NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A-' rating on approximately $773.52 million of outstanding assessment revenue bonds of the Citizens Property Insurance Corp., Louisiana (Citizens).
The Rating Outlook is Stable.
The bonds are payable from pledged revenues, primarily emergency assessments. The rating is derived from Citizen's ability to levy emergency assessments on nearly every property insurance policyholder in the state for an unlimited duration and in a sizable, cumulative amount to pay debt service on the bonds.
KEY RATING DRIVERS
STRONG ASSESSMENT BASE: The rating reflects Citizens' ability to levy emergency assessments on nearly every insurance policy holder in the state for an unlimited duration and in a sizable, cumulative amount to pay debt service on its bonds.
INSULATED FROM INSURANCE OPERATIONS: Although the emergency assessment is not a special tax, it shares many characteristics of a special tax. Its collection is separate from Citizens' insurance operations, and its levy would support a significant level of bond issuance to cover major catastrophic scenarios. Additional security is provided by debt service reserves held by the trustee.
STABILIZED INSURANCE MARKET: The Louisiana insurance market has stabilized since Hurricanes Katrina and Rita in 2005. The private insurance industry remains strong as the state continues to demonstrate a commitment to maintaining a viable insurance market. Favorably, Citizens' share of the insurance market continues to decline due to successful depopulation efforts.
RESOURCE DEPENDENT STATE ECONOMY: The Louisiana economy continues to be centered on resource development, although the state has undertaken concerted economic diversification efforts. The unemployment rate remains below the national average, and recent employment growth is slightly below national averages. Fitch maintains an 'AA' general obligation bond rating on the state.
The rating on the assessment bonds is sensitive to unusually severe hurricane activity that depletes Citizens' claims-paying resources or necessitates significant additional borrowing; an increase in written policies that notably increases Citizens' exposure; or legislative action that affects Citizens' operations or its ability to leverage claims-paying resources.
Citizens, a state-run property insurer of last resort, has statutory authority to levy assessments on insurers and policyholders in Louisiana to cover claims and debt service on issued bonds. The 'A-' rating on Citizens' bonds, which were initially issued in 2006 to fund claims that arose from Hurricanes Katrina and Rita in 2005, reflects this access to special tax-like emergency assessments, the strength of the collection mechanism, and state involvement in ensuring the availability of property insurance in Louisiana.
Citizens is a not-for-profit, tax-exempt entity, established by Louisiana statute to provide coverage for those unable to obtain insurance or affordable insurance in Louisiana's voluntary market. Legislation has been adopted such that it is deemed a governmental entity, with board members appointed by the governor and other state officers, and not an insurance company, and is thus not allowed to declare bankruptcy. It is regulated by the Louisiana Department of Insurance (DOI), although it is not required to obtain or hold an insurer's license issued by the DOI as is required for private insurance companies domiciled in the state. Citizens operates two distinct insurance plans - the Coastal plan and the Fair Access to Insurance Requirements (FAIR) plan - for purposes of calculating different rates to insureds. The financial operations of the two plans are commingled.
Ultimate security for the bonds is derived from Citizens' ability to levy 'emergency assessments' on nearly every property insurance policyholder in the state, including its own policyholders, for an unlimited duration and in a cumulative amount up to statutory regulations to pay debt service on the bonds. The emergency assessment base, derived from the premiums written on property and casualty insurance policies in the state, is large and diverse and provides strong support for bondholders. The assessment is levied as a uniform percentage and cannot exceed the greater of 10% of the prior year's aggregate statewide direct written premium (DWP) on the subject lines of insurance or 10% of that specific year's 'plan year deficit' plus additional related charges. A plan year deficit results when there is a negative operating result for the year in either plan that exceeds all previous accumulated profits and excess reserves over and above reasonably recurring operating costs.
