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Companies and Develop a Policy to Address Any Future Insolvencies' 
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Report to Congressional Requesters: 

June 2004: 

CROP INSURANCE: 

USDA Needs to Improve Oversight of Insurance Companies and Develop a 
Policy to Address Any Future Insolvencies: 

GAO-04-517: 

GAO Highlights: 

Highlights of GAO-04-517, a report to congressional requesters. 

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. 

What GAO Recommends: 

GAO recommends that RMA (1) develop written policies to improve reviews 
of companies’ financial condition, (2) develop written agreements with 
states to improve coordination on the oversight of companies and (3) 
develop a policy clarifying RMA’s authority as it relates to federal 
and state actions and responsibilities when a state regulator takes 
control of a company.

In commenting on this report, RMA agreed with our recommendations and 
has begun implementing them.

www.gao.gov/cgi-bin/getrpt?GAO-04-517.

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Lawrence J. Dyckman at 
(202) 512-3851 or dyckmanl@gao.gov.

[End of section]

Contents: 

Letter: 

Results in Brief: 

Background: 

Company Decisions Contributed to American Growers' Failure: 

RMA Financial Oversight Was Inadequate to Identify American Growers' 
Financial Weaknesses: 

RMA Effectively Protected American Growers' Policyholders but Lacked a 
Policy to Efficiently Address Insolvencies: 

Conclusions: 

Recommendations: 

Agency Comments and Our Evaluation: 

Appendixes: 

Appendix I: Scope and Methodology: 

Appendix II: Penalties and Financial Losses Associated with Marketing 
CRC Plus for Rice Reduced American Growers' Surplus: 

Appendix III: Agent Commissions and Other Expenses Created High 
Operating Costs: 

Appendix IV: Purchase of Competitor's Crop Insurance Business Created 
Additional Expenses: 

Appendix V: American Growers' Surplus Was Inadequate to Cover Expenses 
When Underwriting Gains Did Not Materialize: 

Appendix VI: RMA Paid Policyholders' Claims after American Growers' 
Failure: 

Appendix VII: Rain and Hail's Proposal to Purchase Selected Assets of 
American Growers: 

Appendix VIII: RMA's Decision to Pay American Growers' Agent 
Commissions: 

Appendix IX: Comments from RMA: 

GAO Comments: 

Appendix X: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

Acknowledgments: 

Tables: 

Table 1: Comparison of Ratio Requirements and American Growers' 6 Failed 
Ratios for December 2000: 

Table 2: Comparison of Ratio Requirements and American Growers' 5 Failed 
Ratios for December 2001: 

Table 3: RMA Costs Incurred in the Dissolution of American Growers as of 
March 2004: 

Table 4: Claims Paid to Policyholders After American Growers' Failure: 

Figure: 

Figure 1: American Growers' Policyholders Claims Paid vs. RMA 
Reimbursements: 

Abbreviations: 

CRC Plus: Crop Revenue Coverage Plus: 

FCIC: Federal Crop Insurance Corporation: 

IRIS: Insurance Regulatory Information System: 

NAIC: National Association of Insurance Commissioners: 

NDOI: Nebraska Department of Insurance: 

RMA: Risk Management Agency: 

SRA: Standard Reinsurance Agreement: 

USDA: U.S. Department of Agriculture: 

Letter May 27, 2004: 

The Honorable Bob Goodlatte: 
Chairman, Committee on Agriculture: 
House of Representatives: 

The Honorable Charles W. Stenholm: 
Ranking Minority Member, Committee on Agriculture: 
House of Representatives: 

The Honorable Jerry Moran: 
Chairman, Subcommittee on General Farm Commodities and Risk Management: 
Committee on Agriculture: 
House of Representatives: 

The Honorable Collin C. Peterson: 
Ranking Minority Member, Subcommittee on General Farm Commodities and 
Risk Management: 
Committee on Agriculture: 
House of Representatives: 

Federal crop insurance is part of an overall safety net of federal 
programs for American farmers.[Footnote 1] Federal crop insurance 
provides protection for participating farmers against the financial 
losses caused by droughts, floods, or other natural disasters and 
against the risk of crop price fluctuations. Participation in the 
program is voluntary; however, participation is encouraged through 
federal premium subsidies. In 2003, the program provided nearly $40 
billion in risk protection for over 200 million acres of farmland at a 
cost of over $3 billion to the federal government. The U.S. Department 
of Agriculture's (USDA) Risk Management Agency (RMA) has overall 
responsibility for the crop insurance program. RMA manages the 
contracts with the companies that sell and service crop insurance, 
oversees the development of new insurance products for farmers, and 
monitors compliance with program provisions by both farmers and 
insurance companies. RMA also acts as the ultimate guarantor for policy 
losses, in the event companies are unable to fulfill their obligations 
under the federal crop insurance program. RMA administers the program 
in partnership with private insurance companies that share a percentage 
of the risk of loss or gain associated with each insurance policy 
written. In addition, RMA pays companies an expense reimbursement--a 
percentage of premiums on policies sold--for the administrative costs 
of selling and servicing federal crop insurance policies. Companies 
sell crop insurance to farmers through agents, who are paid a 
commission by the companies on the policies they sell.[Footnote 2]

American Growers Insurance Company (American Growers) failed in 2002; 
at that time, it was the largest participant in the federal crop 
insurance program, accounting for about 20 percent of the premiums 
written in 2002. American Growers experienced a 50 percent decline in 
its surplus over a 9-month period, from January through September 
2002.[Footnote 3] This decline in the company's surplus prompted the 
Nebraska Department of Insurance (NDOI), the regulator for the state in 
which American Growers was chartered, to take control of the company, 
due to its hazardous financial condition. On November 22, 2002, NDOI 
issued a state order of supervision. Under the order of supervision, 
American Growers could not sell any new insurance policies or conduct 
other nonroutine business without the approval of the supervisor 
appointed by NDOI. Rather than immediately liquidating the company, 
NDOI decided with RMA to place the company in rehabilitation--the 
process where the regulator, in this case NDOI, takes control of the 
management of the company--and to operate the company to settle 
remaining claims and transfer existing policies to other companies. On 
December 20, 2002, NDOI obtained a court order that placed American 
Growers into rehabilitation under the auspices of NDOI. Under 
rehabilitation, NDOI appointed a rehabilitator who took control of 
American Growers to oversee the orderly termination of the company's 
business and to allow for an orderly transfer of policies to other 
companies. To ensure continued service to farmers who purchased crop 
insurance through American Growers, RMA chose to pay costs associated 
with managing the company while American Growers finished collecting 
and processing premiums and settling claims. To date, RMA's funding of 
American Growers' operations has cost taxpayers over $40 million to pay 
agent commissions, staff salaries, and other operating expenses.

