After Harvey's wreckage clears, credit assessment comes

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DALLAS – After Hurricane Harvey's floodwaters subside and the emergency crews leave, credit analysts will assess the damage to tax bases after the storm inundated Houston and most of southeast Texas over the weekend.

Although no official estimate of the hurricane’s financial impact has surfaced, the real estate analytics firm CoreLogic anticipated $40 billion of damage before Harvey made landfall.

If that figure bears out, it would make Harvey's damage comparable to that caused by Hurricane Ike, which devastated the Texas Gulf Coast, particularly the island of Galveston, in 2008. Final estimates of Ike’s damage came to about $38 billion, and recovery took years, lowering outlooks on Galveston’s credit in the process.

Terri Wenck, director at Fitch Ratings, said the first clients to be contacted will be utilities, particularly water and sewer operators.

“We completely understand and respect that they have a lot on their hands right now,” Wenck said. “When recovery is underway, we’ll contact them and see what they say. Right now, it’s wait and see.”

The Category 4 hurricane made landfall Friday night between Houston and Corpus Christi Friday night, bringing heavy rain to Houston as it hovered over the coast. The last Category 4 storm to hit the U.S. was Charley in 2004 in Florida, and the last Category 4 storm to hit Texas was Carla in 1961.

Refineries all along the coast were shut down as airlines canceled flights, and schools were closed.

Both of Houston's city-owned airports, George Bush Intercontinental Airport and Hobby Airport, closed to commercial operations Sunday "until further notice."

In a Municipal Market Analytics commentary, analyst Matt Fabian wrote that the storm's effects are unlikely to interrupt national municipal market outperformance or create a material break in strong southeastern Texas growth trends and/or related issuer credit quality improvements.

The frequency of severe flooding in Houston does raise some questions, though. "Because this is the third major flooding event in Houston in as many years, immediate private sector rebuilding efforts may not seek to recapture 100% of the property being lost today, even in the downtown area," he wrote.

Harvey's damage is "undoubtedly catastrophic and unprecedented," said economist Ray Perryman of the Perryman Group.

"Although these types of catastrophes may lead some individuals to leave the areas, the population in Texas and these Gulf Coast communities has been growing for quite some time and is expected to continue to do so even with the unprecedented storm," he said. "Ike in Galveston was a very different situation because Galveston is a self-contained island."

The Electric Reliability Council of Texas (ERCOT) reported about 300,000 customers lost power but that in some cases, power was quickly restored. The most recent storm bringing that number of outages was Winter Storm Stella, which left about 200,000 customers on the Eastern Seaboard without power in March.

Fitch Ratings analyst Steve Murray, who has analyzed storm damage in the region for years, said that Fitch does not anticipate any immediate downgrades due the storm.

“From a global perspective, we don’t expect this event to be materially different from a Katrina or Sandy,” Murray said. “We’re not anticipating any long-term implications. We did not take any negative action on Galveston because of Ike. Katrina was a different animal.”

Economic triage begins with the Federal Emergency Management Agency, Red Cross and other volunteer organizations, followed by teams of insurance adjusters assessing damage and helping residents file claims.

“We don’t have any reason to think the federal government and private insurance won’t step up as they have before,” Murray said.

Some of the institutions in the flood-prone region have learned from previous catastrophes. In the Texas Medical Center, major hospitals including Texas Children's Hospital, Memorial Hermann-Texas Medical Center and TIRR Memorial Hermann Hospital began sealing off their lower floors by slamming shut so-called submarine doors, part of a massive safety upgrade launched after Tropical Storm Allison devastated the medical campus in 2001.

While it will take some time to determine extent of property damages in Texas, Hurricane Harvey holds the threat of inflicting significant losses on property and casualty insurers and reinsurers, according to a report released by Moody’s Investors Service on Monday.

“Primary insurers will face the largest effect from Harvey, with regionally focused carriers most vulnerable given their geographic concentrations,” the Moody’s report said.

“The Southeast is a peak catastrophe zone in the U.S. for reinsurers, and those with exposure to Texas are at risk of incurring meaningful losses, although we expect those losses to be manageable relative to earnings,” Moody's wrote.

“We expect that these large national carriers will have the capacity to withstand a significant event based on careful monitoring of their coastal exposure, geographic diversification, high quality reinsurance protection and strong capital bases owing to a decade free of severe catastrophes,” Moody’s said.

As Harvey weakens to a slow-moving storm, the middle and upper Texas coast could receive two to three feet of rain or more in certain areas. Parts of the southeast greater Houston metropolitan region received more than 20 inches of rainfall by early Sunday morning. Isolated tornados have also been reported. A significant share of insured losses will derive from wind and rain for areas that were not directly hit by the hurricane, Moody's wrote.

Moody’s added that losses along the Texas coast will be absorbed by the Texas Windstorm Insurance Association, the insurer of last resort.

“In total, TWIA provided about $67.6 billion of coverage as of 30 June 2017,” Moody’s said. “TWIA’s total payment capacity is about $4.9 billion, which TWIA estimates will cover more than a 1-in-100-year hurricane. If TWIA’s total losses were to exceed its payment capacity, it would have the option to charge assessments or surcharges on TWIA policyholders.”

Commercial lines insurers could face losses from flooding, Moody’s said, which is typically an optional commercial coverage.

“Harvey highlights the significant exposure that Texas and the Southeast face to hurricanes,” Moody’s said. “According to Property Claims Services, a unit of VerRisk Analytics, the effect in today’s dollars of historical Texas storms would be significant for primary insurers and reinsurers. For example, insured losses from Hurricane Ike in 2008 would be about $14 billion, while Hurricane Rita in 2005 would be almost $7 billion.”

Harvey's impact on Texas Gulf Coast refinery operations near the eye of the storm is likely to be large and potentially long-lasting but Fitch Ratings expects other unaffected refineries to potentially benefit from higher spreads in petroleum prices resulting from market disruption.

“The overall credit impact of the hurricane is likely to be muted, though earnings for refiners such as Citgo and Valero may be affected,” analysts said.

Gasoline prices have already spiked in anticipation of significant refining capacity disruption extending from South Texas to the Houston-Galveston area. However, the timing of the event may limit the duration of a gasoline price spike since the gasoline market is currently well supplied and the US driving season is nearing an end, analysts said. According to the latest US Energy Information Administration data, gasoline stocks are currently 230 million barrels, representing about 22 days of supply.

Many refineries outside the most heavily affected areas, including inland facilities and those in central and eastern Louisiana, will likely benefit from higher gasoline crack spreads created by forced capacity outages in Texas. For facilities still up and running and able to supply areas normally serviced from the Gulf Coast, this would boost results, particularly if extensive flooding and power outages keep Texas refineries and transportation infrastructure offline for an extended period.

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