Crop Insurers Shaded From Drought Losses: Fitch

A catastrophic drought hitting much of the U.S. will likely cause losses for crop insurers, but a significant federal reinsurance backstop will shield underwriter’s capital base, according to a report issued by Fitch Ratings Tuesday.

According to the National Climatic Data Center, 55 percent of the U.S. was in a “moderate to extreme drought” at the end of June. The drought is imposing a heavy toll on crops, with the U.S. corn harvest projected to drop by 299.7 million metric tons.

“We believe the leading writers of crop insurance will be able to absorb any near-term crop losses and are likely to maintain current levels of financial strength due to the primary writers’ size, diverse portfolios, conservative use of additional reinsurance, and the business line’s historical profitability,” the report said.

Fitch said that although the financial performance of crop insurers will likely to deteriorate in 2012 because of the drought, possible losses are unlikely to cut into capital.

“The primary companies typically provide crop protection throughout the U.S. and are diversified geographically and by crop within the business line, which reduces the risk of exposure to a single event or a heavy accumulation of losses in any one region such as the Midwest,” the report states.

In addition, the fact that a portion of all multiperil crop insurance premiums sold is subsidized and reinsured by the federal government through the U.S. Department of Agriculture’s Federal Crop Insurance Corporation – and that carriers often purchase private reinsurance for larger losses – the possibility of large net losses for carriers is unlikely.

Overall, multiperil crop insurance is small part of the U.S. property/casualty market and represents approximately 1% of annual net written premiums, Fitch said. The largest U.S. crop insurers by market share include ACE Limited, QBE Insurance Group Limited, Wells Fargo & Co., American Financial Group, Allianz Insurance Group and Endurance Specialty Holdings.

Endurance is the largest, with 25% of its net written premium from total book coming from crop insurance, the report adds.

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