses incurred but unreported prior to the close of the accounting period, and (3) expenses for investigating and adjusting claims. Such liabilities are necessarily based on assumptions and estimates and while management believes the amounts are adequate, the ultimate liability may be in excess of or less than the amount provided. The methods for making such estimates and for establishing the resulting liabilities are continually reviewed and any adjustments are reflected in the period determined.

Reinsurance In the normal course of business, the Association seeks to reduce the loss that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers.

Advanced Premiums Premiums are generally recognized as revenue on a pro-rata basis over the policy term after the policy is issued. Those premiums received for policies not yet issued are included in advanced premiums within the Association's statutory statement of admitted assets, liabilities, surplus and other funds.

12



Distributions/Assessments to Members Distributions, if any, for each policy year require the prior approval of the commissioner of the Texas Department of Insurance. The policy year is determined by the calendar year in which the policy term commences. Members are assessed to the extent that the Association's Board of Directors determines that available funds are not sufficient to meet the obligations of the Association. During 2008, the Association assessed its members $530 million. There were no assessments made to its member in 2007. (See Note 7)

For policy years beginning subsequent to January 1, 2009, the Board of Directors do not have assessment authority. (See Note 18).

Fair Value of Financial Instruments The following methods and assumptions were used by the Association to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Cash and short-term investments: The carrying values approximate estimated value.

Reclassifications Certain prior year balances have been reclassified to conform to current year presentation.

13

1.

2.


Notes to Statutory Financial Statements

Cash and Short-Term Investments Cash and short-term investments are as follows:

December 31, 2008 2007

Cash $ 447,027,639 $ 107,385,495 Short-term investments 384,428,544 106,816,069

$ 831,456,183 $ 214,201,564

Furniture and Equipment Furniture and equipment consist of the following:

December 31, 2008 2007

Furniture, fixtures and equipment $ 1,172,897 $ 1,025,440 Electronic data flrocessing eguiflment and software 2,600,342 1,709,037

3,773,239 2,734,477 Less: accumulated de2reciation (2,242,866} {l,762,733}

$ 1,530,373 $ 971,744

Depreciation expense was approximately $480,000 and $389,000 for the years ended December 31, 2008 and 2007, respectively.

3. Reinsurance During 2008 and 2007, the Association entered into a reinsurance agreement. This agreement reduces the amount of losses that can arise from claims under a general reinsurance contract known as a catastrophe excess ofloss reinsurance agreement ("excess ofloss").

Effective June 1, 2008, the catastrophe excess of loss reinsurance agreement provides the Association with three layers of coverage. The first layer provides 100% participation of $500 million in excess of$600 million. The second layer provides 100% participation of$500 million in excess of $1.1 billion. The third layer provides 100% participation of $500 million in excess of $1.6 billion. This agreement expired on May 31, 2009. The Association has decided to not renew this reinsurance contract.

14

4.



Effective June 1, 2007, the catastrophe excess of loss reinsurance agreement provided the Association with two layers of coverage. The first layer provided 100% participation of $500 million in excess of$500 million. The second layer provided 100% participation of$500 million in excess of $1 billion. This agreement expired on May 31, 2008.

In accordance with the tenns of the reinsurance agreements, the Association paid the reinsurers net premiums of approximately $354,500,000 and $153,000,000 for the years ended December 31, 2008 and 2007, respectively.

Ceded reinsurance is treated as the risk and liability of the assuming companies; however, the reinsurance contracts do not relieve the Association from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Association. The Association, together with the Texas Department ofInsurance, evaluates the financial conditions of its reinsurers to minimize its exposure to significant losses from reinsurer insolvencies.

The effect of reinsurance on premiums written and earned for the years ended December 31, 2008 and 2007 is as follows:

2008 2007 Written Earned Written Earned

Direct $ 331,048,817 $ 321,936,632 $ 315,139,307 $ 264,889,629 Ceded (350,000,000} (253,130,140} {l67,104,8582 {129,047,3832

Net $ p8,951,183~ $ 68,806,492 $ 148,034,449 $ 135,842,246

During 2008, the Association recovered approximately $115 million of paid losses and loss adjustment expenses relating to reinsurance contracts. There were no recoveries pertaining to reinsurance contracts that were deducted from losses incurred during 2007.

Ceded Reinsurance Premiums Payable Ceded reinsurance premiums payable are reported net of reinsurance ceding commissions receivable as follows:

December 31, 2008 2007

Ceded reinsurance premiums payable $ 96,109,375 $ 43,354,858 Reinsurance ceding commissions receivable ( 4,603,1252 (3,760,4862

$ 91,506,250 $ 39,594,372

15



5. Unearned Premiums

6.

Unearned premiums are reported net of ceded unearned premiums as follows:

December 31,

Gross unearned premiums Ceded unearned premiums

Loss and Loss Adjustment E xpenses

2008 2007

$ 159,434,109 $ 150,321,924 (166,493,055) (69,627,024)

$ (7,058,946) $ 80,694,900

Activity in the liability for unpaid losses and loss adjustment expenses is summarized as follows:

2008 2007

Beginning balance (net of reinsurance receivable of$O and $O} $ 10,575,903 $ 17,526,821

Incurred related to: Current loss year 1,223,282,709 20,738,000 Prior loss }:'ears (82158,508} {2,752,835}

Losses and loss adiustment expense incurred 1,215,124,201 17,985,165

Paid related to: Current loss year (825,177,874) (15,585,000) Prior loss }:,eal's (5,325,550} (9,351,083}

Paid losses and loss adiustment expense (8302503,424} {24,936,0832

Ending balance (net of reinsurance receivable of $1,257,175,137 and $O~ $ 395,196,680 $ 10,575,903

16



7. Statutory Fund During 1993, the Texas Legislature amended Article 21.49 of the Texas Insurance Code authorizing the creation of a Catastrophe Reserve Trust Fund ("Trust Fund") to be held by the Texas Department of Insurance ("TDI") for the purpose of allowing the Association to enter into a program with TDI in lieu of a renewal of the Association's past reinsurance arrangements. Pursuant to the statutory agreement with TDI, the Association terminated its retrospective reinsurance agreement. Consequently, the retrospective premium due from the reinsurers was refunded directly to the Trust Fund, with legal title to such funds reverting to TDI. In accordance with the statutory agreement, the Association shall pay the net equity of all member companies, including all premiums and other revenue of the Association in excess of incurred losses and operating expenses to the Trust Fund or a reinsurance program approved by TDI. As a result, the Association paid $74.3 million to the Trust Fund during 2008 for the year ended December 31, 2007. For the year ended December 31,2007, the net income excluding statutory fund cost of $74,339,700 less the change in deferred tax assets and nonadmitted assets of $3,895 is to be transferred to the Trust Fund or used to fund a reinsurance program.

To administer these funds, TDI entered into a related Funds Management Agreement with the State Comptroller of Public Accounts ("Comptroller") whereby the Comptroller will manage the funds in the Trust Fund.

Under the statutory agreement with TDI, all monies in the Trust Fund are to be used for payment of net losses from windstorm and hail catastrophe losses in excess of $1 00 million in any calendar year and/or catastrophe mitigation (see Note 3). During 2008, the Association received a payment of approximately $469 million from the Trust Fund to meet its estimated obligations.

8. Employee Benefit Plans Defined Benefit Plan. The Association has a defined pension benefit plan, which covers employees from their date of hire, if the employee is scheduled to work at least 1,000 hours in a twelve-month period. Pension benefits are based on years of service and the employee's compensation during the five highest consecutive years' earnings from the last ten years of employment. An employee's benefits vest 5 years from date of hire. The Association makes contributions to the plan that complies with the minimum funding provisions of the Employee Retirement Income Security Act. Such contributions are included in general expenses.

17



The following sets forth a summary of projected benefit obligations, plan assets, funded status, benefit costs and assumptions of the defined pension benefit plan as follows:

December 31, 2008 2007

Change in Projected Benefit Obligations for Vested Particigants: Benefit obligation at beginning of year $ 3,618,822 $ 3,195,710 Service cost 351,225 190,293 Interest cost 241,662 206,033 Actuarial loss 461,939 89,966 Benefits {!aid {50,658} {63,1802 Proiected benefit obligation at end of~ear 4,622,990 3,618,822

Change in Plan Assets Fair value of plan assets at beginning of year 3,359,615 2,727,455 Actual return on plan assets (1,042,255) 217,167 Employer contributions 364,548 478,173 Benefits {!aid {50,658} {63,180}

Fair value of{!lan assets at end of~ear 2,631,250 3,359,615

Funded Status Umecognized net loss 2,298,879 543,740

Prepaid benefit obligation for vested employees $ 307,139 $ 284,533

Accumulated Benefit Obligation for Vested Participants $ 2,631,250 $ 2,928,615

Benefit Obligation for Non-Vested Employees Projected benefit obligation $ 538,207 $ 629,769 Accumulated benefit obligation $ 354,519 $ 322,571


Comgonents of Net Periodic Benefit Costs Service costs $ 351,225 $ 190,293 Interest costs 241,662 206,033 Expected return on plan assets (279,299) (230,247) Amount of loss recognized 28,354 43,174

Total net periodic benefit cost $ 341,942 $ 209,253

18



Minimum Pension Liability Accrual is required when actuarial present value of accumulated benefits exceeds plan assets and accrued pension liabilities. Minimum liability adjustment is reported as an adjustment to unassigned funds. At December 31, 2008 and 2007, no additional minimum liability was required.

Pension Assumptions

December 31, 2008

Weighted-average assumptions used to determine net periodic benefit cost: Discount rate 6.5% Rate of compensation increase Expected long-term rate of return of plan assets

4.0% 8.0%

Weighted-average assumptions used to determine projected benefit obligations: Weighted-average discount rate 6.5% Rate of compensation increase 4.0%

Measurement Date A measurement date of December 31, 2008 was used to determine the above.

Asset Allocation

2007

6.0% 3.5%

8.00%

6.0% 3.5%

The defined benefit pension plan asset allocation as of the measurement date presented as a percentage oftotal plan assets were as follows:

December 31, 2008 2007

Equity securities 50.6% 62.0% Debt securities 45.9% 36.4% Real estate 0.0% 0.0% Other 3.5% 1.6%

100.0% 100.0%

The investment policy of the Plan is to maximize the total return of the fund while maintaining a strong emphasis on preservation of capital. The total portfolio is expected to be less volatile than the market the vast majority of the time. The plan assets are invested in a mix of equity and fixed income investments subject to target allocation ranges. The target allocation range for fixed income investments is between 20% and 40%. The target allocation range for international equity investments is between 10% and 20%. Remaining funds not invested in the categories above are to be invested in short-term cash equivalents such as money market funds.

19



The long-term rate of return represents the expected average rate of return on the plan assets based on the expected long-term asset allocation of the plan. Several factors are considered, including historical market index returns, expectations of future returns in each asset classes, and the potential to outperform market index returns.

Future Payments The following estimated future payments, which reflect expected future service, as appropriate, are expected to be paid in the years indicated:

Years ending December 31,

2009 2010 2011 2012 2013 2014 - 2018

Planned Contributions

Amount

$ 123,896 140,127 183,476 206,237 253,577

1,791,286

The Association expects to make contributions of $335,635 during the year ending December 31, 2009.

Defined Contribution Plan. The Association has a defined contribution 401(k) plan available to eligible employees after six months of employment. The Association contributed approximately $252,000 and $218,000 for the years ended December 31, 2008 and 2007, respectively.

9. Lease Commitments The Association leases office space under a non-cancellable operating lease agreement which expires in 2012. Future minimum lease payments, by year and in the aggregate, under a noncancelable operating lease with initial or remaining terms of one year or more consisted of the following at December 31, 2007:

Years ending December 31, Amount

2009 $ 687,537 2010 709,268 2011 730,999 2012 441,000 2013 and thereafter

$ 2,568,804

20



Rental expense under the non-cancelable operating lease was approximately $591,000 and $514,000 for the years ended December 31,2008 and 2007, respectively.

10. Federal Income Taxes The net deferred tax assets and the increase in nonadmitted deferred tax assets are comprised of the following components:

December 31, 2008 2007

Total gross deferred tax assets $ 68,182,268 $ 6,118,966 Total gross deferred tax liabilities

Net deferred tax asset 68,182,268 6,118,966 Nonadmitted deferred tax assets (68,182,268} (6,118,966}

Net admitted deferred tax assets $ $

Increase in nonadmitted deferred tax assets $ ~62,063,302~ $ ~403,463~

The change in deferred income taxes reported in surplus before consideration of nonadmitted assets is comprised of the following components:

December 31, 2008 2007

Net deferred tax assets $ 68,182,268 $ 6,118,966 Tax-effect of unrealized gains and losses

Net tax effect without unrealized ~ains and losses $ 68,182,268 $ 6,118,966

Chan~e in net deferred income tax $ 62,063,302 $ 403,463

Deferred income tax assets and liabilities consist of the following major components:

December 31, 2008 2007

Deferred tax assets: Discount of unpaid losses and LAE $ 4,502,488 $ 99,607 20% of unearned premiums 204,307 6,006,614 Net operating loss carryforward 63,212,220 AMT tax credit 260,423 Other 2,830 12,745

Total deferred tax assets 68,182,268 6,118,966 Nonadmitted deferred tax aSsets (68,182,268} {6,11829662

Net admitted deferred tax assets $ $

21



The Company's income tax incurred and change in deferred income tax differ from the amount obtained by applying the federal statutory rate to income before federal income taxes as follows:


Expected income tax expense at statutory rate $ (66,227,953) -34% $ 208,724 34% Other 22,839 0% {2,187} 0%

Total income tax $ !66,205,114l -34% 206,537 34%

Federal income taxes incurred $ (4,141,812) -32% 610,000 100% Change in net deferred income taxes {62,063,302} -2% {403,4632 -66%

Total statut0!l income taxes $ !66,205,114l -34% $ 206,537 34%

At December 31, 2008, the Association utilized approximately $13 million of the 2008 net operating losses to recover approximately $4.4 million of taxes paid for the tax years 2007 and 2006. The Association has approximately $186 million of net operating loss carryforwards that will expire in 2028. In addition, the Association has approximately $260,000 of AMT tax credits that will carryforward until utilized.

11. Related Parties Pursuant to the Association's Plan of Operation, its Board of Directors consists of nine members. Five directors are elected from the membership of the Association, two directors are appointed by the Texas Department of Insurance from the public sector based on nominations by the Office of Public Insurance Counsel and two directors, who are licensed local recording agents, are appointed by the commissioner of the Texas Department of Insurance. Of the five directors elected from the membership, a minimum of three members shall be from companies with multi-state operations and a minimum of one member shall be from a company domiciled in the State of Texas.

During 2002, the Association entered into a service contract with The Texas Fair Plan Association (the "Plan") in which the Association is to be fully reimbursed for all expenditures, professional fees, consulting services, allocated employee time, lost investment income and other costs directly associated with the services provided by the Association on behalf of the Plan. As of December 31, 2008 and 2007, the Association incurred or paid expenses for which it has not been reimbursed of $485,334 and $108,559 respectively, on behalf of the Plan. These amounts are recognized in the statutory statements of admitted assets, liabilities, surplus and other funds as a receivable from affiliate.

22



12. Line of Credit The Association has a $150 million line of credit with a bank. There were no balances outstanding or drawn against the line of credit as of and for the years ended December 31, 2008 and 2007. As a result of House Bill 4409 (see Note 18), the current line of credit agreement is no longer valid.

13. Commitments and Contingencies The Association is subject to various investigations, claims and legal proceedings covering a wide range of matters that arise in the ordinary course of its business activities. Management believes that any liability that may ultimately result from the resolution of these matters in excess of the amounts provided will not have a material adverse effect on the financial position of the Association. These matters are subject to various uncertainties, and some of these matters may be resolved unfavorably to the Association.

14. Concentration of Credit Risk The Association maintains deposits of cash in excess of federally insured limits with certain financial institutions. The Association has not experienced any losses in such accounts and believes they are not exposed to any significant credit risk on cash.

15. Nonadmitted Assets Nonadmitted assets consisted of the following:

December 31,

Premiums receivable Prepaid pension cost Deferred tax asset

Total nonadmitted assets

16. Fair Value of Financial Instruments

2008

$ 125,985 $ 307,139

68,182,268

$ 68,615,392 $

2007

266,838 284,533

6,118,966

6,670,337

The estimated fair values and carrying values of tbe Association's financial instruments are as follows:

December 31,

2008 Carrying Amount

Fair Value

Carrying Amount

2007 Fair

Value

Cash and short-term investments $ 831,456,183 $831,456,183 $ 214,201 ,564 $ 214,201 ,564

23



17. Reconciliation with Annual Statement The following schedules set forth the differences in the amounts reported by the Association to Texas Department ofInsurance on its December 31, 2008 annual statement and as reported in the accompanying 2008 audited financial statements. The adjustments, excluding minor reclassifications, relate to the following:

Cash and short-term investments - An adjustment was made to properly reflect claim payments due to timing differences.

