SAN FRANCISCO — The California Earthquake Authority is planning to sell $350 million of taxable revenue bonds next week to boost its ability to pay insurance claims.
The issuance is the authority's first since 2006 and comes two months after a 6.0 magnitude earthquake hit Napa, California, resulting in one death.
The bonds are rated A3 and A by Moody's Investors Service and Fitch Ratings, respectively. Both assign stable outlooks.
"The A3 senior debt rating reflects the CEA's significant resources to cover claims ahead of a possible impairment of the revenue bonds, including available surplus, reinsurance and a capped post-event industry assessments on participating insurers," Moody's analysts said in a credit report.
They added that the authority's strengths are tempered by its significant loss exposure to catastrophic earthquakes in California and the risk inherent in catastrophe loss modeling assumptions.
The authority's bonds, expected to price Tuesday, will be secured by pledged revenues, including pledged policyholder premiums, net of certain costs.
Moody's considers the debt service coverage from pledged revenues to be substantial.
The CEA was created in 1996 by the state legislature as a privately funded, publicly managed instrumentality of the state that provides earthquake insurance to Californians.
It was created in response to the decline in availability of residential property insurance and earthquake insurance after the Northridge earthquake hit southern California in 1994.
After the earthquake, many property insurers sustained major coverage losses and eventually ceased offering such policies in California.
Today, the CEA says it has a market share of approximately 75% of the residential earthquake policies in California. As of Dec. 31, it had 841,836 policies in force generating approximately $575 million in annual premiums.
As of June 30, the CEA had $10.5 billion in sources of funds to pay claims, including $4.6 billion in available capital.
Fitch said its A rating reflects the belief that the CEA's financial flexibility is much stronger than similarly rated private insurers that insure catastrophe risk.
"The state of California, the insurance industry in California and policyholders in California all have an interest in the CEA's continuance as an organization in Fitch's view," the report said.
Next week's deal will include $100 million of serial bonds maturing in 2016 and 2017, and $250 million of term bonds maturing in 2019.
Proceeds will be held by the CEA in its claim-paying account to enhance its claim-paying capacity.
Goldman, Sachs & Co. is the lead underwriter. Orrick, Herrington & Sutcliffe LLP is bond counsel and KNN Public Finance is financial advisor.