Ratings of UK non-life insurers unaffected by floods, losses at GBP 2.5 bln

The recent UK flood events in late June and mid-July across selected areas of the North of England and South England / Midlands are likely to have no impact on UK non-life insurers’ credit ratings, according to a Special Comment published by Moody’s.

Although the two events look set to have a significant impact on 2007 earnings, strong financial performance and strengthened balanced sheets ensure that the losses are manageable for the industry overall and for key players.

The report explains the difficulties of reliable claims estimation from such events.

However, based on industry (Association of British Insurers) estimates, a gross cost of at least GBP 2.5 bln is likely. “The spread of this cost throughout the industry will,  ultimately, depend on the lines of business written by each insurer, with Moody’s anticipating the majority of flood-related claims to come from property (personal and commercial) and business interruption lines”, stated Dominic Simpson, a Moody’s Senior Credit Officer and author of the report.

In terms of the impact of reinsurance, Moody’s understands that the two flood events (end June and mid-July) are to be treated as two separate events by reinsurers, and therefore primary insurance companies are likely to use the extent of their retention levels twice in order to initially absorb the losses, and will also incur costs for the reinstatement of reinsurance protection.

“Furthermore, the retention levels of reinsureds have generally been increasing in recent times. Consequently, although reinsurers will face some cost from these events,  Moody’s expects primary insurers to bear the brunt of the total gross claims”, added Simpson.

However, given recent strong operating performance in the UK non-life sector, with top-of-cycle premium levels and benign financial markets leading in particular to strengthened balance sheets, Moody’s believes that the capacity of the industry to absorb the likely level of losses is consistent with maintenance of current credit ratings. Looking ahead, Moody’s expects flood-related insurance premiums to rise, reflecting the cost of the recent events but also a recognition that such events may occur with increasing frequency in the future.