For the primary time in nearly 30 years, the Louisiana Insurance Guaranty Association is coming to market with a municipal bond deal.
Senior supervisor Wells Fargo Securities is ready to value the Louisiana Local Government Environmental Facilities and Community Development Authority’s $458 million of tax-exempt Series 2022B insurance evaluation income bonds for LIGA on Nov. 16.
“Because of a unique confluence of events, LIGA is accessing the muni market for the first time since 1993 so that we can ensure that Louisiana insurance policy holders can get their claims paid in a timely fashion,” John Wells, LIGA’s govt director, advised The Bond Buyer.
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Crews & Associates is co-managing underwriter on the take care of LaFleur & Laborde as bond counsel. Butler Snow and Boles Shafto are co-counsel to the underwriters whereas Joseph A. Delafield is the authority’s counsel.
Proceeds from the sale will pay for coated claims of insolvent insurance firms and fund a reserve fund.
“It is rare for state insurance guaranty associations to access the bond market,” Jim Perry, a managing director at Wells Fargo, advised 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 accepted the request for up to $600 million of insurance evaluation income bonds for LIGA.
On Aug. 31, the authority issued $142 million of Series 2022A insurance evaluation income notes for LIGA. The securities had been privately positioned with 5 monetary establishments. The notes had been issued to present well timed fee of coated insurance claims.
“The state of Louisiana’s recognition of the essentiality of LIGA is reflected by the powers the Commissioner of Insurance has to ensure assessments are paid and that the state allows an offset against insurance companies’ tax liability for paid assessments, so as to make them more affordable,” Perry stated.
LIGA was created in 1970 to reply to the important public objective of overlaying unpaid insurance claims brought on by insurer insolvency.
LIGA just isn’t an insurance firm, like Citizens Property Insurance Corp. in Florida; as an alternative it was created to pay the claims of insurance firms when they’re deemed insolvent. Every state has a warranty mechanism in place to pay coated claims arising from the insolvency of insurers licensed of their state, in accordance to the National Association of Insurance Commissioners.
It has been likened to the Federal Deposit Insurance Corp., however for insurance firms and coverage holders fairly than banks and depositors.
The Louisiana deal is rated A1 by Moody’s Investors Service and AA-minus by Kroll Bond Rating Agency. Both assign steady outlooks.
Kroll famous the important nature of LIGA’s objective, which makes property and casualty insurance accessible and inexpensive in Louisiana.
It cited as credit score positives a typically favorable evaluation base development seen over the previous 20 years; sound projected debt service protection ranges and restricted recognized capital pressures; and LIGA’s distinctive potential to assess auto insurance coverage traces, in distinction with warranty packages in different states.
“LIGA has a broad and growing assessment base from which it can generate revenues to repay the bonds,” Perry stated. “More than 50% of LIGA’s assessment base is auto insurance companies and the majority of the assessments are paid by large, rated insurance companies.”
Kroll did word as credit score challenges state’s elevated publicity to hurricane and tropical storm injury due to its Gulf Coast location and low elevations, and the current uptick in insurer insolvencies topic to evaluation that necessitated the bond issuance to provide capital.
In Louisiana, each insurance firm that operates within the state is topic to evaluation of up to 1% of its internet direct written premiums, although the state legislature has the authority to improve the 1% cap.
At the highest of the listing, by quantity, of insurance carriers topic to the Louisiana evaluation are extremely rated business giants State Farm, Geico, Progressive and Allstate, in accordance to an internet investor presentation in regards to the deal.
After 4 hurricanes hit Louisiana in 2020 and 2021, claims bills elevated as insurers confronted a excessive quantity of claims, exacerbated by provide chain troubles and different inflationary pressures on claims payouts, the presentation stated.
In 2021, 11 member insurers turned insolvent at a price of $1.17 billion, of which $1.15 billion got here from the eight insolvent householders’ insurers, the presentation stated.
As of Sept. 30, LIGA had $876 million of extra coated claims legal responsibility arising from member insolvencies. It plans to pay these claims from the brand new bond concern, the non-public placement earlier this 12 months, and different evaluation income and property restoration and funding earnings, in accordance to the investor presentation. Next week’s deal will let LIGA proceed to pay claims in a well timed style and unfold the associated fee out over a number of years.
Moody’s stated its score “reflects the broad and moderately growing assessment base that supports debt service, ample debt service coverage and a strong legal and governance structure.”
It famous that LIGA’s evaluation base is usually made up of auto and home-owner insurance policies, which creates a really steady base by financial cycles and offsets “the somewhat narrow 1.25 times debt service coverage rate covenant and additional bonds test.”
The authorized construction can also be strengthened by the gross pledge of revenues and belongings acquired by LIGA, Moody’s stated, in addition to by a closed loop of funds the place pledged revenues are in belief till bonds mature, with extra funds solely eligible to be used for fee of claims or repaying debt early after principal and curiosity funds have been made.
“The stable outlook reflects the expectation that LIGA’s assessment base will continue to moderately grow over the next several years given increasing premium pricing on auto and homeowners policies, which offsets below average population growth in Louisiana,” Moody’s stated.
Before assessing members in 2021 after the current spate of insolvencies, LIGA final levied assessments in 2002-2004, in accordance to the preliminary official assertion, and prior to that assessed members from 1988 to 1998 after the failure of undercapitalized Louisiana auto insurers and to assist bonds issued in 1988 and 1993 in consequence, the POS stated.
Moody’s famous that LIGA’s governance issues are enhanced by the state, which might improve the utmost evaluation levy if wanted, and likewise gives a tax offset to insurers for assessments paid, “in essence funding the assessments to cover insurer insolvencies itself.”
Additionally, a statutorily set per-claim legal responsibility cap “somewhat mitigates the association’s exposure to large claims resulting from severe storms,” Moody’s stated.
“These strengths are tempered by the weak demographic trends in Louisiana, economic growth that tends to trail the nation, and Louisiana’s significant environmental risks related to severe hurricanes and flooding that are associated with the latest run up in insurer insolvencies and resulting claims that must be paid by LIGA,” Moody’s stated.
“The state of Louisiana’s recognition of the essentiality of LIGA is reflected by the powers the Commissioner of Insurance has to ensure assessments are paid and that the state allows an offset against insurance companies’ tax liability for paid assessments, so as to make them more affordable,” Perry stated.
