Susan WitcraftMinneapolis

Crop InsuranceOverview of Primary Market in US

June 6-7, 2005

Guy Carpenter 2

U.S. Crop InsuranceThree Classes of Business

MPCI (Multiple Peril Crop Insurance) Government supported program. Rates, policy forms, underwriting guidelines and loss adjusting procedures are

all established by the Federal Crop Insurance Corporation (FCIC). FCIC offers attractive inuring reinsurance protections. The Policy is “Yield” or “Revenue” based covering “All Perils”.

Crop Hail Traditional crop insurance that has been around since the early 1900’s.

Policy covers only Hail and Allied Coverages. Policy structured as a “percentage of insured value” basis.

Named Peril Single peril coverage on specific crops or MPCI Add On / Deductible

Protection.

Guy Carpenter 3

Crop Insurance Industry2004 Gross Premium Breakdown Estimate

Named Peril$15M

MPCI $4.2B

Crop Hail$427M

MPCI

Guy Carpenter 5

Multiple Peril Crop Insurance (MPCI)Loss Breakdown by Peril 1981 - 2004

Disease4%

Heat4%

Freeze5%

Excess Moisture24%

Hail8%Drought

40%

Other15%

Disease

Heat

Freeze

Excess Moisture

Hail

Drought

Other

Guy Carpenter 6

“Buy Up”

This is a production or yield based policy. This traditional type coverage utilizes a farmer’s deductible level and individual Actual Production History (APH – 6- to 10-year average yield) to determine coverage. The farmer chooses a coverage level (ranging from 50% - 90%) and price election when buying a policy.

Catastrophe

This is also a production or yield based policy. This coverage was introduced by the FCIC in 1995 after the 1993 MPCI loss as a further “subsidy” to the market. The policy offers 50% coverage at 60% of the MPCI price election.

MPCI Industry OverviewDefinitions of Coverage Types

Guy Carpenter 7

MPCI Industry OverviewDefinitions of Coverage Types

“Buy-Up” Insurance Example (Iowa Corn)

Individual Farmer APHYear APH1993 801994 1251995 1501996 1501997 1451998 1401999 1302000 1202001 602002 100Average APH 120

2003 Purchased PolicyMPCI Level 70%Price Election 2.40Amount of Insurance:$201.60

2003 Payout2003 Actual Production: 75Payout: 120 (APH) * 70% (Coverage Level) = 8484 - 75 (2003 Yield) = 9 bushel loss per acre9 * $2.40 (price election) = $21.60 Insurance loss

payment per acre

Guy Carpenter 8

Revenue (CRC or RA)

This is a revenue protection policy. This coverage was first introduced to the market in 1996 for corn and soybeans in the states of Iowa and Nebraska. The FCIC has expanded this coverage for other crops and in nearly all states. The revenue coverage guarantee is determined using the farmers APH and Chicago Board of Trade (CBOT) commodity prices.

Industry OverviewDefinitions of MPCI Coverage Types

CRC Policy Wording DefinitionsMinimum Guarantee - APH multiplied by the Base Price multiplied by the coverage level elected.Harvest Guarantee - APH multiplied by the Harvest Price multiplied by the coverage level elected.Final Guarantee - Greater of the Minimum or Harvest Guarantee.

AssumptionsAPH = 150 CBOT Price = $2.50 Coverage Level = 70% Minimum Guarantee = $262.50

CRC Insurance Example

Guy Carpenter 9

CRC Insurance Example

Example 1 - “2002 Type Scenario” - Yield CBOT price

Actual Minimum Harvest Harvest Final Actual $ LossYield Guarantee Price Guarantee Guarantee Revenue* Per Acre

80 $262.50 $2.75 $288.75 $288.75 $220.00 $68.75

* Current Yield multiplied by Harvest Price

Example 2 - “2001 Type Scenario in Nebraska” - Yield CBOT price

Actual Minimum Harvest Harvest Final Actual $ LossYield Guarantee Price Guarantee Guarantee Revenue* Per Acre

80 $262.50 $2.25 $236.25 $262.50 $180.00 $82.50

Industry OverviewDefinitions of MPCI Coverage Types

Guy Carpenter 10

CRC Insurance Example

Example 3 - “1994 Type Scenario” - Yield CBOT price

Actual Minimum Harvest Harvest Final Actual $ LossYield Guarantee Price Guarantee Guarantee Revenue* Per Acre175 $262.50 $2.25 $236.25 $262.50 $393.75 $0

