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Mike's Blog

Insights from the President of ProAg

Slip Slidin’ Away

by Mike Connealy on 01.22.2013

We are three weeks into January of 2013. We recall the song written by Paul Simon and recorded by him with Art Garfunkel back in the 70’s:
 
The nearer your destination the more you slip slidin’ away…
 
The “destination” at ProAg is to have all our 2012 drought claims worked and put to bed this crop year, a year that has tested the private sector crop insurance industry like none on record. As of this date, January 21, 2013 we have some 200 claims left to finish in the drought states. We are essentially 99% done with these 2012 losses on corn and soybeans. Included are a number of high dollar claims awaiting records for three year APH reviews, these tend to drag out the timetable to finish. We did see good record retention from many insureds that allowed for quicker payments and we thank our agents and adjusters for working through all of those details.

The 2012 underwriting (UW) results for ProAg have also been “slip slidin’ away”. As of this date, we are officially into a negative underwriting (UW) position. Last week, we were still at .3% gain for the 2012 reinsurance year.  We have now slipped into a loss.  This means that ProAg will not be allowed to pay a 2012 profit share to any agency, regardless of any individual agency or state loss ratio. The 2011 SRA rules for agent compensation on the 20% profit share clearly state that the company must have a cumulative underwriting gain [see section II (b) (7)] in order to pay anything above the maximum of 80% of A&O for agent compensation. At ProAg, we now have a cumulative loss, so no reason to make any further calculations. My guess is that we are not alone in our UW loss for 2012 and that most other approved insurance providers (AIP) are also in, or will be in, an UW loss position for 2012.       

The 2011 SRA included an effort by RMA to cut UW gains in good years in the five so called “good states”. These are Indiana, Illinois, Iowa, Minnesota and Nebraska. In addition to cutting UW gains in the good years, the new formula adds losses in the bad years. So, this two pronged effort by RMA to control the UW results is illustrated clearly in the first two years. The 2011 UW outcomes were decent in the five states, and the 2012 results were a disaster. Only Minnesota enjoyed a positive 2012 result out of these five states. The year to date (YTD) paid loss ratios in the commercial fund for ProAg in the five states are as follows:

 Illinois is 380% / Indiana is 240% / Nebraska is 175% / Iowa is 154% / Minnesota is 24%

 For every $10 million of retained premium in the commercial fund, ProAg has approximately these YTD results for the above loss ratios in the five states:

 Illinois is -82% / Indiana is -68% / Nebraska is -46% / Iowa is -35% / Minnesota is +33% 
 
 Interesting trivia item on the YTD ProAg gross loss experience by crop for entire USA:

 Corn – 208% / cotton – 118% / soybeans and wheat – 69%
 
Since the five states represent over 40% of the nationwide commercial fund premium, one can see that there won’t be nearly enough good states to offset the losses from the four hardest hit states in 2012. The RMA summary of business for 2012, as of January 21, 2013 shows loss ratios in excess of  the break even 100% in Texas, New Mexico, Kansas, Kentucky, South Dakota, Missouri, Colorado and Tennessee. In addition, we had a freeze last week in California on exposed 2012 citrus business that will certainly add to the 2012 UW pain. 2012 can’t “slip slide away” too fast for this writer !
       
Questions or comments as always are welcome.

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