You asked us to determine (1) what key factors led to the failure of 
American Growers, (2) whether RMA procedures were adequate for 
monitoring crop insurance companies' financial condition, and (3) how 
effectively and efficiently RMA handled the dissolution of American 
Growers. In addition, you asked us to determine the factors that led to 
RMA determinations that affected a proposed sale of American Growers' 
assets to Rain and Hail LLC (Rain and Hail); and RMA's decision to 
guarantee that all American Growers' agent commissions be paid. 
Information related to Rain and Hail's proposal is provided in appendix 
VII. Information on RMA's decision to pay agent commissions is provided 
in appendix VIII. To determine the key factors that led to the failure 
of American Growers, we examined company documents and financial 
statements, reviewed RMA and NDOI files, conducted interviews with 
employees and company personnel, and obtained statistical analyses of 
the crop insurance program from RMA's data mining center.[Footnote 4] 
We compared American Growers' financial information with that of other 
companies in the crop insurance program. We also spoke with crop 
insurance companies to gain an industry perspective on the failure of 
American Growers and RMA's actions. To evaluate RMA's procedures for 
monitoring companies, we reviewed RMA's regulations and methods, 
interviewed RMA staff, and reviewed documentation to verify that 
monitoring procedures were followed. To determine the effectiveness of 
RMA's handling of the dissolution of American Growers, we examined 
RMA's decision-making process, reviewed financial and other documents, 
and interviewed RMA and American Growers' staff, National Association 
of Insurance Commissioners (NAIC)[Footnote 5] officials, and industry 
groups. We also contacted state insurance commissioners where crop 
insurance companies are chartered to discuss oversight issues and 
coordination with RMA. We performed our work between July 2003 and May 
2004, in accordance with generally accepted government auditing 
standards. Appendix I contains more detailed information on our scope 
and methodology.

Results in Brief: 

American Growers failed because of the cumulative effect of a number of 
business decisions by the company. First, in 1999, the company 
developed and sold a new supplemental insurance product that was not 
guaranteed by RMA. The new insurance provided supplemental revenue 
protection for rice, a crop with which American Growers had limited 
revenue protection experience. Claims and litigation associated with 
the sale of this new product resulted in significant losses to the 
company's surplus. Second, the company incurred above average operating 
expenses in an effort to increase market share. From 2000 to 2002, 
American Growers paid agent commissions that averaged 12 percent higher 
than other companies participating in the program. The company also 
paid expenses not directly related to the sale and service of federally 
funded crop insurance, such as trips to resort locations. These 
expenses, among others, created operating costs that were 11 percent 
greater than the average operating costs of other companies selling 
crop insurance, and these expenses exceeded the reimbursement RMA 
provides companies. Third, in 2001, American Growers attempted to 
increase its market share by purchasing policies and assets from 
another company, but it failed to achieve the level of efficient 
operations necessary to make this decision profitable. The cumulative 
effects of failed growth strategies and high operating costs weakened 
the financial condition of the company and reduced its surplus, setting 
the stage for its eventual financial failure. Finally, in 2002, the 
company projected underwriting gains--the amount by which the company's 
share of retained premium exceeds its retained losses--in excess of its 
10-year average--and was relying on these anticipated profits to cover 
the company's high operating expenses. When such profits did not 
materialize, as the result of a widespread drought in 2002, American 
Growers' surplus dropped significantly, leading NDOI to declare the 
company to be in a hazardous financial condition, and prompting NDOI to 
take control of the company.

In 2002, when American Growers was experiencing financial difficulties, 
RMA's oversight was inadequate to evaluate the overall financial 
condition of the companies participating in the program. One of RMA's 
primary responsibilities is to ensure a sound system of federal crop 
insurance, in part, by monitoring insurance companies' compliance with 
provisions of the federal crop insurance program. However, we found 
that although RMA reviewed companies' operation plans and analyzed 
certain financial data, oversight procedures were insufficient to 
assess the overall financial health of a company. RMA oversight 
procedures focused on historical financial information--from the prior 
6 to 18 months--and whether a company had the financial resources to 
pay claims on policies based on past surplus, not on whether the 
company would be able to cover its operating expenses in the upcoming 
year. In the case of American Growers, RMA was unaware that the company 
was projecting profits on crop insurance policies sold in excess of 
historic averages to pay for its operating expenses, or that failure to 
achieve these profits could result in the financial failure 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. NDOI had 
identified financial and management weaknesses at American Growers and 
had considered planning an on-site examination of the company to 
determine the extent of those weaknesses; but NDOI was unable to 
disclose this information because RMA had not signed an agreement that 
would allow NDOI officials to share such confidential business 
information with RMA. Since the failure of American Growers, RMA has 
taken steps to improve its financial oversight of companies 
participating in the crop insurance program. However, at the time of 
our review, RMA had not developed written policies to formalize its 
oversight procedures. Additionally, RMA was working with state 
regulators to increase RMA-state coordination and was working with NAIC 
on draft language for confidentiality agreements that would allow state 
regulatory agencies to share sensitive business information with RMA.

