Fitch Rates LA Citizens Property Insurance Corp. $340MM Assessment Revs 'A-'; Outlook Stable

Fitch Ratings has assigned an 'A-' rating to $340.28 million of Louisiana Citizens Property Insurance Corporation (Citizens) assessment revenue refunding bonds series 2015.

The bonds are expected to sell via negotiation on or about the week of July 16, 2015.

In addition, Fitch has affirmed the following ratings:

--$682.37 million Citizens assessment revenue bonds at 'A-'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from pledged revenues, primarily emergency assessments on property insurance policyholders in the state.

KEY RATING DRIVERS

STRONG ASSESSMENT BASE: The rating reflects 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. The maximum allowed levy of emergency assessments provides strong coverage of Citizens' current annual debt service expense.

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.

REGULAR ASSESSMENT PROVIDES ADDITIONAL REVENUE: Citizens' ability to levy for additional sources of revenue, through a regular assessment and market equalization surcharge, reduces the need to levy additional emergency assessments for future storm events.

RELIANCE ON REINSURANCE FOR LIQUIDITY: Citizens has diversified its reinsurance portfolio, which now includes the issuance of CAT bonds, and transferred event risk to capital investors. Access to the reinsurance market remains critical as Citizens has been unable to bolster reserves due to significant litigation settlements.

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 and is exposed to the impacts of the current low oil price environment. The number of rotary rigs in the state has declined sharply and initial unemployment claims in the state have escalated. The state has experienced some weakening in its revenue sources as the slowdown in the state's natural resource industry has been incorporated. Fitch maintains an 'AA' general obligation bond rating on the state.

RATING SENSITIVITIES

The rating on the assessment bonds is sensitive to:

--A meaningful increase in Citizens' own liquid resources that bolsters its claims-paying ability;

--Unusually severe hurricane activity that depletes Citizens' claims-paying resources or necessitates significant additional borrowing;

--An inability to access reinsurance markets without a commensurate increase in Citizens' own claims paying resources;

--An increase in written policies that notably increases Citizens' exposure;

--Legislative action that affects Citizens' operations or its ability to leverage claims-paying resources.

CREDIT PROFILE

Citizens, a state-run property insurer of last resort, has statutory authority to levy assessments on policyholders in Louisiana to cover claims and debt service on issued bonds. The rating on Citizens' bonds, which were initially issued in 2006 to fund claims that arose from Hurricanes Katrina and Rita in 2005, reflects the ability to tap sizable resources to pay its obligations, the strength of the collection mechanism, Citizens' diversification of its reinsurance portfolio, and continued depopulation efforts that reduce its liability exposure.

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, as well as available reinsurance policies.

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. The emergency assessment base is almost $2.6 billion, resulting in potential generation of up to $259 million per year per plan year deficit in support of debt service. The emergency assessment rate for the fiscal year ending Dec. 31, 2015 is set at 3.42% 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).

Through the current bond issue that refunds outstanding 2006B bonds, Citizens has elected to remove cash deposits to an emergency assessment stabilization fund tied to the 2006B bond issue and apply the funds to call principal. The fund, which had been previously funded at a year of debt service expense, will be reduced to about 25% of annual, prospective debt service as the series 2015 bonds do not include a deposit to this fund.

Emergency assessments 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 $50 million in retention, lines of credit, and reinsurance policies. Current cash on hand is estimated by Citizens at $88 million at Dec. 31, 2014; a diminishment from higher cash levels in fiscal years 2012 and 2013 is 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 that have required $264.7 million in payments. Citizens has reserved against some lingering payouts related to the settlements and reports no further outstanding litigation. Fitch expects cash on hand to be impacted in fiscal 2015 by the expected further payouts and then stabilize.

Citizens' diversification of its reinsurance policies has lowered its initial out-of-pocket expense to $50 million from $75 million and a line of credit has been increased to $100 million from $75 million and is available to provide for immediate claim payments that exceed Citizens' available resources following a storm event. Total additional, alternate resources in place total $600 million and include $410 million of traditional reinsurance, net a $50 million deductible, and $240 million made available through Citizens' issuance of CAT bonds. These alternate resources are estimated by Citizens to provide sufficient resources to cover an approximate 1-in-96-year storm event based on the blend of two risk models.

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 $2.4 billion would produce potential annual revenue of $242 million. Together with the levy of a regular assessment, Citizens would also levy a surcharge on its own policyholders, which would currently generate about $10 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 an inherent risk factor. Citizens' share of the insurance market has declined over time, from 16% in 2007 to 7% in 2014, 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

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. State Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=987146

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=987146

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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