Hours after learning Louisiana Citizens Property Insurance Corp. is $56 million in the red, the state-run insurer’s board voted to raise its chief executive officer’s annual pay from $240,000 a year to $290,000.
The main short-term culprits in Citizens’ shortfall are two class-action lawsuit settlements and Hurricane Isaac claims, Chief Financial Officer Steve Cottrell said.
Citizens already paid about $105 million to settle the first part of what is called the Oubre lawsuit, a dispute over taking too long to begin the claims adjustment process after hurricanes Katrina and Rita. Citizens budgeted an additional $40 million to settle the second phase of the case.
Citizens agreed to settle a second lawsuit for late payments after the hurricanes, known as the Orill class-action, for $20 million.
Citizens also paid $73.6 million in Isaac claims and expects that number to reach $75 million.
But the real issue for Citizens is that Katrina claims cost $340 million more than Citizens borrowed in 2006, Cottrell said.
“This company’s just not big enough to absorb that kind of cost,” Cottrell said.
Cottrell said Citizens’ staff will present the board with options to take care of the deficit at the next board meeting.
“We’re not going to run out of money,” he said.
Citizens has enough cash on hand to pay its bills and claims, Cottrell said. The company will be down to around $23 million by March.
Citizens needs to keep around $125 million on hand to cover the cost of a hurricane and reinsurance for excessive claims.
Previously, Citizens board had discussed filling the shortfall with a new assessment on property insurers or borrowing $100 million by issuing bonds. Property insurers pass the assessment along to policyholders throughout the state.
Issuing bonds would add three years of assessments for property owners, but state law allows property owners to recover the Katrina assessments each year through a credit on their state income tax forms.
CEO Richard Robertson’s pay raise was the last item the board considered, and the board voted unanimously to add it to the agenda.
Board member Eugene Montgomery said the timing was bad, but the raise still leaves Robertson at the low end of the pay scale compared to the heads of similar-sized insurance companies.
Board member Eric Berger said Robertson hasn’t had a raise in the three years he has run Citizens. He and other board members were unanimous in saying Robertson had done an excellent job in running Citizens.
“The reality is to keep good talent we have to do what we need to do,” Berger said.
However, state Treasurer John Kennedy described the vote as a “gosh-dang whizz down the leg of every Louisiana taxpayer.”
Kennedy, who sits on the board, left before the pay raise discussion. His comments came during a phone call with The Advocate.
“On the day we’re filing papers with the Department of Insurance saying we’re insolvent, this board votes to give the CEO a $50,000 pay raise,” Kennedy said after the meeting. “Now Dick is a great guy. This isn’t about Dick. But this is irresponsible and inexcusable and an insult to every policyholder and taxpayer in this state.”
Taxpayers are going to be stuck with filling the $56 million hole in Citizens’ budget, Kennedy said. If Citizens were a private insurance company, the state Department of Insurance would have taken it over.
The board should be ashamed of itself, Kennedy said. Citizens is broke, despite raising commercial property rates an average of 45.1 percent statewide.
“We shouldn’t be giving anyone a raise,” Kennedy said.
Insurance Commissioner Jim Donelon must approve Robertson’s raise, Kennedy said, and he hopes the commissioner rejects the raise.
Citizens will implement the 45.1 percent increase Feb. 1. The increase will allow Citizens to buy enough reinsurance to handle a 1-in-100-year storm.
In other action, the board delayed a decision on taking over the work of issuing policies and handling non-catastrophe claims. Citizens Chief Operating Officer Vijay Ramachandran and Chief Claim Officer Quin Netzel said Citizens could save at least $7 million a year by doing so.
However, Berger and other board members said they needed more information before making a decision. Berger said he wanted to see a detailed timeline showing the cost savings, and the hiring of the additional 15 to 22 workers needed.
The board voted to revisit the issue in December.
The board also looked at options on what to do about wind-and-hail-only policies, the insurance for hurricane damage. State law requires Citizens to offer the coverage. Wind-only policies have grown from 0.5 percent of all policies in 2005 to 32.5 percent, or 36,562, of Citizens’ 112,423 policies in 2012.
Robertson said the only short-term solution that doesn’t require legislative action is to cut insurance agents’ commissions.
Right now Citizens pays a 10 percent commission, and those commissions added up to $5.6 million in 2012.
The long-term options are getting out of the wind-only business entirely or turning Citizens into a wind-only insurance company, similar to state-backed insurers in South Carolina and Mississippi, Robertson said. The latter is a better option, he said..
Citizens could restrict the areas in which it sold wind-only policies so that private insurance companies didn’t dump all of that business onto the state-run insurer, he said. Citizens could implement a rate and reinsurance structure to handle hurricane claims.
In the years when there were no storms, Citizens could build up cash and use that money to buy more reinsurance, Robertson said. The idea is worth studying.
Copyright © 2011, Capital City Press LLC • 7290 Bluebonnet Blvd., Baton Rouge, LA 70810 • All Rights Reserved