Disaster Relief: Impact of Property Insurance Crisis on the Muni Market

The growing property insurance crisis, wildfire and other climate driven risks push private insurers to leave. In addition, there is a lack of local funding for flood control. How will these trends impact state and local governments?


Transcription:

Justin Cooper (00:11):

We will get started. It's going to be a wild ride. I'm Justin Cooper. I'm a Co-Chair of the Orrick Public Finance Practice here in San Francisco, and I'll go through some brief introductions and then we'll get rolling. To my immediate left is Helen Cregger. She's a Vice President Senior Credit Officer in Moody's, San Francisco, and she covers government credits primarily in California, including enterprise systems, cities, counties, and school districts, and knows a heck of a lot about the insurance business and insurance crisis. Then we have Dan Heimowitz, who also has a credit background. He's a Director of Rating and Credit Strategies at RBC Capital Markets. Was former Moody's head of the Moody's Public Finance Ratings Group and has spent his career kind of in between investment banking and credit rating work. Dan C. Dunmoyer with the excellent tie is the President and CEO of the California Building Industry Association, CBIA.

(01:20):

If you don't know CBIA, they're a big, big deal. They call themselves somewhat self-congratulatory, the leading voice for housing in California, but I think it's probably fair to say they're a statewide trade association based in Sacramento and they represent thousands of member companies, builders, architects, everybody involved in the housing business. And lastly, we have Dan Adler, who's Deputy Director for Climate Finance at the California Infrastructure and Economic Development Bank, the iBank as we all know it, where he's leading the development of the state's Green Bank activities. So we're going to have a couple of presentations with some slides, but really this is going to very quickly turn into a conversation and a discussion among our panelists and among as many of you as would like to participate about what the heck kind of a mess are we in here, how might we get out of it and how does it all affect the public sector and the municipal bond market and the people we all know and love in the public finance industry. So Helen, I'll turn it over to you to run through some slides real quick and then we'll get into the discussion.

 Helen Cregger (02:45):

Thanks Justin. I want to, you're taller than I'm, I want to run through these very quickly. I want to leave a lot of time for discussion, but I just wanted to do a little stage setting for our talk today, since 1980, we have seen because of climate risk and accelerating aggressive acceleration in the number of climate related disasters and the costs required to address those disasters. And within that overall framework, wildfires are playing a role in that as well. Why we haven't seen an appreciable increase in the number of wildfires. Wildfires are burning more acres than they ever have before and they're destroying more structures than they ever have before. So in 2016, we had 2.7 million acres destroyed by wildfire. That's bumped up to 4 million by 2022. And in terms of damages, the trajectory is only going to increase the insurance agents industry and studies indicate that they expect damages from wildfires to increase from about 14 billion annually to about 24 billion annually over the next 30 years. And when insurers look at this forward curve, you can understand their concern with Prop 103 that in California requires them to set premiums based on historical experience because they're looking at these expectations and realizing that they are not going to map to historical experiences but involve greater risk.

(04:33):

Nationally, most homes are at risk for wind and flood damage, but when we consider homes at risk for fire damage far and away, California is at the epicenter of that. And within California, if you ranked counties nationally for the number of homes at risk for wildfire, Riverside County, LA County, and San Bernardino would rank first, second, and third in the whole country. And so that risk is particularly problematic in California. And the studies show that nationally we can expect annual structures destroyed by wildfire to increase from 17,000 annually to about 34,000 annually going forward into that void. And that concern steps the California Fair Plan, which is concentrated in areas that we've identified in our ESG scoring as being at high risk for fire. And were we to look at the fair plan as if it were in its own insurance agency, it would rank fourth in the state in the terms in terms of the number of premiums that it's written and its exposure, the number of policies that the fair plan is underwriting is growing significantly as is the insured value of those policies.

