Record US Crop Losses in 2011 Are Credit Negative for Insurers

Record US Crop Losses in 2011 Are Credit Negative for Insurers

Last Tuesday, the National Crop Insurance Services (NCIS), an industry trade group, announced that US crop insurers’ claim payouts for 2011 for the first time in history surpassed $9 billion because of damage from droughts, floods and freezing weather. Such high claim payouts are credit negative for an industry that continues to face pressures from tightened expense reimbursements from the federal government. Smaller and more geographically concentrated insurers, in particular, may be at risk.

Payments on 2011 insured losses were $9.1 billion as of the NCIS’s report date and could ultimately exceed $10 billion as outstanding claims are settled. Among the factors causing crop damage in 2011 were droughts in the Central Plains and Midwest regions, floods along the Mississippi and Missouri rivers, and untimely freezes in the Southeast. Texas, for example, reported its worst drought in 40 years. The previous record for insured crop losses was $8.7 billion in 2008, resulting primarily from floods that ravaged most of the corn belt. Exhibit 1 lists the top crop insurers based on premiums.

Crop insurers, which are licensed by the Risk Management Agency of the US Department of Agriculture, generally cede a large portion of crop losses to the federal government through the Federal Crop Insurance Corporation’s Standard Reinsurance Agreement (SRA). The SRA applies to the federal multi-peril crop insurance (MPCI) program, through which the government effectively continues to provide significant subsidies to the agricultural sector. We expect that the industry-wide combined ratio (sum of loss and loss adjustment expense (LAE) and other expense ratios) for 2011 will come in below 100%, indicating a still profitable underwriting year for the sector. However, it will be significantly weaker than in 2010, a banner year, and perhaps more in line the more loss-intensive 2008 and 2009, as illustrated in Exhibit 2. For example, compared with the industry-wide combined ratio of 47% in 2010, a 2011 combined ratio at or above the 2008 level would indicate a more than 60% year-on-year decline in underwriting profits for the sector.

Despite a likely still-profitable year for the sector overall, results will vary considerably by group, as crop insurers have significantly different business and geographic profiles. We expect the largest, nationally diversified insurers (the five largest of which compose approximately two-thirds of premiums written) will generally outperform their smaller and more geographically concentrated peers, because of profits earned in less-affected states and regions. Many smaller insurers focus on single states (e.g., they are farm bureau-affiliated) or regions, and are likely to experience greater variability in year-to-year results depending on whether major loss events occur in their region, and the extent to which they retain or cede underwriting exposures to the government. Given that major loss activity in 2011 was particularly concentrated in the central and Midwest states where many of these insurers operate, we expect that their profitability will generally be more adversely affected than the national firms, and some may report combined ratios of more than 100%, indicating an underwriting loss for the year.