RMA effectively protected farmers insured by American Growers, but it 
lacked a policy to efficiently address insurance provider insolvencies. 
Once the company failed, RMA worked with NDOI to protect policyholders 
by ensuring that policies were transferred to other companies 
participating in the federal crop insurance program and ensuring that 
claims were paid. To date, all American Growers' policies have been 
transferred, and nearly all of the claims have been paid. However, 
servicing the company's crop insurance policies cost RMA over $40 
million for such things as agent commissions, employee severance 
packages, and staff salaries. RMA would like to recoup some of these 
costs if American Growers' assets are sold, but whether this will occur 
is unknown. Finally, while RMA was able to effectively cooperate with 
NDOI to dissolve American Growers, RMA has no written policy or 
information sharing agreements to guide its coordination with states 
for ensuring the most effective and efficient resolution of any future 
insolvencies in the federal crop insurance program. As the failure of 
American Growers demonstrates, without written agreements RMA is 
vulnerable to state insurance regulators' actions when a company fails.

To address these issues, we are recommending that the Secretary of 
Agriculture direct RMA to (1) formalize actions under way to improve 
the financial and operational reviews used to monitor the financial 
condition of companies, (2) improve coordination with state insurance 
regulators regarding the financial oversight of companies, and (3) 
develop a written policy clarifying RMA's and states' authority and 
responsibility when a state regulator decides to place a company under 
supervision or to liquidate a company.

We provided USDA with a draft of this report for its review and 
comment. We received written comments from the Administrator of USDA's 
Risk Management Agency. RMA agreed with our recommendations and stated 
that it is (1) formalizing the improvements in oversight that we 
recommended in the new Standard Reinsurance Agreement (SRA) and (2) 
developing written agreements with state insurance regulators and the 
NAIC to improve data sharing and oversight and to clarify RMA's 
authority, as it relates to federal/state actions when a state takes 
action against a crop insurance company. Our detailed response to RMA's 
written comments are presented with RMA's written comments in appendix 
IX.

Background: 

Farming is an inherently risky enterprise. In conducting their 
operations, farmers are exposed to both production and price risks. 
Crop insurance is one method farmers have of protecting themselves 
against these risks. Over the years, the federal government has played 
an active role in helping to mitigate the effects of these risks on 
farm income by promoting the use of crop insurance.

Federal crop insurance began on an experimental basis in 1938, after 
private insurance companies were unable to establish a financially 
viable crop insurance business. The federal crop insurance program is 
designed to protect farmers from financial losses caused by events such 
as droughts, floods, hurricanes, and other natural disasters as well as 
losses resulting from a drop in crop prices. The Federal Crop Insurance 
Corporation (FCIC), an agency within USDA, was created to administer 
the federal crop insurance program. Originally, crop insurance was 
offered to farmers directly through FCIC. However, in 1980, Congress 
enacted legislation that expanded the program and, for the first time, 
directed that crop insurance--to the maximum extent possible--be 
offered through private insurance companies, which would sell, service, 
and share in the risk of federal crop insurance policies. In 1996, 
Congress created an independent office called RMA to supervise FCIC 
operations and to administer and oversee the federal crop insurance 
program.

Federal crop insurance offers farmers various types of insurance 
coverage to protect against crop loss and revenue loss. Multiperil crop 
insurance is designed to minimize risk against crop losses due to 
nature--such as hail, drought, and insects--and to help protect farmers 
against loss of production below a predetermined yield, which is 
calculated using the farmer's actual production history. Buy-up 
insurance, the predominant form of coverage, provides protection at 
different levels, ranging from 50 to 85 percent of production. 
Catastrophic insurance provides farmers with protection against extreme 
crop losses. Revenue insurance, a newer crop insurance product, 
provides protection against losses in revenue associated with low crop 
market prices in addition to protecting against crop loss. RMA, through 
FCIC, pays a portion of farmers' premiums for multiperil and revenue 
insurance, and it pays the total premium for catastrophic insurance. 
However, farmers still must pay an administrative fee for catastrophic 
insurance.[Footnote 6] RMA determines the amount of premium for each 
type of insurance policy by crop. RMA, through FCIC, contracts with 
private insurance companies who then sell these policies to farmers. 
Companies sell crop insurance to farmers through agents. An agent, a 
person licensed by the state in which the agent does business to sell 
crop insurance, is employed by or contracts with a company to sell and 
service eligible crop insurance policies. While most companies pay 
their agents a commission to sell and service crop insurance policies, 
some companies pay agents a salary. American Growers paid its agents a 
commission.

RMA establishes the terms and conditions to be used by private 
insurance companies selling and servicing crop insurance policies to 
farmers through a contract made with the companies called the SRA. The 
SRA is a cooperative financial assistance agreement between RMA, 
through FCIC, and the private crop insurance companies to deliver 
federal crop insurance under the authority of the Federal Crop 
Insurance Act.[Footnote 7] Under the SRA, FCIC reinsures or subsidizes 
a portion of the losses and pays the insurance companies an 
administrative fee or expense reimbursement--a preestablished 
percentage of premiums--to reimburse the companies for the 
administrative and operating expenses of selling and servicing crop 
insurance policies, including the expenses associated with adjusting 
claims.[Footnote 8] While the reimbursement rate is set at a level to 
cover the companies' costs of selling and servicing crop insurance 
policies, the companies have no obligation to spend their payment on 
expenses related to crop insurance, and they may spend more than they 
receive from FCIC. The current reimbursement rates, set by statute, are 
based on recommendations in our 1997 report[Footnote 9] of the costs 
associated with selling and servicing crop insurance policies. However, 
RMA does not have a process for regularly reviewing and updating these 
rates. RMA is currently conducting a limited review of companies' 
expenses to validate the costs of selling and servicing federally 
reinsured crop insurance policies.