(06:07):

And just as a point of comparison, we're now close to 400 billion in Florida. The Citizens Insurance Plan, which is the number one insurer of last resort in that state, has about 529 billion of exposure. So we are moving toward that level just in terms of the fair plan exposure and doubly concerning their exposure is very concentrated in these counties that face the highest fire risk. So over 25% of the fair plan accounts now are in highly exposed areas of the state that creates this vicious loop in the sense that insurers are looking at this and looking at the risk they face not only in direct risk from their policies that they're underwriting, but in the potential assessments that they face from the fair plan. And that's feeding into why we're seeing so many insurers leave the state or dramatically cut back on the policies that they're writing.

(07:23):

And this change is not happening incrementally in zip codes where we see high percentage of non-renewals, there is a quick tipping point where the insurers determine that there's significant risk and non-renewals quickly accelerate to over 60% of insurance policies within particular zip codes nationally, while we've seen premiums increase in terms of climate risk, we're not seeing that in California. That's largely because of the pricing restrictions on Prop 103. So you see that we're distinct in that sense and as a percent of personal income were still relatively low, not necessarily because of the exposure, although we do see the higher concentration in hurricane prone areas. But because of the pricing restrictions in California, and there have been a number of studies that national insurers have actually offset some of their risks that they face in California to higher costs of insurance policies in less regulated states.

(08:38):

For those of you who attended the housing session, this will be a bit redundant, but going forward we see housing costs and included in this is insurance figures and utilities likely to rise and to continue to rise as a percent of incomes. I think we're asked a lot if we've seen any impact on housing values because of the fire risks that we face in California. And Climate Bubble has now come into the dialogue of how we talk about this. When we look back over the past five years, we've seen across the board really price escalation in California. We've seen that almost universally, although there's some evidence that in areas with greater fire risk, Chico, Santa Rosa area, that pricing appreciation has been slower. Clearly a lot of factors go into that in terms of local economies and job growth. But in 2024, the San Francisco Fed did a study and they estimated looking back that homes that were in more fire remote areas have about a 2% higher valuation on average across the board than those that are closer to fire risk.

(10:01):

We haven't seen any impact to date on tax basis, and we can talk about that a little bit more later in the Q&A. That's largely because under prop 13, we have some insulation going forward in terms of potential weakening or softening in property values. Although we could see some diminishment in the assessed valuation growth as sort of slower growth in market values potentially translate to assessments. And then lastly, I'll flip to the last slide because I think that this is a very helpful depiction of the crisis that we face in California. And really there are three factors that are driving up the need for higher insurance premiums. One is the risk we face in terms of actual climate risk. The second is rebuilding costs, which we have seen escalating. And then the third is the cost of reinsurance, which is also rising rapidly. And so the First Street Foundation did an estimate of where premiums were in 2010 and where they are in 2022 and estimated close to a $3,000 annual premium suppression because of Prop 103 and the practices in California. And that's obviously a lot of what's underlying insurer's reluctance to participate in this state. I'll leave it there.

 Justin Cooper (11:36):

Before we get to Dan, how many people here are, I'm just curious, willing to admit that you're currently on the fair plan? There we go. And how many people have received or been informed that they will soon receive a non-renewal notice? Yeah, it's not a small number. It's surprising. It's really a big issue. Alright, go for it.

Daniel Heimowitz (12:04):

Thank you Justin. Okay, good morning. So I am going to supplement a couple of things that Helen said. A lot of what's in my slides is repetitive and I'm not going to spend time on it, but I just wanted to touch on a couple of points that I think are important to this discussion. So the first thing I'll say is something about me, I came back to RBC specifically to run a group on municipal ratings strategies and credit strategies for our large issuer clients. And this has become an extremely hot topic that people want to discuss climate in general, but specifically residential property insurance and both the ramifications for their own credit. So when you're speaking to a large issuer client, does this have a credit implication for us? And more generally what, if anything, can a state, particularly a state government do to intervene or otherwise aid in easing what sense of crisis there is in this market? So this first slide is largely what Helen would say. The only thing I would add on here is this panel was put on the agenda for this conference before both the last two hurricanes, Helene and Milton in Florida and the extensive damage that was there. I followed this stuff closely and I thought hurricanes were named sequentially by alphabet, but I don't know what happened in the two weeks between Helene and Milton that something happened and we had two very large name storms in a very short period of time.

