Louisiana, Texas look to bonds for cat funding

With record hurricane losses in back to back seasons, states along the U.S. Gulf Coast are aiming to boost reserves for their insurers of last resort through the issuance of catastrophe bonds. Louisiana is hard at work drumming up financial support, while in Texas insurance groups are hoping the governor will put the issue of catastrophe bonds before legislators when they meet for a special session beginning April 17.

The Hurricane Center at AccuWeather.com recently reported that the upper Texas coast is likely to see higher than normal hurricane and tropical storm activity over the next 10 years.

Catastrophe modeler Risk Management Solutions of New-ark, Calif., expects higher hurricane landfall frequencies to in-crease modeled annualized insurance losses by 40 percent on average across the Gulf Coast, Florida and the Southeast, and by 25 to 30 percent in the Mid-Atlantic and Northeast coastal regions.

“Hurricane Rita was a warning shot,” Joe Bastardi, chief forecaster at the AccuWeather.com Hurri-cane Center, said in a news release, referring to the 2005 storm that threatened the Houston area and made landfall near the Texas-Louisiana border last September. “The Texas coast is in for a long period of tropical activity, particularly the region from Corpus Christi to Sabine Pass at the Louisiana border.”

Louisiana Insurance Commis-sioner Jim Donelon spent time in New York City recently, meeting with bond insurers and bond rating agencies in a continued effort to help with Louisiana’s recovery efforts following Hurricanes Katrina and Rita. According the Louisiana Department of Insur-ance, Louisiana’s insurer of last resort, Louisiana Citizens Property Insurance Corporation wants to sell an $825 million bond issue to pay policyholder claims resulting from the two hurricanes.

The Texas Windstorm Insurance Association (TWIA) would like the Texas Legislature to authorize the state to issue pre- and post-event catastrophe bonds that could generate $800 million to boost its reserves. TWIA is the insurer of last resort for windstorm losses for homes and businesses along the Texas coast. The initiative has wide support of insurer groups, but Gov. Rick Perry has yet to announce the issues, if any, that the legislature will consider in addition to property tax reform and public school funding, which are the main topics for which the special session is being called.

Citizens, Louisiana’s third largest provider of property insurance, was created by the Louisiana Legislature in 2003 to oversee the state’s high risk property insurance pools and markets of last resort, the FAIR and Coastal Plans. As a result of Hurricanes Katrina and Rita, the corporation’s reserves were wiped out when the FAIR Plan incurred hurricane losses of $1.07 billion

Citizens asked Donelon to participate in the series of seven meetings, citing his involvement as vital in helping the state secure the lowest possible rates and cost for the bonds that will be bought by the New York bonding agencies.

“This is the first significant Louisiana bond transaction post-Katrina and Rita and potentially the largest bond issue in the state’s history,” Donelon said. “Its success is important to restoring investor confidence in Louisiana.” He added that the state’s rebuilding effort will also depend upon confidence in Louisiana’s insurance market.

Louisiana Gov. Kathleen Blanco and Citizens Governing Board member, State Treasurer John Kennedy, participated in a conference call with the rating agencies during the meetings at Donelon’s request.

The commissioner said he is encouraged by the response the state received. “These agencies we met with are the groups who actually assign the bond ratings. These ratings show the potential bond buyers the financial strength of these bonds, and the rating we receive will send a strong message to the rest of the nation that Louisiana’s economy is rebounding from the hurricanes,”Donelon said.

TWIA Executive Director Jim Oliver told Insurance Journal that he and TWIA’s Board of Directors, the majority of which come from the insurance community, have been working with the Texas Department of Insurance and the Texas Public Finance Authority to develop legislation that would provide for the ability to raise money through pre-event and post-event revenue bonds.

“If we don’t do something to increase the capacity of (the insurance pool), the state of Texas will have an economic catastrophe on its hands,” James Langford, vice president of the Texas Farm Bureau Insurance Cos. and TWIA director, said in a news release from the Association of Fire and Casualty Companies in Texas (AFACT).

According to AFACT, a hurricane with 140 mile an hour winds making landfall at Galveston or the immediate area and proceeds inland striking parts of Houston and Harris County, insured losses will reach several billion dollars, wiping out TWIA’s reserves, which currently stand at about $1.3 billion. TWIA provides $26 billion in windstorm coverage for residential and commercial property along the Texas coast. Forty-four percent, or $10.3 billion, of TWIA’s insured property lies in Galveston County.