NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A+' rating on $3.6 billion in senior secured bonds of the Citizens Property Insurance Corp., Coastal Account (formerly known as the 'High Risk Account'):
--series 2007A
--series 2009A-1
--series 2010A-1, 2010A-2, and 2010A-3
--series 2011A-1
--series 2011A-3 (SIFMA floating rate notes)
The Rating Outlook is Stable.
SECURITY
The senior secured bonds and notes are payable from pledged revenues, including: (1) net premiums and surcharges, (2) emergency assessments, (3) regular assessments, (4) Florida Hurricane Catastrophe Fund (FHCF or CAT fund) reimbursements. The primary security, and the rating, 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 an unlimited cumulative amount to pay debt service on the bonds.
KEY RATING DRIVERS
TAX-LIKE ASSESSMENT SECURES BONDS: The rating reflects the security derived from Citizen's ability to levy emergency assessments on nearly every insurance policy holder in the state for an unlimited duration and in an unlimited cumulative amount to pay debt service on its bonds.
ASSESSMENT SUPPORTS SIGNIFICANT DEBT ISSUANCE: Although the emergency assessment is not a special tax, it shares many characteristics of a special tax, is not subject to Citizens' insurance operations, and would support a significant level of bond issuance to cover major hurricane event scenarios.
CURRENT LIQUIDITY STRONG: Following low catastrophe losses over the past seven years, Citizens' financial position is much improved with strong growth in claims paying resources.
CORRELATION WITH FHCF: Reinsurance coverage from Florida Hurricane Catastrophe Fund (rated 'AA' by Fitch) accounts for a significant share of Citizens' pre-event resources for the personal and commercial line accounts, and thus any potential FHCF shortfall could affect Citizens' own liquidity.
WEAK INSURANCE MARKET: The Florida insurance market is stabilizing but remains vulnerable. The larger, financially stronger insurers have either stopped writing new policies or are completely exiting the market, shifting the risk to the smaller, thinly capitalized, Florida-only insurers that are mostly unrated or low rated.
SOLID LONG-TERM ECONOMIC PROSPECTS: Florida's long-term economic fundamentals are strong with future growth expected; however, income levels have declined relative to the nation and region following the recession. Recent economic performance shows improvement.
RATING SENSITIVITIES
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 Florida following a large windstorm event to cover claims or debt service on pre- and post-event bonds. The 'A+' rating on bonds issued for the Coastal account reflects this access to special tax-like emergency assessments, as well as Citizens' strong liquidity position including reinsurance from the 'AA' rated Florida CAT fund, and state involvement in ensuring the availability of property insurance in Florida.
Citizens is a not-for-profit, tax-exempt entity, established by Florida statute to provide coverage for those unable to obtain insurance or affordable insurance in Florida's voluntary market. Legislation has been adopted such that it is deemed a governmental entity and not an insurance company, and is thus not allowed to declare bankruptcy. Although it is regulated by the Florida Office of Insurance Regulation (OIR), it is not required to obtain or hold a certificate of authority issued by the OIR as is required for private insurance companies domiciled in the state. Citizens operates two distinct and financially separate credits - the Coastal account and the personal/commercial lines account. There is no cross-collateralization between the credits.
EMERGENCY ASSESSMENTS ARE TAX-LIKE
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 an unlimited cumulative amount 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 the plan year deficit. The lines are very broad and include all property and casualty insurance, excluding only accident and health, workers' compensation and medical malpractice. As the Florida economy overall was hit very hard by the recession, the base declined from a high of $37.6 billion in 2007 to a low of $33.3 billion in 2009. The base has stabilized and at the current level of $36.2 billion it could generate up to $3.6 billion per year in support of debt service.
IMPROVED LIQUIDITY TO MEET CLAIMS
Emergency assessments, however, are not the first source of liquidity for Citizens to meet hurricane or wind event related claims. Citizens would first tap its available funds on hand, which include both accumulated surpluses and the proceeds of pre-event bond issuances. The first approximately $3.5 billion of claims, after the CAT fund retention of $1.35 bil, would be eligible for reimbursement from the CAT Fund. Citizens has contracted for private reinsurance and has additional surplus available to bring its liquidity to $8 billion before a "plan-year deficit" would exist. At that point, Citizens would be obligated to begin to levy various surcharges and assessments until its obligations are fully met.
First Citizens would levy a surcharge on its own policy holders of up to 15% of the premium, which would generate approximately $482 million. If insufficient, a 'regular assessment' would be levied on all insurers authorized to write subject lines of business in Florida, excluding Citizens' own policyholders, of up to 2% of the DWP on the subject lines of insurance. Regular assessments are paid to Citizens by insurers, which can then recoup those amounts from their policyholders in the subsequent year through premiums. The regular assessment base is approximately $31.4 billion and could generate $629 million in regular assessments.
Citizens, or its predecessor entities, has levied regular assessments nine times since 1972, with a reported 99% collection rate. Most recently, prior to legislative changes that limited regular assessments to 6% and subsequently to 2%, Citizens levied a 6.8% regular assessment to cover a $515 million 2004 plan-year deficit and a 10% regular assessment to partially cover the $1.674 billion plan year deficit in 2005. That regular assessment was reduced by a state appropriation of $632.2 million in an effort by the state to limit the impact on policyholders.
If Citizens policyholder surcharge and regular assessments are insufficient to fund the plan-year deficit, which would take a level of claims corresponding to a projected 1 in 59 year storm event, Citizens must levy emergency assessments to recover the remaining deficit until the deficit is fully recaptured.
Emergency assessments, which can be leveraged or used to pay claims, are expected to be the repayment source for post-event bond holders, and in fact, Citizens is currently levying a 1% surcharge through 2017 to support debt service on outstanding series 2007A post-event bonds.
Citizens' assessment of various loss scenarios predicts approximately $3.5 billion in potential bonding during a 1 - 100 year event and $11.6 billion in bonding in a 1 - 250 year event. Under these scenarios, assuming the Florida CAT fund also bonds to meet its reinsurance obligations, total assessments required for both Citizens and the CAT Fund could approximate 3.0% in a 1 - 100 event and 6.0% in a 1 - 250 event. While this assessment does not seem onerous, the capacity of the municipal bond market to absorb this level of bonding is questionable and a risk factor.
Pre-event bonds are regularly issued to provide liquidity to meet potential claims paying needs for upcoming hurricane season(s). Net proceeds are held in interest bearing permitted investments pending their use to pay policy claims. Due to the lack of storm activity over the past several years, bond proceeds have not been drawn upon to pay claims.
OTHER LEGAL PROVISIONS
Other bondholder protections are adequate. There is strong state non-impairment language, citing the state constitution, that indicates legislative intent that no action be taken to impair any bond indenture or financing agreement or any revenue source committed by contract to such bond or indebtedness. There is no revenue test for additional bonds and the unlimited capacity to issue debt is a credit weakness. There are small debt service reserves for each series, funded from proceeds, equal to maximum annual interest, typically between 2% and 5% of proceeds.
FLORIDA INSURANCE MARKET REMAINS SOMEWHAT WEAK
Citizens Coastal and other insurance lines currently account for approximately 26% of the insurance market in Florida based on direct written premium, up from 23% in 2003. Florida domestic insurers are writing an increasing percentage of new business in the state as the presence of national companies has declined and Fitch considers the overall financial strength of the insurance market in Florida to be relatively weak.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. State Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=792644
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.