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
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
Lara, a statewide elected official, late last year
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
"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 be responsible for 10% to 12% of bond repayments, Heimowitz said.
He added that some of the strongest voices in support of the bond legislation are homebuilders, because they fear the current insurance challenges will make it hard to insure homes during construction or to sell them if homeowners can't obtain insurance required to secure a mortgage.
American Property Casualty Insurance Association President and CEO David Sampson urged California lawmakers to act quickly on the FAIR Plan.
"The Department of Insurance has already taken a necessary first step to preserving the immediate solvency of the Plan by allowing it to obtain a line of credit, but additional long-term funding is needed to spread its catastrophic losses out over time," he said
The increasing onslaught of natural disasters has investors asking questions and paying attention, Heimowitz said.
This month's Southern California fires struck heavily populated areas, as happened when Hurricane Andrew struck Miami in 1992.
It was after Andrew, which drove the
It could also cause leaders in other states experiencing more frequent, and more, costly natural disasters to contemplate steps they can take to get ahead of the risk, he said.
Bond attorneys are still figuring out the potential ramifications to Los Angeles-area issuers, said Justin Cooper, co-chair of Orrick's public finance practice.
"There is no question larger capital improvements and repairs are needed," said Justin Cooper, co-chair of Orrick's public finance practice. "There is also concern that there could be, not just insurance, but utilities and cities held liable, which could put some issuers in distress."
Orrick represents or has relationships with a number of those entities, he said.
"We are concerned on their behalf," he said, noting the
In addition to the bonds contemplated for the FAIR Plan, Cooper said
"We have to have a functioning property and casualty market," Cooper said. "Our state needs insurance companies that will write policies in the state. There is concern if insurers are hit with huge assessments under the FAIR Plan, they will exit the state."
"Imagine what would happen if everyone in the San Fernando Valley defaulted on their mortgage loans, not because they didn't pay, but because they didn't have insurance," he said.
The way Moody's views debt issued in Florida for its Hurricane Catastrophe Fund is that it's rated as state debt, Rappmund said.
"It is supported by a statewide base of policy holders," Rappmund said. "So, it becomes a state credit, and the impact to Florida or Louisiana doesn't pull the credit down, because the impact to the state's GDP (gross domestic product) has been small. But we do look at it as state debt."
Heimowitz is not anticipating cheapening of Los Angeles or California debt issuances, but more a credit sensitivity.
"How buyers will react, I am not sure, but we will see more scrutiny from the rating agencies about the costs of rebuilding," he said.
