By law, California Earthquake Authority (CEA) can only invest in securities eligible under California Government Code § 16430. CEA has adopted investment policies that specify additional guidelines and define minimum criteria for "prime" quality securities and the maturity limits and maximum values each security type can represent.
The CEA Investment Policies aim to achieve three main goals, listed here in order of priority:
- Portfolio Safety: Because the CEA's investments are to be used primarily to pay CEA earthquake-insurance claims, the CEA's principal concern is to safeguard the assets from loss. This goal is met by following two strategies: 1) investments only in high-quality securities and 2) diversification, by spreading investments over different types, multiple credits or issuers within an investment type, and various maturities.
- Liquidity: While operating expenses can be reasonably forecast, the CEA's investment portfolio must be liquid enough to meet the immediate needs of paying CEA earthquake-insurance claims. The investments have "laddered" maturities of between 1.5 and 5 years; such a structure mitigates the risk of loss from having to liquidate securities before their maturity dates.
- Rate of Return: Portfolio safety and adequate liquidity are the overriding principles guiding the management of the CEA's investments. Rate of return is considered only after these two goals are met, but in considering rates of return, the CEA invests only in ways that realize maximum return consistent with safe and prudent treasury-management principles. The rates of return are maintained on levels representative of current market yields. Securities may be purchased only if adequate cash, maturities, or pending sales are available to fund the purchase. In addition, trading for gains or holding securities with short positions is not permitted.