A.M. Best Co. has affirmed the financial strength rating of A- (Excellent) of California Earthquake Authority (CEA). The rating outlook is stable. The rating of CEA reflects its distinctive structure, which has been designed to guarantee the availability and actuarial soundness of residential earthquake insurance in California. The rating recognizes CEA’s excellent risk-adjusted capitalization, financial flexibility, extensive risk-modeling capabilities, sophisticated management practices and conservative investment policy. Despite partially offsetting risks tied to exposure concentration and the volatility inherent in the catastrophe insurance business, CEA appears positioned to cover policyholder obligations in a manner consistent with its A- (Excellent) rating. CEA has excellent financial flexibility and risk protection derived from its unique financial structure, as well as its extensive reinsurance program. One aspect of that financial flexibility is CEA’s ability to assess its participating insurers up to an additional $3.6 billion, if needed, to pay claims for a catastrophic earthquake. In aggregate, CEA’s carefully planned structure provides for coverage of $6.7 billion to its policyholders, enough to cover a one in 850-year earthquake and still maintain capitalization supportive of its rating. A.M. Best also views positively CEA’s exhaustive catastrophe modeling, sophisticated risk and financial management practices, as well as the stabilizing influence of its conservative investment strategy. These factors are critically important to the rating assignment, particularly given the specific risks inherent in CEA’s catastrophe insurance business activities.
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