Former American International Group Inc. chief Maurice "Hank" Greenberg has a new business partner: the U.S. taxpayer.
Greenberg’s Starr Indemnity & Liability Co. is one of 18 companies approved to get federal cash for insuring farmers against loss of crops or income. Wells Fargo & Co., the nation’s fourth-largest bank by assets, Zurich-based Ace Ltd. and units of American Financial Group Inc., Deere & Co. and Archer- Daniels-Midland Co. all enjoy similar public backing.
The government subsidies show how a program created to safeguard the nation’s farmers has evolved into a system that in most years all but guarantees profits for insurers. In 2012, taxpayers spent $14 billion paying more than 60 percent of farmers’ insurance premiums, the companies’ operating costs and the lion’s share of claims triggered by a historic drought, according to the Congressional Research Service.
"What we’ve got is a money-laundering operation," says Harwood Schaffer of the University of Tennessee’s Agricultural Policy Analysis Center. "It looks like we’re doing a free market thing and it’s not free market at all."
Amid congressional efforts to curb federal spending, government aid for a profitable industry is drawing bipartisan criticism. Yet even as House Republicans threaten to shut the government this fall unless the White House agrees to more cuts in nutrition, health and environmental programs, aid for corporations remains inviolate.
Crop insurance, administered by the U.S. Department of Agriculture’s Risk Management Agency, was established in 1938 to help farmers ride out droughts and disease. Today an expanded program directly subsidizes government-approved insurers and indirectly benefits several other financial institutions -- many based in tax-advantaged venues such as Bermuda or Switzerland -- that reinsure those risks.
The government program is designed to provide companies a 14.5 percent return on equity -- a mark higher than that earned last year by companies such as JPMorgan Chase & Co. and General Electric Co.
"If they stay in over the long term, they’re going to have a profit," says Gretchen Roetzer, a director at Fitch Ratings’ North American insurance group. "The odds are in their favor.’
Since insurers are required to cover all eligible farmers, they pass on about 55 percent of total program risk to the government or private reinsurance companies, compared with about 10 percent for other types of insurance, according to Fitch Ratings. That helps shield them in the worst years from ruinous claims.
Crop insurers have banked underwriting gains -- surplus premiums remaining after claims are paid -- in all but two years since 1993. Those private gains cumulatively topped $10 billion in the past decade while the government absorbed $70 million in losses, according to RMA annual reports. From 1989 to 2009, before the government took steps to rein in runaway profits, the companies averaged a 17 percent return on equity, well above the 12.7 percent deemed "reasonable" in a 2010 report for RMA by Seattle-based analytic firm Milliman Inc.
Though they absorbed $1.3 billion in underwriting losses last year, the private sector companies receiving the aid are not in obvious need of financial help. Wells Fargo, whose Rural Community Insurance Services unit is the nation’s largest crop insurer by premium value, boasts $1.4 trillion in assets, according to data compiled by Bloomberg.
Second-ranked Ace’s credit worthiness was raised to "A" in 2010 by analysts at Standard & Poor’s. The insurer, headed by Greenberg’s son Evan, reported $2.7 billion in net income last year.
Other subsidy recipients include Dublin-based XL Group Plc. In 2006, Chief Executive Officer Mike McGavick, 55, was a Republican Senate candidate in Washington state who inveighed against the "crippling national debt" and was endorsed by the Club for Growth, one of the conservative opponents of the crop insurance program.
McGavick, through XL Group, declined a request for comment.
Likewise, Great American Insurance Group of Cincinnati, a unit of American Financial Group Inc., gets government help. Its corporate parent was founded in 1959 by the late billionaire Carl Lindner whose sons Carl III, 60, and Craig, 58, run the company as co-chief executives. Along with their mother Edyth, the three Lindners own almost $1 billion in American Financial shares, according to the company’s 2012 proxy statement.
As Congress phases out other farm programs, crop insurance is becoming the sole backstop for farmers. Without federal subsidies, premiums would more than double, which may cause farmers to drop coverage. In the event of drought or other disasters, those uninsured growers would then demand ad hoc bailouts, says Tom Zacharias, president of the National Crop Insurance Services, an industry group.
In Northfield, Minnesota, which boasts of "cows, colleges, and contentment," Bruce Peterson, 48, has been farming since the drought of 1988. His insurance paid off in 2011 after an early frost damaged his soybean fields.
In the event of a broader crop failure, the insurance would enable Peterson to make the payments on his leased land. "It helps you sleep at night," he says.
NCIS disputes claims of easy money, saying the business is less profitable than other types of property and casualty, or P&C, insurance. An April report it commissioned by the Chicago- based audit firm Grant Thornton, which used a different methodology than the government study, concluded that crop insurers were "significantly less profitable than the P&C industry while simultaneously being riskier."
Zacharias says that current profit levels in the government-managed program are needed to maintain private sector participation. "The returns are adequate to hold a certain number of players in the business," he said, adding that proposals to trim federal spending on the program could cause some insurers to stop covering farmers.
Keith Collins, a former USDA chief economist who is now an industry consultant, says the government’s estimates of the industry’s return on equity represent little more than guesswork. "Nobody knows what the equity of a crop insurer is," he said.
