Private crop insurers, a group led by Wells Fargo and Ace, may face losses that exceed $5 billion if this year's drought is worse than one in 1988, Standard & Poor's said.
Hot, dry weather across much of the Midwest has damaged crops, led to a rally in corn and soybean futures, and boosted insurance loss estimates. The U.S. subsidizes farmers' premiums for multiperil coverage, which protects against a loss of revenue or production due to drought, hail, wind, frost or other natural causes. Private insurers sell and administer the coverage, and the federal government backstops them with payments and reinsurance.
"Insurers with higher concentrations of premiums in the most-affected states, such as Kansas, Illinois, Kentucky, Indiana, Missouri and Tennessee, will see a larger share of the losses," S&P analysts led by Jason Porter said Tuesday in a report.
Losses among crop insurers will vary depending on how much government and private reinsurance they use, S&P said. The companies can withstand losses due to capital levels and revenue from other businesses, according to the ratings firm: "Underwriting losses will be a drag on earnings, but by themselves, will not affect the capital of most insurers that we rate. We do not expect to take any rating actions solely because of crop insurance losses."
Wells Fargo has reinsurance, in which other companies agreed to absorb losses on policies it sold, said Katie Ellis, a spokeswoman. She said the bank has spread its risks to limit liabilities from a single event. Ace didn't immediately respond to an e-mail seeking comment. CEO Evan Greenberg said in July that dry conditions would affect second-half earnings.