The California Earthquake Authority (CEA) has reported that Moody’s Investors Service has affirmed the A3 rating on the Authority’s 6.169% fixed-rate Series 2006-B revenue bonds, due to mature July 20, 2016, and downgraded the rating outlook from stable to negative. Specifically, Moody feels that the risk to bondholders is written into California law, in the form of a provision allowing for, “…the possibility that state authorities may curtail CEA’s activities under certain circumstances.”
In response, representatives of the CEA pointed out that the provision was on the books when the bonds were originally issued, and that it is also counterbalanced by another statute which states that the state Insurance Commissioner may not in any way, “…impede or in any manner interfere with the full and timely payment of principal, interest and premiums on revenue bonds of the authority.”
Moody’s elaborated on their original outlook, stating that the CEA’s rating could return to “stable” if they can “…maintain its claims-paying capacity at levels that can absorb losses at or above a 1-in-500 year return period” for the next 12 months.”
According to the CEA, the first nine months of that twelve-month period already hold enough reinsurance contracts and other claims-paying resources to maintain a capacity equal to or above the proscribed level, and that it intends to maintain that 1-in-500-year return level – or improve it – during 2011, as has been the case every year since the 2006 bonds were issued. CEA CEO Glenn A Pomeroy made a statement to the press, “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.”
The Earthquake Authority also shared that under the most recent scientific and loss-modeling calculations, including the Uniform California Earthquake Rupture Forecast by the Southern California Earthquake Center, the U.S. Geological Survey and the California Geological Survey; the Next Generation of Ground-Motion Attenuation Models, CEAs expected earthquake losses to its portfolio had been revised downward, and their claims-paying capacity has tracked those expected losses.
The CEA said it “…looks forward to and anticipates Moody’s re-evaluation and return to a stable outlook in 2011.”