Citizens eyes borrowing millions

Louisiana Citizens Property Insurance Corp. may have to borrow $100 million through bonds to cover the cost of Hurricane Isaac claims and proposed settlements for two class-action lawsuits the insurer’s board of directors approved Thursday.

Citizens must keep at least $125 million in cash on hand — enough to cover the cost of one hurricane and the cost of purchasing reinsurance to protect itself from excessive claims, Citizens Chief Financial Officer Steve Cottrell told board members.

However, Citizens expects to pay out an estimated $50 million to $75 million to cover 15,000 to 17,000 Isaac-related insurance claims and potentially $21 million and $40 million for the two proposed lawsuit settlements.

That means Citizens could be spending between an estimated $111 million and $136 million total. There’s also a chance the settlements could be rejected at the levels offered.

If nothing is done to solve the problem as estimated, Citizens will run out of cash in early 2013 after paying the Isaac claims and the legal settlements, Cottrell said.

“We’re at least $100 million short,” Cottrell said.

The board did not vote to borrow any money on Thursday. However, the board did vote to take a technical step that preserves Citizens’ right to issue more bonds.

In other action, the Citizens board approved a proposal to increase commercial property insurance rates by an average of 56.9 percent statewide. Citizens has 5,687 commercial policies and 75 percent of them are wind-and-hail-only coverage, which covers hurricane damage.

Almost all of those policies are in the New Orleans area and coastal parishes, according to Citizens.

The increase includes the cost for enough reinsurance to cover the damage caused by a 1-in-100-year storm and a risk component, Cottrell said. All of the major insurance companies carry at least that much reinsurance, he said.

Citizens now buys the level of reinsurance that covers a 40-year event because it hasn’t had the money for the higher coverage level, Cottrell said. If Citizens bought enough reinsurance for a 100-year-storm, the chance that the company would have to issue an assessment on insurers in the state would drop to less than 1 percent.

Even with the 56.9 percent increase, Citizens’ wind-only policies will cost less than the amount private insurers charge for that portion of the coverage, Cottrell said.

As for the two lawsuits Citizens proposed settling, one is known as the Orill class-action lawsuit, a dispute over late payment of hurricane Katrina and Rita claims. Citizens is offering to pay $1,000 per claim, less attorney’s fees and expenses, and is setting aside $21 million.

The other case is the second phase of what is called the Oubre class-action lawsuit, a dispute over the length of time it took Citizens to begin the claims process for hurricanes Katrina and Rita in 2005. Citizens is offering $4,500 per claim and $900,000 to cover administrative and court costs, and is setting aside $40 million, Citizens Chief Executive Officer Richard Robertson said.

Citizens was forced to pay close to $105 million — roughly $12 million of that legal interest — in a judgment in the first phase of the Oubre lawsuit. That class included 18,573 policyholders.

The board also listened to a proposal for Citizens’ staff to take over the management of claims and payments and to issue all policies by 2014.

The move could conservatively save $7 million a year, Citizens Chief Operating Officer Vijay Ramachandran said, and possibly up to $10 million.

The savings include the cost to add 18 to 22 staff positions, according to the proposal. Citizens would handle around 40 percent of its non-catastrophe claims in-house. Citizens now contracts with two private companies to handle all of the claims and policies issued, and those companies would continue to handle claims from hurricanes.

Cottrell presented two long-term options for covering the $100 million shortfall that Citizens faces:

• Issuing more bond debt. In 2006, Citizens issued $978 million in bonds to cover Hurricane Katrina claims, paying on it over time through assessments that Citizens placed on other insurers in the state. The insurers passed the cost on to property owners throughout the state, but the Legislature is allowing a tax credit that many homeowners fail to claim each year.

Under its bond agreements, Citizens has the right to borrow more money if the Katrina claims exceeded the original amount, Cottrell said. The actual cost for Katrina claims has been around $340 million higher than the original estimate.

However, under the bond agreements, Citizens can only borrow the money to recover the expenses over the last 60 days, which include the $105 million Oubre payment.

After expenses, Citizens would clear $100 million to $101 million, Cottrell said.

This option would require Citizens to continue collecting an assessment from property owners for three extra years, until 2029, Cottrell said.

But the assessment amount in those three years would be less than 1 percent of the premiums property owners paid (0.86 percent in 2027, 0.83 percent in 2028 and 0.80 percent in 2029.

Next year, the average homeowner will pay $54, a 3.74 percent assessment, to cover the bond payments. At current prices, the average homeowner’s assessment would be less than $15 a year during the three extra years.

The major advantage to this approach is that property owners would get a tax credit for the assessment, said board member Sen. Dan “Blade” Morrish, R-Jennings.

Insurance Commissioner Jim Donelon said the bond debt gives Citizens the opportunity to spread the payment among all Louisiana taxpayers rather than limiting it to property insurance policyholders.

• Declare a 2012 deficit and collect a regular assessment, which can be up to 10 percent of property premiums, from the insurance industry. Citizens could raise up to $200 million within 30 days under this option, Cottrell said.

Donelon said the major disadvantage for this option is that insurance companies can pass the assessment along to policyholders, something 99 percent of them did after the Katrina bonds assessment.

The board will take the matter up again at its November meeting. By then, Donelon said the insurer should have a better idea of its Isaac claims, and Citizens will also know if it needs to cover the damage from another hurricane.