RMA, through FCIC, is the reinsurer for a portion of all policies 
covered by the federal crop insurance program. Reinsurance is sometimes 
referred to as insurance for insurance companies. It is a method of 
dividing the risk among several insurance companies through cooperative 
arrangements that specify ways in which the companies will share risks. 
Reinsurance serves to limit liability on specific risks, increase the 
volume of insurance policies that may be written, and help companies 
stabilize their business in the face of wide market swings in the 
insurance industry. As the reinsurer, RMA shares the risks associated 
with crop insurance policies with companies that sell federal crop 
insurance. However, if a crop insurance company is unable to fulfill 
its obligations to any federal crop insurance policyholder, RMA, as the 
ultimate guarantor for losses, assumes all obligations for unpaid 
losses on these policies. Reinsurance is also available through private 
reinsurance companies. Crop insurance companies must maintain certain 
surplus levels to issue crop insurance policies. However, they may 
increase their capacity to write policies and may further reduce their 
risk of losses by purchasing reinsurance from private reinsurance 
companies on the risk not already covered by FCIC.

American Growers was originally established in 1946 as Old Homestead 
Hail Insurance Company. The company went through several 
reorganizations and name changes between 1946 and 1989. In 1989, the 
company became American Growers Insurance Company, operating as a 
subsidiary of the Redland Group, an Iowa-based insurance holding 
company. Acceptance Insurance Companies Inc.,[Footnote 10] 
(Acceptance)--a publicly owned holding company that sold specialty 
property and casualty insurance--acquired American Growers in 1993.

As a wholly owned subsidiary of Acceptance, American Growers was 
primarily responsible for selling and servicing federal crop insurance 
policies and shared the same general management as the parent 
organization. Another wholly owned subsidiary of Acceptance, American 
Agrisurance Inc., served as the marketing arm for American Growers.

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. The company's surplus declined due to losses and other costs 
from mistakes made when introducing a new crop insurance product, 
decisions to pay higher than average agent commissions, and the 
purchase of a competitor's business. Additionally, the company's 
operating expenses were about 1 1/3 times its reimbursement from RMA. 
In other words, American Growers was spending $130 for every $100 it 
was receiving from RMA to pay for selling and servicing crop insurance. 
American Growers planned to use profits from policy premiums to pay for 
the expenses not covered by RMA's reimbursement. When these gains did 
not materialize due to widespread drought, the company's surplus 
dropped below statutory minimums, prompting NDOI to take control of the 
company.

First, the company introduced a new crop insurance product, but 
mistakes associated with the sale of this product resulted in 
significant losses in the company's surplus. In 1997, the company chose 
to market a new crop insurance product, Crop Revenue Coverage Plus (CRC 
Plus), which was a supplement to federal crop insurance, but which was 
not reinsured by RMA. In 1999, American Growers expanded the sale of 
this product into rice, a crop with which it had little experience. 
When the company realized it had mis-priced the product for rice and 
withdrew the product, farmers who had planned on using CRC Plus sued 
the company. Financial losses, legal settlements, and other costs 
related to CRC Plus caused significant losses in the company's 
financial surplus. Appendix II provides further details on the losses 
associated with CRC Plus.

Second, American Growers chose to spend more than RMA reimbursed it for 
selling and servicing crop insurance, in part, because the company 
chose to pay above-average agent commissions in order to attract more 
agents to sell for the company. As part of its effort to expand 
operations, the company in 2000 to 2002, paid agent commissions about 
12 percent higher, on average, than those offered by other crop 
insurance companies. In addition to paying agent commission rates above 
the average of other companies in the industry, American Growers 
offered agent sales incentives, such as trips to resort locations, and 
funded other expenses not required to sell and service federal crop 
insurance. These expenses, among others, created operating costs that 
were 11 percent greater than the average operating costs of other 
companies selling crop insurance, and these expenses exceeded the 
reimbursement RMA provided companies. Appendix III provides additional 
details of the high operating costs associated with agent commissions 
and other expenses.

Third, the company purchased the crop business of a competitor, which 
increased its expenses. In 2001, American Growers attempted to expand 
its share of the crop insurance market by purchasing assets from 
another company, including that company's book of crop insurance 
business. Because American Growers was unable to achieve the 
operational efficiencies it had anticipated, this acquisition resulted 
in additional operating costs and expenses that were higher than the 
reimbursement that RMA provided companies to cover the sale and service 
of crop insurance. Appendix IV provides additional details on the 
operating expenses incurred from the purchase of a competitor's crop 
insurance business.

Finally, the company relied on large underwriting gains to pay for its 
expenses, rather than RMA's reimbursement. When these gains did not 
materialize due to widespread drought in 2002, the company's surplus 
dropped to a level that prompted NDOI to take control of the company. 
In its 2002 operating budget, American Growers projected profits in 
excess of its 10-year average and relied on these anticipated profits 
to cover the company's operating expenses and to further its growth. 
The company's profit projections were based, in part, on retaining a 
higher percentage of the risk for the policies it sold than in past 
years. By retaining a higher percentage of the risk on the policies, 
American Growers could increase its profits if claims were low. 
Conversely, the company increased its exposure to loss if claims were 
high. However, profits did not materialize as the result of widespread 
drought, which caused overall federal crop insurance program losses to 
increase from $3 billion in 2001 to $4 billion in 2002. 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. Appendix V provides additional details on the decline 
in American Growers' surplus.

RMA Financial Oversight Was Inadequate to Identify American Growers' 
Financial Weaknesses: 

At the time of American Growers' failure, RMA's financial oversight 
processes were inadequate to identify the full extent of financial 
weaknesses of insurance companies participating in the federal crop 
insurance program. RMA's actual oversight procedures focused primarily 
on whether a company had sufficient surplus to pay claims based on its 
past performance, rather than the overall financial health and outlook 
of the company. 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 reviewed companies' operational plans and selected financial data, 
such as annual financial statements, in the case of American Growers, 
RMA was unaware that the company was projecting underwriting gains in 
excess of historic averages to pay for its operating expenses. The 
company's failure to achieve these gains resulted in a substantial 
reduction in its surplus and its subsequent financial failure. In the 
case of American Growers, RMA and NDOI did not begin cooperating on 
overseeing the company until it had been placed into supervision in 
November 2002.