* Current Yield multiplied by Harvest Price

Example 4 - Yield CBOT price

Actual Minimum Harvest Harvest Final Actual $ LossYield Guarantee Price Guarantee Guarantee Revenue* Per Acre175 $262.50 $2.75 $288.75 $288.75 $481.25 $0

Industry OverviewDefinitions of MPCI Coverage Types

Guy Carpenter 11

$0

$500,000,000

$1,000,000,000

$1,500,000,000

$2,000,000,000

$2,500,000,000

$3,000,000,000

$3,500,000,000

$4,000,000,000

$4,500,000,000

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

MPCIHistorical Perspective – “Late 1990’s”

• Crop Insurance Reform and 1996 Farm bill spurred MPCI sales. FCIC ceased to deliver the MPCI product under bill.

• Increased premium subsidy for farmers in 1999• Introduction of Revenue products in 1996.

Guy Carpenter 12

MPCI 2004 Industry Gross Premium by State

WA MT ND

ORID

WY

MN

CA

NVUT

CO

SD

AZ NM

NE

KS

TX

MO

WI

IA

MI

ME

NY

IL INOH

PA

WV VAKY

OK AR

LA

MS AL

TN

GA

NC

SC

FL

VTNH

MA

RI

DE

CT

MD

NJ

$0 to $25M$25M to $50M

Greater than $100M$50M to $100M

AK

HI

Guy Carpenter 13

MPCIStandard Reinsurance Agreement (SRA)

SRA - a Contract between the Government (FCIC) and the private insurance company.

Proportional and non proportional reinsurances available. The SRA allows ceding companies to cede or designate each crop

contract (policy) to one of the following seven funds:– Assigned Risk– Developmental – Cat– Developmental – Buy-up– Developmental – Revenue– Commercial – Cat– Commercial – Buy-up– Commercial – Revenue

Ceding companies utilize historical experience, market knowledge and underwriting models to determine the business they wish to retain and the undesirable business they wish to cede to the FCIC.

Guy Carpenter 14

Standard Reinsurance Agreement Proportional Reinsurance – A

Assigned Risk Fund– Company’s less desirable business - “Social Fund”.

– FCIC sets cession limits by state, based on loss history.

– 75%-85% of the business is proportionately ceded to FCIC.

Developmental Fund– Accommodates business where “uncertainty” exists or where Assigned

Risk limits are exceeded.

– Up to 65% of gross premiums can be ceded to FCIC.

Commercial Fund– Accommodates a Company’s most profitable business.

– Highest profit potential and highest risk potential.

– Up to 50% of gross premiums can be ceded to FCIC.

Guy Carpenter 15

Standard Reinsurance AgreementNon Proportional Reinsurance

50

% x

0%

15

% x

50

%

35

% x

65

%

60

% x

10

0%

60

% x

16

0%

28

0%

x 2

00

%

Un

l x 5

00

%

Assigned RiskDevelopmental Cat

Developmental Buy-UpDevelopmental Revenue

Commercial CatCommercial Buy-Up

Commercial Revenue

11%

70%

94%

57%

43%

17%

0%

11%

70%

94%

50%

40%

17%

0%

8%

50%

75%

50%

40%

17%

0%

6%

50%

60%

30%

23%

11%

0%

6%

50%

60%

25%20%

11%

0%

4%

30%

45%

25%20%

11%

0%

2%9%

15%

5% 4%2%

0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Participation

Loss Ratio Layer

Fund

Guy Carpenter 16

7.60%

31.50%

22.50%

31.50%

48.90%

37.75%

48.90%

-11.00%

-57.80%-57.80%

-62.30%

-101.60% -101.60%-107.60%

-120.00%

-100.00%

-80.00%

-60.00%

-40.00%

-20.00%

0.00%

20.00%

40.00%

60.00%

Assigned Risk Developmental - Buy-up Developmental - Cat Developmental - Revenue

Commercial - Buy-up Commercial - Cat Commercial - Revenue

Standard Reinsurance AgreementNon Proportional Reinsurance

Maximum Net Gains By State

Maximum Net Loss By State

Guy Carpenter 17

Standard Reinsurance AgreementEffect on Net Gain/Loss of Non Proportional Reinsurance

-110%

-100%

-90%

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

0% 50% 100% 150% 200% 250% 300% 350% 400% 450% 500%

Gross Loss Ratio

Net

Gai

n/L

oss

Commercial Revenue Commercial Cat/Buy-Up Developmental Revenue

Developmental Cat/Buy-Up Assigned Risk

Guy Carpenter 18

Standard Reinsurance AgreementProportional Reinsurance – B

FCIC assumes a 5% share of the total gain or loss of a Company’s book of business.

