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AM Best downgraded the Financial Strength Rating (FSR) to B++ (Good) from A- (Excellent) and the Long-Term Issuer Credit Rating (Long-Term ICR) to “bbb+” (Good) from “a-” (Excellent) of California Earthquake Authority.
Long-Term ICR outlook has been changed to stable from negative. FSR outlook is stable.
The Credit Ratings (ratings) reflect CEA’s balance sheet strength, which AM Best assesses as strong, as well as its strong operating performance, limited business profile and appropriate enterprise risk management, according to the ratings agency.
The rating downgrades are based on the deterioration of CEA’s balance sheet strength over the past year due to a decline in risk-adjusted capitalization. The decline was driven by a reduction in CEA’s claims-paying capacity to a modeled 1-in-360-year return period as of Jan. 1, 2023, from a modeled 1-in-400-year return period at the time of AM Best’s previous annual rating review.
According to AM Best, the market conditions that led to a decrease in claims-paying ability were responsible for the reduction of our capacity to pay them. These included increased exposure, and, most recently, reduced availability of reinsurance.
The Long-Term ICR outlook of negative reflects the CEA governing board’s decision to reduce the minimum level of claims-paying capacity to a modeled 1-in-350-year return period and the expectation that challenging reinsurance market conditions will continue to pressure CEA’s claims-paying capacity.
The governing board’s 2023 risk transfer strategy includes the flexibility to drop below the modeled 1-in-350-year return period if driven by market conditions, with prompt notification of the governing board.
AM Best says that while the CEA may have taken a number of initiatives to reduce exposure (including coverage and deductible modification), the effectiveness and impact of those efforts on the CEA’s risk-adjusted capitalization, and its balance sheet strength, are still uncertain.
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Catastrophe
Natural Disasters
AM is the Best
Earthquake
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