Fitch lowers the ratings of the California Earthquake Authority, but the outlook remains stable

Fitch lowers the ratings of the California Earthquake Authority, but the outlook remains stable.

According to Fitch Ratings, California Earthquake Authority's Issuer

Default Rating and revenue bond ratings have been reduced to "A-" from "A."

The outlook for the rating is steady.

A vote by the CEA's Governing Board, as part of a review of the company's strategic strategy, resulted in the reduction of the objective claims-paying capacity to a return period of one-in-350 years, from the prior target of one-in-400 years.

The CEA's ratings are based on a risk transfer approach that will establish minimum and maximum aggregate claims-paying levels based on return loss periods of one in 350 years and one in 500 years, respectively. As of this writing, the company's credit risk profile (CPC) remains above the previously outstanding rating sensitivity of one-in-400-years, but Fitch expects this to moderate as exposure grows in 2022 and CEA manages its risk transfer purchases to maintain a CPC above a one in 350 year return period going forward.

As of December 31, 2021, the CEA had about $19.6 billion in sources of funds available to pay claims. Nearly $5.8 billion in available capital, revenue bond proceeds, reinsurance and other risk transfer, anticipated post-earthquake evaluations of participating insurers, and a CEA policyholder surcharge layer were all included in the package. According to Fitch, while the existing CPC is not projected to be reduced in absolute terms, it will be expected to cover all claims at a lower return time when compared to the modelled exposure, which will result in a shorter return period overall.

According to Fitch, the most significant risk is a devastating earthquake of sufficient magnitude to deplete CEA's claims-paying resources and necessitate CEA's recourse to the capital markets or other sources of funding to pay claims.

The CEA's claims-paying resources have historically been rated in the 'BBB' category, which is based on the target of a once-in-400-year occurrence occurring in the future. For the assessment, Fitch looked at the risk of exhaustion from three independent modeling firms as well as the CEA's survivability scenarios in relation to the insurance-linked security calibration matrix. According to Fitch, the new aim of one-in-350-years reduces the company's loss exceedance likelihood to a minimum of 0.286 percent, putting the company in the 'BBB-' rating category for the first time.

According to Fitch, the CEA's financial flexibility is "significantly stronger than that of similarly rated private insurers that cover catastrophe risk," allowing its final rating to be raised to "A-," a full category above the risk assessment of claims-paying resources, which was previously assigned to the organization. It is in the best interests of the state of California, as well as the insurance business in the state, and the policyholders in the state, for the CEA to continue to exist as an entity.