Crop Insurers Face a Flood of Drought-Related Claims

The drought affecting more than half the U.S. this year is being compared to the Dust Bowl of the 1930s, and the National Oceanic and Atmospheric Administration is categorizing the phenomenon as the worst in more than 50 years. This is bad news for American farmers, whose corn and soybean crops, among others, are in danger of dehydrating in the fields. Several days ago, the U.S. Department of Agriculture noted that a mere 31% of corn and 34% of soybean crops still remain in good or excellent condition.

More claims for crop insurance companies
Crop insurers aren't exactly happy, either. High crop losses practically guarantee an increase in claims for companies such as ACE (NYS: ACE) , Wells Fargo (NYS: WFC) , and Everest Re Group (NYS: RE) , all of which offer crop insurance. Things are looking so dire that some analysts predict that insurers may see their first loss in a decade.

Inclement weather that caused crop losses last year resulted in the highest payouts on record, reaching $10.7 billion as of April 30 of this year, and could go as high as $11 billion once all claims are processed. The previous highest payout year was 2008, when losses topped $8.7 billion. These payouts may pale in comparison with 2012, however.

Other crop insurers are apt to feel the pinch, as well. American Financial Group (NYS: AFG) and Archer Daniels Midland (NYS: ADM) , through its Crop Risk Services, will almost certainly see more claims this year for drought-related crop losses. For all of these companies, however, the news is not all bad.

Government backing will help ease the pain
The crop insurance industry is subsidized by the U.S. Department of Agriculture, which provides about 60% of each premium dollar in addition to kicking in more than $1 billion each year for insurers' operating costs. When disaster strikes, taxpayers pitch in again; estimates for this year's public portion of the expected drought claims are 50% to 80%.

Another factor that should insulate these insurers from too much financial pain is that these companies are all well-diversified. Most, like Wells Fargo, offer a variety of types of crop insurance, and not all sectors will suffer losses. For most of the industry, crop insurance is a minute part of their business profile, often totaling only 1% of insurance offerings, which keeps their exposure fairly low.

Fool's take
Crop insurers are concerned that farmers may forgo treating damaged crops in the hope of saving them, instead electing to plow them under and just collect the insurance. So far, however, there is little evidence that this is happening. Even as claims begin to pour in, insurers are still hopeful that damages will be limited. In any case, it seems as if the companies' interests are protected enough to shield them from much economic harm -- at least for this year.

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