Amounts recoverable from reinsures and provision for reinsurance - An adjustment was made to reclass amounts as a reduction in reserves in accordance with SSAP No. 62

Loss and loss adjustment expense reserves - An adjustment was made to strengthen reserves based on management's best estimate and also to reduce those reserves for the amounts ceded under reinsurance contracts in accordance with SSAP No. 62.

Funds held under reinsurance treaties - An adjustment was made to reflect funds received in advance for loss payments in accordance with SSAP No. 62.

December 31, 2008 Audited

Annual Financial Statement Adjustments Statements

Statutory statement of admitted assets, liabilities, surplus and other funds:

Cash and short-term investments $ 835,306,600 $ (3,850,417) $ 831,456,183 Amounts recoverable from reinsures 361,250,000 (361,250,000) Receivables from affiliate 515,846 (30,512) 485,334 Loss and loss adjustment expense

reserves 1,152,371,816 (757,175,136) 395,196,680 Other expenses 921,829 (30,513) 891,316 Funds held under reinsurance treaties 540,542,325 540,542,325 Provision for reinsurance 22,752,085 (22,752,085)

Statutory statement of income: Loss and loss adjustment expense

incurred $ 1,083,273,783 $ 131,850,418 $ 1,215,124,201 Other underwriting expenses incurred 49,617,091 4,141,811 53,758,902 Federal income taxes incurred (4,141,812) (4,141,812)

24



Statutory statement of changes in surplus and other funds:

Net loss $ (58,792,981) $ (131,853,303) $ (190,646,284) Change in net deferred income tax 17,274,800 44,788,502 62,063,302 Change in nonadmitted assets (17,156,551) (44,788,504) (61,945,055) Change in provision for reinsurance (22,752,085) 22,752,085 Other 2,888 2,888

Statutory statement of cash flows: Benefit and loss related payments $ 213,299,404 $ 526,696,132 $ 739,995,536 Commissions, expenses paid and

aggregate write-ins for deductions 139,632,204 5,251,748 144,883,952 Federal income taxes paid (recovered) 4,141,812 (4,141,812) Other cash provided (applied) (62,487,536) 523,955,649 461,468,113 N et chan~e in cash 621,105,037 ~3,850,418~ 617,254,619

There were no differences between the 2007 annual statements as filed with the Texas Department of Insurance and the 2007 audited statutory financial statements.

18. Subsequent Events On June 1,2009, the Texas Legislature passed House Bill 4409 in which the funding mechanism for the Association was amended. A section of the bill provides that TWIA shall pay for losses in excess of premium and other revenue as follows:

• From available reserves and the Catastrophe Reserve Trust Fund;

• From proceeds of Class 1 public securities not to exceed $1 billion per year or other financing arrangements (including commercial paper). These proceeds must be repaid by TWIA from its premiums and other revenue;

• From proceeds of Class 2 public securities not to exceed $1 billion per year to be repaid as follows: 30% of the cost shall be paid through non-recoupable assessments to member companies; 70% of the cost shall be paid by a nonrefundable surcharge collected by every insurer and assessed on all policyholder who reside or have operations in or whose property is located in the TWIA catastrophe area. The surcharge applies to all policies that provide coverage on any premises, locations operation or property located in the catastrophe area for all property and casualty lines of insurance except federal flood insurance, workers' compensation, accident and health and medical malpractice;

• From proceeds of Class 3 public securities not to exceed $500M per year to be repaid through non-recoupable assessments to the member companies.

25

Independent Auditors' Report on Supplemental Material

Our audits of the statutory fmancial statements included in the preceding section of this report were performed for the purpose of fanning an opinion on those statements taken as a whole. The supplemental material presented in the following section of this report is presented to comply with the National Association of Insurance Commissioners Accounting Practices and Procedures Manual and Texas State law. Such information has been subjected to the aUditing procedures applied in the audit of the financial statements and, in our opinion, is fairly stated in all material respects in relation to the financial statements taken as a whole.

This report is intended solely for the infonnation and use of the Board of Directors and the management of Texas Windstorm Insurance Association and for filing with the Texas Department of Insurance and should not be used by anyone other than these specified parties. However, this report is a matter of public record and its distribution is not limited.

June 23, 2009 Austin, Texas

Certified Public Accountants

26


Investment categories

Bonds: U.S. Treasury securities U.S. Government agency obligations (excluding mortgage-backed securities): Issued by U.S. Government agencies Issued by U.S. Government-sponsored agencies

Foreign Government (including Canada, excluding mortgage-backed securities)

Securities issued by states, territories and possessions and political subdivisions in the U.S.: State, territories and possessions general obligations

Political subdivisions of states, territories and possessions political subdivisions general obligations

Revenue and assessment obligations Industrial development and similar obligations

Mortgage-backed securities (includes residential and commercial MBS): Pass-through securities: Issued or guaranteed by GNMA Issued by FNMA and FHLMC All other

CMO's and REMIC's: Issued or guaranteed by GNMA, FNMA,

FHLMCorVA Issued by non U.S. Government issuers and collateralized by mortgage-backed securities issued or guaranteed by agencies

All other Other debt and other fixed income securities (excluding short-term): Unaffiliated domestic securities (includes credit tenant loans rated by the SVO)

Unaffiliated foreign securities Affiliated securities

$

Summary Investment Schedule December 31,2008

Gross Investment Holdings *

Amount %

- $

Admitted Assets as Reported in the Annual Statement Amount %

See accompanying independent auditors' report on supplemental material.

27


Investment categories

Equity interests: Investments in mutual funds Preferred stocks: Affiliated Unaffiliated

Publicly trade equity securities (excluding preferred stocks): Affiliated Unaffiliated

Other equity securities: Affiliated Unaffiliated

Other equity interests including tangible personal property under lease: Affiliated Unaffiliated

Mortgage loans: Construction and land development Agricultural Single family residential properties Multifamily residential properties Commercial loans Mezzanine real estate loans

Real estate investments: Property occupied by the company Property held for production of income Property held for sale

Contract loans Receivables for securities Cash, cash equivalents and short-term investments

Other invested assets

Total invested assets

Summary Investment Schedule December 31, 2008

Gross Investment Holdings *

Admitted Assets as Reported in the Annual Statement

Amount Amonnt %

831,456,183 100.000% 831,456,183 100.000%

$ 831,456,183 100.000% $ 831,456,183 100.000%

*Gross investment holdings as valued in compliance with the NAle Accounting Procedures Manual


28


Supplemental Investment Risk Interrogatories December 31, 2008

1) Reporting entity ' s total admitted assets as reported in the accompanying financial statements.

Questions 2 through 23 are not applicable.

$ 841,678,684


29


Reinsurance Interrogatories December 31, 2008

7.1 Has the reporting entity reinsured any risk with any other entity under a quota share reinsurance contract that includes a provision that would limit the reinsurer's losses below the stated quota share percentage (e.g., a deductible, a loss ratio corridor, a loss cap, an aggregate limit or any similar provisions)? YES[] NO [X]

7.2 If yes, indicate the number of reinsurance contracts containing such provisions.

7.3 If yes, does the amount of reinsurance credit taken reflect the reduction in

N/A

quota share coverage caused by any applicable limiting provision(s)? YES[] N/A [X]

8.1 Has this reporting entity reinsured any risk with any other entity and agreed to release such entity from liability, in whole or in part, from any loss that may occur on this risk, or portion thereof, reinsured? YES[] NO [X]

8.2 Is yes, give full information. N/A [X]

9.1 Has the reporting entity ceded any risk under any reinsurance contract (or under multiple contracts with the same reinsurer or its affiliates) for which during the period covered by the statement (i) it recorded a positive or negative underwriting result greater than 5% of prior year-end surplus as regards policyholders or it reported calendar year written premium ceded or year-end loss and loss expense reserves ceded greater than 5% of prior year-end surplus as regards policyholders; (ii) it accounted for that contract as reinsurance and not as a deposit; and (iii) the contract(s) contain one or more of the following features or other features that would have similar results:

(a) A contract term longer than two years and the contract is noncancellable by the reporting entity during the contract term;

(b) A limjted or conditional cancellation provision under which cancellation triggers an obligation by the reporting entity; or an affiliate of the reporting entity, to enter into a new reinsurance contract with the reinsurer, or an affiliate of the reinsurer;

(c) Aggregate stop loss reinsurance coverage;

(d) A unilateral right by either party (or both parties) to commute the reinsurance contract, whether conditional or not, except for such provisions which are only triggered by a decline in the credit status of the other party·


30



(e) A provision permitting reporting of losses, or payment of losses, less frequently than a quarterly basis (unless there is no activity during the period); or

(f) Payment schedule, accumulating retentions from multiple years or any features inherently designed to delay timing of the reimbursement to the ceding entity. YES [X] NO [ ]

9.2 Has the reporting entity during the period covered by the statement ceded any risk under any reinsurance contract (or under multiple contracts with the same reinsurer or its affiliates), for which, during the period covered by the statement, it recorded a positive or negative underwriting result greater than 5% of prior year-end surplus as regards policyholders or it reported calendar year written premium ceded or year-end loss and loss expense reserves ceded greater than 5% of prior year-end surplus as regards policyholders; excluding cessions to approved pooling arrangements or to captive insurance companies that are directly or indirectly controlling by, or under control with (i) one or more unaffiliated policyholders of the reporting entity, or (ii) an association of which one or more unaffiliated policyholders of the reporting entity is a member where:

(a) The written premium ceded to the reinsurer by the reporting entity or its affiliates represents fifty percent (50%) or more of the entire direct and assumed premium written by the reinsurer based on its most recently available financial statement; or

(b) Twenty-five percent (25%) or more of the written premium ceded to the reinsurer has been retroceded back to the reporting entity or its affiliates in a separate reinsurance contract? YES [] NO [X]

9.3 If yes to 9.1 or 9.2, please provide the following information in the Reinsurance Summary Supplemental Filing for General Interrogatory 9:

(a) The aggregate financial statement impact gross of all such ceded reinsurance contacts on the balance sheet and statement income.

(b) A summary of the reinsurance contract terms and indicate whether it applies to the contracts meeting the criteria in 9.1 or 9.2; and


31



( c) A brief discussion of management's principle objectives in entering into the reinsurance contract including the economic purpose to be achieved. N/A

9.4 Except for transactions meeting the requirements of paragraph 30 of SSAP No. 62, Property and Casualty Reinsurance, has the reporting entity ceded any risk under any reinsurance contract (or multiple contracts with the same reinsurer or its affiliates) during the period covered by the financial statement, and either:

(a) Accounted for that contract as reinsurance (either prospective or retroactive) under statutory accounting principles ("SAP") and as a deposit under generally accepted accounting principles ("GAAP"); or

(b) Accounted for that contract as reinsurance under GAAP and as a deposit under SAP? YES [] NO [X]

9.5 If yes to 9.4, explain in the Reinsurance SUlmnary Supplemental Filing for General Interrogatory 9 (Section D) why the contract(s) is treated differently for GAAP and SAP. NI A

9.6 The reporting entity is exempt from the Reinsurance Attestation Supplement under one or more of the following criteria:

(a) The entity does not utilize reinsurance; or,

(b) The entity only engages in a 100% quota share contract with an affiliate and the affiliated or lead company has filed an attestation supplement; or,

(c) The entity has no external cessions and only participates III an intercompany pool and the affiliated or lead company has filed an attestation supplement.

YES [ ]

YES [ ]

YES [ ]

NO [X]

NO [X)

NO [X)


32

TWIA Board Meeting 9117/08

Dolly had seriously depleted TWIA's cash on hand. TWIA has received 8,018 claims as a result of Hurricane Dolly and expects the incurred loss to be roughly $280 million. TWIA had $80 million on hand and assessed the companies $100 million and received $100 million from the CRTF to pay Hurricane Dolly claims. The Commissioner released $370 million from the CRTF on 9/16/08. TWIA must now assess the members of the Assocation $200 million, a one-time assessment not subject to premium tax credits. This will give TWIA approximately $570 million to pay claims. Mr. Oliver stated that it takes about 30 days to start to get monies in from an assessment. The letters to the companies will be sent out on 9/19/08 or 9/22/08, meaning it will be late October before the Association gets most of the assessment money. Before TWIA can access reinsurance it has to cover approximately a $30 million gap through assessment. The $30 million would be eligible for tax credits that the companies can take against premium taxes. Above this $600 million the Association has $1.5 billion of reinsurance. The reinsurance broker, Guy Carpenter, is in the process of preparing collcction procedures for the first layer of reinsurance. Mr. Oliver is confident that the reinsurance payments will be in full for the entire contract. Reinsurance has a reinstatement premium of approximately $200 million. Payment of the reinstatement premium, which is required under the reinsurance agreements, will ensure that the Association is protected against future storm losses through the current treaty year in the amount of $1.5 billion. Reinsurance proceeds are paid net of the $200 million reinstatement premium. The amounts of the reinstatement premium ate: $85 million from the first layer, $62 million from the second layer and $52 million from the third layer. Each layer is reinstated as it is used. This increases the assessments to the companies by $200 million, for a total of $430 million. This provides TWIA with $2.1 billion for Hurricane Ike losses. Should further assessments be required, the Association can assess the companies as needed.

In the six affected counties (Jefferson, Chambers, Galveston, Harris, Brazoria, Matagorda) TWIA has 142,566 policies with a total exposure of $38,629,758,056 for building and contents. Additional living expenses (ALE) and business income brings the exposure to approximately $42 billion. TWlA has 279,504 exposures because many commercial and government policies (apartment complexes, schools, etc.) have multiple items. Mr. Oliver stated that in the aftermath of Hurricane Dolly the Association found that commercial losses, even if the building was left standing, had a lot of water damage when rain entered through broken windows and damaged roofs. The resulting remediation costs are very high. Assuming a 10% loss rate with Hurricane Ike, TWIA could face losses up to $4 billion. He stated if the Board were willing, he would like to ask the companies for $830 million, bringing TWIA up to $2.5 billion to pay for losses. Mr. Goodman asked if TWIA has a line of credit with a bank. Mr. Oliver replied that it has one in the amount of $150 million with Chase Bank. Using it requires paying interest on it, so it is being held back for an emergency. It is, however, readily available. Ms. Neblett asked Mr. Oliver what assessment he would like to see. Mr. Oliver stated that at a minimum $430 million, which would cover the Association to the top of its reinsurance program including all reinsurance premiums and the $30 million gap between the assessment and reinsurance. He would prefer $830 million to be sure the Association has funds for the next 90-120 days, at which time total losses can be more closely assessed. Mr.

2

cgonzalez

Typewritten Text

EXHIBIT C

TWIA Board Meeting 9/17/08

Kaufman stated that he would like to do everything possible to kcep TWIA out of a cash crunch. Mr. Goodman agreed. Mr. Killian, Mr. Jensen, Ms. Morrison and Mr. Dafgek stated that they would prefer the $430 million assessment, stating that if another assessment is required, the Board can reconvene. Chairman Langford noted that everyone should understand that this assessment would be based on the new assessment percentage for 2008, which does not have any caps and was approved by the Commissioner on September 2, 2008. TWIA received all premium change information from the companies and it has been entered into the assessment formula. Mr. Jensen asked if the Board could reconvene sooner than in 30 days if necessary. Mr. Oliver stated that they could convene as needed. The assessments for Hurricane Dolly came in quickly, within two weeks. Mr. Oliver noted it might be slower than that this time, because the companies are paying hurricane claims in the Houston area. Ms. Neblett moved to assess the companies $830 million. Mr. Goodman seconded the motion. Discussion: Mr. Killian said that the companies are also paying their own claims and making claims with their own reinsurerS. Farmers would agree with the $430 million assessment but would not support any more than that. $2.1 billion should be enough for the time being. Chairman Langford called the vote. Ms. Neblett, Mr. Smecca, Mr. Goodman and Mr. Kaufman voted in favor of the $830 million assessment. Mr. Jensen, Mr. Killian, Ms. Morrison, Mr. Dasbkin and Mr. Langford voted against it. Ms. Morrison moved that the Board authorize an assessment of the companies in the amount of $430 million. Mr. Perkins offered the following resolution:

RESOLVED, that as a result of losses caused by Hurricane Ike the General Manager and staff of the Association arc hereby authorized and directed to assess the members of the Association in the amount of $200 million in accordance with Section 221O.058(a)(3) of the Texas Insurance Code and the Plan of Operation of the Association in order to pay the insured losses and operating expenses of the Association in excess of premium and other revenue of the Association;

FURTHER RESOLVED, that as a result oflosses caused by Hurricane Ike the General Manager and staff of the Association are hereby authorized and directed to assess the members of the Association in the amount of $230 million in accordance with Section 2210.058(a)(4) of the Texas Insurance Code and the Plan of Operation of the Association in order to pay the insured losses and operating expenses of the Association in excess of premium and other revenue of the Association, resulting in an aggregate assessment to the members of the Association in the amount of $430 million; and

FURTHER RESOLVED. that the General Manager and staff of the Association are hereby authorized and directed to take such actions, execute such documents, and make such filings as they deem necessary or reasonable in order to implement the foregoing resolutions.

The motion was unanimously approved.

3

§ 2210.058. Payment of Excess Losses; Premium Tax Credit, V.T.C.A., Insurance Code .. .

