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

July 11, 2008

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 that are 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.

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 (especially those concentrated in Indiana, Illinois, Iowa, and Wisconsin) 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.

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-year 2009, the crop will have been sold and its final price settled.

Standard & Poor’s believes the majority of the losses in relation to the 2008 Midwest Floods will emerge from the following lines of businesses: flood insurance provided by the Federal Government 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 role played by the government 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 stemming from the initial storms and floods may arise as comprehensive coverage claims from auto lines of business, according to S&P.

The cost of flood losses for individuals is paid by the federal government and not the property/casualty insurance or reinsurance sectors.

The Federal Crop Insurance Corp., part of the U.S. Department of Agriculture–Risk Management Agency, provides multiple peril crop insurance to farmers to protect themselves against many perils that may affect their crop. The FCIC offers yield-based insurance plans, revenue-based insurance plans and catastrophic coverage. Currently, privately owned insurance companies can participate in the crop insurance business by a reinsurance agreement with FCIC. For the past 10 years, the participation in this business has been very profitable. In addition, insurance companies participating in this business buy excess of loss or catastrophic reinsurance to protect them against a major event. The backstop of losses in the multiperil crop insurance provided by the federal government in addition to private reinsurance bought by the property/casualty insurance carriers will limit the impact on the industry as a whole, S&P says.

Source: Standard & Poor’s
www.standardandpoors.com

Topics Carriers Profit Loss Flood Property Reinsurance Property Casualty Agribusiness Iowa Illinois Wisconsin Casualty

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