NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'AA' rating on approximately $559.5 million in California Infrastructure and Economic Development Bank (infrastructure bank) workers compensation relief bonds, series 2004A & 2004B.
The Rating Outlook is Stable.
SECURITY
The bonds are limited obligations of the infrastructure bank, payable solely from pledged revenues consisting primarily of special bond assessments imposed by the California Insurance Guarantee Association (CIGA) upon all insurers providing workers compensation insurance policies in the state.
KEY RATING DRIVERS
UNLIMITED, MANDATORY ASSESSMENT SECURES BONDS: The bonds are secured by a first lien on an unlimited, mandatory special assessment on all insurers writing workers compensation policies in the state. The special assessment is established annually at a level projected to provide 1.1x coverage, and supplemental assessments may be levied as necessary.
CONSTITUTIONALLY REQUIRED COVERAGE: Workers compensation coverage is constitutionally mandated in California. The state has a demonstrated record of instituting reforms to sustain the workers compensation insurance market.
MARKET STRONGER SINCE BOND ISSUANCE: The risk that problems at the State Compensation Insurance Fund (SCIF), the largest workers compensation insurance provider, could destabilize the market has diminished, because past reforms have attracted additional private insurers. The market is subject to some cost pressures, including from rising health care expenses.
NO NEW DEBT EXPECTED: Although additional authorization for borrowing exists, no new bonds are expected.
CREDIT PROFILE
The bonds are secured by a first lien on a mandatory and unlimited special benefit assessment (SBA) charged to all insurers writing workers' compensation policies in California. CIGA sets the SBA rate annually at a level projected to cover expected debt service by 1.1x; if insufficient, supplemental SBAs may be levied as necessary to ensure coverage. The minimum levy is 1% of net direct premium. CIGA's calculation of the SBA includes a variance factor for series 2004B, which were issued as auction rate bonds and are held by the bank.
CIGA's regular assessment on workers compensation insurers, levied at 1% of net direct premium, and the SBA are deposited first to the trustee to meet debt service requirements; regular assessments are available to CIGA thereafter. By statute, CIGA may use other resources including its regular assessment to pay bonds, but these funds are not pledged. Moreover, if an insurer's payment is insufficient, amounts received are statutorily applied first to cover the SBA levy. Residual SBA revenues are held by the trustee and available for early bond repayment. A debt service reserve is also funded at maximum annual debt service.
Workers compensation insurance is provided to California employers by private insurers and SCIF, a state entity. The role of CIGA, a state entity subject to regulation by the state insurance commissioner, is to repay claims against insolvent insurers. CIGA is supported by statutory deposit requirements from insurers and the regular assessment.
The state workers compensation system has undergone considerable reform over the last decade. Prior to reforms in 2003 and 2004, the market faced a high level of payouts, fierce price competition, and subsequent insurer insolvencies and voluntary departures from the market. Reforms included significant changes to medical delivery and treatment for injured workers, higher statutory deposit requirements for insurers, higher regular assessments on insurers, and authorization for up to $1.5 billion in bonds supported by the SBA.
Another round of reforms to benefits was undertaken in 2012 which has no direct impact on the bonds. Future legislative action affecting CIGA, SCIF or the broader market remains a possibility, although bondholders are protected by a state non-impairment clause.
The outstanding bonds were issued in 2004, with proceeds used by CIGA to pay claims on insolvent insurers. A second issuance, planned for 2006, was never undertaken. The remaining bond authorization, which was intended to expire in 2006, has been extended by the state's legislature. Interest on the auction rate bonds is calculated on a weekly basis, linked to one of two short-term reference rates. The authorization provides flexibility to CIGA to refund the 2004B auction rate bonds, if necessary, should interest rates rise significantly. Any additional issuance also requires levying a sufficient SBA as well as consent of the state insurance commissioner.
The largest provider of workers compensation policies and source of SBA revenues remains the SCIF. However, the share of premiums underwritten by the SCIF has declined to 10% as of 2012, from 53% at the time of bond issuance, as private insurers have expanded their market share in the state following reforms.
The SCIF was established by the state constitution in 1914 and is required to provide coverage fairly and competitively with other insurers. Premium rates are established by the SCIF's board of directors. Like private sector insurers, premium levels are subject to objection by the state's insurance commissioner only for certain specified reasons.
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=798695
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