Big US crop insurers say losses manageable despite drought

Wed Jul 25, 2012 8:56pm IST

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* RCIS, Rain & Hail say can handle losses

* Corn Belt in worst drought since 1950s

* Most expect losses worse than 2011's nearly $11 bln

By Ben Berkowitz

July 25 (Reuters) - Two of the largest crop insurers in the United States played down concerns over the financial impact of the worst drought in more than 50 years, saying they expected only modest losses even as claims rise to record levels.

Wells Fargo's RCIS and Ace Ltd's Rain & Hail and said this week that between careful underwriting and reinsurance, they could handle what many expect to be billions of dollars in total payouts for crop losses this year.

Anecdotal evidence suggests record numbers of farmers could file claims this year. Some find it more economical to give up on their crops than to spend money to try and save them -- a trend that could re-ignite a debate in Washington about a proposal to expand government-subsidized crop insurance.

Ace, which calls itself the second-largest of the 15 or so U.S. crop insurers, reported on Tuesday that a higher loss ratio would trim 19 cents per share from earnings, or more than $65 million in total -- a figure that could rise substantially in coming months if the drought gets worse.

"If the current drought conditions worsen and continue to harvest, our model's worst-case loss, based on what we know, would be an additional circa $200 million after tax," Chief Executive Evan Greenberg said a conference call on Wednesday. He added: "We are not predicting this outcome."

Management at Wells Fargo, the top provider, says the vast majority of the bank's crop exposure has been reinsured and that the bank has also entered stop-loss agreements, according to a research note from Stifel Nicolaus analyst Christopher Mutascio.

Taking into account markets share data and loss ratios sustained during the 2002 drought, he estimated the bank could suffer a hit to earnings of $380 million, or 5 cents per share.

Wells Fargo spokesman Gabriel Boehmer said it is premature to speculate on what the affect of the drought will be.

"Nonetheless, we are prepared for claims season," he said.

Ace declined to break down its losses by various strands of crop insurance coverage, saying it would update investors if necessary after making its own projections.

Greenberg declined to answer a question about whether Ace could acquire other crop insurers hurt this year. He did, though, endorse crop insurance as profitable for the company.

"Crop insurance is a great business. Over any period of time it has been very good," he said. "Right now, at this point, while the earnings are under pressure they're still expected to be reasonable."

INDUSTRY GROWING

Growth in crop insurance is well documented. A decade ago, insurance covered about 75 percent of the U.S. corn crop; last year it covered 85 percent of all planted acres.

In 2011, insurers indemnified farmers for about $10.8 billion in losses, according to industry association National Crop Insurance Services. A fuller picture of this year's losses is expected by mid-to-late August, though most expect them to be greater than last year.

Wherever the number ultimately lands, crop insurers like RCIS and Rain and Hail will rely heavily on reinsurance to offset some of their losses.

The Standard Reinsurance Agreement that insurers enter into with the U.S. Department of Agriculture's Federal Crop Insurance Corp is sometimes criticized as a subsidy to the industry, a charge crop insurers have vehemently denied.

In Aug. 2009, Milliman Inc conducted an analysis for the USDA that found over the prior 20 years, insurers in the reinsurance program earned an average rate of return of 17.1 percent. That was 430 basis points higher than what Milliman said was the "reasonable rate of return" in that period.

On the other hand, a Jan. 2011 report prepared by Grant Thornton for the industry trade group National Crop Insurance Services found that crop insurance on the whole was a less profitable business than other property insurance lines.

Either way, this year's drought may boost future results for insurers, potentially pushing up rates for next year's coverage.

"It's possible," Greenberg said. "It's going to depend on global crop conditions as well as projected U.S. weather conditions."

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