V.T.C.A. , Insurance Code § 2210.058

Vernon's Texas Statutes and Codes Annotated Currentness Insurance Code Title 10. Property and Casualty Insurance (Refs & Annos) Subtitle G. Pools, Groups, Plans, and Self-Insurance Chapter 2210. Texas Windstorm Insurance Association Subchapter B. Administration of Association § 2210.058. Payment of Excess Losses; Premium Tax Credit

(a) If, in any calendar year, an occurrence or series of occurrences in a catastrophe area results in insured losses and operating

expenses of the association in excess of premium and other revenue of the association, the excess losses shall be paid as follows:

(1) $100 million shall be assessed against the members of the association as provided by Subsection (b);

(2) losses in excess of $1 00 million shall be paid from the catastrophe reserve trust fund established under Subchapter J and

any reinsurance program established by the association;

(3) for losses in excess of those paid under Subdivisions (I) and (2), an additional $200 million shall be assessed against the

members of the association, as provided by Subsection (b); and

(4) losses in excess of those paid under Subdivisions (I), (2), and (3) shall be assessed against members of the association,

as provided by Subsection (b).

(b) The proportion of the losses allocable to each insurer under Subsections (a)( I), (3), and (4) shall be determined in the manner

used to determine each insurer's participation in the association for the year under Section 2210.052.

(c) An insurer may credit an amount paid in accordance with Subsection (a)( 4) in a calendar year against the insurer's premium

tax under Chapter 221. The tax credit authorized under this subsection shall be allowed at a rate not to exceed 20 percent per

year for five or more successive years beginning the calendar year that the assessments under this section are paid. The balance

of payments made by the insurer and not claimed as a premium tax credit may be reflected in the books and records of the

insurer as an admitted asset of the insurer for all purposes, includ ing exhibition in an annual statement under Section 862.00 I.

CREDIT(S)

Added by Acts 2005 . 79th Leg .. ch. 727, ~ 2. eff. April 1,2007. Amended by Acts 2007. 80th Leg .. ch . 932. ~ 2 1, efr June

15. 2007.

HlSTORICAL AND STATUTORY NOTES

2007 Electronic Pocket Part Update

Prior Laws:

Acts 1971 , 62nd Leg., p. 843, ch. 100.

Acts 1979, 66th Leg. , p. 1599, ch. 675 , § I.

Acts 1993, 73rd Leg., ch . 685 , § 17.06.

Acts 1997, 75th Leg., ch. 642, § 5.

V.A.T.S. lnsuranceCode, art. 2 1.49. § 19.

Current through the end of the 2007 Regular Session of the 80th Legislature

End of ()oc umrllt

.:0<;'1 ', .. Next @ 2014 Thomson Reuters No claun to onglf,al U .. ) Goven nent Work~

cgonzalez

Typewritten Text

EXHIBIT D

§ 221(1.071. Payment or Excess LO$sl'.l8' ; Payment Fror!'l ... , n: !NS § 2210.071

Vernon's Texas Statutes and Codes Annotated Insurance Code

Title 10. Property and Casualty Insurance (Refs & Annos) Subtitle G. Pools, Groups, Plans, and Self-Insurance

Chapter 2210. Texas Windstorm Insurance Association Subchapter B-1. Payment of Losses

V.T.C.A., Insurance Code § 2210.071

§ 2210.071. Payment of Excess Losses; Payment From Reserves and Trust Fund

Effective: September 28, 2011

Currentness

(a) If, in a catastrophe year, an occurrence or series of occurrences in a catastrophe area results in insured losses and operating

expenses of the association in excess of premium and other revenue of the association, the excess losses and operating expenses

shall be paid as provided by this subchapter.

(b) The association shall pay losses in excess of premium and other revenue of the association from available reserves of the

association and available amounts in the catastrophe reserve trust fund.

(c) Losses not paid under Subsection (b) shall be paid from the proceeds from public securities issued in accordance with this

subchapter and Subchapter M and, notwithstanding Subsection (a), may be paid from the proceeds of public securities issued

under Section 221 O.072(a) before an occurrence or series of occurrences that results in insured losses.

Credits

Added by Acts 2009, 81st Leg., ch. 1408, § 16, eff. June 19,2009. Amended by Acts 2011, 82nd Leg., 1st C.S., ch. 2 (RB. 3), § 10, eff. Sept. 28,2011.

Notes of Decisions (2)

V. T. C. A., Insurance Code § 2210.071, TX INS § 2210.071

Current through the end of the 2013 Third Called Session of the 83rd Legislature

. ,

EXHIBIT E

ret

§ 22'10.072. PaymMi: From Cias" 1 Public S?curWes; FlnnodaL., TX iN::> § 2210.072

Vernon's Texas Stahltes and Codes Annotated Insurance Code


Chapter 2210. Texas Windstorm Insurance Association Subchapter B-l. Payment of Losses


§ 2210.072. Payment From Class 1 Public Securities; Financial Instmments


Currentness

(a) Losses not paid under Section 2210.071(b) shall be paid as provided by this section from the proceeds from Class 1 public

securities authorized to be issued in accordance with Subchapter M I before, on, or after the date of any occurrence or series of occurrences that results in insured losses. Public securities issued under this section must be repaid within a period not to

exceed 14 years, and may be repaid sooner if the board of directors elects to do so and the commissioner approves.

(b) Public securities described by Subsection (a) that are issued before an occurrence or series of occurrences that results in incurred losses:

(1) may be issued on the request of the board of directors with the approval of the commissioner; and

(2) may not, in the aggregate, exceed $1 billion at anyone time, regardless of the calendar year or years in which the outstanding public securities were issued.

(b-I) Public securities described by Subsection (a):

(1) shall be issued as necessary in a principal amount not to exceed $1 billion per catastrophe year, in the aggregate, for

securities issued during that catastrophe year before the occurrence or series of occurrences that results in incurred losses in that year and securities issued on or after the date of that occurrence or series of occurrences, and regardless of whether for a single occurrence or a series of occurrences; and

(2) subject to the $1 billion maximum described by Subdivision (I), may be issued, in one or more issuances or tranches,

during the calendar year in which the occurrence or series of occurrences occurs or, ifthe public securities cannot reasonably be issued in that year, during the following calendar year.

(c) Ifpublic securities are issued as described by this section, the public securities shall be repaid in the manner prescribed by Subchapter M from association premium revenue.

§ 2210.072. Paymellt From Class ~ Public S<>(: Irit.les: Finam:l;:{l..., TX It<lS § 22'IO,On

(d) The association may borrow from, or enter into other financing arrangements with, any market source, under which the

market source makes interest-bearing loans or other financial instruments to the association to enable the association to pay

losses under this section or to obtain public securities under this section. For purposes of this subsection, financial instruments

includes commercial paper.

(e) The proceeds of any outstanding public securities described by Subsection (a) that are issued before an occurrence or series

of occurrences shaH be depleted before the proceeds of any securities issued after an occurrence or series of occurrences may

be used. This subsection does not prohibit the association from issuing securities after an occurrence or series of occurrences

before the proceeds of outstanding public securities issued during a previous catastrophe year have been depleted.

(f) If, under Subsection (e), the proceeds of any outstanding public securities issued during a previous catastrophe year must be

depleted, those proceeds shaH count against the $1 billion limit on public securities described by this section in the catastrophe

year in which the proceeds must be depleted.

Credits

Added by Acts 2009, 81st Leg., ch. 1408, § 16, eff. June 19,2009. Amended by Acts 2011, 82nd Leg., 1st C.S., ch. 2 (H.B. 3), § II, eff. Sept. 28, 2011.

Footnotes V.T.C.A. , Insurance Code § 2210.601 et seq.


Current through the end of the 2013 Third CaHed Session of the 83rd Legislature

t IU of Il.,,,lIn,,ut ~r

t e

§ 2210.073. P,,-ymi!nt FroB, CI;::ss 2 Public $!}curitim:., TX INS § .22"10.013





§ 2210.073. Payment From Class 2 Public Secmities


Currentness

(a) Losses not paid under Sections 2210.071 and 2210.072 shall be paid as provided by this section from proceeds from Class

2 public securities authorized to be issued in accordance with Subchapter M on or after the date of any occurrence that results

in insured losses under this subsection. Public securities issued under this section must be repaid within a period not to exceed

10 years, and may be repaid sooner if the board of directors elects to do so and the conIDlissioner approves.

(b) Public securities described by Subsection (a):

(1) may be issued as necessary in a principal amount not to exceed $1 billion per catastrophe year, in the aggregate, whether

for a single occurrence or a series of occurrences; and

(2) subject to the $1 billion maximum described by Subdivision (I), may be issued, in one or more issuances or tranches,

during the calendar year in which the occurrence or series of occurrences occurs or, ifthe public securities cannot reasonably

be issued in that year, during the following calendar year.

(c) If the losses are paid with public securities described by this section, the public securities shall be repaid in the manner

prescribed by Subchapter M.

Credits

Added by Acts 2009, 81st Leg., ch. 1408, § 16, eff. June 19, 2009. Amended by Acts 2011, 82nd Leg., 1st C.S., ch. 2 (H .B. 3), § 12, eff. Sept. 28, 2011.


Current through the end ofthe 2013 Third Called Session of the 83rd Legislature

~ 1111 "I II", 11m III "

I' e t

§ 2210.074. Payment Thr ugh CkiSS 3 Pvblic Securities, TX INS § 221il.Oi'4





§ 2210.074. Payment Through Class 3 Public Securities

Effective: September 28,2011

Currentness

(a) Losses not paid under Sections 2210,071,2210,072, and 2210,073 shall be paid as provided by this section from proceeds

from public securities authorized to be issued in accordance with Subchapter M 1 on or after the date of any occurrence that

results in insured losses under this subsection or through reinsurance as described by Section 2210.075. Public securities issued

under this section must be repaid within a period not to exceed 10 years, and may be repaid sooner if the board of directors elects to do so and the commissioner approves.

(b) Public securities described by Subsection (a):

(1) may be issued as necessary in a principal amount not to exceed $500 million per catastrophe year, in the aggregate, whether for a single occurrence or a series of occurrences; and

(2) subject to the $500 million maximum described by Subdivision (1), may be issued, in one or more issuances or tranches,

during the calendar year in which the occurrence or series of occurrences occurs or, if the public securities cannot reasonably be issued in that year, during the following calendar year.

(c) lfthe losses are paid with public securities described by this section, the public securities shall be repaid in the manner

prescribed by Subchapter M through member assessments as provided by this section The association shall notify each member of the association of the amount of the member's assessment under this section. The proportion of the losses allocable to each

insurer under this section shall be determined in the manner used to determine each insurer's participation in the association for the year under Section 2210.052, A member of the association may not recoup an assessment paid under this subsection through a premium surcharge or tax credit.

Credits Added by Acts 2009, 81st Leg. , ch , 1408, § 16, efT. June 19,2009. Amended by Acts 2011, 82nd Leg., 1st C.S" ch. 2 (H,B.

3), § 13, elf. Sept. 28, 2011.

Footnotes V .. T.C.A., Insurance Code § 2210.601 ct seq.

§ 2210.074. P;:;ym':!n t Through Class 3 Public Securities, TX INS § 221f.).074



I 111101 1l ... III11[tll { \

~ .

§ 221().612. Payment vf CII:IS!; '1 Public _'eclIritic5, TX INS § 2210.£12



Chapter 2210. Texas Windstorm Insurance Association Subchapter M. Public Securities Progranl


§ 2210.612. Payment of Class 1 Public Securities


Currentness

(a) The association shall pay Class I public securities issued under Section 221 o.on from its net premium and other revenue.

(b) The association may enter financing arrangements as described by Section 221 o.on( d) as necessary to obtain public

securities issued under Section 2210.072. Nothing in this subsection shall prevent the authorization and creation of one or more

programs for the issuance of commercial paper before the date of an occurrence or series of occurrences that results in insured

losses under Section 221O.072(a).

Credits

Added by Acts 2009, 81st Lcg .. ch. 1408, § 41 , eff. June 19, 2009. Amended by Acts 2011, 82nd Leg., 1st C.S., ch. 2 (H.R

3), § 49, efT. Sept. 28, 2011.



I uti 1,1 nil "III nl

§ 2210.613. Payment Of Class 2 PUDlic S~C lritif:s, TX !NS § 22'10.613



Chapter 2210. Texas Windstorm Insurance Association Subchapter M. Public Securities Program


§ 2210.613. Payment Of Class 2 Public Securities


Currentness

(a) The association shall pay Class 2 public securities issued under Section 2210.073 as provided by this section. Thirty percent

of the cost of the public securities shall be paid through member assessments as provided by this section. The association shall

notify each member ofthe association of the amount of the member's assessment under this section. The proportion of the losses

allocable to each insurer under this section shall be determined in the manner used to determine each insurer's participation in

the association for the year under Section 2210.052. A member of the association may not recoup an assessment paid under

this subsection through a premium surcharge or tax credit.

(b) Seventy percent of the cost of the public securities shall be paid by a premium surcharge collected under this section in an

amount set by the commissioner. On approval by the commissioner, each insurer, the association, and the Texas FAIR Plan

Association shall assess, as provided by this section, a premium surcharge to each policyholder of a policy that is in effect on or

after the l80th day after the date the commissioner issues notice of the approval ofthe public securities. The premium surcharge

must be set in an amount sufficient to pay, for the duration of the issued public securities, all debt service not already covered

by available funds or member assessments and all related expenses on the public securities.

(c) The premium surcharge under Subsection (b) shall be assessed on all policyholders of policies that cover insured property

that is located in a catastrophe area, including automobiles principally garaged in a catastrophe area. The premium surcharge

shall be assessed on each Texas windstonn and hail insurance policy and each property and casualty insurance policy, including

an automobile insurance policy, issued for automobiles and other property located in the catastrophe area. A premium surcharge

under Subsection (b) applies to:

(1) all policies written under the following lines of insurance:

(A) fire and allied lines;

(B) fann and ranch owners;

(C) residential property insurance;

(D) private passenger automobile liability and physical damage insurance; and

§ 2210.6'13. PaynHmt Of Cbss 2 Public Sncurl\ies, TiNS § Z?10.M3

(E) commercial automobile liability and physical damage insurance; and

(2) the property insurance portion of a commercial multiple peril insurance policy.

(d) A premium surcharge under Subsection (b) is a separate charge in addition to the premiums collected and is not subject to

premium tax or commissions. Failure by a policyholder to pay the surcharge constitutes failure to pay premium for purposes

of policy cancellation.

Credits

Added by Acts 2009, 81st Leg., ch. 1408, § 41, eff. June 19,2009. Amended by Acts 2011, 82nd Leg., 1st C.S., ch. 2 (H.B.

3), § 50, efT. Sept. 28, 2011.



1,111,,1111 ""'lnl ):

§ 2210.€11S. Payment Of Class :1 Ptib!L Seclldties, iX INS 221 .6135



Chapter 2210. Texas Windstorm Insurance Association Subchapter M. Public Securities Program


§ 2210.6135. Payment Of Class 3 Public Securities


Currentness

(a) The association shall pay Class 3 public securities issued under Section 221 0.074 as provided by this section through member

assessments. The association, for the payment of the losses, shall assess the members of the association a principal amount not

to exceed $500 million per catastrophe year. The association shall notify each member of the association of the amount of the

member's assessment under this section.

(b) The proportion of the losses allocable to each insurer under this section shall be determined in the manner used to determine

each insurer's participation in the association for the year under Section 2210.052.

(c) A member of the association may not recoup an assessment paid under this section through a premium surcharge or tax credit.

Credits

Added by Acts 2009, 81st Leg., eh. 1408, § 41, eff. June 19,2009. Amended by Acts 2011, 82nd Leg., 1st C.S., ch. 2 (H.B.

3), § 51, efT. Sept. 28, 2011.



11111 hi I'" tllIf\lI( I 1

N. t


Statutory Financial Statements Years Ended December 31, 2009 and 2008

PDF created with pdfFactory trial version www.pdffactory.com

http://www.pdffactory.com


cgonzalez

Typewritten Text

cgonzalez

Typewritten Text

EXHIBIT F


Contents

2

Accountants’ letter of qualifications 3-4 Independent auditors’ report 5 Statutory financial statements Statements of admitted assets, liabilities, surplus and other funds 6 Statements of income 7 Statements of changes in surplus and other funds 8 Statements of cash flows 9 Summary of significant accounting policies 10-13 Notes to statutory financial statements 14-28 Independent auditors’ report on supplemental material 29 Supplemental material Summary investment schedule 30-31 Supplemental investment risk interrogatories 32 Reinsurance interrogatories 33-35




3

Accountants’ Letter of Qualifications

Board of Directors Texas Windstorm Insurance Association We have audited, in accordance with auditing standards generally accepted in the United States of America, the statutory financial statements of Texas Windstorm Insurance Association (the “Association”) for the years ended December 31, 2009 and 2008, and have issued our report thereon dated June 9, 2010. In connection therewith, we advise you as follows:

a. We are independent certified public accountants with respect to the Association and conform to the standards of the accounting profession as contained in the Code of Professional Conduct and pronouncements of the American Institute of Certified Public Accountants, and the Rules of Professional Conduct of the Texas Board of Public Accountancy.

b. The engagement partner and engagement manager, who are certified public accountants, have 12

years and 5 years, respectively, of experience in public accounting and are experienced in auditing insurance enterprises. Members of the engagement team, most of whom have had experience in auditing insurance enterprises and most of whom are certified public accountants, were assigned to perform tasks commensurate with their training and experience.

c. We understand that the Association intends to file its audited statutory financial statements and

our report thereon with the Texas Department of Insurance and that the Insurance Commissioner of that state will be relying on that information in monitoring and regulating the statutory financial condition of the Association.

