CEA Ratings Downgrade to A-

March 30th 2022 – Fitch Ratings has downgraded the California Earthquake Authority’s IDR “and revenue bond ratings” to an A-. Previously the CEA’s IDR ratings was an A. Now it is an A-.

CEA Current IDR Rating: A-

CEA Past IDR Rating: A

An A- rating is considered lower than an A rating. Fitch Rating service did this because of certain actions taken by the CEA’s governing board. These actions were deemed a “

According to Fitch Ratings, the CEA voted to change their claims paying capacity from a “rating sensitivity of 1-in-400-years” to a “claims-paying levels to 1-in-350-years.” This action results in a “reduction in claims-paying capacity.”

Details on the the Fitch Ratings downgrade of the California Earthquake Authority:

According to Fitch Ratings, the CEA voted to change their claims paying capacity from a “rating sensitivity of 1-in-400-years” to a “claims-paying levels to 1-in-350-years.” This has a signficant impact on the potential overall health of the claims paying insurer. According to Fitch’s Risk Assessment: “the authority’s claims-paying resources have historically been in the ‘BBB’ rating category, based on the target of a 1-in-400-years event. Fitch reviewed the probability of exhaustion from three independent modeling firms and the CEA’s survivability scenarios against the insurance-linked security calibration matrix for this assessment. The new target of 1-in-350-years moves the company’s loss exceedance probability to a minimum of 0.286%, into the ‘BBB-‘ rating category.” But what does all of this mean?

The CEA themselves tells us, but buries the informaiton deep within their site. According the CEA’s March 18th meeting notes: “CEA Staff has analyzed the following return periods:

“1 in 400: Maintaing CEA’s exisiting claims-paying capacity would, depending on future capacity growth require significant rate increases or coverage reductions”

Vs “1 in 350: A modest reduction in claims-paying capacity would, depending on future capacity growth, provide immediate relief from potential rate increases and would modify the need for rate increases going forward. A reduction in claims-paying capacity, however increases the potential for a post event CEA policyholder surcharges or pro rata payout and could result in a financial rating downgrade.”

There are other return periods in their document as well. We ommitted those for clarity’s sake.

What we can clearly see from their language is that at the past 1 in 400 event level – the CEA was expected to either have to increase rates or reduce cover. However by lowering it to a 1 and 350 event level “immediate relief from potential rate increases” becomes a reality. Magically the problem goes away. Or does it?

The Impact of the March 2022 Fitch CEA Downgrade:

Fitch ratings seems to get it. The insurer has lowered what amounts to their reserve level by changing a key metric that has been in place for sometime. Based simply on the Earthquake Authority’s own notes – this puts the insurer is a more perilous situation. This “increases the potential for…policyholder surcharges or pro rata payout…” None of these outcomes are good news. What are policyholder surcharges and pro rata payouts? We will review this at another time, but they are NOT common in the insurance world.

By downgrading the insurer Fitch seems to understand that this is not a positive financial move, either for consumers [who are the end users] or the Insurer themselves.

What is an IDR?

According to Fitch Ratings, an IDR is a Issuer Default Ratings. In part IDRs are: “Credit ratings [that] are indications of the likelihood of repayment in accordance with the terms of the issuance.” They caution on that “Ratings are not facts and, therefore, cannot be described as being “accurate” or “inaccurate.”

An IDR is a rating of the issuer. In this situation the issuer is the CEA.

Who is Fitch Ratings?

Fitch is a ratings agency. They rate all sorts of Corporations, including various Insurers. There are numerous other rating agencies including Moodys and AM Best.

Who is the CEA?

The CEA is the California Earthquake Authority. The CEA accounts for the vast majority of Earthquake property policies in the State of California. The enterprise is a public private partnership.

A Recap on the Fitch Ratings Downgrade of the CEA – March 2022

On March 30th of 2022 Fitch Ratings downgraded the California Earthquake Authority’s “Issuer Default Rating (IDR) and revenue bond ratings to ‘A-‘ from ‘A’. The Rating Outlook “is Stable.” This was done because of the “CEA’s Governing Board” made certain potentially negative decisions about  “claims paying capacity.” The CEA was downgraded from an A to an A-.

A Note on Financial Ratings:

Ratings are just estimates and as expressed by Fitch: “Ratings are not facts.” Rating agencies make all sorts of mistakes. Just because a rater says something is the case, doest not mean that it is. Check other rating agencies before making a decision. In fact with insurance – speak with a licensed agent in your jurisdiction before making any decisions about buying, cancelling, or ammending any policies or proposals.

Sources of Information: Fitch Ratings and CEA March 2022 Meeting notes.

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