Provision first introduced for the 2005 crop season.

Due to the profitable nature of the business, this provision is the Government’s way of reducing their cost to service and manage the MPCI Program.

Guy Carpenter 19

SRAGross U/W Gain Calculation Examples

Assigned Risk Developmental (Buy-up) Commercial (Buy-up) Total

State

Gross Premium (000's)

Gross Premium (000's)

Gross Loss

(000's)Gross

LR

Gross Premium (000's)

Gross Loss

(000's)Gross

LR

Gross Premium (000's)

Gross Loss

(000's)Gross

LR

Gross Premium (000's)

Gross Loss

(000's)Gross

LR

MN $2,000 $200 $320 160% $0 $0 0% $1,800 $900 50% $2,000 $1,220 61%

IA $2,000 $100 $100 100% $200 $130 65% $1,700 $1,105 65% $2,000 $1,335 67%

CA $4,000 $500 $500 100% $500 $1,100 220% $3,000 $3,000 100% $4,000 $4,600 115%

TX $7,000 $3,000 $6,600 220% $2,000 $2,000 100% $2,000 $1,300 65% $7,000 $9,900 141%

Total $15,000 $3,800 $7,520 198% $2,700 $3,230 120% $8,500 $6,305 74% $15,000 $17,055 114%

Guy Carpenter 20

SRANet U/W Gain Calculation Examples

“After Proportional Cessions”

State

Net Premium (000's)

Net Loss (000's) Net LR

Net Premium (000's)

Net Loss (000's) Net LR

Net Premium (000's)

Net Loss (000's) Net LR

Net Premium (000's)

Net Loss (000's) Net LR

MN $50 $80 160% $0 (1) $0 0% $1,800 $900 50% $1,850 $980 53%

IA $25 $25 100% $200 (1) $130 65% $1,700 $1,105 65% $1,925 $1,260 65%

CA $65 $65 100% $500 (1) $1,100 220% $3,000 $3,000 100% $3,565 $4,165 117%

TX $450 $990 220% $700 (2) $700 100% $2,000 $1,300 65% $3,150 $2,990 95%

Total $590 $1,160 197% $1,400 $1,930 138% $8,500 $6,305 74% $10,490 $9,395 90%

(1) 100% Retained

(2) 35% Retained

Assigned Risk Developmental Buy-up Commercial Buy-up Total

Overall Loss Ratio Goes Down with

Proportional Cessions

Guy Carpenter 21

SRANet U/W Gain Calculation Examples

“After Non-Proportional Cessions”

State

Net Premium (000's)

U/W Gain/Loss

(000's) Net L/R

Net Premium (000's)

U/W Gain/Loss

(000's) Net L/R

Net Premium (000's)

U/W Gain/Loss

(000's) Net L/RNet Premium

(000's)

