KBRA Affirms Rating for California Earthquake Authority's Series 2022A Revenue Bonds

KBRA affirms the A+ long-term credit rating for the California Earthquake Authority's ("CEA") Series 2022A Revenue Bonds. The Outlook is Stable.

Key Credit Considerations

The rating on the revenue bonds is based on KBRA's assessment of the CEA's financial strength as an essential earthquake insurance provider in the state of California as well as key structural aspects of the bonds. As of June 30, 2024, the CEA has multiple sources of claims paying capacity (CPC) totaling approximately $20.3 billion, which approximates a modelled 1-in-385 year return period loss event and provides ample coverage of a recast of the top two historical events, the San Francisco and Northridge earthquakes. The CEA is the leading insurer for residential earthquake risk in California and has demonstrated deep knowledge and technical capabilities for this highly specialized peril and has maintained a sophisticated and diverse risk transfer program. A high quality investment portfolio with a strong liquidity profile is a favorable credit consideration. Debt service coverage from pledged revenues was approximately 5.0x at year-end 2023, which is viewed as strong.

Balancing these strengths is geographic and product concentration as the CEA only writes one line of low frequency, high-severity business in a single geography. Further, there is the potential for operational risk, as there has not been a major earthquake in California since Northridge, and as historical earthquake events and data are limited, modeled earthquake losses could be subject to significant model error. Lastly, the residential homeowners and personal lines insurance markets within the State of California have been pressured by unfavorable underwriting results. Significant near-term market volatility has adversely impacted the CEA's written premium volume though there are indications that the market may gradually be reverting to a more stabilized environment.

The California Earthquake Authority Revenue Bonds benefit from a pledged security interest in future premiums collected on CEA earthquake policies across the state as well as a pledge of the CEA’s Available Capital as defined under the California Insurance Code. The CEA issues Revenue Bonds to enhance its CPC, diversify its capital structure, and reduce the cost of its risk transfer program.

Rating Sensitivities

Significant CPC growth relative to PMLs over the long-term, a favorable change in the composition of CPC, reduced reliance on risk transfer mechanisms, available capital becoming the predominant source of claims funding and favorable regulatory or legislative changes may result in positive rating action.

Material changes in risk management strategies including, but not limited to, reduced CPC relative to management's minimum coverage threshold of 1-in-350 year PML, a decline in risk transfer capacity or credit quality of the CEA's reinsurance program, deterioration of CPC from a meaningful loss event/series of events which is not promptly replenished, regulatory and/or legislative changes negatively affecting the function and scope of the CEA, liquidity event causing delay in claims payments, or a breach of financial bond covenants may result in negative rating action.

To access rating and relevant documents, click here.

Methodologies