SALE OF TEXAS COMP FACILITY HITS SNAG ON RESERVE LEVY

AUSTIN, Texas-Texas insurance companies may face a $58 million assessment from the Texas Workers' Compensation Insurance Facility before the former market of last resort is privatized.

European International Reinsurance Co. Ltd., a Barbados-based subsidiary of Swiss Reinsurance Co., submitted the only bid for the facility, offering $5 million to take over the fund and run off its business.

The sale of the facility, however, is not yet assured. In a meeting last week, representatives from Swiss Re and the facility's governing board were wrangling over a tax issue that could derail the transaction.

"It's an economic issue that could wreck the train, but we're hoping to work it out," said Gene Fondren, chairman of the governing board of the TWCIF.

Legislation enacted in Texas this year authorized privatization of the facility, which last wrote coverage in 1993.

As part of its bid, the buyer requested that the $58 million assessment be made to boost the facility's loss reserves and cover runoff expenses. The facility's board of directors approved the charge, and insurers are receiving notices regarding their assessments.

Some insurers are receiving notices of assessments that range from $5 million to $8 million,

said John B. Lennes Jr., vp of the Alliance of American Insurers in Schaumburg, Ill.

A majority of the state's workers comp insurers are TWCIF members.

The assessment may come after insurers in Texas lost a recent fight to hold on to their portion of surpluses paid in recent years when the fund showed profits (BI, July 7). The Texas Department of Insurance last week approved a rule ordering insurers to pay policyholders that bought retrospectively rated plans a portion of the $718.5 million returned to insurers from 1991 through 1994. The department estimates those policyholders will receive $272 million in payments.

An American Insurance Assn. spokesman said it hopes the state will give insurers credit for paying the proposed assessment and the surplus refunds, if both payments are ordered.

A Swiss Re spokesman declined to discuss the purchase of the facility because it is pending. But he said the facility always has had "an ability to assess its membership for costs" or make refunds following a surplus.

The TWCIF operated as the state's residual market until 1994, when it stopped writing coverage and was replaced by the Texas Workers Compensation Fund. The facility rang up sizable deficits until workers comp reforms in the state prompted marketplace changes that in 1991 began generating surpluses for the insurer.

There weren't a lot of takers when the insurer was put on the block.

"Early on, there were some potentially interested parties," but the Swiss Re unit's bid was the only one to materialize, said Betty Patterson, director of financial monitoring in the financial program at the Texas Department of Insurance.

Insurers will have a chance to recoup some of the investment if the runoff goes well. Any payoff, however, won't be available for some time.

Terms of the sale call for insurers that pay assessments to get stock in Facility Insurance Holding Corp., a Texas company that Swiss Re has formed to handle the runoff. If in the next 20 years the claims payments do not exceed $1.15 billion, the stock is redeemable at amounts determined then. If losses exceed that amount, the shares are not redeemable. But a sticking point in the negotiations centers on the tax on redeemed stock.

Mr. Fondren said Swiss Re disagrees with the facility's understanding that the seller would pay the taxes. "My personal view is that we can compromise to share" the payment if one comes due, he said.

Ms. Patterson said the law authorizing the sale requires the conversion to be made by Aug. 31. Otherwise the Texas Property & Casualty Insurance Assn. will absorb the facility.