A.M. Best Affirms Ratings of California Earthquake Authority; Revises Outlook to Stable.

OLDWICK, N.J. -- A.M. Best Co. has affirmed the financial strength rating (FSR) of A- (Excellent) and issuer credit rating (ICR) of "a-" of California Earthquake Authority (CEA) (Sacramento, CA). The outlook for the ratings has been revised to stable from negative.

The ratings of CEA reflect its distinctive structure, which has been designed to guarantee the availability and actuarial soundness of residential earthquake insurance in California. The ratings also recognize CEA's excellent risk-adjusted capitalization, financial flexibility, extensive risk modeling capabilities, sophisticated management practices and conservative investment policy. Despite partially offsetting risks tied to exposure concentration and the volatility inherent in the catastrophe insurance business, CEA appears positioned to cover policyholder obligations in a manner consistent with its ratings.

CEA serves a unique role, ensuring that earthquake insurance coverage is available to residential property owners in California. CEA has excellent financial flexibility and risk protection derived from its unique financial structure, as well as its extensive reinsurance program. One aspect of that financial flexibility is CEA's ability to assess its participating insurers based on their current market share up to an additional $3.66 billion, if needed, to pay claims for a catastrophic earthquake. In aggregate, CEA's carefully planned structure provides for coverage of $8.3 billion to its policyholders. A.M. Best also views positively CEA's exhaustive catastrophe modeling, sophisticated risk and financial management practices, as well as the stabilizing influence of its conservative investment strategy. These factors are critically important to the rating assignments, particularly given the specific risks inherent in CEA's catastrophe insurance business activities.

The revised rating outlook acknowledges the recently passed California Senate Bill 430, allowing for the creation of a new $1.3 billion layer of industry assessment, effective December 1, 2008, which will be concurrent with the expiration of the $2.197 billion first layer of industry assessment. The new $1.3 billion layer of industry assessment will reside on top of CEA's financial structure, directly above the second layer of industry assessment of $1.465 billion. The new layer of industry assessment will be effective for a minimum period of 10 years, beginning December 1, 2008. The negative outlook was previously applied to reflect the uncertainty regarding the December 1, 2008 sunset provision on CEA's first industry assessment layer, which could have resulted in reduced claims paying capacity.

Partially offsetting these rating strengths is the concentration of the company's exposure to earthquake-related property losses in California and potential conflicts that could arise over time as a publicly managed insurer. Furthermore, A.M. Best notes that a relatively high degree of volatility remains fundamental to CEA's business. Despite the extensive risk modeling, catastrophic loss forecasts carry no guarantee of their ultimate accuracy, and CEA's operating history has yet to include any significant earthquake losses. As a public facility, CEA must accept all qualified properties, regardless of risk. This exposes CEA to the possibility of adverse risk selection and possible inadequate pricing on some policies it issues. However, studies by CEA and consulting actuaries have identified no adverse selection.

Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com.