(13:38):

We also learned that a lot of places that didn't think they were terribly vulnerable to hurricanes suddenly became very vulnerable to hurricanes and became the epicenter of the worst damage, particularly the high country in western parts of North Carolina. And so it's becoming a more broad-based, more far-reaching issue for more people. Next slide just says what basically the same thing that Helen said, insurance is getting more costly, it's less available, more people who don't particularly don't have a mortgage are choosing to go without insurance. And this becomes, in a sense, a secondary problem for local and state governments who have to deal with people who end up homeless or in homes that are uninhabitable and have no way to deal and recover from that flip right along here to what I think is the crux of a discussion for this group and today, which is what's the real fallout to the municipal market?

(14:41):

What does this really mean for municipal credits and the like? And it's not just the homeowner that has a problem. And by the way, I'd say to Josh every time I go out and talk about this out west, there's always someone in the room, at least one who hasn't got it, who either has a non-renew or a double digit price increase and they're very unhappy with what they're getting. And so this is not sort of an abstract thing, but something that's very tangible and real to an awful lot of people out here. So you have decreased housing affordability. These are the kind of things that Helen spoke about. The last one though, is it undermining state and local government fiscal strength and is it having a rating effect? Our hosts, the Bond Buyers ran an article a couple months ago which said, all these wildfires are interesting and it was very extensive article, but they haven't changed bond ratings or pricing.

(15:31):

And that was really sort of a telling thing. People have see the problem, they understand the problem, but they don't necessarily see yet where it's showing up either in the pricing of a bond or seeing any evidence of any bond ratings actually being changed because of it. All the rating agencies have commented in various ways about the crisis. David Sanchez this morning said, this is a relevant disclosure issue and the SEC is going to be looking for what people say about climate risk and mentioned specifically residential property insurance. So it's hard for people to ignore it, but it's not clear what exactly the impact is. So what can the public sector do? This first page is what the public sector has been doing for quite a while. Two things, mitigation, trying to harden and otherwise protect people from the worst ravages of losses, whether it's from hurricanes or fires or floods and other things.

(16:29):

And the other is regulation and it's how do you regulate the insurance companies? How do you get people to participate more in the market? How do you get companies not to withdraw? How do you get people price relief? So that gap on Helen's chart between the actuarily correct price and what they're being allowed to charge can be closed and keep the insurers actively engaged in a market. Those are all the places that you would expect the state to do. That's what the state insurance regimen is really set up to do. That's what state insurance regulators do. That's what legislative committees that deal with insurance issues typically deal with.

(17:07):

Helen mentioned the fair plan and gave some statistics and things, but I think every time I go out and talk about this, one of the questions of what's a fair plan, if you're a muni bond person, you don't necessarily know what a fair plan is and that term is becoming one that's being used quite a bit and it's worth talking about. So fair plan is what people also call the insurer of last resort. If you can't get insurance either at all, you get turndowns from everybody or you get turndowns within what's considered a reasonable price. And different states have different views of what a reasonable price should be, you can turn to the fair plan. And the fair plan is simply a state sponsored but privately run pool where insurers typically are required, if they're admitted residential property insurers within a state, they're required to participate in that pool in an amount equal to their market share within the state in the regular commercial non-fire player market.

(18:03):

So if you're Allstate and you're 20% of the market, then you're going to take 20% of the fair plan risk of those credits, all those individual homes that couldn't otherwise get insurance on their own. And that when you talk to the insurance companies, that's one of the reasons that a lot of the companies are talking about exiting a market. We didn't want to underwrite that risk on our own and now we're getting asked to take a very substantial piece of it because we're a big, large active player in this state and it's being foisted upon us whether we like it or not. So that's how the fair plans work. They have a quote on the bottom which says these things were never supposed to be anything other than a break the glass in an emergency kind of a setup. They certainly weren't made to take on the kind of market share that they've taken on.

