Crop Insurance Grows All Weather Profits Despite Drought

Despite the warnings that multi-peril crop insurers may face its largest loss in several decades, it’s unlikely carriers will flee the sector anytime soon for two very good reasons: Decent upside profits coupled with downside risk absorbed by a federal backstop.

That is a significant point made by Endurance Holdings in a presentation filed with the Securities and Exchange Commission on Tuesday.

In the presentation, Endurance argues that its 2007 purchase of crop insurer ARMTech has been one of the bright spots in both policy counts and profits when compared to other lines of business.

ARMTech has generated $160 million in operating profits since the acquisition while growing the policy count by 40.4 percent, according to the filing.

That makes crop insurance a no brainer when compared to other business lines. Endurance’s property line premiums have declined 35% since 2003, casualty premiums by 26% since 2004 and aerospace/marine premiums have dropped 78% from a 2005 high, the presentation reveals.

In 2012 alone ARMTech produced crop year gross written premiums estimated at $905 million and ranks as the fifth largest crop provider in a “business which is not correlated to the traditional P&C pricing cycle and has high risk adjusted return potential,” the presentation states.

Beyond being consistently profitable business, the loss side of the ledger is also attractive.

According to the presentation, key benefit for Endurance from its crop insurance play is the limited losses and muted volatility the business provides as a result of the government’s reinsurance backstop that is administered by the U.S. Department of Agriculture.

“ARMTech’s business has historically produced stable profits over time after reflecting the reinsurance terms set out in the current standard crop reinsurance agreement,” the Endurance tells investors in the presentation.

The filing reveals that ARMTech’s historic average loss ratio — post U.S. Federal cessions — has been 78.7%, adjusted for the 2011 Federal reinsurance terms. The Endurance presentation adds that the crop insurer’s best year in terms of loss ratio was 2007 with posting 69.8% — and the worst was 2011 with a 90.5% loss ratio.

Admittedly, carrier loss ratios will come under significant strain this year as a result of the U.S drought, according to report by Standard & Poor’s released Tuesday. The rating agency predicts that from its discussions with industry participants that the net loss ratio of crop insurance carriers (before private reinsurance) could exceed 120%.

However, S&P adds that even this year’s losses will not deter carriers from offering crop cover, especially since the most catastrophic losses where loss ratios top 500% are completely covered by the U.S. government.

“Underwriting losses will be a drag on earnings, but by themselves, will likely not affect the capital of most insurers that we rate. Consequently, we do not expect to take any rating actions solely because of crop insurance losses at this time,” said Standard & Poor’s credit analyst Jason Porter in a statement.

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