Bermudians are looking for ways to get into the US agricultural insurance market, writes Mairi Mallon.
The growth in the size of US agricultural crop and multi-peril crop insurance market and the stable pricing provided by federal programmes has led to a flurry of acquisitions, mainly by Bermudian reinsurers flush with cash and looking for diversification and stability. Crop insurance, which indemnifies farmers against crop losses by guaranteeing a set crop price, yield or total revenue for the harvest period in exchange for a premium payment, is offered through the federally sponsored Multiple Peril Crop Insurance programme by just 17 companies. To do this they need to hold Risk Management Agency (RMA) – the managing agency for the Federal Crop Insurance Corporation – licences to provide insurance coverage through the Standard Reinsurance Agreement (SRA). Applying and getting a licence can take up to six months. This has made buying either providers of insurance or managing general agents attractive as it provides ease of entry.
The most recent acquisition was by US property casualty reinsurer OdysseyRe Holdings, but Bermudians Endurance Specialty Holdings and RenaissanceRe Holdings have also bought a slice of the action. Class of 2005 Bermudian, Flagstone Re is also currently looking at whether it is to buy one of the 17 companies or apply for a licence. Other more established Bermudians, namely Ace Ltd and XL Capital, have been in the arena for years and have considerable expertise in the area. Ace is the second largest writer of crop insurance in the US and conducts this line of business through Rain and Hail, the premier provider of risk management crop insurance programmes to rural America.
This sector has recently undergone huge growth – going from about $2bn 30 years ago to an estimated $10bn today. This growth is partly due to the value of the crops rising – corn being increasingly used for ethanol production and the rising cost of food has led to higher valuations and the increased use of insurance.
The federal government subsidises the cost of reinsurance by providing separate funds that the primary carriers can cede to. It provides them with excess of loss reinsurance which is provided at a subsidised level below what it would go for on the open market.
This means that if a company writes $100m worth of business, it may cede as little as $30m or as much as $60m (30% to 60%) depending on its risk appetite, and cede an amount of that to the federal government which will provide them with a lower cost, subsidised reinsurance.
All the companies involved charge the same rate and the companies compete based on service, commission structure or contingent profit sharing.
“What makes it attractive from an insurance perspective, particularly from a reinsurer, such as RenaissanceRe or Flagstone, is we can have the benefit of that federal reinsurance programme which is taking off a significant component of losses potentially,” says Gary Prestia, chief underwriting officer, North America, for Flagstone. “And doing that at a lower cost to the marketplace and at a subsidised level means it looks very attractive on a net basis – net after the cost of reinsurance and after the potential recovery from the federal programme. That is why you have seen this dramatic rise in interest.”
Prestia says Flagstone is currently only writing reinsurance in this line, but is looking to enter this new market before the renewals in spring, when 80% of business is written as the crops are planted (the rest are based on the few crops that are planted in autumn). But they have not decided whether to “grow organically” or buy a crop insurance provider that has already been designated by the RMA.
He says the fact that the crop and multi-peril crop market has quadrupled over the past 30 years has made it much more attractive to larger organisations.
“It has become much more meaningful and it is well on the map with respect to the size of it,” he says. “I think you are seeing this activity because of the demand for ethanol and the high cost of food around the world which has raised the original price of the commodities being insured.”
Corn and soya bean are the biggest crops being insured and corn still takes top place. Then there are fruit crops which includes big harvests such as oranges in Florida and pineapples.
Despite a very late season this year – excess moisture and cold in the mid-West in the beginning of spring delayed planting by between two to four weeks – yields look likely to be healthy this year.
But the crops are not out of danger yet, as the late planting has pushed harvesting out later in the season, which means the crops could still be exposed to an early frost or drought.
But at the end of August, corn and soya bean were doing very well, with states such as Ohio and Nebraska running at about 100% on average of the normal expected yield. Wisconsin and Missouri are just behind the curve, while soya bean could be as much as 130%.
“We are keeping our fingers crossed as an industry that we’ll make it down smoothly and the yields are what we anticipate, which is right on target,” says Prestia.
One of the first of the Bermudians to buy into this specialty market was Endurance Specialty, buying ARMtech Insurance Services in September last year.
According to Endurance, ARMtech is the fifth largest underwriter of US federally-sponsored crop insurance, with $410m in total premiums in 2007. ARMtech grew significantly when it acquired American Agri-Business Insurance Co in 2003. American Agri-Business Insurance holds the RSA licence and can underwrite crop insurance in 33 states.
Then in April, RenaissanceRe announced an agreement to acquire Agro National, a premier managing general underwriter of crop insurance for an undisclosed sum. With the deal, Agro National became part of the Glencoe Group, which conducts the individual risk business of RenaissanceRe.
“Agro National has been an important partner to the Glencoe Group and we know first-hand the quality of the team that is joining our organisation,” said Neill Currie, president and chief executive officer of RenaissanceRe.
Currie told Global Reinsurance that Agro was a good fit with their existing business because it slotted in well with their subsidiary modelling company WeatherPredict.
“We use WeatherPredict to help us look at weather patterns and a large part of that risk can be drought. Using our WeatherPredict capabilities can be very helpful and it is a large market. We feel we already write a significant amount of that business, but we view (Agro) as an opportunity to grow that into a real franchise for us over the coming years, and it matches up with our existing skill sets. There are a lot of similarities between writing agricultural insurance and writing property catastrophe or catastrophe-exposed business.”
And then in September, Hudson Insurance Group, the US insurance division of OdysseyRe, announced that it had bought the crop insurance business of CropUSA Insurance Agency. Since 2006, CropUSA has acted as managing general underwriter for Hudson in the crop insurance sector.
Brian Young, CEO of Global Insurance Operations, says: “Crop insurance has become a meaningful part of our US insurance portfolio, and this transaction will enhance our efforts to expand this class in a dynamic marketplace.”
Prestia says that the federal programme is attracting all this interest because this line is so table with the cost known at the start of the year.
“The federal government does provide a subsidisation in the form of the covers they provide, so it is below what the open market would charge for the same layers of protection,” he says. “So that subsidisation does make it, again, a more attractive right for the carriers on a net basis. When they look at their total premium that is what they see – the federal government plus any recoveries which they receive from the federal government.”
He says that many of the buyers buy quarter share on the net retained part of their policy and will also buy some stop-loss layers that come in above the federal programme (which generally stops at about a 100 or a 102 loss ratio).
“Most of them will buy another 20 to 30 points of stop loss coverage on an excess of loss basis above that and when you look at that, their net position is protected very well,” he adds. “So they can get to a 130 loss ratio before they would really start to lose money on a net basis. That is what makes it attractive both for the carriers as well as the reinsurance companies that have started to acquire both companies and managing general agents that are laying this business.”
Prestia thinks that where Endurance, Odyssey and RenaissanceRe have entered the crop, others will follow.
“I would not be surprised if there was some continued consolidation,” he says. “The trend is for bigger companies to take note of this sector now that the premium is becoming large enough. It is no longer just a blip on the map. It is beginning to become a little more meaningful and many are building out capabilities in this area.”
Mairi Mallon is a freelance journalist.