While we understand that an objective of issuing a report on the statutory financial statements is to satisfy regulatory requirements, our audit was not planned to satisfy all objectives or responsibilities of insurance regulators. In this context, the Association and Insurance Commissioner should understand that the objective of an audit of statutory financial statements in accordance with auditing standards generally accepted in the United States of America is to form an opinion and issue a report on whether the statutory financial statements present fairly, in all material respects, the admitted assets, liabilities, surplus and other funds, results of operations and cash flows in conformity with accounting practices prescribed or permitted by the Texas Department of Insurance. Consequently, under auditing standards generally accepted in the United States of America, we have the responsibility, within the inherent limitations of the auditing process, to plan and perform our audit to obtain reasonable assurance about whether the statutory financial statements are free of material misstatement, whether caused by error or fraud, and to exercise due professional care in the conduct of the audit. The concept of selective testing of the data being audited, which involves judgment both as to the number of transactions to be audited and the areas to be tested, has been generally accepted as a valid and sufficient basis for an auditor to express an opinion on financial statements. Audit procedures that are effective for detecting errors, if they exist, may be ineffective for detecting misstatements resulting from fraud. Because of the characteristics of fraud, particularly those involving concealment and falsified documentation (including forgery), a properly planned and performed audit may not detect a material misstatement resulting from fraud. In addition, an audit does not address the possibility




4

that material misstatements resulting from fraud may occur in the future. Also, our use of professional judgment and the assessment of materiality for the purpose of our audit means that matters may exist that would have been assessed differently by the Insurance Commissioner. It is the responsibility of the management of the Association to adopt sound accounting policies, to maintain an adequate and effective system of accounts, and to establish and maintain an internal control structure that will, among other things, provide reasonable, but not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition and that transactions are executed in accordance with management's authorization and recorded properly to permit the preparation of financial statements in conformity with accounting practices prescribed or permitted by the Texas Department of Insurance.

The Insurance Commissioner should exercise due diligence to obtain whatever other information that may be necessary for the purpose of monitoring and regulating the statutory financial position of insurers and should not rely solely upon the independent auditor's report.

d. We will retain the workpapers prepared in the conduct of our audit until the Texas Department of Insurance has filed a Report of Examination covering 2009, but not longer than seven years. After notification to the Association, we will make the workpapers available for review by the Texas Department of Insurance at the offices of the insurer, at our offices, at the Insurance Department or at any other reasonable place designated by the Insurance Commissioner. Furthermore, in the conduct of the aforementioned periodic review by the Texas Department of Insurance, photocopies of pertinent audit working papers may be made (under the control of the accountant) and such copies may be retained by the Texas Department of Insurance.

e. The engagement partner has served in that capacity with respect to the Association since 2009, is

licensed by the Texas Board of Public Accountancy, and is a member in good standing of the American Institute of Certified Public Accountants.

f. To the best of our knowledge and belief, we are in compliance with the requirements of section 7

of the NAIC's Model Rule (Regulation) Requiring Annual Audited Financial Reports regarding qualifications of independent certified public accountants.

This letter is intended solely for the information and use of the Texas Department of Insurance and is not intended to be and should not be used by anyone other than these specified parties. June 9, 2010




5

Independent Auditors’ Report

Board of Directors Texas Windstorm Insurance Association Austin, Texas We have audited the accompanying statutory statements of admitted assets, liabilities, surplus and other funds of Texas Windstorm Insurance Association (the "Association") as of December 31, 2009 and 2008 and the related statutory statements of income and changes in surplus and other funds, and cash flows for the years then ended. These financial statements are the responsibility of the Association's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Association’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As described more fully in the Summary of Significant Accounting Policies – “Basis of Accounting”, these financial statements were prepared in conformity with accounting practices prescribed or permitted by the Texas Department of Insurance, which is a comprehensive basis of accounting other than accounting principles generally accepted in the United States of America. On September 13, 2008, Hurricane Ike struck the gulf coast of Texas. Claims attributable to this hurricane contributed greatly to the Association’s $190.6 million net loss for 2008. The Association has authority to assess certain property and casualty insurers underwriting business in the state of Texas under Texas Insurance Code Section 21.49 for losses incurred during 2008. However, if another major claim event occurs in the future, it could have a severe impact on the financial condition of the Association. In our opinion, the statutory financial statements referred to above present fairly, in all material respects, the admitted assets, liabilities, surplus and other funds of the Texas Windstorm Insurance Association at December 31, 2009 and 2008, and the results of its operations and its cash flows for the years then ended, on the basis of accounting described in the Summary of Significant Accounting Policies – “Basis of Accounting”. This report is intended solely for the information and use by the Board of Directors and the management of Texas Windstorm Insurance Association and for filing with the Texas Department of Insurance and is not intended to be and should not be used by anyone other than these specified parties. However, this report is a matter of public record and its distribution is not limited. June 9, 2010





Statutory Statements of Admitted Assets,


6

December 31, 2009 2008

Admitted Assets Cash and short-term investments $ 352,013,162 $ 831,456,183 Receivable from Texas FAIR Plan Association 595,329 485,334 Premiums receivable 267,950 292,178 Furniture and equipment, net 1,339,868 1,530,373 Federal income tax recoverable - 4,671,812 Member assessments receivable 1,807,770 3,242,804

Amounts recoverable from reinsurers 93,168,209 -

$ 449,192,288 $ 841,678,684


Liabilities: Loss and loss adjustment expenses $ 31,686,974 $ 395,196,680 Other expenses payable 2,874,342 891,316 Other taxes, licenses and fees 1,774,886 1,058,346

Current federal income taxes 38,880,652 - Unearned premiums, net of ceded unearned premiums 183,870,362 (7,058,946) Advanced premiums 8,607,382 10,063,456 Ceded reinsurance premiums payable, net of ceding commissions 41,058,472 91,506,250 Funds held under reinsurance treaties - 540,542,325 Amounts withheld or retained for account of others 100,230 90,438

Provision for reinsurance 69,239,449 - Deferred pension liability 362,902 - Additional minimum pension liability 1,183,067 -

Statutory fund payable 69,553,570 -

Total liabilities 449,192,288 1,032,289,865

Commitments and contingencies (Notes 7, 8, 9, 13, 14 and 15)

Surplus and other funds: Unassigned surplus (deficit) - (190,611,181)

$ 449,192,288 $ 841,678,684






Statutory Statements of Income

7


Underwriting income: Premiums earned $ 357,906,150 $ 321,936,632 Premiums ceded (167,443,257) (253,130,140)

Net premiums earned 190,462,893 68,806,492

Deductions: Losses and loss expenses incurred (290,313,489) 1,215,124,201 Other underwriting expenses incurred: Commissions 61,148,941 32,821,433 General expenses 19,714,562 14,742,468 Premium and maintenance taxes 7,035,201 6,195,001

Total underwriting deductions (202,414,785) 1,268,883,103

Net underwriting gain (loss) 392,877,678 (1,200,076,611)

Investment income: Net investment income earned 707,687 6,009,349

Other income: Assessment income 905,946 530,000,000 Statutory fund income - 469,281,450 Other 2,888 (2,284)

Total other income 908,834 999,279,166

Net income (loss) before statutory fund cost and federal income tax expense (benefit) 394,494,199 (194,788,096) Statutory fund cost 69,553,570 -

Net income (loss) before federal income tax expense (benefit) 324,940,629 (194,788,096) Federal income tax expense (benefit) 57,000,000 (4,141,812)

Net income (loss) $ 267,940,629 $ (190,646,284)






Statutory Statements of Changes In Surplus and Other Funds

8

Unassigned Surplus (Deficit)

Balance at January 1, 2008 $ (86,032) Net loss (190,646,284) Change in deferred income taxes 62,063,302 Change in nonadmitted assets (61,945,055) Other 2,888

Balance at December 31, 2008 (190,611,181) Net income 267,940,629 Change in deferred income taxes (54,418,012) Change in nonadmitted assets 47,108,841 Change in provision for reinsurance (69,239,449) Additional minimum pension liability (780,824) Other (4)

Balance at December 31, 2009 $ -





Statutory Statements of Cash Flows

9


Cash from operations: Premiums collected, net of reinsurance $ 329,505,218 $ 35,374,591 Net investment income 707,687 6,009,349 Miscellaneous income 908,797 999,282,054 Benefit and loss related payments (128,802,454) (739,995,536) Commissions, expenses paid and aggregate write-ins for deductions (122,794,273) (144,883,952) Federal income taxes paid (13,447,536) -

Net cash from operations 66,077,439 155,786,506

Cash from financing and miscellaneous sources: Other cash (applied) provided (545,520,460) 461,468,113

Net cash from financing and miscellaneous sources (545,520,460) 461,468,113

Net change in cash and short-term investments (479,443,021) 617,254,619 Cash and short-term investments, beginning of year 831,456,183 214,201,564

Cash and short-term investments, end of year $ 352,013,162 $ 831,456,183







10

Nature of Business Texas Windstorm Insurance Association (the "Association") was created by the Texas Legislature when it enacted Article 21.49 (the "Act"), as amended, of the Texas Insurance Code, currently codified as chapter 2210. The purpose of the Act is to provide a method whereby adequate windstorm, hail and fire insurance may be obtained in certain designated counties located in the gulf coast region of the State of Texas. Presently, only windstorm and hail coverage is provided by the Association. The membership of the Association includes every property insurer authorized to write property insurance in the State of Texas, except companies that are excluded by law. The Act provides that members will share in the Association's losses on a policy year basis to the extent of their percentage of participation during the policy year involved, as determined under the provisions of the Act and the Association's Plan of Operations. In the event of a net loss for any policy years prior to January 1, 2009, members participating in that policy year may be assessed for their share of the loss based upon their respective participation percentages. On June 1, 2009, the Texas Legislature passed House Bill 4409 in which the funding mechanism for the Association was amended. A section of the bill provides that the Association shall pay for losses in excess of premium and other revenue as follows:

• From available reserves and the Catastrophe Reserve Trust Fund;

• From proceeds of Class 1 public securities not to exceed $1 billion per year or other financing arrangements (including commercial paper). These proceeds must be repaid by the Association from its premiums and other revenue;

• From proceeds of Class 2 public securities not to exceed $1 billion per year to be repaid as

follows: 30% of the cost shall be paid through non-recoupable assessments to member companies; 70% of the cost shall be paid by a nonrefundable surcharge collected by every insurer and assessed on all policyholder who reside or have operations in or whose property is located in the TWIA catastrophe area. The surcharge applies to all policies that provide coverage on any premises, locations operation or property located in the catastrophe area for all property and casualty lines of insurance except federal flood insurance, workers’ compensation, accident and health and medical malpractice;

• From proceeds of Class 3 public securities not to exceed $500M per year to be repaid through

non-recoupable assessments to the member companies.






11

Basis of Accounting The accompanying financial statements have been prepared on a statutory basis in accordance with accounting practices prescribed or permitted by the Texas Department of Insurance. Prescribed statutory accounting practices include state laws, regulations and general administrative rules applicable to all insurance companies domiciled in the State of Texas and the National Association of Insurance Commissioners' ("NAIC") Accounting Practices and Procedures Manual. Permitted statutory practices include practices not prescribed but allowed by the Texas Department of Insurance. A difference between Texas prescribed practices and NAIC statutory accounting practices, as they relate to the Association, is that furniture, labor-saving devices, machines, and all other office equipment may be an admitted asset depreciated in full not to exceed 5 years. NAIC statutory accounting practice classifies these assets as non-admitted. The effect of admitting these assets is as follows:

December 31, 2009 2008

Unassigned deficit, as reported $ - $ (190,611,181) Effect of Texas prescribed practices: Admitted furniture and equipment (758,988) (405,614)

Unassigned deficit, NAIC SAP basis $ (758,988) $ (191,016,795) In the preparation of the accompanying financial statements, Texas Department of Insurance has permitted companies domiciled in the state of Texas to delay the adoption of certain substantive amendments (SSAP 10R) to the 2009 Accounting Practices and Procedures Manual. Significant differences between statutory accounting practices and accounting principles generally accepted in the United States of America ("GAAP"), as they relate to the Association include the following:

a) Certain assets designated as “non-admitted assets” are charged directly against surplus rather than capitalized and charged to income as used. These include certain fixed assets, prepaid expenses and other assets.

b) Loss and loss adjustment expense reserves are presented net of related reinsurance rather than on

a gross basis.

c) Commissions and other acquisition costs relating to issuance of new policies are expensed as incurred rather than deferred and amortized over the period covered by the policies.

d) Defined pension liability excludes non-vested employees’ rather than including vested and non-

vested employee obligations.






12

e) The statement of cash flows represent cash balances, cash equivalents and short-term investments with initial maturities of one year or less rather than cash and cash equivalents with initial maturities of three months or less.

f) Deferred income taxes are limited by an admissibility formula as opposed to using the “more

likely than not” standard. Also, changes in the net deferred income taxes are reflected in the statutory statements of changes in surplus and other funds rather than reflected in the statement of income.

Use of Significant Estimates The preparation of financial statements in accordance with statutory accounting practices requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Short-Term Investments Short-term investments are recorded at cost which approximates market value. These short-term investments are comprised solely of United States government securities. Furniture, Equipment and Depreciation Furniture and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful life of 3-5 years. Income Taxes The provision for federal income taxes is computed in accordance with Subchapter L of the Internal Revenue Code. The Association utilizes the balance sheet approach in computing its provision for deferred income taxes. Accordingly, deferred income taxes arise from the temporary differences in the valuation of certain assets and liabilities as determined for financial reporting purposes, and the benefits expected to be realized from the use of capital loss carry forwards. Such temporary differences relate primarily to the discounting of loss and loss adjustment expense reserves, the recognition of unearned premiums and capital losses in excess of gains. The admissibility of deferred tax assets is limited by an admissibility formula developed by the NAIC. Premiums All policies issued by the Association have a maximum term of one year from date of issuance. Premiums earned are taken into income over the periods covered by the policies whereas the related acquisition costs are expensed when incurred. Unearned premiums, net of deductions for reinsurance, are computed on a pro-rata basis over the term of the policies.






13

Loss and Loss Adjustment Expense Reserves Loss and loss adjustment expense reserves are based upon claim estimates for (1) losses for cases reported prior to the close of the accounting period, (2) losses incurred but unreported prior to the close of the accounting period, and (3) expenses for investigating and adjusting claims. Such liabilities are necessarily based on assumptions and estimates and while management believes the amounts are adequate, the ultimate liability may be in excess of or less than the amount provided. The methods for making such estimates and for establishing the resulting liabilities are continually reviewed and any adjustments are reflected in the period determined. Reinsurance In the normal course of business, the Association seeks to reduce the loss that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. Advanced Premiums Premiums are generally recognized as revenue on a pro-rata basis over the policy term after the policy is issued. Those premiums received for policies not yet issued are included in advanced premiums within the Association's statutory statement of admitted assets, liabilities, surplus and other funds. Assessments to Member Companies Prior to the enactment of HB 4409 in 2009, member companies were assessed to the extent that the Association’s Board of Directors determined that available funds were not sufficient to satisfy the obligations of the Association. During 2009 and 2008, the Association assessed its members approximately $905,000 and $530 million, respectively. Fair Value of Financial Instruments The following methods and assumptions were used by the Association to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and short-term investments: The carrying values approximate estimated value. Reclassifications Certain prior year balances have been reclassified to conform to current year presentation.






14

1. Cash and Short-Term Investments Cash and short-term investments are as follows:

December 31, 2009 2008

Cash $ 107,086,496 $ 447,027,639 Short-term investments 244,926,666 384,428,544

$ 352,013,162 $ 831,456,183 2. Furniture and Equipment Furniture and equipment consist of the following:

December 31, 2009 2008

Furniture, fixtures and equipment $ 1,106,414 $ 1,172,897 Electronic data processing equipment and software 3,319,040 2,600,342

4,425,454 3,773,239 Less: accumulated depreciation (3,085,586) (2,242,866)

$ 1,339,868 $ 1,530,373 Depreciation expense was approximately $803,000 and $480,000 for the years ended December 31,

2009 and 2008, respectively. 3. Reinsurance During 2008, the Association entered into a reinsurance agreement. This agreement reduces the

amount of losses that can arise from claims under a general reinsurance contract known as a catastrophe excess of loss reinsurance agreement ("excess of loss").

Effective June 1, 2008, the catastrophe excess of loss reinsurance agreement provided the

Association with three layers of coverage. The first layer provided 100% participation of $500 million in excess of $600 million. The second layer provided 100% participation of $500 million in excess of $1.1 billion. The third layer provided 100% participation of $500 million in excess of $1.6 billion. This agreement expired on May 31, 2009. The Association has decided to not renew this reinsurance contract.