The levy of emergency assessments can occur in multiples, i.e. the levy for the 2005 plan-year deficit of up to 10% of the assessment base, supporting outstanding bonds, can be in addition to a levy for a future plan-year deficit, also up to 10% of the assessment base. The subject business lines are very broad and include all property and casualty insurance, including fire and vandalism, windstorm and hail, homeowners, and commercial multi-peril. The assessment base has steadily grown over time, oftentimes at a double-digit rate. The emergency assessment base is approximately $2.4 billion (derived from calendar year 2012 statewide direct written premium), resulting in potential generation of up to $242 million per year per plan year deficit in support of debt service. The emergency assessment rate for the fiscal year ending Dec. 31, 2014 is set at 3.54% and is expected to produce over $85.5 million for debt service payments.
Providing bondholder protection, emergency assessments are collected by insurers in the state and deposited directly with the bond trustee, keeping their collection separate from the financial operations of Citizens. There is also a reserve fund equal to maximum annual debt service (two-thirds of which is funded through surety bonds and one-third of which is cash funded) and an emergency assessment stabilization fund, currently funded in the amount of over $85 million that provides for another year of debt service payment.
Emergency assessments, however, are not the first source of liquidity for Citizens to meet catastrophe-related claims. Citizens would first tap its available funds on hand, which include accumulated surpluses, lines of credit, and reinsurance policies. Current cash on hand is estimated by Citizens at $72 million at Dec. 31, 2013; a diminishment from higher cash levels in early fiscal 2012 due to payments on litigation settlements as well as damages related to Hurricane Isaac, which struck Louisiana in August, 2012. The settlements are the outcome of several class action lawsuits against Citizens and resulted in cash payments to date of $160 million. There are also several ongoing lawsuits of which Citizens is a party to and the corporation has set aside reserves to address these potential liabilities.
Hurricane Isaac struck the state of Louisiana in August 2012, resulting in damages that required about $100 million in claims' payments to Citizens' policyholders. Of these payments, $50 million came from Citizens' own resources and $50 million was covered by reinsurance policies in place. Total alternate resources in place total $725 million and include a $75 million line of credit and $650 million of reinsurance, net a $50 million deductible. These alternate resources are estimated by Citizens to provide sufficient resources to cover an approximate 1-in-100 year storm event.
Should storm losses exceed these resources, per statute Citizens would first levy a regular assessment, similar in calculation to the emergency assessment but not inclusive of Citizens' own ratepayers. The levy on the regular assessment base of $2.2 billion would produce potential annual revenue of $220 million. Together with the levy of a regular assessment, Citizens would also levy a surcharge on its own policyholders in the ratio of the total regular assessment to the DWP, which would currently generate almost $20 million annually. Fitch believes that, in most situations, these resources would prove sufficient to fund claims related to significant wind events. Should these resources provide insufficient funding for claim payments, Citizens could then levy an emergency assessment.
Regular assessments are paid to Citizens by insurers, who can then recoup those amounts from their policyholders in the subsequent year through premiums; the surcharge is collected by Citizens. Citizens has only levied a regular assessment and a surcharge once, in 2005, following Hurricanes Katrina and Rita. The regular assessment and surcharge revenues are not pledged or available to pay debt service on the bonds.
While the assessment for the outstanding bond issues does not seem onerous, the capacity of ratepayers in Louisiana to absorb multiple levies of emergency assessments is a risk factor. Citizens' share of the insurance market has declined over time, from 16% in 2007 to 8% in 2012, which does limit its exposure and provide some offset. The state has demonstrated strong support for Citizens and the enabling statute contains a non-impairment clause from the state for the benefit of bondholders. Additionally, the state allows for a state income tax credit for insurance ratepayers for their annual, individual emergency assessment.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Guidelines for Rating Assessment-Secured Debt Issued by State-Sponsored Property Insurers', dated Feb. 14, 2013;
--'Tax-Supported Rating Criteria', dated Aug. 14, 2012;
--'U.S. State Government Tax-Supported Rating Criteria', dated Aug. 14, 2012.
Applicable Criteria and Related Research:
Rating Debt Issued by State-Sponsored Property Insurance Entities
Tax-Supported Rating Criteria
U.S. State Government Tax-Supported Rating Criteria