Fitch Rates Assessment Revenue Bonds of Citizens Property Insurance Corp., LA ‘A-‘; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings assigns an 'A-' rating to the following bonds of the Citizens Property Insurance Corp., Louisiana (Citizens):

--$56.92 million assessment revenue refunding bonds, series 2012.

The bonds are expected to price on or about Feb. 22, 2012.

In addition, Fitch affirms the 'A-' rating on Citizens' outstanding $856.92 million assessment revenue bonds.

The Rating Outlook is Stable.

SECURITY

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 significant reserve funding.

ONGOING LITIGATION: Litigation related to a delay in paying claims from damages from Hurricane Katrina has resulted in a $104 million judgment against Citizens. While Citizens intends to appeal the ruling, the judge in the case has garnished Citizens' accounts for this amount less an earlier $6 million deposit. While the ruling is extremely detrimental to Citizen's cash position, somewhat offset by the ability to apply accumulated surplus emergency assessment revenue to the judgment, the security underlying Citizens debt offerings remains unchanged and protects bondholders.

POSITIVE FINANCIAL TRENDS: Except for the pending financial loss to Citizens from the judicial ruling, Citizens' financial position has been improving, with growth in claims paying resources following low catastrophe losses since Hurricane Katrina and improved financial oversight.

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 has declined to pre-Katrina levels.

RESOURCE-BASED ECONOMY: The Louisiana economy continues to be centered on resource development, although the state has undertaken concerted economic development efforts. The unemployment rate remains below the national average and recent employment growth has exceeded national averages.

WHAT COULD TRIGGER A RATING ACTION

Unusually severe hurricane activity that depletes Citizens' claims-paying resources, necessitates significant additional borrowing, and/or negative legislative action could pressure the rating.

CREDIT PROFILE

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 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 of up to 10% of that year's aggregate statewide direct written premium (DWP) on the subject lines of insurance, or a maximum of 10% of that specific year's 'plan year deficit'. 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 the outstanding and refunding 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 $2.2 billion, resulting in potential generation of up to $220 million per year per plan year deficit in support of debt service. The emergency assessment rate in fiscal 2012 is set at 3.9% and is expected to produce over $85 million for debt service payment.

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 $86 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 had been approximately $161 million prior to the garnishment of $98 million of these funds for the payment of a judgment against Citizens. The judgment is the outcome of a class action lawsuit (Oubre et al. v. Louisiana Citizens Fair Plan), whereby Citizens was found to not have expeditiously paid claims related to damages from Hurricane Katrina. Partly offsetting the sizable cash award is $75 million in accumulated surplus emergency assessment revenue held by the bond trustee that can be applied to payment of the judgment, thereby reducing operating cash by $23 million rather than the full $98 million. Although Citizens is seeking to have the judgment overturned, its immediate financial cushion to fund claims has been reduced, increasing the likelihood that alternate resources would be tapped in a potential catastrophic situation.

Alternate resources include a $50 million line of credit and a reinsurance program that provides additional protection up to $500 million, net a $75 million deductible. Together, remaining available cash and these funds would prove sufficient to cover an approximate 1-in-70-year storm event. Should losses exceed these resources, statutorily, Citizens would first levy a regular assessment, similar in calculation to the emergency assessment but not inclusive of Citizens' own rate-payers. The levy on the regular assessment base of $2 billion would produce potential annual revenue of $200 million. Following the levy of a regular assessment, Citizens could then levy a surcharge on its own policyholders of up to 10% of the ratio of the regular assessment to the DWP, which would generate approximately $20 million annually. Fitch believes that, in most situations, these combined resources would prove sufficient to fund claims related to significant wind events and that the overall credit quality of Citizens has not been diminished by the recent court judgment.

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 14% in 2008 to 9% 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'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Guidelines for Rating Assessment-Secured Debt Issued by State-Sponsored Property Insurers,

dated April 27, 2011;

--'Tax-Supported Rating Criteria', dated Aug. 15, 2011;

--'U.S. State Government Tax-Supported Rating Criteria', dated Aug. 15, 2011.

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648897

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Fitch Ratings
Primary AnalystMarcy Block, +1-212-908-0239
Senior Director
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary AnalystGretchen Roetzer, +1-312-606-2327
Director (Insurance)
or
Committee ChairLaura Porter, +1-212-908-0575
Managing Director
or
Media RelationsSandro Scenga, +1-212-908-0278
[email protected]

Source: Fitch Ratings