The credit outlook for the California Earthquake Authority (CEA) was lowered from “stable” to “negative” by Moody’s Investors Services last week after it questioned the state-run earthquake insurer’s long term ability to pay claims.
A statement by Moody’s said that CEA’s “risk exposure has become elevated relative to claims-paying capacity” and would only increase as the quasi-government agency lays plans for a new marketing plan to expand coverage in the Sunshine State.
“We changed the rating outlook to negative because CEA’s risk exposure has increased faster than its claims-paying resources,” said Kevin Lee, a senior credit officer at Moody’s in a written statement.
The outlook was lowered at the same time Moody’s affirmed the CEA’s current investment grade status.
The rating agency said that CEA’s exposure-in-force has grown over 23 percent, from $227.4 billion to $280.7 billion, in the past three years while claims-paying capacity has risen only 11.4 percent, or from $8.7 billion to $9.7 billion.
Moody’s added that CEA’s claims-paying capacity can absorb annual earthquake modeled losses corresponding to about a 1-in-500 year return period. However, if a major earthquake were to occur and claims paying capacity were threatened state law would require the CEA to halt writing new policies or renewing existing policies.
“While the [state insurance] commissioner may lift such an order at any time, until then, pledged revenues would no longer be sufficient to service the bonds,” Moody’s said.
Glenn Pomeroy, CEO of the earthquake authority, countered that the CEA has obtained sufficient reinsurance to maintain its capacity every year and that it expects its “1-in-500-year or better level” will continue into next year.
“While the CEA is pleased that the A3 rating on the bonds has been affirmed, we believe Moody’s decision to change the rating outlook is unsupported by the facts,” Pomeroy said.