In pitching its product to farmers, the crop insurance industry enjoys the government’s full backing. The Federal Crop Insurance Corporation says its "mission is to encourage the sale of crop insurance -- through licensed private agents and brokers -- to the maximum extent possible."
Any licensed insurer can sell crop insurance after providing the USDA’s Risk Management Agency a detailed operations plan and demonstrating that it has adequate financial heft and trained personnel. For new providers, the process can take a year or more.
RMA negotiates the specifics of available insurance coverage with the 18 providers, precluding traditional market competition. As a result, the insurers battle to win the loyalty of the agents who actually sell the policies.
Some analysts, including Schaffer, say that process drives program costs higher. "Companies don’t want to displease their customers because they’ll go to another company," he says. "You have claims approved that shouldn’t be."
The competition among insurers bids up agent compensation, which represents the bulk of the industry’s administrative costs. In 2011, insurers paid agents about $1.28 billion, almost 75 percent more than in 2006, according to Bloomberg calculations using data from Grant Thornton and RMA.
The government reimburses insurers for their costs based on a percentage of total premiums. Between 2004 and 2008, soaring commodity prices inflated premiums, causing annual subsidies to more than double to $2 billion and leading RMA to warn of "the potential for windfall" payments.
In 2010, the government and insurers renegotiated the standard reinsurance agreement, which specifies the policies that companies can offer and the division of underwriting gains and losses between the taxpayer and insurers.
Since then, the annual cost reimbursement -- which insurers say fails to cover all their expenses -- has been capped at $1.3 billion plus inflation. Even with the limits, the insurers’ administrative subsidy last year was 42 percent higher than in 2006, even though the number of policies was almost unchanged.
"Even in a pretty bad year, the companies make money," said Bruce Babcock, an agricultural economist at Iowa State University who’s studied the program. "It’s basically set up to make sure companies make money."
The No. 1 ranked crop insurer, Wells Fargo’s Rural Community Insurance Services, last year reported $2.45 billion in crop insurance premiums. One of 88 separate Wells Fargo businesses, the insurer was profitable for nine of the past 10 years and for the decade as a whole, says Mike Day, CEO of the Anoka, Minnesota-based company.
Less generous program terms, more volatile weather and additional government regulations are squeezing profits, he said. "If it was five years ago, you could say, ’Gee, this is just way too lucrative,’" he said in an interview. "It’s a whole different world now."
Amit Kumar, an analyst with Macquarie Securities Group in New York, agrees that the industry’s profit outlook "has definitely come down" as a result of program changes over the past few years.
Yet conditions remain sufficiently attractive for Hank Greenberg, the 88-year-old insurance industry legend who headed AIG. In February, a unit of his privately-held Starr Companies said it won approval to provide government-backed crop insurance. Four months later, Climate Corp., a San Francisco- based insurance company, announced it would also join the program.
Starr Companies, and its West Des Moines-based managing general agent, International Ag Insurance Solutions, both declined interview requests. Ace Ltd. also declined to speak about its participation in the program.
Many of the companies that write crop insurance policies are small parts of large financial institutions that don’t report results separately for their crop business. One that does is Endurance Specialty Holdings Ltd. of Bermuda, which acquired crop insurer ARMtech Insurance Services Inc. in December 2007 for $125 million.
Since then, the company has produced $110 million in operating profit, according to an Aug. 29 Endurance securities filing. ARMtech of Lubbock, Texas, has "historically produced stable profits over time," the filing said.
Endurance declined an interview request.
Reinsurers, too, have been entering the business. In recent years, companies such as Everest Re Group Ltd. of Bermuda and Australia-based QBE Insurance Group Ltd. have acquired smaller companies that write farmers’ policies. Axis Capital Holdings Ltd. of Bermuda also said last year it planned to increase its crop reinsurance business.
For insurers and reinsurers alike, the crop business helps smooth financial results that rise and fall with other more cyclical insurance lines. Joe Taranto, CEO of Everest Re, which insures and reinsures crop exposure, told analysts in April: "We are expecting a normal year. A normal year means a very reasonable profit."
Last year, as drought devastated the farm belt, the program’s total premiums fell $6.2 billion short of farmers’ claims. The government absorbed $4.9 billion of that amount while the insurers paid $1.3 billion.
The ballooning costs have been targeted by lawmakers in both parties.
Representative Paul Ryan, the chairman of the House Budget Committee, has proposed cutting crop coverage subsidies as part of a $31 billion reduction over the next decade in farm expenditures.
"We should have a crop insurance system that helps protect people from catastrophic losses," the Wisconsin Republican told MSNBC in June. "But we shouldn’t be playing what I call, you know, crony capitalism."
The Obama administration also proposed cutting $11.7 billion from the program over the next decade. New farm legislation approved in the House and the Senate, however, would expand the program.
Crop insurance preserves the nation’s food supply and has "social value," said Day of RCIS.
"If you look at what happened in 2012, the program works exactly how it was designed to work," he said. "Our hope would be that there wouldn’t be any changes."
(This is the second in a series of articles on the U.S. crop insurance program. The first installment was published on Sept. 9: Taxpayers Make U.S. Farmers Fat Cats With Crop Insurance)