Fitch Ratings downgraded California Earthquake Authority’s Issuer Default Rating and revenue bond ratings to ‘A-‘ from ‘A’.
The Rating Outlook is Stable.
The rating action follows the vote of the CEA’s Governing Board to reduce the target claims paying capacity to a return period of one-in-350 years, from the previous target of one-in-400 years, as part of a review of the company’s strategic plan.
The CEA’s ratings reflect the risk transfer strategy that will set the minimum and maximum aggregate claims-paying levels to one-in-350-years and one-in-500-years return loss periods. The company’s CPC currently remain above the previously outstanding rating sensitivity of one-in-400-years, but Fitch says it expects this to moderate as exposure grows in 2022 and CEA manages its risk transfer purchases to support CPC above a one-in-350-years return period, on a go forward basis.
The CEA had nearly $19.6 billion in sources of funds to pay claims as of Dec. 31, 2021. Included was nearly $5.8 billion in available capital, revenue bond proceeds, reinsurance and other risk transfer, prospective post-earthquake assessments of participating insurers and a CEA policyholder surcharge layer. The current CPC is not expected to be reduced on an absolute basis, but relative to modelled exposure, will now be expected to cover all claims at a lower return period, according to Fitch.
The principal risk is a catastrophic earthquake large enough to exhaust claims-paying resources and requiring CEA to access the capital markets or other sources to pay claims, according to Fitch.
The CEA’s claims-paying resources have historically been in the ‘BBB’ rating category, based on the target of a one-in-400-years event. Fitch reviewed the probability of exhaustion from three independent modeling firms and the CEA’s survivability scenarios against the insurance-linked security calibration matrix for the assessment. The new target of one-in-350-years moves the company’s loss exceedance probability to a minimum of 0.286%, into the ‘BBB-‘ rating category, according to Fitch.
Fitch said the CEA’s financial flexibility is “much stronger than similarly rated private insurers that cover catastrophe risk,” enabling its final rating to be elevated a full category above the risk assessment of claims-paying resources to ‘A-‘. 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.
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