(18:49):

The two largest fair plans in the country by far are the California Fair Plan, which is now approaching 400 billion of insured risk and Florida citizens, which is about pushing back up towards 20% of the market share in Florida. It's over 15 by last statistics and apparently have been growing a lot this year. Again, these two fair plans, California's fair plan works just like what I said, the liabilities and the premiums are shared equally by your market share. Florida has that basic feature, but it has an additional feature and it's had it for a long time, which is to successively expand its assessment base ultimately to a statewide assessment of not just residential property, not just their own policy holders, but in fact almost every line of property and casualty insurance that's written in the state with the largest one being auto. And so basically they can ultimately to pay liabilities, assess people's on their auto policies and on everything else creates a very large base.

(19:55):

It makes the actual assessment that might be levied relatively small when you consider overall cost of insurance. And that last one, if they assess that broader base, it can be used and the reason they would assess is it can be used is to support a bond issue which they can issue and they're authorized by the state to issue bonds secured by those assessments. That really is what California is now considering for the fair plan. They're not considering yet the broader base of payment, but there was a bill which got very far last year, did not get brought to the floor for final vote, but it passed the house and got through all the committees in the Senate and then the session that ended in the beginning of September did not see the floor. But we expect or we've heard that it's going to show up again in some form when the legislature comes back in the beginning of the new year and that bill would've authorized the California Fair Plan to also issue bonds secured by their payment mechanisms in order to spread the cost out over multiple years.

(20:58):

I'm going to wrap up here on two more slides here. So the other model in Florida, which is just interesting is something called the Florida Cat Fund. I'm not going to go into a lot of detail, but basically in addition to a fair plan, basically every policy residential policy written in Florida has reinsurance from the Florida Cat Fund. It becomes a very stable and reliable source of reinsurance. The reinsurance market, as Helen said, is kind of bulky and unreliable. It can be very expensive at times, it can be relatively available. Other times Florida has this institutionalized reinsurance fund. It's been functioned very effectively. And the one thing I'd say about it that's really interesting is that for 11 years until three years ago, they had no serious losses and the result was that the premiums they charged for their reinsurance gave them a balance of over $17 billion, which was a very good cushion going into the last two years when they've had very serious losses.

(21:56):

So rather than having a commercial reinsurer who writes those policies, takes the premiums and then either they pay losses or they take it and it's now on the insurance company's balance sheet in Florida, it stays within a fund run by the state there for the future years to deal with loss. And so I guess the last couple slides I have are really just the question of why would the state get involved at all? And the answer is because it can affect the state crown economy, it can affect the state credit. I think the very first point of the two maps is that the problem is becoming much more widespread. And so in Florida this came early because everybody in Florida feels hurricane vulnerable. More and more people in the state of California are feeling wildfire vulnerable. More and more people on the Gulf Coast are feeling vulnerable. And so this goes on and on and I think we'll stop right there, but there's a lot to talk about on this topic.

 Justin Cooper (22:57):

Alright, so it's not hard to see that this is, in fact it's unmistakable that this is a big mess with the potential not only to make each of our individual lives difficult, but to have serious consequences for fiscally for state and local government. So what are we going to do? And D two, I'll start with you because although you're here on behalf of the Building Industry Association, you're also a Sacramento insider. How are government and industry going to solve this problem for us all?

Dan C. Dunmoyer (23:30):

That is the question. Good morning everybody. Good to be here. And I appreciate the kind introduction. I know we have this statement where the voice of housing, but nine out of 10 housing units built in the state are built by one of our members. So we kind of feel that's fair. All types of housing. And the reason why I mentioned that is the housing we're building today is quite different than what we built even 10 or 15 years ago as it comes to this issue of risk management, California has the most aggressive code process of any state in the nation by a factor of probably three or four. My counterparts in Ohio are still using 2010 codes. We're working on 2028 codes. I know it's only 2024, but we have started to move ourselves as a building industry into attempting to build fireproof homes. And that sounds kind of crazy, but if you look at the homes we've built since 2010 in master plan communities in California, there's been less than 1% of those homes that have burned down in these recent horrific fires we've had.