RMA's Procedures Were Inadequate to Evaluate Companies' Overall 
Financial Condition: 

In 2002, when American Growers failed, data provided to RMA by the 
companies participating in the federal crop insurance program provided 
an overall picture of company operations and complied with RMA's 
regulations. However, the information provided was typically 6 to 18 
months old; and, according to an RMA official, the agency's oversight 
focused primarily on whether a company had financial resources to pay 
claims on crop insurance policies and not on the overall financial 
health of the company.[Footnote 11] RMA's approach to financial 
oversight stemmed, in part, from the fact that the companies 
participating in the program are private and are licensed and regulated 
by state insurance departments. State insurance departments are 
responsible for monitoring the overall financial condition of companies 
chartered and licensed to operate in their state. In addition, some of 
the companies selling crop insurance are affiliated with holding 
companies or other related companies, which RMA does not review for 
financial soundness. Since American Growers' failure, RMA has begun 
requiring federal crop insurance companies to provide additional 
financial data to help the agency determine if companies are adequately 
financed to perform their obligations under their SRAs.

One of RMA's primary responsibilities is to ensure the integrity and 
stability of the crop insurance program, in part, by monitoring 
insurance companies' compliance with program criteria such as 
submitting statutory statements required by state regulators and 
meeting certain financial ratios, as defined in federal regulations. To 
ensure that the companies participating in the federal crop insurance 
program sell and service insurance policies in a sound and prudent 
manner, the Federal Crop Insurance Act[Footnote 12] requires crop 
insurance companies to bear a sufficient share of any potential policy 
loss. Title 7, Code of Federal Regulations, chapter IV, contains the 
general regulations applicable to administering the federal crop 
insurance program. The SRA between RMA and participating crop insurance 
companies establishes the terms and conditions under which RMA will 
provide subsidy and reinsurance on crop insurance policies sold or 
reinsured by insurance companies. These terms and conditions state, in 
part, that companies must provide RMA with accurate and detailed data, 
including their (1) annual plan of operation, (2) financial statements 
filed with the applicable state insurance regulator, and (3) any other 
information determined necessary for RMA to evaluate the financial 
condition of the company.

When approving a company to participate in the crop insurance program, 
RMA analyzes it according to 16 financial ratios set forth in RMA 
regulations.[Footnote 13] Combined, these 16 ratios are intended to 
provide RMA a reasonable set of parameters for measuring insurance 
companies' financial health, albeit generally from a historical 
perspective.[Footnote 14] The 16 financial ratios include such things 
as (1) change in net writings, (2) 2-year overall operating 
ratio,[Footnote 15] (3) change in surplus, and (4) liabilities to 
liquid assets. Ten of the 16 ratios specifically refer to changes 
related to companies' surplus--the uncommitted funds used to cover 
policy claims. When a company fails more than 4 of the 16 financial 
ratios, RMA requires the company to submit an explanation for the 
deviation and its plans to correct the situation.[Footnote 16] If the 
explanation appears reasonable, RMA approves the company to sell and 
service crop insurance for the next crop year.

In August 2001, RMA notified American Growers that the company had 6 
ratios, based on its December 2000 financial statement, that fell 
outside acceptable ranges, including its 2-year overall operating 
ratio, change in surplus, and 2-year change in surplus. Table 1 shows 
the 6 ratio requirements and American Growers' ratio for each of the 6 
ratios it failed.

Table 1: Comparison of Ratio Requirements and American Growers' 6 
Failed Ratios for December 2000: 

Ratio: Two-year overall operating ratio; 
Ratio requirement (percent): < 100%; 
American Growers' ratio (percent): 122%.

Ratio: Investment yield; 
Ratio requirement (percent): 4.5 to 10%; 
American Growers' ratio (percent): 13%.

Ratio: Change in surplus; 
Ratio requirement (percent): -10 to +50%; 
American Growers' ratio (percent): -22%.

Ratio: Combined ratio after policyholders' dividends; 
Ratio requirement (percent): < 115%; 
American Growers' ratio (percent): 145%.

Ratio: Two year change in surplus; 
Ratio requirement (percent): > -10%; 
American Growers' ratio (percent): -18%.

Ratio: Return on surplus; 
Ratio requirement (percent): > -5%; 
American Growers' ratio (percent): -40%. 

Source: GAO analysis of RMA data.

[End of table]

According to an RMA memorandum dated October 2001, American Growers 
reported that most of its unacceptable ratios were due primarily to 
underwriting losses related to its multiperil crop insurance that 
produced unfavorable results due to drought conditions in 2000, 
particularly in Nebraska and Iowa, and the impact of the federally 
subsidized reimbursement not covering the company's expenses. 
Additionally, American Growers cited the cost of the class-action 
lawsuit relating to its CRC Plus product as a contributing factor. 
Finally, American Growers explained that the expansion of its crop 
operations through the purchase of a competitor's crop insurance 
business was expected to provide efficiencies that would reduce 
expenses and help improve the company's profitability in the future.

Based on American Growers' explanations, RMA determined that the 
company's 2002 SRA should be approved. RMA did not believe that the 
adverse developments that American Growers had experienced were 
significant enough to move the company close to insolvency. RMA's 
decision was partially based on anticipated improvements in overall 
performance resulting from American Growers' acquisition of another 
company's assets and the potential for achieving greater economies of 
scale.

Furthermore, while American Growers failed more than 4 of the 16 
financial ratios, it was not the only company with such results. Of the 
18 companies participating in the federal crop insurance program in 
2002, other companies had a higher number of failed ratios than 
American Growers, though most had fewer. Specifically, of the other 17 
companies, 3 companies had 7 or more failed ratios, 1 had 6--the same 
number as American Growers, and 13 companies had 4 or fewer failed 
ratios.

