S&P Advises Floods Could Lead to Ratings Actions on Midwest-Focused Insurers

August 21, 2008

An aerial photo shows a flooded area of downtown looking North over Cedar Rapids, Iowa, June 13, 2008. Interstate I-380 can be seen on the left while Mays Island, with Cedar Rapids City Hall, is seen on the right with its bridges under water. Floodwaters inundated about 100 city blocks of Cedar Rapids, Iowa’s second-largest city with 200,000 residents. REUTERS/Ron Mayland (UNITED STATES)

Standard & Poor’s Ratings Services said it does not expect the 2008 Midwest floods to impact ratings or outlooks for the majority of companies that it rates.

However, property/casualty writers geographically concentrated in the affected states, especially those focused on Indiana, Illinois, Iowa and Wisconsin, may have proportionately higher losses, which, combined with the effects of the softening pricing cycle, weak financial markets, and an active catastrophe season, may trigger a few ratings actions, the rating agency said.

As a stand-alone event, the 2008 Midwest floods are expected to have a relatively small impact on property/casualty reinsurance and insurance companies, but the effects will vary widely among the different property/casualty insurance and reinsurance carriers, according to S&P.

Nationals Not Affected

National/multinational carriers with product and geographic diversification will not be subject to losses that would have an effect on capital and no rating actions are expected for these companies, S&P said.

However, smaller, less diversified regional carriers with concentrated portfolios in the Midwest may suffer proportionately large losses, possibly affecting capital positions with potential negative rating implications. However, even in such cases, this would only be a contributing factor in combination with others that could bring about ratings changes, according to S&P.

Great Flood of 1993

The flooding began in early June 2008 and has lasted into July, but its scope and impact is diminishing as favorable weather conditions cause water levels to recede.

Although the recent floods have been compared to the Great Flood of 1993, which affected Illinois, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, South Dakota, and Wisconsin, there are several differences, according to S&P. Overall, precipitation levels year-to-date in the Midwest are higher and covered a much larger area than for the same time period in 1993. However, above-average rainfalls in 1992 made the ground much more saturated in 1993 than this year.

In 2008, the major flooding events occurred earlier in the calendar year than in 1993, which occurred in late June and through July of that year, substantially affecting the July germination (the process whereby seeds or spores sprout and begin to grow) further affecting the crops in 1993.

As floods recede in the Midwest, and if weather remains favorable, S&P says it is possible that the effects on crops might not be as significant as in 1993. Nevertheless, S&P analysts say they expect that insured losses resulting from the 2008 Midwest Floods will be as large as those caused in 1993 or even larger because although there may be less crop failure, the price of the crop has substantially increased due to the increase in commodities prices.

S&P said it will not be possible to establish the insurable damage until the floods totally recede and crop-related losses are calculated. By mid-2009, crops will have been sold and a final price settled.

Flood and Crop Insurance Hit

Standard & Poor’s believes the majority of the losses in relation to the 2008 Midwest Floods will emerge from the flood insurance provided through the National Flood Insurance Program (NFIP) and Multiple Peril Crop insurance which is provided by private insurance companies, which reinsure that coverage with the federal government and private reinsurance carriers.

The government will likely retain large losses because it fully insures flood damages (for participating residential and commercial policyholders) and provides backstop of losses in multiperil crop insurance for commercial insureds. S&P sees the impact on the insurance industry being considerably reduced by the government’s role in these two specific lines of business.

In addition, some increased loss activity will emerge from the farm owners, homeowners, commercial multiperil, business interruption, and allied lines of business. Most of these losses will likely result from covered perils which occurred during the initial storms, tornados, high winds, and lightning. However, the large flood losses will not likely be covered unless they are covered by the NFIP because of standard policy exclusions of flood risks.

Other more marginal losses may arise as comprehensive coverage claims from auto lines of business, says S&P.

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