(24:34):

So if you change the roof, it's as simple. If you change the roof, the windows, the siding, and the vegetation around the home, the five foot zone around the home, you can create a home that if the entire community is built in this fashion and is surrounded by avocado trees and citrus or golf courses, those homes won't burn other than a single kitchen fire. And so it sounds, as you look at climate, and I had the privilege of working for Governor Schwarzenegger and negotiated AB 32, so I'm not a climate denier, but if you look at this whole issue of the crisis of insurance, what is not discussed today and would expect it to be no insure in the state of California wants to sell auto insurance, either has nothing to do with climate California, it has to do with inadequate rates. It's a novel concept, but businesses generally don't like to sell a product for less than it costs them.

(25:26):

And so as that point, as Helen pointed out, so clearly when you have a $2,900 gap between what you think you should charge and what you can charge, if you can't charge it, you don't sell it. And that's really the crux of the insurance piece. So for us in the housing side, we desire very much to address the climate challenge. And that's not just in California. If you look at Florida and other states trying to work hard there, there's less willingness in other parts of the state, Southeast, there are a lot more libertarian than California, we're more progressive. So when you tell them you need to change codes in Florida or Louisiana, they get nervous and think that's government getting overreaching. But the insurance mechanism is now starting to push code changes just because you can't get insurance or you can't get the price you need.

(26:11):

So my brother and sisters across the country are starting to realize that you really do need to build homes that are only more sustainable, more environmentally friendly, but actually are capable of withstanding disasters. And it's coming slower in some states faster in Colorado, Washington, even Texas, the great libertarian state of Texas is realizing that the cost of insurance is a real challenge. Just flip over to Texas for a second though. We just had a panel on housing. It was amazingly insightful, but one key factor that's driving why we're not building as much housing as we should be building, especially resilient housing, is, I guess I love the term of the mayor from Oakland, Libby when she said it's that bagel effect that everything bagel. We will build more houses in the metroplex of Houston than we will in the state of California this year. So there are differences in regulation, there are differences of getting to market.

(27:06):

So you combine those factors and that's what you see the housing crisis in California, the insurance crisis. Last thing I'll say relates to the insurance crisis. We were the sponsors of AB 29 96, a coalition of over 25 business groups who desperately need insurance. It's not just for housing because we can't build condos in the state because we don't have insurance for a commercial risk, but we also can't do wineries in the state. We can't do farm buildings in this state. We can't do mid-size commercial risks in the state because of this crisis. This is a big crisis. It can be fixed to our commissioner's credit Commissioner Lara has come forward with a plan, a sustainable insurance strategy plan to make this work. And it takes into account, basically California will now look at the actual risk of insurance. We'll take into account cat modeling, reinsurance and the actual cost of insurance.

(27:57):

The only problem with the commissioner's plan, there is no philosophical theoretical mathematical actuarial problem. The only issue is this was announced last September 18th, it is still in process. So at the current rate, this plan will not be in place until next year. And then once the companies take those rating plans, resubmit them, there'll be an excess of 7% rate increases. And so each and every one of those plans will be challenged by so-called consumer groups. I say so-called because in the meantime you'll be paying a hundred percent more than you should if you're in the fair plan. And so this will be fixed if we all move at the current pace somewhere in Q1 of 27, not 26, 27. So that's a trajectory. And so our hope in the building community, not just the building community, the entire business community is for everybody here to say, commissioner, great job. Just move faster. We need to see these transactions occur quicker, the regulations promulgated. So it's a combination of modifying our anachronistic regulatory system, building fire safe homes in an effort to make California a more resilient state. So try to solve it in about seven minutes, but that was my effort.

 Justin Cooper (29:07):

Well that's great and we have a, that's sort of a medium and long-term plan. I think the point of AB 2996, and I'm interested if you agree with Dan Heimowitz that it may come back was to enable the fair plan to be capitalized now through a capital markets execution just to sort of calm the market down and shore things up a little bit.

Dan C. Dunmoyer (29:32):

Yeah, we are still working on this. I met with a gentleman who stopped this from happening last night to see if we could move forward. So it was Senator McGuire who's the president of pro tem of the state senate in California, elected not to allow our measure to be brought up. I won't get into all the details of the hygiene center other than to say the governor and the commissioner on one side and the pro tem was on the other. And I guess the pro tem won, but it was a bill that had no opposition by the time we got there, thanks to a lot of help from people like Justin and Jennifer from Orrick, but also the commissioner weighed in, the consumer groups, weighed in, the insurance industry, weighed in, builders weighed in, all the business community weighed in. So we are hopeful that this will be brought back up.

(30:13):

Oh, let, they forget the iBank that all the bond work for us as well. And so that collaborative effort, we hope it does come back because the other thing that I'll just touch on, I call it the death spiral of insurance. I know it sounds so negative, but as the other Dan appears said so accurately as well as Helen, what happens with the fair plan growing? Because a hundred percent of that risk, as Dan pointed out, is born by the admitted carriers. Their only way of diminishing their risk is to non-renew their existing policy holders. So as the fair plan grows, you non-renew more and you just create this spiraling effect. So the benefit of 29 96 is you don't have to come up with $5 billion in 30 days. You have to come up with $5 billion in 30 years. And so the hope is that that will calm the market down.

(31:02):

Hope is that everybody will get together including the president pro tem, and we'll resolve that issue. Obviously we'll create some bonding capacity. And there's also some short-term credit opportunities here as well, which we developed when we developed the California Earthquake Authority. So there is some opportunity to calm this down as the commissioner implements his regulations. Without that, this is moving really fast into a horrific situation. The numbers that are here are actually much worse in the last three months. Those numbers have grown another 15% for the fair plan. So this is moving in a trajectory that is very dangerous for the state of California and for the entire insurance mechanism.

 Justin Cooper (31:42):

I'm glad you mentioned the iBank. Dan Adler, you all would've been and may still be the issuer if and when AB 2996 passes, but I know you also have a much long-term role that has very little to do with the issuance of bonds, but just bringing to bear support for climate resilience and just generally trying to make us more climate resilient as a state. So could you talk a little bit about that?

Daniel Adler (32:16):

Yeah, happy to. Good to be with you all this morning. Dan Adler, deputy for Climate Finance at iBank. I've been working in climate exclusively for the last 25 years in various capacities. This is a challenging space to be optimistic about. In the conversation this morning in particular is highlighting some of the least tractable aspects of the challenge in the near term, the human response to climate change has been characterized as some combination of mitigation, resilience and suffering. We will have some of all three of those and the policy challenge is to concentrate obviously more on the first two than the last one, but there will be some of each. When we look at what's happening with wildfire in particular, there's a set of issues and a set of approaches that the state is bringing to bear, some of which iBank can influence and I'll just characterize those, but also what the state at large is trying to do first obviously is focused on adjusting regulations where it makes sense to, we're keenly aware and the process should speed up around reform for insurance pricing and rate design.

(33:15):

But that goes to other issues such as how utilities engage, what they charge, what the overall regulatory environment for new asset development is in the state. So a bucket of issues on reforming regulation. But then the key role for the allocation of public finance in the concentration of public capital resources is really central. iBank has a longstanding program of municipal lending, a hundred plus outstanding loans, each of which has an increasingly close scrutiny as applied to climate risks. What's the viability of a loan in the increasingly challenged climate future? We're looking at that the purchases of our bonds are looking at that. That's something that we're increasingly taking seriously as I'm sure you all are too. When we allocate capital, we have the ability to adjust the pricing when the strategy underlying it is climate resilient and we're increasingly utilizing those tools. But the key for forest wildfire in particular is to recognize that unlike the challenges elsewhere in the world and certainly on the east coast, these are local issues.

(34:08):

The data that was shared earlier about the spike in wildfire we're actually doing better in the last several years. 2020 was just a horrific anomaly. September 9th, 2020, the orange skies throughout the Bay Area, that's frankly shaped our thinking about wildfire and set and train a whole new set of actions at the state level, but it's directly correlated to drought. And the last several years, I think I have a slightly different view than what Helen shared. We're actually doing a lot better in terms of acreage burned structures destroyed and specifically where those wildfires are taking place. The state of California has a strategy to treat a million acres a year. We've got roughly 33 million acres of forest land in the state. 3% of that is directly controlled by California, so the rest is federal land and private land. You can imagine the challenge of treating acres at that scale with that diversity of interest underlying it.