15

In accordance with the terms of the reinsurance agreement, the Association paid the reinsurers net premiums of approximately $58,700,000 and $241,400,000 during 2009 and 2008, respectively.

Ceded reinsurance is treated as the risk and liability of the assuming companies; however, the

reinsurance contracts do not relieve the Association from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Association. The Association, together with the Texas Department of Insurance, evaluates the financial conditions of its reinsurers to minimize its exposure to significant losses from reinsurer insolvencies.

The Association has unsecured reinsurance recoverables which exceed 3% of the Association’s

surplus with the following reinsurers as of December 31, 2009: (in thousands) Name of reinsurer 2009 Everest Reinsurance Company $ 16,777 Liberty Mutual Insurance Company 936 Munich Reinsurance America, Incorporated 6,684 Odyssey America Reinsurance Corporation 10,069 QBE Reinsurance Company 924 Swiss Re Underwriters Agency, Inc. 8,943 Transatlantic Reinsurance Company 1,984 Folksamerica Reinsurance Company 4,472 Converium Reinsurance 11,553 Lexington Insurance Company, Pembroke 2,696 Liberty Syndicate Paris 832 Lloyd’s Underwriter Syndicate No. 0033 HIS 9,019 Lloyd’s Underwriter Syndicate No. 0318 MSP 528 Lloyd’s Underwriter Syndicate No. 0382 PWH 962 Lloyd’s Underwriter Syndicate No. 0435 FDY 6,343 Lloyd’s Underwriter Syndicate No. 0566 STN 7,887 Lloyd’s Underwriter Syndicate No. 0570 ATR 173 Lloyd’s Underwriter Syndicate No. 0623 AFB 200 Lloyd’s Underwriter Syndicate No. 0727 SAM 960 Lloyd’s Underwriter Syndicate No. 0780 ADV 522 Lloyd’s Underwriter Syndicate No. 1084 CSL 626 Lloyd’s Underwriter Syndicate No. 1274 AUL 1,201 Lloyd’s Underwriter Syndicate No. 1301 BGT 105 Lloyd’s Underwriter Syndicate No. 1400 DRE 1,330 Lloyd’s Underwriter Syndicate No. 1414 RTH 8,482 Lloyd’s Underwriter Syndicate No. 1910 ARW 1,810 Lloyd’s Underwriter Syndicate No. 2001 AML 12,235






16

Name of reinsurer 2009 Lloyd’s Underwriter Syndicate No. 2003 SJC 4,231 Lloyd’s Underwriter Syndicate No. 2007 NVA 962 Lloyd’s Underwriter Syndicate No. 2010 MMX 734 Lloyd’s Underwriter Syndicate No. 2623 AFB 850 Lloyd’s Underwriter Syndicate No. 2791 MAP 4,231 Lloyd’s Underwriter Syndicate No. 3000 MKL 2,119 Lloyd’s Underwriter Syndicate No. 3820 HDU 803 Lloyd’s Underwriter Syndicate No. 4020 ARK 690 Lloyd’s Underwriter Syndicate No. 4444 CNP 1,780 Mapfe Compania de Reaseguros S.A. 2,142 Ace Tempest Reinsurance Limited 452 Ariel Reinsurance Company Ltd 1,181 Axis Capital Holdings Limited 574 Catlin Insurance Company Ltd 251 Harbor Point Re Ltd 4,559 Hiscox Ltd 2,186 New Castle Reinsurance Company Ltd 38 PartnerRe Limited 265 Platinum Underwriters Holdings Ltd 221 Tokio Millennium Re Ltd 4,028 Validus Holdings Limited 88 Allianz Risk Transfer AG 2,878 Paris Re 205 Amilin Bermuda Ltd 10,629 Total $ 164,350 The effect of reinsurance on premiums written and earned for the years ended December 31, 2009

and 2008 is as follows:

2009 2008 Written Earned Written Earned

Direct $ 382,342,402 $ 357,906,150 $ 331,048,817 $ 321,936,632 Ceded (950,202) (167,443,257) (350,000,000) (253,130,140)

Net $ 381,392,200 $ 190,462,893 $ (18,951,183) $ 68,806,492 During 2009 and 2008, the Association recovered approximately $675 million and $115 million,

respectively, of paid losses and loss adjustment expenses relating to reinsurance contracts.






17

4. Ceded Reinsurance Premiums Payable Ceded reinsurance premiums payable are reported net of reinsurance ceding commissions

receivable as follows:

December 31, 2009 2008

Ceded reinsurance premiums payable $ 43,111,396 $ 96,109,375 Reinsurance ceding commissions receivable (2,052,924) (4,603,125)

$ 41,058,472 $ 91,506,250 5. Unearned Premiums Unearned premiums are reported net of ceded unearned premiums as follows:

December 31, 2009 2008

Gross unearned premiums $ 183,870,362 $ 159,434,109 Ceded unearned premiums - (166,493,055)

$ 183,870,362 $ (7,058,946) 6. Loss and Loss Adjustment Expenses Activity in the liability for unpaid losses and loss adjustment expenses is summarized as follows:

2009 2008

Beginning balance (net of reinsurance receivable of $1,257,175,137 and $0) $ 395,196,680 $ 10,575,903

Incurred related to: Current loss year 17,744,000 1,223,282,709 Prior loss years (308,057,489) (8,158,508)

Losses and loss adjustment expense incurred (290,313,489) 1,215,124,201

Paid related to: Current loss year (9,656,000) (825,177,874) Prior loss years (63,540,217) (5,325,550)

Paid losses and loss adjustment expense (73,196,217) (830,503,424)

Ending balance (net of reinsurance receivable of $386,127,586 and $1,257,175,137) $ 31,686,974 $ 395,196,680






18

7. Statutory Fund During 1993, the Texas Legislature amended Article 21.49 of the Texas Insurance Code

authorizing the creation of a Catastrophe Reserve Trust Fund ("Trust Fund") to be held by the Texas Department of Insurance ("TDI") for the purpose of allowing the Association to enter into a program with TDI in lieu of a renewal of the Association's past reinsurance arrangements. Pursuant to the statutory agreement with TDI, the Association terminated its retrospective reinsurance agreement. Consequently, the retrospective premium due from the reinsurers was refunded directly to the Trust Fund, with legal title to such funds reverting to TDI. In accordance with the statutory agreement, the Association shall pay the net equity, including all premiums and other revenue of the Association in excess of incurred losses and operating expenses to the Trust Fund or a reinsurance program approved by TDI. As a result, the Association accrued $69.5 million of statutory fund costs for the year ended December 31, 2009.

To administer these funds, TDI entered into a related Funds Management Agreement with the State

Comptroller of Public Accounts ("Comptroller") whereby the Comptroller will manage the funds in the Trust Fund.

Under the statutory agreement with the TDI, under the law in effect prior to the enactment of HB

4409 all monies in the Trust Fund were to be used for payment of net losses from windstorm and hail catastrophe losses in excess of $100 million in any calendar year and/or catastrophe mitigation (see Note 3). During 2008, the Association received a payment of approximately $469 million from the Trust Fund to meet its estimated obligations.

8. Employee Benefit Plans Defined Benefit Plan. The Association has a defined pension benefit plan, which covers

employees from their date of hire, if the employee is scheduled to work at least 1,000 hours in a twelve-month period. Pension benefits are based on years of service and the employee's compensation during the five highest consecutive years' earnings from the last ten years of employment. An employee's benefits vest 5 years from date of hire. The Association makes contributions to the plan that complies with the minimum funding provisions of the Employee Retirement Income Security Act. Such contributions are included in general expenses.






19

The following sets forth a summary of projected benefit obligations, plan assets, funded status, benefit costs and assumptions of the defined pension benefit plan as follows:

December 31, 2009 2008

Change in Projected Benefit Obligations for Vested Participants: Benefit obligation at beginning of year $ 4,622,990 $ 3,618,822 Service cost 680,919 351,225 Interest cost 312,070 241,662 Actuarial loss 639,496 461,939 Benefits paid (123,370) (50,658)

Projected benefit obligation at end of year 6,132,105 4,622,990

Change in Plan Assets Fair value of plan assets at beginning of year 2,631,250 3,359,615 Actual return on plan assets 766,131 (1,042,255) Employer contributions 335,640 364,548 Benefits paid (123,370) (50,658)

Fair value of plan assets at end of year 3,609,651 2,631,250

Funded Status Unrecognized net loss 2,159,552 2,298,879

(Accrued) prepaid benefit obligation for vested employees $ (362,902) $ 307,139 Accumulated Benefit Obligation for Vested Participants $ 4,792,718 $ 2,631,250 Benefit Obligation for Non-Vested Employees Projected benefit obligation $ 462,322 $ 538,207 Years ended December 31, 2009 2008

Components of Net Periodic Benefit Costs Service costs $ 680,919 $ 351,225 Interest costs 312,070 241,662 Expected return on plan assets (218,756) (279,299) Amount of loss recognized 231,448 28,354

Total net periodic benefit cost $ 1,005,681 $ 341,942






20

Minimum Pension Liability Accrual is required when actuarial present value of accumulated benefits exceeds plan assets and

accrued pension liabilities. Minimum liability adjustment is reported as an adjustment to unassigned funds. At December 31, 2009 and 2008, additional minimum liability of $1,183,067 and $0 was required, respectively.

Pension Assumptions December 31, 2009 2008 Weighted-average assumptions used to determine net periodic benefit cost: Discount rate 6.0% 6.5% Rate of compensation increase 4.0% 4.0% Expected long-term rate of return of plan assets 8.0% 8.0% Weighted-average assumptions used to determine projected benefit obligations: Weighted-average discount rate 6.0% 6.5% Rate of compensation increase 4.0% 4.0% Measurement Date A measurement date of December 31, 2009 was used to determine the above. Asset Allocation The defined benefit pension plan asset allocation as of the measurement date presented as a

percentage of total plan assets were as follows: December 31, 2009 2008 Equity securities 58.1% 50.6% Debt securities 39.0% 45.9% Real estate 0.0% 0.0% Other 2.9% 3.5% 100.0% 100.0% The investment policy of the Plan is to maximize the total return of the fund while maintaining a

strong emphasis on preservation of capital. The total portfolio is expected to be less volatile than the market the vast majority of the time. The plan assets are invested in a mix of equity and fixed income investments subject to target allocation ranges. The target allocation range for fixed income investments is between 20% and 40%. The target allocation range for international equity investments is between 10% and 20%. Remaining funds not invested in the categories above are to be invested in short-term cash equivalents such as money market funds.






21

The long-term rate of return represents the expected average rate of return on the plan assets based on the expected long-term asset allocation of the plan. Several factors are considered, including historical market index returns, expectations of future returns in each asset classes, and the potential to outperform market index returns.

Future Payments The following estimated future payments, which reflect expected future service, as appropriate, are

expected to be paid in the years indicated:

Years ending December 31, Amount 2010 $ 142,763 2011 197,853 2012 223,269 2013 277,515 2014 310,653 2015 - 2019 2,426,757 Planned Contributions The Association expects to make contributions of $759,736 during the year ending December 31,

2009. Defined Contribution Plan. The Association has a defined contribution 401(k) plan available to

eligible employees after six months of employment. The Association contributed approximately $258,000 and $252,000 for the years ended December 31, 2009 and 2008, respectively.

9. Lease Commitments The Association leases office space under a non-cancellable operating lease agreement which

expires in 2012. Future minimum lease payments, by year and in the aggregate, under a non-cancelable operating lease with initial or remaining terms of one year or more consisted of the following at December 31, 2009:

Years ending December 31, Amount

2010 $ 709,268 2011 730,999 2012 441,000 2013 - 2014 and thereafter -

$ 1,881,267






22

Rental expense under the non-cancelable operating lease was approximately $621,000 and $591,000 for the years ended December 31, 2009 and 2008, respectively.

10. Federal Income Taxes The net deferred tax assets and the increase in nonadmitted deferred tax assets are comprised of the

following components: December 31, 2009 2008 Total gross deferred tax assets $ 14,258,983 $ 68,182,268 Total gross deferred tax liabilities (92,484) - Net deferred tax asset 14,166,499 68,182,268 Nonadmitted deferred tax assets (14,166,499) (68,182,268) Net admitted deferred tax assets $ - $ - Decrease (increase) in nonadmitted deferred tax assets $ 54,015,769 $ (62,063,302) The change in deferred income taxes reported in surplus before consideration of nonadmitted assets

is comprised of the following components:

December 31, 2009 2008 Net deferred tax assets $ 14,166,499 $ 68,182,268 Tax-effect of additional minimum pension liability (402,243) - Net tax effect without unrealized gains and losses $ 13,764,256 $ 68,182,268 Change in net deferred income tax $ (54,418,012) $ 62,063,302 Deferred income tax assets and liabilities consist of the following major components: December 31, 2009 2008 Deferred tax assets: Discount of unpaid losses and LAE $ 371,466 $ 4,502,488 20% of unearned premiums 13,473,442 204,307 Net operating loss carryforward - 63,212,220 AMT tax credit - 260,423 Additional minimum pension liability 402,243 - Other (80,652) 2,830 Total deferred tax assets 14,166,499 68,182,268 Nonadmitted deferred tax assets (14,166,499) (68,182,268) Net admitted deferred tax assets $ - $ -






23

The Company’s income tax incurred and change in deferred income tax differ from the amount obtained by applying the federal statutory rate to income before federal income taxes as follows:

Years ended December 31, 2009 2008 Expected income tax expense at statutory rate $ 113,729,220 35% $ (66,227,953) -34% Other - 0% 22,839 0% Total income tax $ 113,729,220 35% $ (66,205,114) -34% Federal income taxes incurred $ 57,000,000 17% $ (4,141,812) -32% Change in net deferred income taxes 54,418,012 17% (62,063,302) -2% Accrual adjustment/change in rate 2,311,208 1% - 0% Total statutory income taxes $ 113,729,220 35% $ (66,205,114) -34% At December 31, 2009, the Association utilized approximately $184 million of the 2008 net

operating losses to offset current year taxable income. The amounts of federal income taxes incurred that are available for recoupment in the event of

future net losses are approximately $57 million for 2009. 11. Related Parties Pursuant to the Association's Plan of Operation, its Board of Directors consists of nine members.

Five directors are elected from the membership of the Association, two directors are appointed by the Texas Department of Insurance from the public sector based on nominations by the Office of Public Insurance Counsel and two directors, who are licensed local recording agents, are appointed by the commissioner of the Texas Department of Insurance. Of the five directors elected from the membership, a minimum of three members shall be from companies with multi-state operations and a minimum of one member shall be from a company domiciled in the State of Texas.

12. Service Contract with Texas FAIR Plan Association During 2002, the Association entered into a service contract with the Texas Fair Plan Association

(the "Plan") in which the Association is to be fully reimbursed for all expenditures, professional fees, consulting services, allocated employee time, lost investment income and other costs directly associated with the services provided by the Association on behalf of the Plan. As of December 31, 2009 and 2008, the Association incurred or paid expenses for which it has not been reimbursed of $7,604,974 (of which $7,009,645 has been non-admitted) and $485,334, respectively, on behalf of the Plan. These amounts are recognized in the statutory statements of admitted assets, liabilities, surplus and other funds as a receivable from Texas FAIR Plan Association.






24

13. Line of Credit The Association had a $150 million line of credit with a bank. There were no balances outstanding

as of December 31, 2008 or drawn against the line of credit for the years ended December 31, 2009 and 2008. This agreement expired on July 13, 2009 and was not renewed.

14. Commitments and Contingencies The Association is subject to various investigations, claims and legal proceedings covering a wide

range of matters that arise in the ordinary course of its business activities. Management believes that any liability that may ultimately result from the resolution of these matters in excess of the amounts provided will not have a material adverse effect on the financial position of the Association. These matters are subject to various uncertainties, and some of these matters may be resolved unfavorably to the Association.

15. Concentration of Credit Risk The Association maintains deposits of cash in excess of federally insured limits with certain

financial institutions. The Association has not experienced any losses in such accounts and believes they are not exposed to any significant credit risk on cash.

