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
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
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
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.
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
Fitch affirms the following ratings with a Stable Outlook:
--Fixed-rate revenue bonds due 2016 at 'A';
--IDR at 'A'.
Additional information is available at 'www.fitchratings.com'.
--'Insurance Rating Methodology' (
--'Insurance-Linked Securities' (
Insurance Rating Methodology
Source: Fitch Ratings
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