(35:01):

But for the first time as just reported, we actually did it. We've got a long-term strategy. We do a million acres a year for the next several decades, and then we're back in a room where we're actually managing our forests in a way that we frankly haven't for 50 years roughly for a host of environmental reasons and market design reasons. And the underlying forest business, we haven't been doing that and now we are. So the concentration of resources for wildfire suppression, new codes, as Dan one of the other Dans mentioned in the rebuilding context, that's all well and good, but the places that are primed to burn and where we have the risk of catastrophic human and economic loss are in more economically distressed environments. So what does that mean for municipal credits? These places that need the help cannot float bonds just to fund it themselves.

(35:46):

So it's got to be a concentrated public effort to localize money where we can and take down that portion that Helen identified of the unfunded component, which is climate risk addressable by human and policy action. We can do that in wildfire. Can't really do that in hurricanes, can't really do that. You can do that in drought to a certain extent, but being really specific about which climate risk you're talking about and where there's an addressable path for the allocation of capital. We've got our local lending program, we have our conduit bond program that is supporting large scale infrastructure, so obviously needs to be underwritten and analyzed from a climate risk perspective. We're bringing new tools to bear directly lending for climate infrastructure through our green bank work. All of that is essential. But the last piece I want to highlight is the animation of markets.

(36:31):

There's a host of things we can be doing to bring more private sector innovation behind our climate solutions and forestry is a great example. Bloomberg just the other day released a nice piece describing the state's efforts across dozens of different agencies to put grant capital to work some of our loan capital, supporting some innovative partnerships including one with CSA insurance to fund a new venture that would put equity and debt behind enterprises using forest biomass, high hazard waste that have previously no economic value but can be turned into wood products, construction materials, advanced energy products. We're privileged to support that innovative effort through our evolving green bank mandate and then let market forces where it's possible to do so, lean in and try and solve portions of this challenge. It's not applicable in every climate instance, that trifecta of mitigation, resilience and suffering will still be with us. But concentrating resources in animating markets is core to California's approach and it's certainly what we're trying to do more of at iBank. And I'll say that the climate bond coming up just next month, which is looking strong, has 10 billion for various forms of resilience through multiple channels. A lot of local projects getting smart about where these climate risks show up in communities and how that attaches to muni risks and other economic risks is I think the next phase of our work.

 Justin Cooper (37:49):

So your comment about forestry provides an opportunity for me to put my tinfoil hat on for a moment. I have heard the following things about our approach to forestry management and wildfire and controlled burns that we should as a state be burning about a million acres a year. And we're currently, by the way, my sources are at the Instagram level, maybe a little above that, but that we should be burning a million acres a year and we are currently burning about 50,000 that the air quality management districts have primacy over the fire department. So they make it hard for fire departments to or for whoever does controlled burns, to run controlled burns that the liability associated with a controlled burn lies with the firefighters or the fire department. But that if you just wait for someone to flick a Marlboro out the window and that's a wildfire, hey, that's fine. That's nobody's fault that firefighters get paid overtime for fighting wildfires and not for fighting, not for performing controlled burns and that air quality management districts do not have to take into account wildfire when reporting their particulates per whatever unit in their reports that they have to do on how they're improving the air quality. Are any or all of those true?

Daniel Adler (39:13):

I know better than to argue with an Instagram influencer. So let me just from that perspective, but most of that is not, I would say current. If you went back maybe five years, certainly on the acres treated front, maybe we could say we're there, but literally as of this month we hit our target of treating a million acres a year, not just burning. There's a bunch of ways to do it, some of which is traditional practices, which we got away from, some of which is controlled burn. They're individuals with probably the best title in the world of burn bosses, that's their official title. They're in charge of what gets burnt and where the liability issues have been real, they're coming to grips with them. But it goes to this notion of California leading with 3% of the land, how do we bring in our federal partners? And in recent years we've had a lot more progress in that regard. Local air districts do have a role to play local air pollution is obviously something to be managed, but through it all, we set a sign space, target million acres a year for the next 25 years. As of this year we're doing it. Is it enough? Is it going to solve the problem? No. But if we localize that effort in high risk, high potential loss, economically crucial activities, then it starts to feel like a strategy that makes a difference at the margin.

