Fitch Affirms California Earthquake Authority's Ratings at 'A'; Outlook Stable
October 28, 2015 06:15 PM Eastern Daylight Time
CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed all ratings for The California Earthquake Authority (CEA), including the IDR at 'A' and the outstanding series 2006 and 2014 revenue bonds at 'A'. The Rating Outlook is Stable.
KEY RATING DRIVERS
CEA's ratings reflect the strategy to maintain minimum and maximum aggregate claims-paying levels to 1-in-450-year and 1-in-550-year return loss periods, respectively. The CEA had $11.6 billion in sources of funds to pay claims at June 30, 2015. Included was $4.9 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 1-in-506-year earthquake, or a probability of (resource) exhaustion of 0.2% at June 30, 2015.
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 assessment.
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.
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 strengths include the CEA's stable pledged revenue and performance on debt service covenants that 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 cash and equivalents and U.S. Treasury securities at year-end 2014.
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 materially.
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 has affirmed the following ratings:
The California Earthquake Authority
--2006 series revenue bonds due 2016 at 'A';
--2014 series revenue bonds due 2016 'A';
--2014 series revenue bonds due 2017 'A';
--2014 series revenue bonds due 2019 'A'.
--IDR at 'A'.
The Rating Outlook is Stable.
Additional information is available at www.fitchratings.com.
DEVIATION FROM CRITERIA
Fitch's master criteria report Insurance Rating Methodology does not specifically address the notching of revenue bonds. The rating of the CEA's revenue bonds does not reflect a recovery assumption, as would be customary for most forms of debt rated under this criteria. Based on consideration of the unique characteristics of the CEA's revenue bonds, Fitch has decided it would be most appropriate to align the rating of the revenue bonds with the CEA's Issuer Default Rating (IDR), to allow it to reflect its default probability without any explicit adjustment for assumed recovery. Due to minimal historical data and anticipated highly uncertain volatility in a default scenario, Fitch believes it would be difficult to establish a meaningful recovery assumption for the CEA's revenue bonds.
Insurance Rating Methodology (pub. 16 Sep 2015)
Insurance-Linked Securities Methodology (pub. 23 Jul 2015)
Dodd-Frank Rating Information Disclosure Form
Fitch Ratings, Inc.
Martha M. Butler, CFA, +1-312-368-3191
70 W. Madison Street
Chicago, IL 60602
Chris A. Grimes, +1-312-368-3263
Douglas L. Meyer, CFA, +1-312-368-2061
Alyssa Castelli, New York