Insurers Facing Largest Loss: Not from Hurricane, but From Summer Drought

As one part of the country prepares to lose millions getting soaked by a hurricane, another is losing billions from a drought.

The 2012 summer drought is so bad that insurers face the largest agricultural losses in US history. Because agriculture has become a big, nay huge, business, farmers, like executives in other industries hedge potential risks by taking out insurance. And they have every intention of collecting.

The good news, if it can be called that, is that the government will pick up much of that tab. The reason is that it offers crop reinsurance programs and farm issues tend to dominate the economies of a number of states. In an election year, there will be no quibbling about the cost, even from self-styled deficit hawks.

Four years after the worst financial crisis in 80 years, the nation now faces the worst agricultural crisis in the same period. Images of the Joad family and other desperate 'Okies' from John Steinbeck's acclaimed 1939 novel,'The Grapes of Wrath,' may come to mind, but farmers today are executives, futures traders, environmental experts, supply chain managers and sophisticated financiers. The insurance companies, having weathered the financial crisis thanks to government bailouts, now face another challenge as the drought wipes out their farm state business partners.

The only upside may be that now that the financial services industry is once again threatened, the primary cause - climate change - may actually receive more respect from those whose finances are most at risk. It takes a village, indeed. JL

Javier Blas and Alistair Gray report in the Financial Times:

The insurance industry faces its biggest ever loss in agriculture as the worst drought to hit the US in more than half a century devastates the country's multibillion-dollar corn and soybean crops, triggering large claims.
Insurance companies providing so-called crop protection will recoup part of their loss, nonetheless, as the US federal government reinsures some of their risk, on top of subsidising the premiums that farmers pay to private companies.

Agricultural economists at the University of Illinois estimate the drought will trigger this year gross indemnities of roughly $30bn, with an underwriting loss of $18bn. Of that, the US government would shoulder around $14bn, while private sector insurers are likely to face a loss of $4bn, they said. Standard & Poor's, the rating agency, put the losses of the private sector a notch higher at $5bn.

"The US drought is indeed a 'catastrophic' event," Gregory W Locraft, insurance analyst at Morgan Stanley in New York, wrote in a recent note to clients, adding that it "is likely the largest [insurance] crop loss in history."

Gary Schnitkey and Bruce Sherrick, at the University of Illinois, warned some of the US crop insurers are owned by publicly listed companies, "who may not have realised the scope of losses that their crop insurance subsidiaries could generate".

Ace estimates a hit of $268m if its "modelled worst case" of the drought comes to fruition while Munich Re, the world's biggest reinsurer, estimates costs of €160m.

Dom Addesso, president of Everest Re Group, the parent of Heartland Crop Insurance, told investors in a recent conference call that the "the only headwind in the insurance book" of the company right now was "the crop business".

Moody's, the rating agency, said other insurers with big exposures include QBE, American Financial, Rural Community, part of Wells Fargo, and Fireman's Fund, part of Allianz. The rating agency warned that smaller insurers focused on agriculture or with businesses concentrated in loss-affected areas, including Rural Community, Farmers Mutual and a subsidiary of John Deere., "appear considerably more vulnerable on a direct basis than their more diversified industry peers".

Agricultural economists said the true level of the crop losses would only be known in the fourth quarter, after farmers complete their harvests and claims adjusters visit fields across the country. The US meteorological service last week said the drought had engulfed 87 per cent of the country's corn area and 85 per cent of the soya.

Private sector crop insurers have started to compute their crop losses on their overall portfolios, with some companies cutting their profits forecast for the year.

The multibillion losses that the US government faces comes at a difficult time as lawmakers consider a new Farm Bill, the omnibus bill adopted every five years. Fiscal conservatives asked months ago for a reduction in the crop-insurance programme, which has been in existence in one form or other since the Great Depression of the 1930s. But the drought has changed the political calculus, and most lawmakers are supporting an extension of the programme.