The Association writes windstorm and hail coverage primarily in the 13 counties along the Texas

coast. 16. Nonadmitted Assets Nonadmitted assets consisted of the following: December 31, 2009 2008 Premiums receivable $ 133,344 $ 125,985 Prepaid pension cost - 307,139 Deferred tax asset 14,166,499 68,182,268 Receivable from Texas FAIR Plan Association 7,009,645 - Furniture and equipment 197,063 - Total nonadmitted assets $ 21,506,551 $ 68,615,392 17. Fair Value of Financial Instruments The estimated fair values and carrying values of the Association's financial instruments are as

follows: 2009 2008

December 31, Carrying Amount

Fair Value

Carrying Amount

Fair Value

Cash and short-term investments $ 352,013,162 $352,013,162 $ 831,456,183 $ 831,456,183






25

18. Reconciliation with Annual Statement The following schedules set forth the differences in the amounts reported by the Association to

Texas Department of Insurance on its December 31, 2009 annual statement and as reported in the accompanying 2009 audited financial statements. The adjustments, excluding minor reclassifications, relate to the following:

Taxes, licenses and fees and current federal income taxes payable – A reclassification adjustment

was made to properly classify current federal income taxes payable. Receivable from Texas FAIR Plan – An adjustment was made to non-admit certain receivables

from Texas FAIR Plan. Other underwriting expenses incurred and additional minimum pension liability – An adjustment

was made to record additional minimum pension liability in accordance with SSAP No. 89. Statutory fund payable – An adjustment was made to properly reflect the statutory fund cost in

accordance with Article 21.49 of the Texas Insurance Code. Deferred tax assets – An adjustment was made to reflect the tax effect of the above changes. December 31, 2009

Annual Statement Adjustments

Audited Financial

Statements Statutory statement of admitted assets,

liabilities, surplus and other funds:

Receivable from Texas FAIR Plan $ 7,604,974 $ (7,009,645) $ 595,329 Taxes, licenses and fees 40,655,550 (38,880,664) 1,774,886 Current federal income taxes - 38,880,652 38,880,652 Statutory fund payable 124,264,347 (54,710,777) 69,553,570 Unassigned deficit (47,701,144) 47,701,144 -






26

December 31, 2009


Audited Financial

Statements Statutory statement of income:

Statutory fund cost $ 124,264,347 $ (54,710,777) $ 69,553,570 Other underwriting expenses incurred 89,081,784 (1,183,080) 87,898,704 Statutory statement of changes in surplus

and other funds:

Net income $ 212,046,772 $ 55,893,857 $ 267,940,629 Change in net deferred income tax (54,242,329) (175,683) (54,418,012) Change in non-admitted assets 54,345,046 (7,236,205) 47,108,841 Additional minimum pension liability - (780,824) (780,824) The following schedules set forth the differences in the amounts reported by the Association to

Texas Department of Insurance on its December 31, 2008 annual statement and as reported in the accompanying 2008 audited financial statements. The adjustments, excluding minor reclassifications, relate to the following:

Cash and short-term investments – An adjustment was made to properly reflect claim payments

due to timing differences. Amounts recoverable from reinsures and provision for reinsurance – An adjustment was made to

reclass amounts as a reduction in reserves in accordance with SSAP No. 62 Loss and loss adjustment expense reserves – An adjustment was made to strengthen reserves based

on management’s best estimate and also to reduce those reserves for the amounts ceded under reinsurance contracts in accordance with SSAP No. 62.

Funds held under reinsurance treaties – An adjustment was made to reflect funds received in

advance for loss payments in accordance with SSAP No. 62.






27

December 31, 2008


Audited Financial

Statements Statutory statement of admitted assets,

liabilities, surplus and other funds:

Cash and short-term investments $ 835,306,600 $ (3,850,417) $ 831,456,183 Amounts recoverable from reinsures 361,250,000 (361,250,000) - Receivables from affiliate 515,846 (30,512) 485,334 Loss and loss adjustment expense

reserves

1,152,371,816 (757,175,136) 395,196,680 Other expenses 921,829 (30,513) 891,316 Funds held under reinsurance treaties - 540,542,325 540,542,325 Provision for reinsurance 22,752,085 (22,752,085) - Statutory statement of income: Loss and loss adjustment expense

incurred $ 1,083,273,783 $ 131,850,418 $ 1,215,124,201 Other underwriting expenses incurred 49,617,091 4,141,811 53,758,902 Federal income taxes incurred - (4,141,812) (4,141,812) Statutory statement of changes in surplus

and other funds:

Net loss $ (58,792,981) $ (131,853,303) $ (190,646,284) Change in net deferred income tax 17,274,800 44,788,502 62,063,302 Change in nonadmitted assets (17,156,551) (44,788,504) (61,945,055) Change in provision for reinsurance (22,752,085) 22,752,085 - Other - 2,888 2,888 Statutory statement of cash flows: Benefit and loss related payments $ 213,299,404 $ 526,696,132 $ 739,995,536 Commissions, expenses paid and

aggregate write-ins for deductions

139,632,204 5,251,748 144,883,952 Federal income taxes paid (recovered) 4,141,812 (4,141,812) - Other cash provided (applied) (62,487,536) 523,955,649 461,468,113 Net change in cash 621,105,037 (3,850,418) 617,254,619






28

19. Subsequent Events No events have occurred subsequent to December 31, 2009 through the date of the audit report that

would have a material impact on the Association’s financial statements or that would merit disclosure.




29

Independent Auditors' Report on Supplemental Material

Our audits of the statutory financial statements included in the preceding section of this report were performed for the purpose of forming an opinion on those statements taken as a whole. The supplemental material presented in the following section of this report is presented to comply with the National Association of Insurance Commissioners Accounting Practices and Procedures Manual and Texas State law. Such information has been subjected to the auditing procedures applied in the audit of the financial statements and, in our opinion, is fairly stated in all material respects in relation to the financial statements taken as a whole. This report is intended solely for the information and use of the Board of Directors and the management of Texas Windstorm Insurance Association and for filing with the Texas Department of Insurance and should not be used by anyone other than these specified parties. However, this report is a matter of public record and its distribution is not limited. Certified Public Accountants June 9, 2010 Austin, Texas





Summary Investment Schedule

December 31, 2009

30

Gross Investment

Holdings *


Investment categories Amount % Amount %

Bonds:

U.S. Treasury securities $ - - $ - - U.S. Government agency obligations (excluding mortgage-backed securities):

Issued by U.S. Government agencies - - - - Issued by U.S. Government-sponsored agencies

- - - -

Foreign Government (including Canada, excluding mortgage-backed securities)

-

-

-

-

Securities issued by states, territories and possessions and political subdivisions in the U.S.:

State, territories and possessions general obligations

-

-

-

-

Political subdivisions of states, territories and possessions political subdivisions general obligations

-

-

-

- Revenue and assessment obligations - - - - Industrial development and similar obligations

-

-

-

-

Mortgage-backed securities (includes residential and commercial MBS):

Pass-through securities: Issued or guaranteed by GNMA - - - - Issued by FNMA and FHLMC - - - - All other - - - - CMO’s and REMIC’s: Issued or guaranteed by GNMA, FNMA, FHLMC or VA

-

-

-

-

Issued by non U.S. Government issuers and collateralized by mortgage-backed securities issued or guaranteed by agencies

- - - - All other - - - - Other debt and other fixed income securities (excluding short-term):

Unaffiliated domestic securities (includes credit tenant loans rated by the SVO)

-

-

-

-

Unaffiliated foreign securities - - - - Affiliated securities - - - -






Summary Investment Schedule

December 31, 2009

31

Gross Investment

Holdings *


Investment categories Amount % Amount %

Equity interests:

Investments in mutual funds - - - - Preferred stocks: Affiliated - - - - Unaffiliated - - - - Publicly trade equity securities (excluding preferred stocks):

Affiliated - - - - Unaffiliated - - - - Other equity securities: Affiliated - - - - Unaffiliated - - - - Other equity interests including tangible personal property under lease:

Affiliated - - - - Unaffiliated - - - - Mortgage loans: Construction and land development - - - - Agricultural - - - - Single family residential properties - - - - Multifamily residential properties - - - - Commercial loans - - - - Mezzanine real estate loans - - - - Real estate investments: Property occupied by the company - - - - Property held for production of income - - - - Property held for sale - - - - Contract loans - - - - Receivables for securities - - - - Cash, cash equivalents and short-term investments

352,013,162

100.000%

352,013,162

100.000%

Other invested assets - - - -

Total invested assets $ 352,013,162 100.000% $ 352,013,162 100.000% *Gross investment holdings as valued in compliance with the NAIC Accounting Procedures Manual






Supplemental Investment Risk Interrogatories

December 31, 2009

32

1) Reporting entity’s total admitted assets as reported in the accompanying financial statements. $ 449,192,288

Questions 2 through 23 are not applicable.






Reinsurance Interrogatories

December 31, 2009

33

7.1 Has the reporting entity reinsured any risk with any other entity under a quota share reinsurance contract that includes a provision that would limit the reinsurer’s losses below the stated quota share percentage (e.g., a deductible, a loss ratio corridor, a loss cap, an aggregate limit or any similar provisions)? YES[ ] NO [X]

7.2 If yes, indicate the number of reinsurance contracts containing such

provisions. N/A 7.3 If yes, does the amount of reinsurance credit taken reflect the reduction in

quota share coverage caused by any applicable limiting provision(s)? YES[ ] N/A [X] 8.1 Has this reporting entity reinsured any risk with any other entity and agreed

to release such entity from liability, in whole or in part, from any loss that may occur on this risk, or portion thereof, reinsured? YES[ ] NO [X]

8.2 Is yes, give full information. N/A [X] 9.1 Has the reporting entity ceded any risk under any reinsurance contract (or under multiple contracts

with the same reinsurer or its affiliates) for which during the period covered by the statement (i) it recorded a positive or negative underwriting result greater than 5% of prior year-end surplus as regards policyholders or it reported calendar year written premium ceded or year–end loss and loss expense reserves ceded greater than 5% of prior year-end surplus as regards policyholders; (ii) it accounted for that contract as reinsurance and not as a deposit; and (iii) the contract(s) contain one or more of the following features or other features that would have similar results:

(a) A contract term longer than two years and the contract is noncancellable

by the reporting entity during the contract term;

(b) A limited or conditional cancellation provision under which cancellation

triggers an obligation by the reporting entity; or an affiliate of the reporting entity, to enter into a new reinsurance contract with the reinsurer, or an affiliate of the reinsurer;

(c) Aggregate stop loss reinsurance coverage; (d) A unilateral right by either party (or both parties) to commute the

reinsurance contract, whether conditional or not, except for such provisions which are only triggered by a decline in the credit status of the other party;






Reinsurance Interrogatories

December 31, 2009

34

(e) A provision permitting reporting of losses, or payment of losses, less frequently than a quarterly basis (unless there is no activity during the period); or

(f) Payment schedule, accumulating retentions from multiple years or any

features inherently designed to delay timing of the reimbursement to the ceding entity. YES[X] NO [ ]

9.2 Has the reporting entity during the period covered by the statement ceded any risk under any

reinsurance contract (or under multiple contracts with the same reinsurer or its affiliates), for which, during the period covered by the statement, it recorded a positive or negative underwriting result greater than 5% of prior year-end surplus as regards policyholders or it reported calendar year written premium ceded or year-end loss and loss expense reserves ceded greater than 5% of prior year-end surplus as regards policyholders; excluding cessions to approved pooling arrangements or to captive insurance companies that are directly or indirectly controlling by, or under control with (i) one or more unaffiliated policyholders of the reporting entity, or (ii) an association of which one or more unaffiliated policyholders of the reporting entity is a member where:

(a) The written premium ceded to the reinsurer by the reporting entity or its

affiliates represents fifty percent (50%) or more of the entire direct and assumed premium written by the reinsurer based on its most recently available financial statement; or

(b) Twenty-five percent (25%) or more of the written premium ceded to the

reinsurer has been retroceded back to the reporting entity or its affiliates in a separate reinsurance contract? YES [ ] NO [X]

9.3 If yes to 9.1 or 9.2, please provide the following information in the Reinsurance Summary

Supplemental Filing for General Interrogatory 9: (a) The aggregate financial statement impact gross of all such ceded

reinsurance contacts on the balance sheet and statement income.

(b) A summary of the reinsurance contract terms and indicate whether it

applies to the contracts meeting the criteria in 9.1 or 9.2; and







35

(c) A brief discussion of management’s principle objectives in entering into the reinsurance contract including the economic purpose to be achieved. N/A

9.4 Except for transactions meeting the requirements of paragraph 30 of SSAP No. 62, Property and

Casualty Reinsurance, has the reporting entity ceded any risk under any reinsurance contract (or multiple contracts with the same reinsurer or its affiliates) during the period covered by the financial statement, and either:

(a) Accounted for that contract as reinsurance (either prospective or

retroactive) under statutory accounting principles (“SAP”) and as a deposit under generally accepted accounting principles (“GAAP”); or

(b) Accounted for that contract as reinsurance under GAAP and as a deposit

under SAP? YES [ ] NO [X] 9.5 If yes to 9.4, explain in the Reinsurance Summary Supplemental Filing for

General Interrogatory 9 (Section D) why the contract(s) is treated differently for GAAP and SAP. N/A

9.6 The reporting entity is exempt from the Reinsurance Attestation Supplement

under one or more of the following criteria: (a) The entity does not utilize reinsurance ; or, YES [ ] NO [X] (b) The entity only engages in a 100% quota share contract with an affiliate

and the affiliated or lead company has filed an attestation supplement; or, YES [ ] NO [X]

(c) The entity has no external cessions and only participates in an

intercompany pool and the affiliated or lead company has filed an attestation supplement. YES [ ] NO [X]





.----. ---, .. __ .

''''''''1 ~ ~ .. ~.!; __ -..-_._.of .......... 1):<:.1:(/,.-

... ., .;: omceoftbe CGmmIaalaner,MaIi COde 113-1C 333 O~/llUp$' P.O. Box 149104. Austin. Texas 78714-9104 512 ~ telG~ • 512415-2005 fax • WWW.IdI.stale.tx.u$

Mareh 21. 2011

Mr. Garry Kaufman, Chairman Texas Windstorm Insurance Association GaMlston, Insurance Associates 6025 Heards .Lane Galveston, TX.77551

Mr. Michae' Gel'lk 6xecutiVe VKle President Texas FarmSureau MutuallnsufSnce Company 6420 Fish Pond Road Waco, Texas 16710

Ms. Georgia Neblett The University ofTe,ps- MarineScienae llistltute 750 Channel View 01'. Port Aransas, Texas 18313

Re: The Association's Use of Current Premium Income

Dear 'Executive Committee Members:

Ina recent- upd~tetb the Legislature, the question of the proper use of current premium donarsto pay claims and losses· from Hurricanes Ike and Dplly was raised. Specifically, the. question presented was "eould the Assooiatlon use current premium inooroeto pay Hurricanes Ike and Dolly claims?"

When InsuranoeCode Chapter 2210 was amended by' the 8.1st Legislature (House Bill 44'00), catastrGphe claim funding for future e~nts was revised. The amendmen_ diQ not revise or amend the method of funding catastrophe claims that existed before September 1, 2009. rhe amendments to Chapter 2210 are pr~and dJd nQt exp~s that the amendments woutd be retroactiVely appll~.

Before HOU$e BIII4409, losses in any calendar yesr that exceeded premium and other revenue, were to be resolved pursuant to Insufance Code Section 2210.058. SectIon 2210.058 set out specific sources 'and priority of funding to pay for losses In any calendar year. Section 2210.058 was repealed by HB 4409 but the repeal did not address assessments neeessary to pay for losses that existed befOre the effective date of the repeal.

cgonzalez

Typewritten Text

EXHIBIT G

-------------_ .•.... _ .......• __ .... __ ..... _----_ ........ __ ._ ....... _---

As. the .1os8e$ from HJJtt~ Ike anci Dolly are obligations and liabilities that eldsted~r to the effeCtIve date of Hi 4409, we believe the funding mechanism for such losses IS contained In chapter 2210 before it was amended by HB 4409.

We are considering what would be a prudent course of action for the use of current premium de!lanJ; and, at this time, it appeanJ current premium dollars shoukf not be used to pay claims losses of Hurricanes Ike and Dolly. We therefore urge the Soard to promptly obtain a legal analysis of the pertinent statutes and provide appropriate instr.u~ions to the Assooiation regarding whether cun:ent premium income may be used for {he payment of Hurricane Ike and Dolly Claims. this is an important and critical question that merits your immediate attention.

Sincerely,

/vVt~Iu,~ Mike. Geeslin Commls&ioner of Insurance

Cmmt PFecE' GN.8

QJsnuq PFecE: One Plaza Square, Suite 203

Port Arthur, TX 77642 409-n4-0788

P.O. Box 2910 Austin, TX 78768-2910

512-463-0662 Fax: 512-463-8381

STATE of TEXAS HOUSE of REPRESENTATIVES

Fax: 409-n4-0750 [email protected]

Ms. Eleanor Kitzman Commissioner Texas Department of Insurance 333 Guadalupe Austin, Texas 78701-3938

Mr. John W. Polak General Manager TWIA 5700 South MoPac Expressway Building E, Suite 530 Austin, Texas 78749

Dear Ms Kitzman:

JOE DESHOTEL Texa~ State Representative 22nd Legislative District

March 24, 2013

Mr. Mike Gerik Chainnan Texas Windstonn Insurance Assoc. 5700 South MoPac Expressway Building E, Suite 530 Austin, Texas78749

To follow up on our conversations from Thursday morning, March 21, 2013 in Chairman Todd Hunter's office, we believe that the proposed discussion and any action to place TWIA into Receivership is unnecessary and unwarranted. What the Board should do, as has long been advocated by Mike Geeslin, the previous Insurance Commissioner, as well as coastal members of the Board, is assess the insurance companies under the law applicable to insurance policies in effect in September 2008.

In our meeting, as well as reflected in TWIA documents, we were advised that TWLA has spent approximately $316 million dollars in 2009, 2010, 2011 and 20] 2 premiums to resolve 2008 Hurricane Ike claims. In addition, TWIA has set aside in reserves an additional $330+ million from premiums to pay for the currently pending/remaining claims. This brings the total probable payout for Hurricane Ike to $2.7 billion.

