Bill would allow bonds for California’s last-resort insurer

Bloomberg News

This month’s devastating Los Angeles-area wildfires have created urgency around a bill that would allow the California Infrastructure and Economic Development Bank to issue bonds to support the state’s property insurer of last resort.

California’s FAIR Plan, created by state law, is a private association of insurance companies that cover customers who can’t obtain property insurance through the market.

That number between 2020 and 2024, and the more than 16,000 structures destroyed by the Easton and Palisades fires this month are expected to include a significant number of FAIR Plan customers.

Assembly Bill 226 is a reboot of AB 2996, introduced last year by Assembly Member David Alvarez, D-San Diego to bolster the FAIR Plan. The bill died without a Senate vote after clearing the Assembly unanimously.

This time out, Assemblymember Lisa Calderon, D-Los Angeles, joined Alvarez as co-author to re-introduce the legislation on Jan. 9, two days after the Eaton and Palisades fire began their marches through thousands of homes.

The bill would authorize the California Infrastructure and Economic Development Bank, a state government conduit issuer, to issue bonds to finance the costs of claims and increase the FAIR Plan’s liquidity and claims-paying capacity.

“Rapid growth in policies-in-force and exposure in high-risk areas have placed the FAIR Plan’s solvency at risk,” S&P Global Ratings analysts wrote in a Jan. 25 report. “Supporting FAIR Plan’s $458 billion in total exposure is $377 million of liquid funds and $5.78 billion of reinsurance protection.”

The nearly “$7 billion total exposure to the Pacific Palisades and Eaton fires will test the FAIR Plan’s ability to meet its claim obligations,” S&P analysts wrote.

“This bill is an excellent first step, among many we must take, to stabilize California’s insurance market by protecting the FAIR Plan, especially given the devastating fires in Los Angeles,” Alvarez said in a statement.

If the FAIR Plan becomes insolvent, it would ratchet up costs for insurance companies, leading to fewer insurance options, skyrocketing premiums, and more Californians struggling to find coverage, Alvarez said. The bill would protect families and the market from additional chaos, he said.

Both California Gov. Gavin Newsom and Insurance Commissioner Ricardo Lara of put a lot of energy into trying to either woo back or retain property insurers last year.

Lara, a statewide elected official, late last year modeling the 1988 voter-approved Proposition 103, allowing insurers to use updated catastrophe models for wildfires, in return for writing more policies in areas with higher wildfire risk.

Those changes allow insurance companies to include reinsurance costs and use forward-looking models, said Denise Rappmund, a Moody’s Ratings vice president and senior analyst. Previously, insurers had to set costs based on historic claims, Rappmund said.

The reforms haven’t affected Moody’s ratings, because it’s too soon to tell what their impact will be, she said.

Bond rating fallout

Moody’s after the wildfires lowered its outlook for city of Los Angeles and Los Angeles Department of Water and Power bonds to negative. All three rating agencies rating actions from outlooks to downgrades to city entities.

“Our negative outlook on Los Angeles incorporates, not just recovery uncertainty, and the uncertainty around FEMA, but the potential liabilities for settlement costs — and the potential for long-term structural changes in the local economy,” said Eric Hoffmann, a Moody’s associate managing director.

AB 226 hasn’t been assigned to a specific committee yet.

This year’s version like last year’s includes an urgency clause, allowing it to take effect immediately upon the governor’s signing.

It has broad support, including from homebuilders, the insurance industry, a wine industry association and others.

“These bonds can provide an immediate cash infusion into the FAIR Plan to ensure that smaller admitted insurers do not have to immediately pay assessments to the FAIR Plan and go bankrupt to backfill the FAIR Plan; and larger insurers deplete their surplus to pay for the post-disaster FAIR Plan assessments,” reads a letter of support, dated Tuesday, signed by Dan Dunmoyer, president and CEO of the California Building Industry Association, and the leaders of 12 other organizations.

The Los Angeles wildfires represent a “very large exposure” for the FAIR Plan, said Daniel Heimowitz, director of credit and ratings strategies for RBC Capital Markets.

“We are following it closely,” Heimowitz said.

The way the FAIR Plan works, if an insurance company, for instance, insures 10% to 12% of the market, they would…