Reports Say California Not Earthquake Proof, on 1906 Quake’s Anniversary

Standard & Poor’s Ratings Services recently noted in two articles, “San Francisco’s Credit Rating Is Strong–But Not Earthquake Proof” and “One Hundred Years Later, California Homeowners And Insurers Are Still On Shaky Ground,” that California is not fully prepared for a major earthquake.

On April 18, 1906, San Francisco was hit by a 7.9-magnitude earthquake that killed at least 3,000 people, resulted in more than 200,000 homeless, and spawned a fire that destroyed more than 28,000 buildings. Since that “Big One,” the state, from a catastrophic point of view, has been touched comparatively lightly, S&P said. However, the U.S. Geological Survey estimates that during the next 30 years, the chances of a major earthquake hitting the San Francisco Bay Area and Southern California are 67 percent and 60 percent, respectively. A 1906-magnitude quake would have significant implications for California municipalities, residents, and the insurers that write personal lines coverage for those residents, S&P indicated.

San Francisco’s GO bonds are currently rated ‘AA’ by Standard & Poor’s — but even a city with a ‘AA’ rating and good financial reserves would be hard pressed to handle a disaster like the one in 1906, the company said.

“A major earthquake could result in the dislocation of San Francisco’s population and economic losses with businesses moving out of town,” Standard & Poor’s credit analyst Ian Carroll explained. “If all of those things happened at once and caught the city off guard, there could be lowered ratings across the spectrum of bonds.”

According to Standard & Poor’s credit analyst Michael Gross, total personal property damage costs from a high-magnitude California earthquake could realistically exceed $100 billion. Approximately 35 percent to 55 percent of this damage might be insured.

“California’s homeowners are unprotected from the financial consequences of a major quake to a disturbing degree,” Gross said. “The California Earthquake Authority, a privately funded entity governed by three state officials and largest provider of earthquake coverage in the world, could see its funds could run dry if one or more large earthquakes occur. Its ability to assess its members for an initial $2.2 billion in claims after a triggering event will expire on Dec. 1, 2008. If the Big One comes and claims are higher than the authority’s total claims paying ability, policyholders might have to accept a prorated percentage of their expected coverage, which could call into doubt the credibility and value of such policies.”

The report is available to subscribers of RatingsDirect, Standard & Poor’s Web-based credit research and analysis system, at www.ratingsdirect.com. Nonsubscribers may purchase a copy of the report by calling (212) 438-9823 or sending an e-mail to research_request@standardandpoors.com. Ratings information can also be found on Standard & Poor’s public Web site at www.standardandpoors.com; under Credit Ratings in the left navigation bar, select Find a Rating, then Credit Ratings Search.

Source: Standard & Poor’s