 Justin Cooper (40:23):

Great. I'd love to get an audience question. This is such a personal topic for many of us. Somebody's got to have a question. Alright panelists, what questions should the audience members be asking and go ahead and answer it.

Dan C. Dunmoyer (40:49):

I'll take a stab at this. So as far as in the context of working with the insurance industry on these issues, and I know part of this question is what is the impact of this on municipal bonds? I thought the comments made earlier by page Litton was on point, which is when you have to come up with a lot of cash quickly, maybe it limits your ability to invest in municipal finance. So in preparation for this, I did reach out to some of the big carriers and asked them, are you changing your liquidity issues because of all these disasters? Interestingly enough, as bad as fire risk is in California, and Dan, am I right and show the slides there? I mean if you look at a hurricane, the exposure to losses exceeds a hundred billion dollars. Our fires in California were expensive, 15 to 25 billion.

(41:38):

I'm not trying to diminish the scope and horrific nature of it, but fire in the world of insurance is considered a secondary risk compared to hurricane or even earthquake. So Northridge earthquake impacted 630,000 housing units in 1994. The Paradise Fire, our worst fire in modern history was 20,000 units. So it gives you a sense of when you look at risk, and I don't consider earthquake a climate risk, but I'm not a climate scientist so I might be wrong, but hurricane fire, those types of issues are with the comparative nature. So the question to ask is more just in the context of will insurers truly change how they invest? The other thing to keep 'em, I don't think so. And the reason why too is they need to have a really good ledger sheet of highly secure investments to get through Mr. LA's Commissioner LA's Financial Review.

(42:27):

So there still is a tremendous benefit for well insured municipal bonds to be considered as an acceptable investment for insurers. If you get companies as big as State Farm, I mean their asset group is so massive that over a hundred billion dollars they can hold onto municipal risk a lot longer. Farmers, it's the second biggest carrier in the state. Its surplus differential is almost one 40th the size of State farms. That's how solvent State Farm is compared to farmers. I'm insured by farmers, so it's not a negative statement, it's just a fact. But they have much less capacity to be liquid the way that State Farm is. So all this to say, as long as insurers get adequate rates, they're more likely to use municipal funds and invest in them. If it's inadequate, they have to remain a lot more liquidity and it diminishes their capacity to invest. And so those are some of the factors that are not really seen publicly but behind their decisions, they're trying to figure out as this unfolds. This is primarily a California statement, but it does have impact across the country.

 Helen Cregger (43:33):

As you run through those figures, Dan, I'm reminded of one of the things that I think the state needs to do, and that is increase the transparency around the fair plan because it's much easier for you to talk about liquid assets of private insurers and citizens in Florida rather. And the cap plan, which is the reinsurer for that state are very open and transparent about the assets that they hold, which by magnitude versus the disasters that they face are still relatively robust and their ability to go out and make assessments on all types of insurance, not just homeowner's insurance is more robust as well. So I think one of the steps that the state can make is just hold the fair plan's feet to the fire in terms of making them do a better job of reporting their liquid assets so that there can be confidence that they now have the ability to do. In addition, they've allowed insurers when they do an assessment and it hasn't been done for 30 years, but at some point it will to put some of that back directly on the rate payers. And I think the first time people on their insurance bill, in addition to seeing much higher annual rates, see oh, and you're being assessed an additional $300 because of wildfire damage, they're going to recognize and there'll be a call for accounting and why isn't the fair plan better capitalized?

 Justin Cooper (45:09):

That's a really good point. It is frustratingly difficult to get good information on what's going on with the fair plan. We are over time, so let's have a round of applause for Helen and the three Dans.