Companies sell crop insurance to farmers through agents. Company Decisions Contributed to American Growers’ Failure

American Growers’ failure was the result of a series of company decisions  that reduced the company’s surplus, making it vulnerable to collapse when  widespread drought erased anticipated profits in 2002. The company’s  decisions were part of an overall management strategy to increase the  scope and size of American Growers’ crop insurance business. When American Growers’ expenses and losses dropped the company’s  surplus below statutory minimums, NDOI declared the company to be in a  hazardous financial condition and took control of the company—first  placing the company under supervision in November 2002 and then in  rehabilitation in December 2002. In addition, RMA did not generally share information or  coordinate with state regulators on the financial condition of companies  participating in the federal crop insurance program. Although RMA routinely reviewed the financial documents required under  the SRA, we found the agency’s financial oversight procedures inadequate  to fully assess American Growers’ financial condition. Some of the  suggestions to improve the SRA included requiring companies to provide  (1) “revenue and expense forecast budget data for the forthcoming year as  a part of the plan of operations approval process, including agents’  commission rates and salary and other compensation for top company  officials,” (2) “information relating to any planned acquisition of other crop  insurance companies,” and (3) “the financial roles that will be played by  parent/subsidiary companies in the crop insurance operations.”

		RMA Did Not Coordinate Oversight with State Insurance Regulators

RMA did not routinely coordinate with state regulators regarding the  financial condition of companies participating in the federal crop insurance  program. However, at the conclusion of our review, no written confidentiality  agreements had been formalized. RMA Effectively Protected American Growers’ Policyholders but Lacked a Policy to Efficiently Address Insolvencies

RMA worked with NDOI to effectively manage the failure of American  Growers by ensuring that policyholder claims were paid and crop  insurance coverage was not disrupted. RMA Effectively Protected American Growers’ Policyholders

RMA effectively protected American Growers’ policyholders after the  company’s failure by ensuring that farmers’ claims were paid and that their  crop insurance coverage was not disrupted. Conclusions

The failure of American Growers, at the time, the largest participant in the  federal crop insurance program was caused by the cumulative effect of  company decisions over several years, and triggered by a drought that  forced the company to severely deplete its surplus to cover operating  expenses. While NDOI accommodated  RMA’s interests by allowing RMA to fund the operation of the company long  enough to pay farmers’ claims, other actions available to the state,  including liquidation, could have increased RMA’s costs or limited RMA’s  flexibility in protecting policyholders. Specifically, we agreed to determine (1) what key  factors led to the failure of American Growers, (2) whether Risk  Management Agency (RMA) procedures were adequate for monitoring crop  insurance companies’ financial condition, and (3) how effectively and  efficientlyRMA handled the dissolution of American Growers. RMA suggests that the state’s initial action  impacted its flexibility in working with the state and the company. However, as noted in this report, these procedures were  insufficient to assess the overall financial health of a company.
Why GAO Did This Study

U.S. Department of Agriculture's (USDA) Risk Management Agency (RMA) administers the federal crop insurance program in partnership with insurance companies who share in the risk of loss or gain. In 2002, American Growers Insurance Company (American Growers), at the time, the largest participant in the program, was placed under regulatory control by the state of Nebraska. To ensure that policyholders were protected and that farmers' claims were paid, RMA agreed to fund the dissolution of American Growers. To date, RMA has spent about $40 million. GAO was asked to determine (1) what factors led to the failure of American Growers, (2) whether RMA procedures were adequate to monitor companies' financial condition, and (3) how effectively and efficiently RMA handled the dissolution of American Growers.

What GAO Found

The failure of American Growers was caused by the cumulative effect of company decisions that reduced the company's surplus, making it vulnerable to collapse when widespread drought in 2002 erased anticipated profits. The company's decisions were part of an overall strategy to increase the scope and size of American Growers' crop insurance business. However, when anticipated profits did not cover the company's high operating expenses and dropped its surplus below statutory minimums, Nebraska's Department of Insurance (NDOI) declared the company to be in a hazardous financial condition prompting the state commissioner to take control of the company. In 2002, RMA's oversight was inadequate to evaluate the overall financial condition of companies selling federal crop insurance. Although RMA reviewed companies' plans for selling crop insurance and analyzed selected financial data, oversight procedures generally focused on financial data 6 to 18 months old and were insufficient to assess the overall financial health of the company. Additionally, RMA did not routinely share information or otherwise coordinate with state regulators on the financial condition of companies participating in the crop insurance program. For example, NDOI had identified financial and management weaknesses at American Growers. Since American Growers' failure, RMA has acted to strengthen its oversight procedures by requiring additional information on companies' planned financial operations. It is also working to improve its coordination with state insurance regulators. However, as we completed our review, neither of these initiatives had been included in written agency policies. When American Growers failed, RMA effectively protected the company's policyholders, but lacked a policy to ensure it handled the insolvency efficiently. RMA has spent over $40 million, working with the state of Nebraska, to protect policyholders by ensuring that policies were transferred to other companies and that farmers' claims were paid. NDOI accommodated RMA's interests by allowing RMA to fund the operation of the company long enough to pay farmers' claims. Prior to American Growers' failure, RMA did not have an agreement with the NDOI commissioner defining state and federal financial roles and responsibilities. If the NDOI commissioner had decided to liquidate the company, RMA may have incurred more costs and had less flexibility in protecting policyholders.