Louisiana heads to bond market to pay claims from insolvent insurers

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For the first time in nearly 30 years, the Louisiana Insurance Guaranty Association is coming to market with a municipal bond deal.

Senior manager Wells Fargo Securities is expected to price the Louisiana Local Government Environmental Facilities and Community Development Authority’s $458 million tax-exempt Series 2022B Insurance Assessment Income Bonds for LIGA on Nov. 16.

“Due to a unique confluence of events, LIGA is entering the muni market for the first time since 1993 so that we can ensure that Louisiana insurance policyholders can get their claims paid in a timely manner,” said John Wells, executive director of LIGA. The bond buyer.

Damage from Hurricane Ida in New Orleans in September 2021. After four hurricanes in two years and 11 insurer bankruptcies, the Louisiana Insurance Guaranty Association is turning to the bond market.

Bloomberg News

Crews & Associates is co-managing the underwriter of the deal with LaFleur & Laborde as bond advisor. Butler Snow and Boles Shafto are Joint Underwriters’ Counsel while Joseph A. Delafield is Authority Counsel.

Proceeds from the sale will pay covered claims from insolvent insurance companies and fund a reserve fund.

“It’s rare for state insurance guarantee associations to get into the bond market,” Wells Fargo chief executive Jim Perry told The Bond Buyer. “LIGA’s offering is an example of how the municipal bond market can help address unique challenges and serve an essential public purpose.”

In August, the Louisiana Bond Commission approved the request for up to $600 million in insurance valuation income bonds for LIGA.

On August 31, the authority issued $142 million Series 2022A insurance assessment income notes for LIGA. The securities were the subject of a private placement with five financial institutions. The tickets were issued to ensure the timely payment of covered insurance claims.

“The recognition by the State of Louisiana of the essential character of LIGA is reflected in the powers available to the Commissioner of Insurance to ensure that dues are paid and that the State authorizes an offset against the tax liability of insurance companies for premiums paid, to make them more affordable,” Perry said.

LIGA was established in 1970 to meet the essential public purpose of covering unpaid claims caused by insurer insolvency.

LIGA is not an insurance company, like Citizens Property Insurance Corp. in Florida ; rather, it was created to pay the claims of insurance companies when they are deemed insolvent. Each state has established a guarantee mechanism to pay covered claims resulting from the insolvency of insurers licensed in their state, according to National Association of Insurance Commissioners.

It has been compared to the Federal Deposit Insurance Corp., but for insurance companies and policyholders rather than banks and depositors.

The Louisiana operation is rated A1 by Moody’s Investors Service and AA-minus by rating agency Kroll Bond. Both attribute stable outlook.

Kroll noted the essential nature of LIGA’s goal, which is to make property and casualty insurance available and affordable in Louisiana.

He cited as positive credit a generally favorable valuation base growth seen over the past 20 years; sound debt service coverage levels and limited known capital pressures; and LIGA’s unique ability to rate auto insurance policy lines, unlike warranty programs in other states.

“LIGA has a large and growing valuation base from which it can generate revenue to repay obligations,” Perry said. “Over 50% of LIGA’s appraisal base are auto insurance companies and the majority of appraisals are paid by large rated insurance companies.”

Kroll noted that the credit challenges the state’s high exposure to damage from hurricanes and tropical storms due to its Gulf Coast location and low elevations, and the recent increase in insurer insolvencies. subject to a valuation that required the issuance of bonds to provide capital.

The agreement will help policyholders get timely reimbursements, said John Wells, executive director of the Louisiana Insurance Guaranty Association.

In Louisiana, each insurance company operating in the state is subject to an assessment of up to 1% of its net direct written premiums, although the state legislature has the power to increase the 1%.

Topping the list, by volume, of insurance companies subject to Louisiana’s assessment are highly rated industry giants State Farm, Geico, Progressive and Allstate, according to an online investor presentation on the OK.

After four hurricanes hit Louisiana in 2020 and 2021, claims costs rose as insurers faced high claims volumes, exacerbated by supply chain issues and other inflationary pressures on insurance companies. claims payments, as presented.

In 2021, 11 member insurers became insolvent at a cost of $1.17 billion, of which $1.15 billion came from the eight insolvent owners’ insurers, according to the presentation.

As of September 30, LIGA had $876 million in additional liability for covered claims arising from member insolvency. It plans to pay those claims from the new bond issue, the private placement earlier this year, and other estate valuation and collection income and investment income, according to the presentation to investors. Next week’s agreement will allow LIGA to continue to pay claims in a timely manner and spread costs over several years.

Moody’s said its rating “reflects the broad and moderately growing valuation base that supports debt service, broad debt service coverage and a strong legal and governance structure.”

He noted that LIGA’s valuation base is primarily auto and home insurance policies, which creates a very stable base through economic cycles and offsets “the somewhat narrow 1.25 times the debt service coverage ratio and additional obligation test”.

The legal structure is also reinforced by the gross pledge of income and assets received by LIGA, Moody’s said, as well as a closed loop of funds where pledged income is in trust until bond maturity, the funds surplus that can only be used for payment. claims or prepayment of debt after principal and interest payments have been made.

“The stable outlook reflects the expectation that LIGA’s valuation base will continue to grow moderately over the next few years given rising premium prices on auto and home insurance policies, which offsets below-average population growth in Louisiana,” Moody’s said.

Before evaluating members in 2021 after the recent wave of insolvencies, LIGA last levied dues in 2002-2004, according to the preliminary official statement, and before that, members evaluated from 1988 to 1998 after bankruptcy of undercapitalized Louisiana auto insurers and to support bonds. issued in 1988 and 1993 as a result, the POS said.

Moody’s noted that LIGA’s governance considerations are enhanced by the state, which can increase the maximum assessment levy if necessary, and also provides tax compensation to insurers for assessments paid, “essentially funding assessments to cover the insolvencies of the insurers themselves”.

Additionally, a legislated per-claim liability cap “somewhat mitigates the association’s exposure to large claims resulting from severe storms,” ​​Moody’s said.

“These strengths are tempered by weak demographic trends in Louisiana, economic growth that tends to follow the country, and significant Louisiana environmental risks from severe hurricanes and flooding that are associated with the latest wave of insurer insolvencies. and resulting claims to be paid by LIGA,” Moody’s said.

“The recognition by the State of Louisiana of the essential character of LIGA is reflected in the powers available to the Commissioner of Insurance to ensure that dues are paid and that the State authorizes an offset against the tax liability of insurance companies for premiums paid, to make them more affordable,” Perry said.

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