In March 2002, American Growers had 5 ratios, based on its December 
2001 financial statement, that fell outside acceptable ranges, 
including change in net writings, 2-year overall operating ratio, and 
liabilities to liquid assets. Table 2 shows the 5 ratio requirements 
and American Growers' ratio for each of the 5 ratios it failed.

Table 2: Comparison of Ratio Requirements and American Growers' 5 
Failed Ratios for December 2001: 

Ratio: Change in net writings; 
Ratio requirement: (percent): -33 to +33%; 
American Growers' ratio: (percent): 51%.

Ratio: Two-year overall operating ratio; 
Ratio requirement: (percent): <100%; 
American Growers' ratio: (percent): 105%.

Ratio: Investment yield; 
Ratio requirement: (percent): 4.5 to 10%; 
American Growers' ratio: (percent): 15%.

Ratio: Liabilities to liquid assets; 
Ratio requirement: (percent): <105%; 
American Growers' ratio: (percent): 117%.

Ratio: Quick liquidity; 
Ratio requirement: (percent): >20%; 
American Growers' ratio: (percent): 9%.

Source: GAO analysis of RMA data.

[End of table]

American Growers cited its acquisition of its competitor's crop 
insurance business, the adverse development of its CRC Plus settlement, 
and the delay in its reinsurance payments due from RMA as the primary 
reasons for failing these ratios. Based on the company's explanation of 
why it had failed the 5 ratios, in June 2002--5 months before American 
Growers' financial failure--RMA determined that American Growers met 
the standards for approval to sell and service crop insurance policies 
for 2003.

In 2002, as in 2001, although American Growers failed to meet more than 
4 ratios, as required by the SRA, its performance was not unlike some 
other companies. Of the 19 companies participating in the crop 
insurance program in 2003, 2 companies had 8 or more failed ratios, 2 
had 5--the same number as American Growers, and 14 companies had 4 or 
fewer failed ratios.

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. RMA 
reviewed the company's surplus and reinsurance arrangements and 
approved the company to write policies for the 2003 crop year, based on 
this analysis. However, RMA was unaware that American Growers was 
projecting profits in excess of historic averages to pay for its 
operating expenses and that its failure to achieve these profits would 
mean that the company's surplus would be inadequate to absorb resulting 
operating losses and could result in the financial failure of the 
company.

One reason RMA was unable to identify deficiencies in American Growers' 
finances was because, following the agency's emphasis on companies' 
compliance with program criteria, RMA only reviewed a company's 
historical financial information and its ability to pay claims on the 
basis of the company's past surplus and its private reinsurance 
agreements. For example, RMA's decision to approve companies to 
participate in the federal crop insurance program for 2002 (July 2001 - 
June 2002) was based on the company's financial information as of 
December 31, 2000. Further, while RMA required companies to submit an 
operation plan showing projected policy sales, RMA did not require a 
company to provide operating budget projections for the upcoming year. 
As a result, RMA's approval decisions were generally based on a 
company's past financial performance rather than a forward-looking 
perspective of a company's financial health.[Footnote 17]

Without knowing the details of a company's projected operating budget 
including its acquisition plans and the financial conditions of 
affiliated, parent, or subsidiary companies, RMA did not have a 
complete picture of the company's financial condition. Thus, RMA was 
unable to adequately identify or take action to lessen any risks that 
may have been developing in companies with deteriorating profits, as 
was the case in American Growers. We believe that this lack of 
information impaired RMA's decision-making process; therefore, the 
agency was forced to make decisions based on incomplete, narrowly 
focused, and dated information.

Subsequent to the financial failure of American Growers, RMA took 
several steps to improve its oversight and analysis of the financial 
condition of companies currently participating in the federal crop 
insurance program. For example, in 2003, RMA started requesting more 
comprehensive budget and cash flow information from participating 
companies, which provides the agency a more forward-looking perspective 
of the companies' financial health. Specifically, RMA will require 
insurance companies to provide their estimated underwriting gains or 
losses for the coming year; copies of all risk-based capital 
reports;[Footnote 18] and a signed statement identifying any potential 
threats to the company's ability to meet its obligations for current 
and future reinsurance years, along with the possible financial 
ramification of such obligations. In addition, RMA is revising the SRA 
in its efforts to address some of the shortcomings of the current SRA. 
Although RMA officials said the agency plans to continue requesting 
more comprehensive information from crop insurance companies and had 
developed a financial analysis plan, as we concluded our review, the 
agency did not have formal written policies and procedures in place 
incorporating these changes.

In a November 2003 memorandum to RMA's administrator, USDA's Office of 
Inspector General provided general comments and suggestions for RMA's 
consideration in its renegotiation of the current SRA. 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. RMA's contact with state regulators was ad hoc and 
primarily limited to episodes during the introduction of new crop 
products or company acquisitions. RMA did not discuss the financial 
status of companies with regulators, but it would have been prevented 
from doing so because it lacked an agreement with state insurance 
regulators regarding the sharing of confidential financial and 
examination records.

Companies selling and servicing crop insurance under the federal crop 
insurance program are subject to the regulations of the state where the 
company is chartered as well as federal regulations. According to NAIC, 
a state regulators' primary responsibilities are to protect the public 
interest; promote competitive markets; facilitate the fair and 
equitable treatment of insurance consumers; promote the reliability, 
solvency, and financial solidity of insurance institutions; and enforce 
state regulation of insurance. State regulators, among other things, 
require companies to file periodic information regarding their 
financial condition, including the adequacy of their surplus to cover 
claim losses, and the solvency of the company.

