S&P Global Ratings has announced that it has now raised its long-term issuer credit and insurer financial strength ratings on Flood Re Ltd. to ‘A’ from ‘A-‘, resulting in a stable outlook.
The upgrade reflects upon the rating agency’s increased confidence in the success and effectiveness of the Flood Re scheme.
The product is a joint initiative that involves the domestic insurance industry and U.K. government.
In 2016, Flood Re received minimal claims until the latest financial year ending March 31, 2020. Adverse weather in November 2019, followed by storms Ciara and Dennis in February 2020, caused significant flooding in various parts of the U.K.
These events resulted in gross claims costs of £96 million, materially higher than Flood Re had previously experienced. These costs include £10mn of losses brought about by COVID-19-related restrictions.
UK lockdown restrictions resulted in delayed repairs to flooded properties, and increased costs of temporary accommodation for policyholders. In comparison, Flood Re’s gross claims in 2018 were just £16 million.
Despite these events, Flood Re reported 2019 post-tax profits of £49 million.
As a result, its risk-based capital adequacy under their model remained well above the ‘AAA’ level. In addition, Flood Re’s regulatory solvency ratio at end-March 2020 was 522%.
The rating agency’s report shows that Flood Re has built up its capital base to a satisfactory level, which stood at £367 million at end-March 2020.
Whilst the capital base remains relatively small, S&P believes that the company has successfully surpassed the critical start-up phase.
Even though while Flood Re was set up to withstand significantly more severe events, the rating agency believes that the test posed by those in November 2019 and February 2020 highlight that the levy scheme, reinsurance structure, and outsourcing of activities such as claims-handling have worked effectively.
Flood Re is required to review the scheme at least once every five years and report its findings to the U.K. government. Under its upcoming quinquennial review (QQR), Flood Re is proposing a number of changes to fine-tune the scheme.
The stable outlook indicates to S&P that over the two-year horizon, Flood Re will maintain risk-based capital adequacy in excess of their ‘AAA’ benchmark, and that U.K. home insurers will continue to use the Flood Re scheme.
Andy Bord, Chief Executive of Flood Re, commented: “Our recently announced 2019/20 annual results demonstrate that following the first major flooding events since our launch in April 2016, we continue to be a financially-robust organisation.
“We are therefore pleased to see that S&P has recognised our strong position and we believe that this upgraded rating will reaffirm to our stakeholders that we have the capital base, long-term plan and operational efficiency to continue enabling homes in flood risk areas to access affordable home insurance for the lifetime of Flood Re’s existence and beyond.”
