Steve Cottrell, chief financial officer for the Louisiana Citizens Property Insurance Corp., outlined the issue Tuesday to the company board’s finance committee.
“There’s no free money,” he said.
Citizens will be $56 million in the red after covering claims for Hurricane Isaac and settling class-action lawsuits for improper handling of past storm claims. Cottrell said that shortfall tops $100 million when general operating costs, reinsurance payments and other expenses are included.
The company provides property insurance mostly to coastal Louisiana homeowners and businesses that can’t get insurance through the private market.
To drum up cash, Citizens could charge an assessment on private insurance companies around the state for each property policy. The insurers would pass that cost on to customers through a surcharge.
The company also could borrow money through a bond sale. Those costs, too, would be passed on to insurance customers covered by private companies through an assessment on all commercial and personal policyholders statewide.
With the bond sale, the insurance assessment can be claimed by policyholders as a state income tax credit, and the state covers the cost of that credit. However, few of those assessments have been claimed as credits in previous years, so most people haven’t taken advantage of the tax break.
A third option is doing nothing, but Cottrell said Citizens won’t have enough money to pay bills and would face a drop in its credit rating.
“We will run out of cash,” he said.
Citizens’ board of directors will consider which path to take at its January meeting. Cottrell said he would recommend the bond sale, to borrow $100 million, which would be paid off over time with interest.
The board’s finance committee didn’t offer a recommendation about how to close the gap.
Cottrell said the costs of several legal settlements, along with Hurricane Isaac’s blow to southeastern Louisiana in August, will drain all the company’s reserves.
The company paid a $104 million judgment in July to thousands of policyholders who sued over the slow adjustment of claims after hurricanes Katrina and Rita in 2005. Cottrell estimated another $63 million will be paid to settle two remaining class action lawsuits tied to the company’s handling of claims after those storms.
While no decisions were made about how to resolve the shortfall, the board backed an idea designed to cut costs for the insurance company.
Board members voted 6-2 to handle the work of issuing policies and responding to non-catastrophe claims in-house, rather than hiring outside firms for the jobs. Citizens officials said the move was estimated to save at least $6 million a year when phased in by 2014.
The company will hire about 20 new employees to do the work.
Some members of the board questioned whether the savings figures were inflated and whether the changes would reverse Citizens’ improvements in handling claims.
“I want to save the money, but I’m worried about the risk that something’s going to go wrong,” said Treasurer John Kennedy.
Sen. Dan “Blade” Morrish said if the change doesn’t work, Citizens can return to outsourcing.
“It’s an opportunity we can’t afford not to take,” Morrish said.
By MELINDA DESLATTE