|[June 10, 2014]
Fitch Affirms California Earthquake Authority at 'A'; Outlook Stable
CHICAGO --(Business Wire)--
Fitch Ratings has affirmed the California Earthquake Authority's (CEA)
outstanding fixed-rate revenue bonds at 'A'. The bonds mature on July 1,
2016. Fitch has also affirmed the CEA's Issuer Default Rating (IDR) at
'A'. The Rating Outlook is Stable.
KEY RATING DRIVERS
The ratings reflect the CEA's maintenance of claims-paying resources
targeted to cover losses for at least a one-in-500-year earthquake. The
CEA had $10.4 billion in sources of funds to pay claims at March 31,
2014. Included was $4.5 billion in available capital, as well as the
proceeds from the revenue bonds, reinsurance and other risk transfer,
and prospective post-earthquake assessments of 'participating insurers'.
The CEA's principal risk is 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. The total
claims-paying resources are estimated to cover losses for a
one-in-480-year earthquake, or a probability of (resource) exhaustion of
0.21% at March 31, 2014.
In Fitch's assessment, the CEA's capital quality is adequate. Fitch
reviewed the probability of exhaustion from three independent modeling
firms (EQE, AIR and RMS) and from the CEA's survivability scenarios,
against the insurance-linked security (ILS) calibration matrix for this
The CEA's ratings also reflect Fitch's belief that the CEA's financial
flexibility is much stronger than similarly-rated private insurers that
insure catastrophe risk. 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.
In addition, Fitch believes there are potential public policy or
industry initiatives that would contribute to the CEA's ability to
recapitalize following a large earthquake that exhausted its
claims-paying resources. Also contributing to the CEA's financial
flexibility are its strong capital formation rate, and the ability to
access capital markets to issue additional revenue bonds.
Additional ratings strengths include the CEA's stable pledged revenues
and performance on debt service covenants, which result in part from its
highly profitable operations, and significant market share. The quality
of the CEA's investment portfolio is very high, consisting solely of
U.S. government and agency securities, 'AAA'-rated comercial paper, and
cash and equivalents.
Key ratings triggers that could lead to a downgrade include changes in
claims-paying resources that reduced covered losses to a one-in-400-year
event. However, a timely demonstration of the CEA's ability to access
capital markets or recapitalize by other means, following a reduction in
claims-paying capacity, could mitigate downgrade pressure. Fitch may
also downgrade the ratings if the quality of its investment portfolio or
the financial strength of its industry members or reinsurers declined
The key rating trigger that could lead to an upgrade is an increase in
claims-paying resources to a one-in-1,000-year event.
The CEA is a privately financed, publicly managed entity that offers
basic residential earthquake insurance in California. The CEA was
created by the California Legislature in 1996 to assure availability of
earthquake coverage for homeowners following the Northridge Earthquake.
Fitch affirms the following ratings with a Stable Outlook:
The California Earthquake Authority
--Fixed-rate revenue bonds due 2016 at 'A';
--IDR at 'A'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Nov. 13, 2013);
--'Insurance-Linked Securities' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Insurance Rating Methodology
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