U/W Gain/Loss

(000's) Net L/R

MN $50 ($2) 103% $0 $0 100% $1,800 $781 57% $1,850 $780 58%

IA $25 $0 100% $200 $42 79% $1,700 $559 67% $1,925 $601 69%

CA $65 $0 100% $500 ($135) 127% $3,000 $0 100% $3,565 ($135) 104%

TX $450 ($24) 105% $700 $0 100% $2,000 $658 67% $3,150 $634 80%

Total $590 ($26) 104% $1,400 ($93) 113% $8,500 $1,999 24% $10,490 $1,880 82%

Total U/W Gain 18%

Assigned Risk Developmental Buy-up Commercial Buy-up Total

Overall Loss Ratio Goes Down Further with Non-Proportional Cessions

Guy Carpenter 22

MPCI Historical Industry Underwriting Results

Underwriting Gain / LossYear Gross Premium Net Retained Premium $ %1989 $722,262,045 $352,456,663 $28,892,316 8.20%1990 744,751,547 408,584,026 51,134,007 12.51%1991 656,071,552 445,059,562 41,309,936 9.28%1992 694,514,965 465,872,117 21,811,739 4.68%1993 702,430,420 434,847,472 (83,326,250) -19.16%1994 919,637,263 536,602,513 103,270,641 19.25%1995 1,270,326,512 768,499,418 132,302,113 17.22%1996 1,627,091,008 1,155,072,581 247,571,252 21.43%1997 1,689,202,256 1,263,143,481 352,070,977 27.87%1998 1,875,995,690 1,591,730,382 279,208,820 17.54%1999 2,312,374,790 1,836,870,180 271,756,850 14.79%2000 2,536,402,462 1,893,524,050 285,017,991 15.05%2001 2,977,930,337 2,372,197,462 349,821,584 14.75%2002 2,911,424,789 2,294,612,548 (36,262,528) -1.58%2003 3,436,731,510 2,606,792,668 388,026,833 14.89%2004 4,185,369,786 3,139,784,617 549,462,308 17.50% *

Total $29,262,516,932 $21,565,649,740 $2,982,068,589 13.83%

*Estimated

Guy Carpenter 23

MPCIExpenses

FCIC A&O Reimbursement Summary

34.0%

32.5%31.0%

27.5%

22.0% 22.0% 22.0% 22.0% 22.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

1991 1993 1995 1997 1999 2001 2002 2003 2004

• Continued reduction in the A&O has put many companies in an operational deficit position between 2 -10% of Net Retained Premiums.

Guy Carpenter 24

MPCI Cash Flow Example

Iowa Farmer

Insurance Company / MGA /

AgentFCIC

FCIC

InsuranceCompany

Needs to purchase MPCI Policy to protect Corn by no later than March 15th for crops planted in Summer of previous season through Spring of current season

Operating Account

Premium Collections from Insured Monthly settlements with FCIC

A & O Expense Reimbursement

Premium Due FCIC• Funds most of the transactions like

payments for agent commissions, LAE, etc.

• Settlement on 3/31 of following year of U/W gain/loss from FCIC

Escrow Account• In the name of FCIC to

fund claim payment requests

• FCIC funds account within 3 days of receiving certified claim

• Insurance Company funds their own claim payment account from escrow to pay the Farmer

Guy Carpenter / Reinsurer

Premium

Losses

Reinsurance contract runs from 1/1 to 12/31 of current year and protects U/W after SRA for crops planted through 3/15 of current year. Single premium/loss transaction within 30 days after settlement with FCIC

Guy Carpenter 25

Crop Hail

Guy Carpenter 26

Industry GrowthHistorical Perspective

0

100,000,000

200,000,000

300,000,000

400,000,000

500,000,000

600,000,000

700,000,000

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

Crop Hail Industry Historical Premium

• Prior to the advent of the Multi-Peril Crop Insurance, Farmers managed their agricultural risk through Crop Hail coverages and various disaster relief programs.

• With the increased popularity of CRC coverages, and higher MPCI subsidies to the Farmer, Crop Hail insurance products started to decline as a risk management tool.

• With the profitability of MPCI business, ceding companies targeted growth in the MPCI class by offering agents more competitive hail products.

Guy Carpenter 27

Crop Hail 2004 Industry Premium by State

WA MT ND

ORID

WY

MN

CA

NVUT

CO

SD

AZ NM

NE

KS

TX

MO

WI

IA

MI

ME

NY

IL INOH

PA

WV VAKY

OK AR

LA

MS AL

TN

GA

NC

SC

FL

VTNH

MA

RI

DE

CT

MD

NJ

$0 to $1M$1M to $5M

Greater than $10M$5M to $10M

Guy Carpenter 28

Crop Hail Historical Industry Premium and Loss Ratios

1988 362,842,000 36%

1989 374,948,000 55%

1990 410,681,000 77%

1991 412,480,000 61%

1992 423,054,000 110%

1993 486,958,000 81%

1994 515,819,000 87%

1995 531,409,000 58%

Year Premium Loss Ratio

1996 630,965,00072%

1997 594,026,00057%

1998 576,464,00083%

1999 508,108,00076%

2000 468,405,00068%

2001 433,743,00069%

2002 405,003,000 70%

2003 422,216,00056%

2004 427,694,000 57%

Year Premium Loss Ratio

Susan WitcraftMinneapolis

Crop InsuranceOverview of Primary Market in US

June 6-7, 2005