Prior to the failure of American Growers, RMA did not routinely 
coordinate with state regulators regarding companies' financial 
condition. Also, RMA did not have a written policy or information-
sharing agreements that would allow state insurance regulators to share 
sensitive financial information about crop insurance companies with the 
agency. According to several state regulators, RMA did not routinely 
share information or otherwise coordinate with state regulators to 
determine the financial health of a company. According to another state 
regulator, RMA and the state have talked when a company was introducing 
a new crop insurance product; however, the regulator could not remember 
sharing information with RMA about the financial operations of 
companies participating in the federal crop insurance program. 
Furthermore, the state regulators with whom we spoke said that any 
policy promoting coordination would be of limited value unless the 
states and RMA established a written agreement allowing the state 
regulators to share confidential business information with RMA.

RMA's lack of an agreement for sharing information with NDOI prevented 
the state from disclosing sensitive business information on American 
Growers. NDOI officials identified financial and management weaknesses 
directly or indirectly affecting American Growers during its periodic 
reviews as early as 2000. Beginning in 2001, and continuing through 
August 2002, NDOI was internally discussing the possibility of 
conducting a targeted examination of Acceptance, including its 
subsidiary--American Growers. However, in September 2002, due to other 
priorities and resource constraints, NDOI decided to postpone an on-
site examination of the company until 2003. RMA called the state 
insurance regulator in May 2002, and again in September 2002, asking 
whether there were any special inquiries or actions pending by the 
state regarding American Growers and whether American Growers was 
listed on the state's list of companies at risk. NDOI acknowledged to 
RMA that it had asked American Growers to provide additional 
information regarding its first quarterly submission for 2002; however, 
NDOI explained that this was not unusual because a number of other 
companies also had outstanding inquiries. NDOI explained that most of 
its information is considered public and could be furnished to RMA if 
requested. However, NDOI's work products, including its list of 
companies most at risk, company examination reports, and associated 
work papers were considered confidential. As a result, NDOI required 
that a confidentiality agreement be signed before they could share the 
information. On September 20, 2002, NDOI began drafting a 
confidentiality agreement so it could share information about American 
Growers with RMA. However, this agreement was not completed before 
American Growers' failure.

Since the failure of American Growers, RMA has begun working with NAIC 
on draft language for confidentiality agreements that would allow state 
regulatory agencies to share confidential business information with 
RMA. 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. However, servicing the company's 
crop insurance policies cost RMA more than $40 million for such things 
as paying agent commissions and staff salaries. Further, RMA lacked a 
written policy that clearly defined its relationship to state actions 
in handling company insolvencies. While NDOI accommodated RMA's 
interests by not immediately liquidating American Growers' assets so 
that policyholders could be served, without a written agreement in 
place, other actions such as liquidation could have limited RMA's 
flexibility to protect policyholders and maintain stability in the 
federal crop insurance program.

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. After NDOI obtained an 
order of supervision, NDOI and RMA signed a memorandum of understanding 
that specified that American Growers, under NDOI appointed management, 
would pay claims and service policies with American Growers' funds. RMA 
signed an amendment to American Growers' 1998 SRA and agreed to 
reimburse the company for continued expenses associated with paying or 
servicing crop insurance claims when American Growers' available cash 
accounts--about $35 million--dropped to $10 million or below. RMA began 
day-to-day oversight of American Growers in conjunction with NDOI at 
the company's Council Bluffs, Iowa, offices on January 6, 2003. The 
purpose of the oversight was, among other things, to ensure the timely 
payment of claims, the timely collection of premiums, the efficient 
transfer of 2003 business to other insurance companies, and the review 
and approval of the company's employee retention plan and payments to 
creditors.

RMA worked with NDOI to keep American Growers in rehabilitation rather 
than liquidate the company because RMA was concerned that if NDOI chose 
to liquidate the company RMA may not have a mechanism to expeditiously 
pay claims and transfer American Growers' policies to other insurance 
providers. Continuity of coverage is critical to policyholders because 
they must provide proof of insurance coverage in order to secure loans 
and obtain credit to plant the next year's crops. Policyholders may 
become ineligible for crop insurance for 1 year if their coverage is 
terminated. RMA was concerned that if American Growers was liquidated, 
policyholders would not be paid for their losses and their coverage 
would lapse, making them ineligible for continued crop insurance 
coverage. While the SRA provides that RMA could take control of 
American Growers' crop insurance policies, it did not have an effective 
way to service these policies.

On December 18, 2002, RMA issued procedures for transferring existing 
policies written under American Growers to other insurance providers 
approved under the federal crop insurance program. Under these 
procedures, American Growers was to notify its agents that all of its 
policies must be placed with another insurance provider. The agents had 
the primary responsibility to transfer the policies. By April 2003, RMA 
transferred or assigned a total of 349,185 policies--all which were 
eligible--to other companies in the federal crop insurance program 
reflecting about $576.4 million in premiums.[Footnote 19] Any American 
Growers' policy that was not transferred voluntarily to a new insurance 
provider was assigned by RMA on a random basis to a provider that was 
currently writing insurance in the applicable state. Less than 8 
percent of the policies had to be assigned to other insurance providers 
because the policy or agent had not acted on them, or because paperwork 
errors interfered with their transfer. For the fall and spring crop 
seasons combined, agents or policyholders transferred about 323,000 
policies, and RMA assigned about 26,500 policies.

RMA worked in conjunction with NDOI and remaining American Growers' 
staff to ensure that 52,681 claims totaling about $410 million were 
paid.[Footnote 20] About $400 million of these claims were paid by 
March 2003. The claims that were filed resulted from policyholder 
losses from the 1999 through 2003 crop seasons--primarily the 2002 crop 
season. A month-by-month presentation of this information is presented 
in appendix VI.

Servicing American Growers' Policies Cost RMA More Than $40 Million: 

The cost of servicing American Growers' crop insurance policies, which 
included the administrative and operating costs of paying claims and 
transferring policies, totaled about $40.5 million as of March 2004 
(see table 3). These costs included agent commissions, office space 
leases and rental equipment, payroll for remaining American Growers' 
staff, severance pay, and other expenses.[Footnote 21] Six former 
American Growers' employees remained on-site to respond to information 
requests associated with paid claims and transferred policies, to 
process remaining claims, and to produce end-of-year financial 
statements.

