News Column

Fitch Affirms California Earthquake Authority at 'A'; Outlook Stable

June 10, 2014

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 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.

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 commercial paper, and cash and equivalents.

RATING SENSITIVITIES

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 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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=723072

Insurance-Linked Securities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684430

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=833939

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Martha M. Butler, CFA

Senior Director

+1-312-368-3191

Fitch Ratings, Inc.

70 W. Madison Street

Chicago, IL 60602

or

Secondary Analyst

Chris A. Grimes

Associate Director

+1-312-368-3263

or

Committee Chairperson

Douglas L. Meyer, CFA

Managing Director

+1-312-368-2061

or

Media Relations

Brian Bertsch, New York, +1-212-908-0549

brian.bertsch@fitchratings.com

Source: Fitch Ratings


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Business Wire


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters