We have been asked several times about how the 2013 reinsurance year is going to finish for ProAg, specifically regarding the ability of ProAg to pay profit share to agents who are otherwise eligible for a profit share. This is our answer to what amounts to a key financial issue for agents, particularly after being shut out of profit share payments in 2012 due to extensive Midwest drought losses across the industry.
A reminder the 2011 Standard Reinsurance Agreement (SRA) has specific rules regarding whether an individual approved insurance provider (AIP) is eligible to pay any agent profit share. In order to be eligible, the AIP has to have a positive underwriting result (gain) on the October Accounting Report from RMA. As long as the number is positive, some portion of the total eligible profit share can be paid. The exact amount is a function of some additional SRA-driven terms and conditions, and probably too complicated to worry about right now. So for the moment, let’s just assume that if an AIP has a positive 2013 gain underwriting gain, they will likely be able to cover the profit share that would be payable in October of 2014.
The 2013 crop year has included what we refer to as “uneven” results on from an underwriting perspective. There are several states that have excellent MPCI results for ProAg including, but not limited to: Florida, Washington, Michigan, Ohio, Indiana, Montana, Nebraska, and South Dakota.
There are a few states that we know have significant UW losses including Minnesota, Iowa, Colorado, Wisconsin, and New Mexico. Minnesota and Iowa are “disasters,” our 2013 paid loss ratio currently exceeds 200% for commercial fund business. At present the paid industry loss ratios are lower than ProAg’s for much of the Midwest, but we view this as a temporary situation. ProAg got an early start on prevented planting claims, and had most paid before the corn-price driven revenue loss notices began to roll in, so we expect the industry loss ratios will continue to rise as other AIPs catch up on claims.
There are a few states that we predict will have small UW gains for ProAg including Illinois, Georgia, Kansas, North Carolina, Arizona, and Oklahoma. There are also states that we predict a modest UW loss based upon our book of business, underwriting decisions, and claims activity, including the key states of Texas and North Dakota.
There remains a significant unknown for ProAg and for the crop insurance industry as a whole in that our California book sustained December freeze losses on citrus policies. These claims have not yet been able to flow through the claims process and hit the paid column. We know that this freeze is a serious event, and that it will take ProAg’s California book from an excellent underwriting result to an unknown, possibly negative outcome for the state. The nature of the citrus business and processor contracts is such that we really won’t know the final 2013 California losses until early in the summer of 2014.
Hence, the answer is that ProAg will quite likely be able to pay a profit share to those agents who have earned one, but nothing is certain as of this date. Our current UW gain stands at 6.0%+, based upon losses paid to date, which includes $13 million of estimated UW gain dollars for California. If we subtract the entire $13 million of estimated California gain dollars, we still have 3.0% plus in the gain column for our overall book, which would be sufficient to cover profit share payments earned by our agents.
Our open 2013 claims outside of California are primarily “stragglers” that are unlikely to cause much movement in the UW gains or losses by state – with the exception of some potential GRIP (area plan revenue) claims on 2013 corn. These GRIP losses are difficult to predict, but tend to run at about the same loss ratio as regular corn revenue losses for a given state.
In closing, we are trying to be as transparent as possible on this key items for agents. We have reason to believe that the industry results on 2013 UW gain are also “uneven”. This means that certain AIPs will be able to definitively say “yes or no” on their ability to pay a 2013 profit share. There may well be others that, like ProAg, have significant California exposure that might ultimately have a negative impact their ability to pay.
We will provide monthly updates on this topic as more information becomes known. Any questions or comments, please let me know and please remember that the 2013 results have no impact on the 2014 crop year.