August 30, 2017 / 7:49 PM / a year ago

Fitch: Harvey Unlikely to Trigger U.S. Insurer Downgrades

(The following statement was released by the rating agency) CHICAGO, August 30 (Fitch) Hurricane Harvey is unlikely to trigger ratings downgrades of individual property/casualty insurers or reinsurers, as indications remain that this will be an earnings and not capital event for the industry, Fitch Ratings says. We believe a large proportion of economic losses will be uninsured or covered by the government's National Flood Insurance Program (NFIP), as losses are likely to be more heavily flood-related than wind-related. Fitch-rated insurers typically have capital positions that can withstand significant catastrophe losses and their ratings incorporate an expectation of some catastrophe losses for insurers with known catastrophe exposures. Private market personal lines insurers will likely have less substantial insured losses from homeowners coverage than past gulf hurricane events as policies generally do not cover flood damage, but they will face significant auto insurance claims as comprehensive coverage includes flood damage. Insured losses from Harvey are likely to be more weighted to commercial lines than for past hurricanes, given large expected commercial flood and business interruption (BI) losses, which are covered. Flooding from Harvey has led to closures of broad transportation networks and numerous office and manufacturing facilities in the Houston area that will last for an indeterminate period, and property damage and lost business income will take some time to estimate. Coverage terms and the means for calculating losses from BI and contingent BI claims can vary across policies, and entail a lengthy settlement process. Flood risk for homeowners in the U.S. is almost entirely assumed by the NFIP, with the private market for primary flood coverage limited to a handful of surplus lines writers, admitted companies, and Lloyd's of London syndicates. Figures from the NFIP indicate that most homes in counties affected by Harvey do not have flood insurance, but the event is still expected to generate a meaningful loss for the organization. The NFIP currently has $23 billion of debt owed to the U.S. Treasury with a total borrowing capacity of $30.4 billion, which could be reached with losses related to Harvey. The program is up for renewal in 2017, and additional debt and funding needs for NFIP to meet obligations relating to Harvey would create additional legislative and public policy uncertainty. From reinsurance companies' perspective, insured losses are likely to largely fall within primary insurers' retention levels under catastrophe reinsurance programs, with a small portion ceded to reinsurers. However, the NFIP placed its first significant reinsurance program in January 2017, ceding $1.042 billion of coverage to a group of 25 private reinsurers and Lloyd's syndicates in an effort to reduce the accumulation of future debt to the Treasury. NFIP's pre-Harvey projections suggested there was a 17.2% chance of losses from an event exceeding the attachment level of $4 billion in 2017. Given the magnitude of Harvey flooding, reinsurers providing the NFIP with flood reinsurance protection (26% of NFIP losses between $4 billion and $8 billion) could suffer a total loss. However, as there are 25 carriers on the program, the loss should be manageable for each reinsurer. Catastrophe losses in 1H17 for the reinsurance segment were below average (combined ratio impact: 4 percentage points), which will help the sector absorb Harvey-related losses in the second half of the year. This analysis is still preliminary. We will review the impact on rated entities' 2017 earnings and capital positions to see if any rating actions are merited when the storm passes and more accurate loss determinations can be made. Given that the storm remains active and large segments of metropolitan Houston remain flooded with limited road access, it will take some time to assess the magnitude of losses from Harvey. Contact: Christopher A. Grimes, CFA Director, Insurance + 1 312 368-3263 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 Brian C. Schneider, CPA, CPCU, ARe Senior Director, Insurance + 1 312 606-2321 David Prowse Senior Analyst, Fitch Wire +44 20 3530 1250 Media Relations: Benjamin Rippey, New York, Tel: +1 646 582 4588, Email: Additional information is available on The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. 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