Fitch Affirms California Earthquake Authority’s ‘A’ Rating

Fitch Ratings has affirmed the “A” rating on California Earthquake Authority’s outstanding fixed-rate revenue bonds, which mature on July 1, 2016. Fitch has also affirmed CEA’s Issuer Default Rating (IDR) at “A.” The Rating Outlook is Stable.

“The ratings reflect the CEA’s maintenance of claims-paying resources targeted to cover losses for at least a one-in-500-year earthquake,” Fitch said in a statement.

CEA had $9.5 billion in sources of funds to pay claims at June 30, 2011. Included in that was $3.9 billion in available capital, in addition to proceeds from the revenue bonds, reinsurance and post-earthquake industry assessments.

“The CEA’s principal risk is to a catastrophic earthquake large enough to exhaust its claims-paying resources and requiring it to access the capital markets or other sources in order to pay claims,” Fitch stated. “The total claims-paying resources are estimated to cover losses for a one-in-529-year earthquake, or a probability of resource exhaustion of 0.19 percent.”

Fitch views CEA’s capital quality to be adequate based primarily on its stress-adjusted probability of exhaustion on the insurance-linked security (ILS) calibration matrix, and although the assessment of capital is lower relative to the ratings of similar companies that insure catastrophe risk, Fitch stated that it believes CEA’s financial flexibility is much stronger than similarly-rated private insurers.

“The state of California, the insurance industry in California, and policyholders in California all have an interest in the CEA’s continuance as an organization in Fitch’s view,” Fitch stated.

Additionally, Fitch believes there are public policy or industry initiatives that would potentially contribute to the organization’s ability to recapitalize following a large earthquake that exhausted its claims-paying resources.

CEA’s capital formation rate and ability to access capital markets to issue additional revenue bonds, post-event bonds, or bonds payable from surcharges on CEA policyholders also contribute to its financial flexibility, Fitch stated.

Other strengths include CEA’s strong, stable pledged revenues and performance on debt service covenants, Fitch stated.

Fitch estimated the quality of CEA’s investment portfolio is “very high,” consisting solely of cash and equivalents and U.S. Treasury securities, at year-end 2010.

CEA, a privately financed, publicly managed entity that offers basic residential earthquake insurance in California, was created by the California Legislature in 1996 to assure availability of earthquake coverage for homeowners following the Northridge Earthquake.

Topics California Catastrophe Natural Disasters