AM Best Downgrades California Earthquake Service credit ratings

OLDWICK, NJ — (BUSINESS WIRE) — AM Best downgraded its Financial Strength Rating (FSR) to B++ (Good) from A- (Excellent) and Long-Term Issuer Credit Rating (Long-Term ICR) to bbb+” (Good) from “a-” (excellent) from the California Earthquake Authority (CEA) (Sacramento, CA). The outlook for the long-term ICR has been revised to negative from stable, while the outlook for the 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.

The rating downgrades are based on deteriorating CEA’s balance sheet strength over the past year due to lower risk-adjusted capitalization as measured by Best’s Capital Adequacy Ratio (BCAR). The decrease in risk-adjusted capitalization was driven by a reduction in CEA’s claims payment capacity to a typical return period of 1 in 360 years as of January 1, 2023, from a typical return period of 1 in 400 years. At the time of AM Best’s previous annual ratings review. The decline in ability to pay claims was attributed to the impact of market conditions, which included continued increases in exposure and, more recently, reduced availability of reinsurance.

The negative long-term outlook for ICR reflects the CEA Board’s decision to lower its minimum claims-payable capacity to a typical yield period of 1 in 350 years and the expectation that tough reinsurance market conditions will continue to put pressure on CEA’s claims-payability. Furthermore, the CEA Board’s 2023 Risk Shift Strategy includes the flexibility to backtrack from the typical 1 in 350 year payout period if driven by market conditions, with immediate notification from the Board.

While CEA has several initiatives under way 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.

This press release relates to the credit ratings posted on the AM Best website. For all rating information related to the issuance and related disclosures, including details of the bureau responsible for issuing each of the individual ratings referenced in this issuance, please see AM Best’s recent rating activity webpage. For additional information regarding the use of credit rating opinions and their limitations, please see the Best Credit Ratings Guide. For information on the proper use of Best Company Credit Ratings, Best Performance Ratings, Initial Best Credit Ratings, and AM Best press releases, please see Guide to Proper Use of Best Company Ratings and Ratings.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in more than 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

Copyright © 2023 AM Best Rating Services, Inc. All Rights Reserved. and/or its affiliates. All rights reserved.

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