AM Best Downgrades California Earthquake Authority credit ratings

AM Best downgraded its Financial Strength Rating (FSR) to B++ (Good) from A- (Excellent) and its Long-Term Issuer Credit Rating (Long-Term ICR) to “bbb+” (Good) from “a-” (Excellent). Earthquakes in California.

The outlook for long-term ICR was revised to negative from stable, while the outlook for FSR is stable.

The credit ratings (ratings) reflect the strength of CEA’s balance sheet, which AM Best rates as strong, as well as its strong operating performance, limited business profile and appropriate enterprise risk management, according to the rating agency.

The rating downgrades are based on the deterioration in the strength of CEA’s balance sheet over the past year due to lower risk-adjusted capitalization. This decline was driven by a reduction in CEA’s claims payment capacity to a typical yield period of 1 in 360 years as of January 1, 2023, from a typical yield period of 1 in 400 years at the time of AM’s previous annual rating review for BEST.

The decline in ability to pay claims was attributed to the impact of market conditions, which included continued increases in exposure and more recently decreased availability of reinsurance, according to AM Best.

ICR’s negative long-term outlook reflects the CEA Board’s decision to lower its minimum claims-paying capacity to a typical return period of 1 in 350 years and the expectation that challenging reinsurance market conditions will continue to put pressure on CEA’s claims-to-pay capacity.

The Board’s 2023 Risk Shift Strategy includes flexibility to backtrack from the typical 1 in 350 year return period if driven by market conditions, with immediate notification from the Board.

While the CEA has various initiatives to manage exposure, including coverage and deductible adjustments, the ultimate effectiveness of these efforts and their impact on risk-adjusted capitalization and balance sheet strength remains uncertain, according to AM Best.

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