Significant Uninsured Harvey Losses Mean US Insurer Downgrades Unlikely

Hurricane Harvey is unlikely to trigger ratings downgrades of individual property and casualty insurers or reinsurers, as indications remain that this will be an earnings and not a capital event for the industry, Fitch Ratings said. Fitch believes 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 Hurricane 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 Hurricane 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 United States 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 Hurricane 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 US Treasury with a total borrowing capacity of $30.4 billion, which could be reached with losses related to Hurricane Harvey. The program is up for renewal in 2017, and additional debt and funding needs for NFIP to meet obligations relating to Hurricane 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 percent chance of losses from an event exceeding the attachment level of $4 billion in 2017.

Given the magnitude of Hurricane Harvey flooding, reinsurers providing the NFIP with flood reinsurance protection (26 percent of NFIP losses between $4 billion and $8 billion) could suffer a total loss. However, as there are 25 insurers on the program, the loss should be manageable for each reinsurer.

Catastrophe losses in the first half of 2017 for the reinsurance segment were below average (combined ratio impact: 4 percentage points), which will help the sector absorb Hurricane Harvey-related losses in the second half of the year.

This analysis is still preliminary. Fitch expects to 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 Hurricane Harvey.

Read what Kroll Bond Rating Agency has to say about Hurricane Harvey on Captive.com in "Kroll Bond Rating Agency Evaluates Harvey Exposure Across Its Ratings" and "KBRA: Hurricane Harvey To Have Modest Impact on Underwriting Results."