In the September 17. 2008 Board meeting after Hurricane Ike, Jim Oliver, the Executive Director of TWIA, noted that with $42 Billion in insured exposure in the 6 county Ike impacted area, at a

COMMtnEes

Land a Resource Management Chairman

Public Education Member

cgonzalez

Typewritten Text

EXHIBIT H

Ms. Eleanor Kitzman March 24, 2013 Page 2

10% loss ratio, TWIA's exposure could be 4.0 Billion dollars. Mr. Mr. Oliver requested an assessment of $830 million to the insurance carriers under the 2008 TWIA statutory funding structure (this statutory structure was changed in 2009 by HB 4009 as discussed below). Mr. Oliver noted that with cash from the Trust Fund and $1.5 billion in reinsurance this $830 million assessment would allow TWIA to pay claims up to $2.5 billion. The four coastal representatives on the Board votedfor the $830 million assessment, but the five insurance industry representatives did not vote for the assessment. The insurance company representatives would only go as high as a $430 assessment which brought TWlA to a capacity to pay $2.1 billion.

Despite promise~' (discussed below) to make further assessments at later dates, no further assessment has ever been TTUUie! Instead, the TWIA Board, even under the oversight by TDI and Commissioner Kitzman, has paid out and reserved $600+ million in premiums. If the Board would simply follow the law in place for these 2008 policies and assess the insurance companies and move the premium money to the Trust Fund, which currently has $178 million, TWlA would have over $775 million, which is hundreds of millions more (50%) than the Trust Fund has ever had!

At the October 8. 2008 Board meeting, it was noted that TWIA expected 90,000 claims and estimated the cost to be $2.7 billion dollars. (Ironically, we were advised in our meeting on 3121113 that this is the total that TWlA has paid and reserved for all Ike claims.) Further, Mr. Oliver noted that another assessment might not be necessary until the first quarter of 2009. The Board agreed to wait to discuss another assessment until the December 2008 meeting.

On November 18. 2008 the head actuary for TWIA responded to an inquiry from Rep. Larry Taylor's office that the estimated losses were $2.1-$2.5 and noted the $430 million in assessments and added, "For example. if the ultimate lossesfrom Hurricane Ike are $2.5 billion, we will need to assess an additional $400 million from the last layer of assessments . ..

The next meeting of the TWIA Board was December 9, 2008 at which time Mr. Oliver estimated the losses would be $2.1-$2.4 and that another assessment might be necessary the following (2009) summer.

Although there is no talk: of an assessment on the companies at the March 9, 2009 meeting, it was noted that, "The two hurricanes (Ike and Dolly) depleted the Catastrophe Reserve Trust Fund .... Unless a change is made in the statute, TWIA will have no funds for hurricane season 2009, except company assessments." Likewise, there was no talk of assessments during the June 23, 2009 or December t S. 2009 meetings.

The March 9. 2010 meeting had no discussions of assessments. It was noted that $ 1.4 billion had been spent to date and there is a reference in the audit documents that $2.3 billion is the estimated loss. The June 22, 2010 meeting did not reference any assessments and oddly estimated losses at $1.9 billion "$100 million greater than originally anticipated" which is in direct opposition to all of the above including their answers to the audit report in the March 2010 records.


The September 14.2010 meeting reflects that 92,700 claims had been filed and only 40,000 policyholders in the 6 counties had not had a claim filed. It was noted that $1.725 billion had been paid out to date and the estimate was at $2.1 billion for Ike losses. It is also noted that there was a recent settlement of the "slab" cases.

At the December 7. 2010 meeting, it was reported that $1.82 billion had been paid to date and the incurred losses would probably be $2.3 billion "up from the original estimate of S2.1" yet there was no discussion of assessments.

On March 21. 2011 Commissioner Mike Geeslin wrote a letter to TWIA, as the result of a legislative inquiry, specifically, "could the Association use current premium income to pay for Hurricane Ike and Dolly losses?" After analyzing the legislation that was passed in 2009 (HB 4409) the Commissioner determined that, without expressly saying it, TWIA should asses the companies. "As the losses from Hurricane Ike and Dolly are obligations and liabilities that existed prior to the effective date of HB 4409, we believe the funding mechanism for such losses is contained in Chapter 2210 before it was amended by HB 4409 (i.e. assessment of the companies) .... It appean that current premium dollan should not be used to pay claim losses from Hurricane Ike and Dolly." Mr. Pollack wrote a memo to the Board raising the issue. No action was taken.

At the June 28.2011 Board meeting, Mr. Pollack noted that it was unclear if assessments were necessary. In an audit that was presented to the Board, the auditing company noted under the section, ''Nature of Business" that, "In the event of a net loss in any policy year prior to January 1,2009, members participating in that policy year may be assessed for their share of the loss based upon their respective participation percentages." No action was taken.

Before he left office, Commissioner of Insurance, Mike Geeslin, again wrote the TWIA Board on August 12,2011 addressing the assessment issue. He wrote, "Also, of substantial interests are issues related to the resolution of Hurricane Ike losses and funding. These include, but are not limited to, the potential assessment of member companies for 2008 losses, and accounting for 2009 through 2011 annual premium dollars that have been used to pay Ike daims. How these matters are resolved will have an impact on the level of public trust of TWlA ... I believe that at the next Board meeting, the Board should have all available information from counsel and TWIA staff necessary to vote on and resolve these issues." How prophetic Commissioner Geeslin was 18 months ago as we sit here today!

Commissioner Kitzman took over for Commissioner Geeslin between the June and September 2011 Board meetings. At the September 13, 2011 Board meeting, Commissiner Kitzman told the Board that she did not think that an assessment was needed at that time despite the fact that TWIA had paid and reserved over $200 million out of Post Ike Premiums and that the Board had sufficient revenue (premiums???) and reinsurance to pay the remaining Hurricane Ike and Dolly claims and that WI would continue to monitor the situation. It was then noted that TWIA had paid out over $2.0 billion and that reinsurance would be exhausted by the end of the year.

· '


At the December 13,2011 Board meeting it was noted that the reinsurance had been exhausted and that $30 million remained uncollectable due to the Lehman Brothers failure. A memo dated December 31,2011 raised the estimate of Ike losses to $2.35 Billion along with $305 million in losses from Hmricane Dolly and noted that during a normal non stonn year approximately $200 mi1lion would be put into the Trust fund. However, because of the Robstown storm and increasing reserves for Ike, only $82 million would be transferred to the Trust Fund. No diseussion of assessments was mentioned.

A March 31, 2012 "Management Discussion and Analysis" presented at the May 15. 2012 Board meeting raised the Ike loss claims estimate to $2.4 Billion. No mention of assessments was presented. Likewise, at the August 12, 2012 Board meeting a lengthy discussion was held with Commissioner Kitzman, about TWIA funding including the $174 million in the Trust Fund and scenarios that could deplete available funding sources. Assessments were never mentioned by anyone. This meeting is in contrast to the meeting just a year earlier where Commissioner said TWIA had sufficient revenue and reinsurance to pay claims.

A memorandum from the TWIA executive director John PoUack presented to the Board at the December 2012 meeting raised the Ike loss estimate from $2.4 billion to $2.53 billion. Assessments were not mentioned.

A review of the available Board meeting minutes reveals that the TWIA Executive Director's initial estimates that additional assessments were necessary were correct and that nobody ever followed up on Commissioner Geeslin's directives. It is not too late for the Board to take action, assess the member companies, put $600 million in the Trust Fund and shore up TWIA's funding situation which would eliminate the need to even discuss receivership. With $775 million in the Trust Fund the legislature could build a substantial financial model for the security of the coast and the State of Texas.

Sincerely,

Abel Herrero House District 34

a · <{~/ CraigEil~ House Dia;:J ;3

· . Ms. Eleanor Kitzman March 24, 20 13 PageS

Cc: TWIA Board Members David Durden

~ f:;:JAo = Allan Ritter House District 21

'(t:::J: ';~';\ I:::;:·'. '\i,:~\ Texas Department of Insurance \"', ',lit -: Office ofthe Commissioner, Mall COde 113·1C \, ',' 333 Guadalupe· P.O. Box 149104. Austin. Texas 78714-9104

'. 512 463-6464lelephone· 512475-2005 fa)(· www.tdi.state.tx.us

August 12. 2011

Mr. Mike Gerik, Chairman Texas Windstorm Insurance Association Texas Farm Bureau Mutual Insurance Company 6420 Fish Pond Road Waco, Texas 76710

Re: Texas Windstorm Insurance Association

Dear Mr. Gerik:

In my Jetter to the Board of Directors (Board) dated March 21, 2011, I expressed concerns related to the proper use of current premium dollars and requested that the Board address that issue as well as the 2008 Hurricane Ike losses. I understand that those issues are still outstanding and that the Board is seeking legal guidance. The Board's decision to address those issues is commendable.

Texas Insurance Code, Chapter 2210, Subchapter J. establishes the guides and steps for accounting for the Association's annual net profits. The provisions of Subchapter J. except as to the funding of the Mitigation and Preparedness Plan, have remained intact without substantial change since 2008. Determining and filing an accurate annual financial statement will provide great assistance in compliance with the provisions of Subchapter J.

Also, of substantial interest are issues related to the resolution of Hurricane Ike losses and funding. These include, but are not limited to, the potential assessment of member companies for 2008 losses, and accounting for 2009 through 2011 annual premium dollars that have been us~ to pay Hurricane Ike claims. HoW these matters are resolved will have an impact on the level of public trUst aehic';,oo by TWIA:

I believe that at the next board meeting, the Board should have all available information from counsel and TWIA staff necessary to vote on and resolve these issues. To that end, Tm staff requests a meeting and dialogue with your legal advisors and staff. Please instruct your general counsel to contact Gene C. Jannon @ (512) 475-2001 to arrange a date and time to begin these important discussions.

SiNl~-~ .~~. ~ik~~{in Commissioner of Insurance

cgonzalez

Typewritten Text

EXHIBIT I

Minutes of the Texas Windstorm Insurance Association

Board of Directors Meeting Moody Gardens Galveston, Texas August 13,2013

Chairman Gerik called the meeting to order at 8:00 a.m. Board members were provided with a . copy of the anti-trust statement and reminded of the prohibitions in the anti-trust statement by counsel. Mr. Perkins stated that public comment is on the agenda and requested that any speakers limit remarks to a maximum of three minutes.

The following board members were present, representing:

The following Board members were present, representing: 1. Michael Gerik, Chairman Insurance Industry Representative 2. Ron Lawson Insurance Industry Representative 3. Alice Gannon, Secretary/Treasurer Insurance Industry Representative 4. Mike O'Malley Insurance Industry Representative 5. Cliff Craig Non-Seacoast Territory Representative Member 6. David Franklin Non-Voting Engineer Member 7. Georgia Neblett, Vice Chairman First Tier Coastal County Resident Member 8. Steve Elbert First Tier Coastal County Resident Member 9. Edward (E.Jay) Sherlock First Tier Coastal County Resident Member 10. Gene Seanlan First Tier Coastal County Resident Member The following TWIA staff. counsel, and agents were present: 1. John Polak, General Manager TWIA 2. Pete Gise, Controller TWIA 3. Jim Murphy, Actuary TWIA 4. Lee Talbert, Executive Assistant TWIA 5. Dave Williams, VP Claims TWIA 6. David Durden, VP Legal TWIA 7. Mike Perkins, Association Counsel Sneed, Vine & PelTY, PC 8. Clark Thomson Calhoun, Thomson + Matza, LLP

The following were also present:

Guests: Ann O'Ryan Dalton Smith Verle Petri Chris Carbone Otie Zapp

AAATX Bank of America Merrill Lynch Chubb Citibank Coastal Windstorm Insurance Coalition

cgonzalez

Typewritten Text

EXHIBIT J

8/13/13

Rick Spruill Foster Edwards Erin Moore George Taylor Wes Swift Jon Green Joan Polak Amy Gimbel Tad Delk Henry Freudenburg Pearl Mueller Lee Loftis Wally Goodman Craig Fegley Jonna Kay Hamilton Kergin Bedell Greg Smith Brigitt Hartin Lynette Kilgore Justin Hudman Lynette Kilgore Cari Christman Elizabeth McMillen Ingrid D' Anna Commissioner Julia Rathgeber Marilyn l-Iamilton Marianne Baker Michael Nored Bob Betz Brian O'Neill Wes Koehl Tom Gonzales Bo Gilbert Gary Cox Brant Chandler Jerry Mohn

Corpus Christi Caller Times Corpus Christi Chamber of Commerce Elizabeth Christian & Associates F.B. Taylor Insurance GCDN GSM Insurers Guest Guy Carpenter Guy Carpenter GWAC ICT lIAT lIAT JPMorgan Chase Nationwide OPIC Port Aransas Chamber of Commerce Rep. Bonnen's office Rep. Eiland's office Chairman Hunter's office Rep. Eiland's office Senator Taylor's office SMlInsurance SMIInsurance TDI TDl TDI TDI Towers Watson Towers Watson TWIA UPC Insurance USAA Wellington Premium Finance Wellington Premilml Finance WPIPOA

2. Approval of Minutes: The minutes from the .hme 18,2013 meeting in Austin were reviewed. Ms. Neblett moved to approve the minutes. Ms. Gannon seconded the motion. The motion was approved with one abstention (Mr. O'MalIey abstained because he was not present at the June 18 meeting).

3. Public Comment: • Rep. Craig Eiland: Rep. Eiland urged the board to assess the member companies

without waiting for the Attorney General's opinion. He stated that policyholders will sue the Association if it does not assess the companies, and that the companies would sue the Association if it does assess the companies. In his

2

8/13113

opinion statute 2210.058 does not give the Association discretion regarding assessing the companies. He added that the Commissioner of Insurance challenged the Association to develop a three-year plan, which would be easier to develop with additional funds in the CRTF.

• Elizabeth McMillen, SMT Insurance: As an agent and an insured, Ms. McMillen said she represents both sides of the issue. She stated that assessment is a better alternative to increasing rates in order to maintain affordabiIity of coverage for coastal dwellers.

• Foster Edwards, President of Corpus Christi Chamber of Commerce: Mr. Edwards believes that the companies should be assessed. He stated that the insurance company representatives on the TWIA board should recuse themselves because they have a conflict of interest in any vote on assessments.

• Buzz Melton, Apartment/Hotel Associations in Galveston County: Urged the board to make necessary difficult decision to ensure that there are funds to pay claims.

• Marie Robb, Galveston City Council: Asked the board to assess the companies, stating that TWIA cannot be depopulated when companies are not motivated to write coverage on the coast.

• Otie Zapp, Coastal Windstorm Insurance Coalition: Stated that the word . "incUlTed" determines the issue of member assessments, adding that TWIA is

financially vulnerable at this point in time. • Beaman Floyd, TX Coalition for Affordable Insurance Solutions: There are two

sides ofthis issue. The question seems to be whether excess loss is a snapshot in time or overall. As far as insurance companies can tell, Ike claims have been paid and TWIA had sufficient cash to continue to do so. Regarding conflicts of interest on the board, the board is a community of interests; companies, insureds and agents. The board was formulated by the legislature to be a community of interests and no one should be disqualified to vote on the issue of assessments.

• Jerry Moen, President, TX Chapter of American Shore and Beach Preservation: Requested that the board consider the residents of the coastal communities, keep the premiums low and assess the companies to maintain the quality ofIife of the coastal dwellers.

4. Remarks by Commissioner Julia Rathgeber: The Commissioner said she is looking forward to the discussion about the possibility of a clearing house, which may be a good concept to make the market work better and allow more options tor insureds. As well, the Commissioner is looking forward to options that are user friendly coming from the ongoing feasibility study.

5. Financials: A. Report of the Secretary/Treasurer: Ms. Gannon reviewed the income statement,

management discussion and analysis and cash balance sheet. Direct premium written has increased by 9.6%, reflecting the 5% rate increase and some increase in policy growth and premium trends. The Association has had favorable development in HtuTicane Ike incurred losses. The deficit has been reduced to $109 million. This does not include the money in the Catastrophe Reserve Trust Fund, nor does it include the $60 million refund claim that has been filed with the

3

8113113

Associates on audit practices and procedures projects in the past. Staff has engaged Rupert & Associates to ensure that, as the Association makes changes in its processes it remains in compliance and that the board fhlfills its role in terms of governance of the Association. Mr. Gise added that TOI previously approved the board serving as the audit committee. The audit committee is a critical component ofthe governance function. While staff is still researching the creation of an internal audit function, it recommends pursuing this action, having discussions with other wind plans that have implemented an internal audit function, and providing specific recommendations to the board at the December meeting, with a budget amount and a more defined implementation plan. Chainnan Gerik noted that should there be an internal audit function, the individual will report directly to the board. Ms. Neblett stated that this is foresight on the pati of staff and that staff is authorized and directed to continue to explore the establishment of an internal audit function and provide a recommendation to the board at the December 2013 meeting. Ms. Gannon seconded the motion. The motion was unanimously approved.

