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Fitch Upgrades Assessment Revenue Bonds of
Citizens Property Insurance Corp., LA to 'A-'


Fitch Ratings has upgraded to 'A-' from 'BBB' the rating of the following bond of the Citizens Property Insurance Corp., Louisiana (Citizens):

     — $576,965,000 assessment revenue bonds, series 2006B.

Additionally, Fitch Ratings assigns an 'A-' rating to Citizens' outstanding $279,235,000 assessment revenue bonds, series 2006C.

The Rating Outlook is Stable.

The Issuer Default Rating (IDR) of 'BBB', which is on Rating Watch Negative will be withdrawn. Going forward, Fitch's ratings on Citizens' debt will apply to specific bonds and no IDR will be maintained. This change is made in conjunction with the publication of updated criteria for rating assessment secured debt issued by state sponsored insurers in April 2011 and the transition of lead coverage for this credit from Fitch's Insurance Group to the Public Finance Group.

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 policy holder in the state for an unlimited duration and in a sizable, cumulative amount to pay debt service on the bonds.

KEY RATING DRIVERS

     — The rating primarily reflects an increased emphasis on the security derived from Citizens' 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 its bonds.

     — 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.

     — Following no significant catastrophic losses since Hurricane Katrina and improved financial oversight, Citizens' financial position has strengthened with growth in claims paying resources.

     — Prior difficulties with its financial management systems, pointing to corporate governance weakness, have been resolved and Citizens produced a fiscal 2010 comprehensive financial statement with a clean audit opinion.

     — 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.

     — 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 but recent employment growth has been slower than the nation. Fitch maintains an 'AA' general obligation bond rating on the state.

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.

     — Continuing to improved financial metrics and a consistent track record of paying claims while replenishing capital resources.

CREDIT PROFILE

Citizens, a state-run property insurer of last resort, has statutory authority to levy assessments on insurers and policyholders in Louisiana following a large windstorm event to cover claims or debt service on issued bonds. The 'A-' rating on bonds 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 Citizen's ability to levy 'emergency assessments' on nearly every insurance policy holder 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 up to 10% of the assessment base, supporting the 2006 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 base is currently $2.2 billion, resulting in potential generation of up to $221.6 million per year per plan year deficit in support of debt service. The emergency assessment rate in fiscal 2011 is set at 4%, producing over $85 million per annum to pay debt service on the 2006 bonds that mature in 2026.

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 both accumulated surpluses, currently estimated at $150 million, and a $50 million line of credit. Citizens also maintains a reinsurance program that provides additional protection up to $500 million, net a $75 million deductible. Together, 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 policy holders of up to 10% of the ratio of the regular assessment to the DWP, which would generate approximately $16 million annually.

Regular assessments are paid to Citizens by insurers, which 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. Providing bondholder protection, emergency assessments are collected by the insurers 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 and an emergency assessment stabilization fund that provides for another year of debt service payment, for a total of two years of debt service in reserve.

While the assessment for the 2006 bond issues does not seem onerous, the capacity of ratepayers in Louisiana to absorb multiple levies of emergency assessments is questionable and a risk factor. Citizens share of the insurance market has declined over time, from 14% in 2008 to 9% in 2011, which does 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.

NEW YORK (Business Wire)





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