Market Overview

Fitch Affirms California Workers Comp. Relief Bonds at 'AA'

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NEW YORK--(BUSINESS WIRE)--

Fitch Ratings takes the following action on the California Infrastructure and Economic Development Bank (infrastructure bank) as part of its continuous surveillance effort):

--Approximately $611 million workers compensation relief bonds, series 2004A & 2004B, affirmed at 'AA'.

The Rating Outlook is Stable.

KEY RATING DRIVERS:

--The bonds are secured by a first lien on an unlimited, mandatory special assessment on all insurers writing workers compensation policies in the state. The special assessment is established annually at a level projected to provide 1.1 times (x) coverage, and supplemental assessments may be levied as necessary.

--Workers compensation coverage is constitutionally mandated in California. The state has a demonstrated record of instituting reforms to sustain the workers compensation insurance market.

--The risk that problems at the State Compensation Insurance Fund (SCIF), the largest workers compensation insurance provider, could destabilize the market has diminished, because reforms have attracted additional private insurers. The market is subject to some cost pressures, including from rising health care expenses.

--Although additional authorization for borrowing exists, no new bonds are expected.

SECURITY:

Limited obligations of the infrastructure bank, payable solely from revenues pledged under the indenture. Revenues consist primarily of special bond assessments imposed by the California Insurance Guarantee Association (CIGA) upon all insurers providing workers compensation insurance policies in the state.

CREDIT PROFILE:

The bonds are secured by a first lien on a mandatory and unlimited special benefit assessment (SBA) charged to all insurers writing workers' compensation policies in California. CIGA sets the SBA rate annually at a level projected to cover expected debt service by 1.1x; if insufficient, supplemental SBAs may be levied as necessary to ensure coverage. The minimum levy is 1% of net direct premium. CIGA's calculation of the SBA includes a variance factor for series 2004B, which were issued as auction rate bonds and are held by the bank.

CIGA's regular assessment on workers compensation insurers, levied at 1% of net direct premium, and the SBA are deposited first to the trustee to meet debt service requirements; regular assessments are available to CIGA thereafter. By statute, CIGA may use other resources including its regular assessment to pay bonds, but these funds are not pledged. Moreover, if an insurer's payment is insufficient, amounts received are statutorily applied first to cover the SBA levy. Residual SBA revenues are held by the trustee and available for early bond repayment. A debt service reserve is also funded at maximum annual debt service.

Workers compensation insurance is provided to California employers by private insurers and SCIF, a state entity. The role of CIGA, a state entity subject to regulation by the state insurance commissioner, is to repay claims against insolvent insurers. CIGA is supported by statutory deposit requirements from insurers and the regular assessment.

The state workers compensation system has undergone considerable reform over the last decade. Prior to reforms, the market faced a high level of payouts, fierce price competition, and subsequent insurer insolvencies and voluntary departures from the market. Reforms included significant changes to medical delivery and treatment for injured workers, higher statutory deposit requirements for insurers, higher regular assessments on insurers, and authorization for up to $1.5 billion in bonds supported by the SBA. Although there have been few significant statutory changes to the workers compensation insurance market in recent years, future legislative action affecting CIGA, SCIF or the broader market remains a possibility. Bondholders are protected by a state non-impairment clause.

The outstanding bonds were issued in 2004, with proceeds used by CIGA to pay claims on insolvent insurers. A second issuance, planned for 2006, was never undertaken. The remaining bond authorization, which was intended to expire in 2006, has periodically been renewed by the state's legislature and currently extends through 2012. Interest on the auction rate bonds is calculated on a weekly basis, linked to one of two short-term reference rates. The authorization provides flexibility to CIGA to refund the 2004B auction rate bonds, if necessary, should interest rates rise significantly. The 2004B auction rate bonds are currently held by the bank. Any additional issuance also requires levying a sufficient SBA as well as consent of the state insurance commissioner.

The largest provider of workers compensation policies and source of SBA revenues remains the SCIF. However, the share of premiums underwritten by the SCIF has declined to 16% as of 2010, from 53% at the time of bond issuance, as private insurers have expanded their market share in the state following reforms. The SCIF was established by the state constitution in 1914 and is required to provide coverage fairly and competitively with other insurers. Premium rates are established by the SCIF's board of directors. Like private sector insurers, premium levels are subject to objection by the state's insurance commissioner only for certain specified reasons. A partial sale of SCIF was proposed by the state as part of its adopted fiscal year 2010 budget, but the proposal was ultimately abandoned after litigation.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria', dated Aug. 16, 2010;

--'U.S. State Government Tax-Supported Rating Criteria', dated Oct. 8, 2010.

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564546

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

Fitch Ratings
Cindy Stoller, +1-212-908-0526
Media Relations, New York
cindy.stoller@fitchratings.com
or
Primary Analyst:
Douglas Offerman, +1-212-908-0889
Senior Director
Fitch, Inc.
1 State St. Plaza
New York, NY 10004
or
Secondary Analyst:
Karen Krop, +1-212-908-0661
Senior Director
or
Committee Chairperson:
Marcy Block, +1-212-908-0239
Senior Director

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