La. Citizens latest state insurer to tap cat bond market
The Louisiana Citizens Property Insurance Corp. has become the third state-run residual market wind pool to turn to the private insurance-linked securities market, issuing $100 million of catastrophe bonds through the Cayman Islands-based Pelican Re Ltd. facility, risk management blog Artemis.bm reports.
The bonds, which have not yet been rated by the major credit rating agencies, would provide three years of indemnity coverage for hurricanes, with an intentionally low attachment point that would allow Citizens to draw on coverage for smaller storms.
Artemis noted that it was “encouraging to see Louisiana Citizens bring a catastrophe bond to market as many of the non-profit state hurricane insurers have been discussing the capital markets in recent months,” before sounding the optimistic note: “Florida Citizens next perhaps?”
Although that’s probably not likely (the Florida Legislature already wrapped up its 2012 session, with some modest changes to Citizens’ capital structure) it is certainly true that state-sponsored insurers have been playing a growing part of the ILS market, with several deals announced in just the past few months. These deals clearly belie claims that such entities would be unable to find private sector capital without the backing of some form of federal backstop. Indeed, institutional investors have shown again and again that they have a huge appetite for catastrophe risks, if for no other reason than that they are not correlated with the market and credit risks that run through the rest of their portfolios.
The California Earthquake Authority – which was the first residual market entity to jump into the insurance-linked securities market with its two-year, $100 million Western Capital Ltd. offering in February 2001 – recently returned after a decade-long absence with not one, but two offerings from its Embarcadero Re Ltd. facility, each for three years and $150 million. The California State Compensation Insurance Fund – the nation’s largest state-run workers’ comp insurer – also securitized $200 million of its earthquake risks with bonds issued through the Golden State Re Ltd. vehicle, which will mature in January 2015
In terms of windstorm risks, the biggest splash by a state-run insurer in the cat bond market thus far has been the North Carolina Joint Underwriting Association and Insurance Underwriting Association, known colloquially as the “FAIR Plan” and the “Beach Plan.” North Carolina completed its first two-year, $200 million offering through the Parkton Re Ltd. facility in July 2009, before supplementing that with the three-year, $305 million Johnston Re Ltd. offering in May 2010 and another three-year, $202 million Johnston Re offering (which replaced the maturing Parkton bonds) in May 2011.
The Massachusetts Property Insurance Underwriting Association is the other residual market wind insurer to securitize U.S. hurricane risks, with its three-year, $96 million Shore Re Ltd. offering in July 2010.
For its part, Louisiana Citizens could certainly stand to shore up its claims-paying ability, in light of a pending judgment to pay out more than $100 million to policyholders whose claims weren’t handled quickly following the 2005 hurricanes.
Originally a $92.8 million judgment for a set of 18,500 policyholders, the bill has grown to $105 million with interest, and another roughly 6,500 policyholders still have claims pending. Citizens has lost all of its judicial appeals thus far, and hasn’t yet decided whether to appeal the case to the U.S. Supreme Court. The high court has, however, denied Citizens’ request for an emergency stay on seizure proceedings.
Most recently, on March 6, a state district judge gave Regions Bank 10 days to tell plaintiffs in the case how much of Citizens’ money the bank was holding. Assuming the seizure process proceeds, the bank ultimately will have to turn the money over to a Jefferson Parish sheriff, with the court in charge of supervising distribution. Plaintiffs’ attorneys have already turned down a $103 million offer from Citizens to settle all claims.
This hit to its bottom line cames as Citizens has otherwise made good progress on an ambitious depopulation program in recent years, an effort to reduce potential taxpayer liabilities. Should the company face a shortfall in reserves and surplus following a major storm, Citizens has authority to lay assessments of 10% and, in extreme circumstances, an additional 10% on private property insurers.
After reaching a peak of 164,000 residential policies and 10,000 commercial policies as of 2008, Citizens is now down to about 105,000 home policies and 5,500 business policies. Many of the policies were transferred to 11 new property insurers under an incentive-based take-out process established four years ago, which has thus far seen $123.7 million in premiums covering $13.2 billion of property assumed by private insurers.
Citizens transferred 11,000 properties to private companies in the last round of take-outs in November 2011, and expects to do another round in late 2012. Louisiana Insurance Commissioner James Donelon and Citizens’ management have said they expect the company will always retain about 80,000 to 85,000 policyholders who will not be able to obtain private coverage.
In January, Citizens submitted a request to Donelon for a 10.5% overall rate increase, including 10.8% for FAIR Plan rates, 2.3% for FAIR Plans that exclude wind and hail coverage, 7.2% for Coastal Plan rates and 3.8% for Coastal Plans that exclude wind-and-hail coverage. The request was made to make Citizens policies less competitive with private market insurers. Under state law, the company’s rates must be at least 10% higher than private competitors.