Moody’s Affirms California Earthquake Authority Bonds
Moody’s Investors Service has affirmed the A3 rating on the California Earthquake Authority’s (“CEA”) 6.169% fixed rate Series 2006-B revenue bonds (mature July 20, 2016) and changed the rating outlook to stable from negative.
The outlook change reflects CEA’s maintenance of risk exposure in line with claims paying capacity.
The CEA is a privately financed, publicly managed entity that offers residential earthquake insurance in California through participating insurance companies.
“As we noted in our March 4, 2010 rating action, CEA’s rating outlook would likely return to stable if it demonstrated an ability and willingness to maintain its claims-paying capacity at a level that would cover modeled losses for at least a 1-in-500 year earthquake,” said Kevin Lee, a senior credit officer at Moody’s.
Since the last rating action, modeled losses have gone down as a result of changes to EQECAT’s earthquake model, allowing the CEA to increase in-force exposures and reduce claims-paying capacity without exceeding the 1-in-500 year level. As of April 30, 2011, CEA estimated it had sufficient claims paying capacity to withstand a 1-in-516 year modeled earthquake.
Debt service coverage, defined as the ratio of pledged revenues to maximum annual debt service, continues to be strong (e.g., 11.8x in 2010). Moody’s A3 rating on the CEA bonds is based on the security provided by pledged revenues, which consist principally of pledged policyholder premiums and investment earnings. Pledged revenues are the sole source of credit support for the bonds.
According to the rating agency, the main risk to bondholders is the possibility that the CEA must cease writing premiums under certain circumstances. In particular, if a major earthquake prompts the CEA to estimate that its claims-paying capacity will no longer be sufficient to meet policyholder claims in full, the state insurance commissioner must, by law, order the CEA to cease renewing or writing new policies, in which case pledged revenues would no longer be sufficient to service the bonds. A cease-and-desist order that lasts 60 days or more would constitute an event of default under the bond indenture.
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