H. 2012 Financial Audit: Mr. Thomson reported that Calhoun, Thomson + Matza completed the audit in accordance with statutory accounting and also in accordance with GAAP. The auditors issued an unqualified opinion on the audit. The auditors did not observe any material issues. There were no material mistatements and no disagreements with management during the audit. Mr. Thomson pointed out that there are two versions of the financial statements, one statutory and one GAAP. The statutory statement is required under statute. The GAAP is used for reporting to TO!. The auditors did not identify any material deficiency in internal controls. Ms. Gannon moved that the board acknowledges reviewing and hereby accepts the financial audit report of Calhoun Thomson + Matza as presented to the board. Ms. Neblett seconded the motion. The motion was unanimously approved.

1. Results of RFP and Selection of Accountant! Auditor for 2013 Audited Statements: As directed by the board, staff coordinated a Request for Proposal (RFP) for selection of the accountant/auditor for the 2013 TWIA financial audit. Staff received five responses, one from a "big 4" firm, two Austin-based firms and two firms recommended by PIPSO. An evaluation committee, consisting of two knowledgeable TWIA staff members and partner with an independent CPA finn who had not submitted a proposal, evaluated the responses. Based on criteria of experience, clarity of proposal and cost, the staff recommended that Calhoun Thomson + Matza should continue with the audit for 2013. Ms. Neblett questioned how costs of the firms compared and was told Calhoun Thomson + Matza was neithel' the highest or lowest, but based on their experience hours required should be favorable to TWIA. Ms. Neblett moved tlmt the board accept the recommendation of staff to retain Calhoun Thomson + Matza as the financial audit firm for the Association's 2013 financial statements and authorizes the execution of an engagement letter on terms similar to prior engagement letters. Ms. Gannon seconded the motion. The motion was unanimously approved.

J. TDI Financial Examination: TOI notified staff that they will conduct a financial examination of TWIA in conjunction with the previously announced exan1ination of the Texas FAIR Plan. The examination is expected to commence in November

5

8/13/13

2013. Staff is conducting a readiness evaluation over the next weeks in preparation for the examination.

K. State Sales and Use Tax Refund Claim: TWIA received a favorable ruling from the Comptroller's office on the effective date of the exemption. The efIective date has been changed to April 2007. Staff filed all refund claims with the Comptroller's office, who has accepted them. Staff anticipates the audit to be completed by the end of third quarter 2013. The overall reflmd is estimated to be approximately $9 million.

L. IRS Refund Claim: This refund claim was filed almost two years ago. The Association recently responded to the fifth document request from the IRS. The application is pending and progressing, but there is no significant new information.

M. 2013 storm season loss funding: Current funding for TWIA is at $2.7 billion, excluding the BAN. Staffhas met with TDI and the Commissioner as well as the Texas Public Finance Authority, to evaluate other funding opportunities. Staff feels that the BAN is the best option; however, the time frame to execute the BAN at this point in the storm season makes it less attractive. Consequently staff is pursuing other alternatives. One option is liquidity funding with Chase Bank. Staffhas received an updated proposal. The original proposal had two features: a $250 million BAN secured by Class 2 securities and a $200 million line of credit. Staff is evaluating the proposal. Some due diligence from TWIA and TDI is required by Chase. A September storm would not preclude Chase from continuing to assist TWIA with liquidity. Security for Chase is the issuance of Class 2 and 3 bonds; to the extent that they can secure position there the liquidity would be available in the mid to late October time frame. Chairman Gerik asked if that would change the attachment point in the reinsurance. Mr. Gise said that it would not impact the reinsurance. Mr. Polak stated that staff has done an exhaustive review with the subcommittee and TDI and examined seven alternatives. Staff continues to move forward developing a three-year storm funding plan. Ms. Neblett moved that staff pursue a $200 million line of credit and a companion $250 million Bond Anticipation Note with Chase Bank, with the permission of TDI, for the 2013 huu-icane season. Mr. Craig seconded the motion. The motion was unanimously approved. Mr. O'Malley encouraged staff to pursue the option to secure pre-event bonds with a five-year term as well as catastrophe bonds.

N. Assessment of InslU'ance Companies for Losses Resulting from Hurricane Ike: Mr. Perkins stated that as of June 30, 2013 the estimated ultimate net loss to the Association from Hurricane Ike was $2.67 billion. $1.3 billion was paid by reinsurance. $430 million was paid through member company assessments and $370 million through the Catastrophe Reserve Trust Fund. The remaining net loss of$575 has been paid or reserved from the Association's premium revenue and investment income earned or collected during the five years since Hurricane Ike. The Association's financial position and funding options for the current storm season are the subject of much discussion. Reinsurance has been placed. However former Commissioner Kitzman denied the application for a $500 million BAN which would have provided liquidity to pay losses and been convertible into a five-year anlortizing loan in the event other Class 1 public

6

8/13113

securities could not be sold. The BAN would also lave allowed reinsurance to attach at a higher point, thus providing more reinsu ance coverage for the same expense. As TWIA has sought funding options to'l1crease claims paying capacity, the issue of member company assessmen s has again come up for deliberation by the board. In 2009 the Texas legisl ture revised TWIA's funding structure, replacing unlimited assessments on mem er companies supported by tax credits with a post~event borrowing structure i olving public securities issued on behalf of the Association by the Texas Fnance Authority. The legal basis to support continued authority for assessmen of the companies for losses prior to the repeal of the law is unclear. Former C mmissioners Geeslin and Kitzman had differing opinions on the issue of wh ther the Association should seek to assess member companies for Ike losses. s TWIA's f1.mding challenges persist, pressure has increased to take action on the assessment issue. Mr. Perkins asked that the board receive confidential legal advi e prior to voting on the assessment issue in open session.

6. Closed Session: At 9:25 a.m. Chairnlan Gerik conven d the Board into executive session pursuant to Section 55] .071 and 551.074 ofth Texas Government Code. At 11 :58 a.m. the board moved back into open session.

7. Consideration of issues related to matters deliberated i closed session that ma . require action, ifany, of the Board of Directors: Ms. annon stated that most important consideration is that the board does what is egal and within the law. There is still a question about which law applies; the new la or the one repealed in 2009. Some clarity could be provided by waiting for the Att rney General's opinion. Mr. O'Malley agreed with Ms. Gannon but added that an a sessment could be considered in the event of a major storm .. Ms. Neblett said that th AG opinion is just that, an opinion. Ms. Neblett moved that the member insurance companies be assessed $575 million, subject to the review of the TDI. Mr. Seaman seconded the motion. Discussion: Mr. O'Malley asked ifTDI would review or actually approve the assessments. Commissioner Rathgeber said that the T IA board decision on the issue of assessment of insurers falls outside the curren administrative oversight of TWIA by TDI. However, TDI would review the proc ss ofthe assessment. Administrative oversight is a review of the processes nd procedures to implement the assessment, not second guessing a vote ofthe boar . Ms. Neblett clarified her motion: Ms. Neblett moved to assess the member co. panies for $575 million, subject to the approval ofTDI of the procedures invol ed in making the assessment. Mr. Seaman seconded the motion. Discussion: The bard discussed their opinions in favor of or opposed to an assessment. Mr. Craig and 1'. Lawson pointed out that there were no unpaid claims from HUl1'icane Ike. Mr. mig stated that there are many issues to discuss, such as building codes and continuat on of coverage on non-eligible structure. Mr. Lawson added that there is no immediae need to assess. Mr. Seaman said that an assessment could be recouped through pre 11ium tax credits. Chairman Gerik noted that the regulators have had differing opit ions on whether or not the Association can assess the companies. In his opinion t might be illegal to assess the companies. Through the recent settlement of Ike litig tion at the end of May 2013, there was no need for assessment because the funding scheme in place had been

7

8113/13

followed and all claims were paid. He added that recent criticism of the board lor not assessing the companies in 2008 and 2009 was unfounded; assessments are not made based on events that have not happened. Mr. Sherlock thought the assessment would be good for policyholders. Mr. O'Malley stated that the unanticipated lawsuits filed after the storm caused the financial issues that the Association suffered. Nothing at the time of the storm justified an additional assessment. Legislative action in 2009 made the ability to assess unclear. The AG opinion may provide legal c.larity for the board. Chairman Gerik called the question. The motion failed by a vote of four to four (in favor: Mr. Seaman, Ms. Neblett, Mr. Elbert, Mr. Sherlock. Opposed: Mr. O'Malley, Mr. Craig, Mr. Lawson, Chail111an Gerik. Abstained: Ms. Gannon) Ms. Gannon requested that, in light of the failure of the motion, Mr. Perkins present a statement on behalf of the board.

Mr. Perkins presented the following statement for consideration by the board: RESOLVED, that the TWIA board takes very seriously the liquidity and funding challenges facing TWIA. The board is committed to take all actions that board members believe to be fiscally prudent and clearly legally authorized to protect the association and its policyholders and to maximize the association's ability to timely pay policy claims and association expenses. However, the board members are mindful of the fact that four years ago the legislature significantly revised the association's funding structure to end unlimited assessment of member companies passed through to all citizens of Texas through tax credits. The current system involves funding thtough the issuance of public securities that are to be repaid from specific funding sources that include TWIA premium, member assessments and surcharges on coastal insureds. There is a legal basis to suppOli the continuing authority to levy assessments. However, this authority is not clear and there is also a legal basis for the contrary position on this issue. Therefore, the TWIA board will not take action to levy an assessment at this time. The board will, however, leave the option to act open and in the coming days the board members will remain vigilant. Issues that the board will monitor include: 1) whether TWIA experiences a major storm; 2) the Attorney General's opinion to be issued within the next several months in response to the request filed last month by a member of the legislature; 3) any input or direction received from the Texas Department of Insurance on this matter; and 4) other relevant developments including any changes in TWIA's financial position. This board has authority to call special and emergency meetings as circumstances warrant and as Texas law and the Association's Plan of Operation permit. The board will be at the ready if action is required. Ms. Gannon moved to accept the resolution. Mr. Seaman seconded the motion. The motion passed by a vote of7-1. (In favor: Mr. O'Malley, Mr. Craig, Mr. Gerik, Ms. Gannon, Mr. Elbeli, Mr. Lawson, Mr. Seaman. Opposed: Ms. Neblett. Abstained: Mr. Sherlock) The motion passed.

8. Actuarial: A. Reserve Adequacy: Mr. Murphy reported that the Association's reserves were

reviewed as of June 30, 2013. The review indicated a slight increase in prior accident years and an increase in the 2013 accident year reserves resulting from the most recent quarter development. In his opinion, the Association's reserves met the requirements of the insurance laws of Texas. Hurricane Ike estimate has

8

8/13/13

decreased from $2.72 billion to $2.675 billion due to new litigation below projections. The ultimate estimate for Hurricane Dolly increased from $305 million to $315 million, Despite the favorable trend in litigation activity, there is a material risk of adverse development associated with variability associated with litigation,

B. Policy Count/Exposures: Overall growth remains around 3% annually for policy growth and 4% for exposures.

C. Board Review ofthe Actuarial/Underwriting Committee Recommendations and Action of the Statutorily Required Rate Filing. Ms. Gannon said that the committee met twice to discuss the rate filing, on July 25 and August 5. She presented the formal recommendation of the ActuariallU nderwriting Committee regarding the mandatory annual August 15 rate filing. Consistent with the strategy the board developed in 2010 for moderate annual increases, the committee unanimously recommended that TWIA file for a 5% rate increase effective January 1,2014. The formal recommendation was seconded by Mr. Craig. Discussion: Ms. GalIDOn stated that the actual indications developed by staff actuary Mr. Murphy and outside consulting firm Merlinos were much higher (33% for residential and 31 % for commercial). The committee agreed that the balance between adequate rate and the need to move forward in a measured way and sensitivity to the affordability issue made the 5% rate increase appropriate. Ms. Neblett stated that the annual increases are making windstol111 insurance unaffordable for coastal dwellers and suggested a zero rate increase. She added that during the financial forecast discussion Mr. Gise stated that absent a rate increase in 2014, TWIA could have a potential $25 million decrease in surplus. She suggested that TWIA develop some method of saving $25 million rather than asking for another rate increase. Ms. Gannon said that rate making is prospective, making today's rate, compared to expected future losses, significantly inadequate, a position suppOlted by OPIC alld an outside actuarial expelt. Mr. O'Malley stated that, when Hurricane Ike hit, the Association had not had an assessment in 20 years, but 20 years of premium increases had proved inadequate. He added that rates that are 31 % inadequate are a primary reason that TWIA is a dominant writer in the market. Mr. Sherlock suggested changing the rating from a primary to a secondary dwelling and charging more for secondary dwellings. Ms. Gannon replied that the committee would be pleased to study this approach fmther if requested. Mr. Craig suggested that the legislative affairs committee might consider suggesting pricing differential as a recommendation to the legislature. Chairman Gerik called the question. The motion passed by a vote of7-2. (In favor: Ms. Gannon, Mr. O'Malley, Mr. Elbert, Mr. Craig, Mr. Gerik, Mr. Sherlock, Mr. Lawson. Opposed: Ms. Neblett, Mr. Seaman)

D. Statutory Limits of Liability: As prescribed by the Texas Insurance code section 221 0.502(a), the liability limits are to be adjusted based on changes in the Boeckh Index. As of June 30, 2013 there are 282 risks at the current limits ofliability. The Association must make a filing with TOl before the annual September 30 deadline, as required by statute. Ms. Gannon moved to increase the limits of liability as follows

Dwelling and individually owned townhouses Cun'ent 20 13

$1,773,000 Indicated 2014

$1,816,000

9

8/13/13

Contents of apartment, condo or townhouse $ 374,000 $ 383,000 Commercial structures/associated contents $4,424,000 $4,514,000 Ms. Neblett seconded the motion. The motion was unanimously approved.

9. Underwriting A. Underwriting Management Change: Mr. Polak reported that Vice President of

Undervvriting Randy Wipfleft TWIA on the first of August. Jim Murphy is acting as interim manager. Several candidates have been identified, both internal and external, and interviews will be scheduled in the coming weeks.

B. Agent Training: TWIA Underwriting is implementing on-line training courses as an additional resource that agents can take at any time to obtain continuing education credits. TWIA Underwriting will continue on-site training workshops for agents.

10. Claims: A. Claims Operations: Mr. Williams reported that claims has completed upgrading

its technology to be scalable for larger catastrophe events. Infrastructure improvements allow for up to 100 remote users to key claims systems. Additional capacity has been added for workstation hardware and software. Installation was completed on the VOIP (voice over internet protocol) call center solution which is the foundation for the enterprise phone system to be added later and permits hundreds or thousands of users throughout the country if necessary in a major catastrophe scenario. The field adjuster vendor management program is being updated. Five aspects have been completed, subject to final approval. These aspects include updated property damage evaluation guidelines, bringing TWIA into synch with the rest of the industry. Operationally, as of June 30, 2013 claims received 83% more claims than projected year to date. This was due to two storms, Santa Fe and Corpus Christi. Despite the volume, there has been a very low cycle time of 12 days from first notice of loss to payment. The complaint ratio has been lowered compared to this time last year to 0.22%. Customer feedback continues to indicate high customer satisfaction. Any negative customer comments are followed up for resolution.

B. Claims Litigation: Mr. Durden reported that TWIA has 117 active unsettled claims. 94 are active and 14 are "no policy" cases. 75 are related to Hurricane Ike. Staff is working to resolve the remaining lawsuits, negotiating with plaintiff firms.

11. Operations: A. Operations/Management Report Card: Mr. Polak said that statIhas completed its

operations improvement plan initiated and developed in response to TD1's administrative oversight. StatIis moving forward to make adjustments to improve the ability of the organization to meet its primary mission of promptly and fairly resolving claims in the event of a catastrophe event. The reactions of policyholders to TWIA are far more favorable than in the past. The skills of senior management have been upgraded with replacement of 70% of the executive leadership at TWIA including replacement of all claims and underwriting management personnel. Regular communication between the

10

8/13/13

Association and the board has improved. Many of these improvements have been validated by outside audits. The extensive Association improvements exhibit that has been provided to the board on a quarterly basis will be discontinued, with staff reporting any changes to the board as they occur.

B. Clearing House: Staff has had discussions with the legislative/external affairs committee concerning improvements that would require legislative change. One area is depopulation. Staff has been investigating what it could accomplish without legislative change and within TO! rules and the Plan of Operation. One item included in legislation but not passed is the clearing house. One means to help depopulate the organization would be to provide better knowledge to all carriers about all potential policyholders. This would provide an opportunity for the voluntary market to select and voluntarily write TWIA risks. Staff has begun working with TD1 to design a proposed concept between now and the December board meeting. At that mtecting staff will provide the board with a feasibility study with key reference points and a structure that the Association could implement without legislative action, as well as what type of legislative action would be required to expand the concept. The IT capabilities are already in place. Florida Citizens is the only other wind pool implementing this process and has been a helpful and valuable resource.

12. 83Td Texas Legislature: No major legislative actions impacting TWIA funding or structure came from the regular or the special sessions.

13. Committees: The audit committee will be on the December agenda.

14. Future meetings: • December 10,2013 - Omni, Corpus Christi • February 17,2014 - Marriott South, Austin

15. Adjourn: The meeting adjourned at 1 :30 p.m.

Prepared by: Lee Talbert Executive Assistant

11