Table 3: RMA Costs Incurred in the Dissolution of American Growers as 
of March 2004: 

Type of costs: Payroll, payroll taxes, benefits; 
Amount: $8.4.

Type of costs: Agent commissions; 
Amount: $7.6.

Type of costs: Space leases including costs to break leases, rental, 
equipment maintenance, and other; 
Amount: $6.8.

Type of costs: Severance; 
Amount: $6.4.

Type of costs: Premiums to reinsurers; 
Amount: $4.3.

Type of costs: Claims overpayments[A]; 
Amount: $3.6.

Type of costs: Health insurance; 
Amount: $2.1.

Type of costs: Other[B]; 
Amount: $1.3.

Total; 
Amount: $40.5.

Source: GAO analysis of RMA data.

[A] Payments to farmers that, after adjustment, were determined to be 
overpayments. RMA is in the process of trying to collect these claims.

[B] Other costs include 401k benefit costs, and profit-share bonuses, 
among others costs.

[End of table]

RMA would like to recoup some of these costs by (1) obtaining revenues 
that could be derived from the liquidation of American Growers' assets 
by NDOI, if that should occur, and (2) requesting that NDOI provide RMA 
with any portion of the company's cash reserves--totaling about $7 
million as of February 2004--that may remain before the company is 
liquidated. However, according to NDOI, RMA's standing as a creditor in 
the case of liquidation is unclear, and RMA does not know to what 
extent, if any, it can recoup its costs from these financial sources.

RMA Lacked a Written Policy to Efficiently Address Insurance Provider 
Insolvencies: 

At the time of American Growers' failure, RMA did not have a written 
policy defining its financial roles and responsibilities in 
relationship to state actions in the event of an insurance provider 
insolvency. While the SRA provides that RMA may take control of the 
policies of an insolvent insurance company to maintain service to 
policyholders and ensure the integrity of the federal crop insurance 
program, state regulators' decisions may constrain RMA's ability to 
efficiently protect policyholders. In the case of American Growers, an 
RMA official reported that NDOI made it clear that it had no choice, 
given the weakened financial condition of the company, but to liquidate 
American Growers unless RMA funded the company until all the policies 
had been serviced. If the state had liquidated the company, it would 
have sold all the company's property and assets, creditors may have 
initiated legal actions over the existing assets (including premiums 
owed by policyholders), and there was the possibility of a freeze on 
the payment of any claims. Furthermore, liquidation would have left RMA 
with a number of crop policies to service, with no way of servicing 
them.

RMA decided that the best course of action was to reach an agreement 
with NDOI to stave off liquidation by reimbursing NDOI for all costs 
associated with the servicing of policies until all 2002 policies had 
been serviced and until all producers had found new insurance providers 
for the 2003 crop year. Fortunately, NDOI accommodated RMA's interests 
by allowing RMA to fund the operation of the company long enough to pay 
farmers' claims and transfer policies. However, other actions available 
to the state could have increased RMA's costs or limited RMA's 
flexibility in protecting policyholders.

When an insurance provider becomes insolvent, the SRA provides that RMA 
will gain control of its federally funded crop insurance policies and 
any premiums associated with those policies. However, as the case of 
American Growers demonstrates, RMA is not prepared to assume such 
responsibility. RMA was concerned, among other things, that it lacked 
sufficient staff and other capabilities, such as data management 
systems, to effectively service policyholders. RMA could have employed 
a contractor to service policyholders, but doing so could have been 
costly and may not have resulted in the timely payment of claims. 
Furthermore, according to RMA, they were unable to identify a company 
to contract with to service the policies and related claims. Thus, 
according to RMA, while RMA has the authority in the event of 
insolvency to service policyholders by taking control of companies' 
policies, it is unprepared to act on this authority. RMA is further 
dependent on state regulators to make decisions that will allow the 
agency to act in the most efficient manner to protect policyholders and 
maintain stability in the federal crop insurance program.

Prior to American Growers' insolvency, RMA had not reached an agreement 
with NDOI that addressed RMA's interests in the case of insolvency 
including the state's financial responsibilities. RMA argues that while 
it does not have a written policy to address insolvencies, it does have 
flexibility to assess the situation when it occurs and use the most 
efficient way to ensure that policyholders do not face a service 
disruption. While the lack of a written policy and agreements may allow 
greater flexibility, the absence of specific framework may also result 
in state regulator decisions detrimental to RMA and the federal crop 
insurance program. A policy describing state and RMA authorities and 
responsibilities when a state decides to act against an insolvent 
company would provide RMA some assurance that the federal government's 
interests are protected.

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. Reviewing the causes underlying American 
Growers' failure and RMA's actions provides a valuable opportunity to 
identify shortcomings in the financial oversight of companies 
participating in the federal crop insurance program and reforms 
necessary to strengthen RMA's oversight and RMA's ability to respond to 
an insurance provider insolvency.

The failure of American Growers demonstrates that companies relying on 
anticipated underwriting gains to cover operational expenses may face 
financial difficulties similar to American Growers. More specifically, 
it suggests that companies must find ways to achieve operating 
efficiencies so that their expenses do not exceed the administrative 
and operational expense reimbursement provided by RMA to cover expenses 
for the sale and service of federal crop insurance policies. Further, 
the failure of American Growers highlights the need to improve RMA's 
financial oversight of companies participating in the federal crop 
insurance program. Clearly, RMA's oversight procedures at the time of 
the failure were inadequate to ensure that companies met applicable 
financial requirements for participation in the program. Specifically, 
the failure of American Growers highlights the need for improved 
financial and operational reviews, and improved coordination with state 
insurance regulators. If adequate financial oversight procedures had 
been in place prior to the failure of American Growers, the company's 
weakened financial condition may have been detected in time to allow 
for corrective actions and thereby reduced costs to taxpayers. While 
RMA has conducted additional oversight of companies and has initiated 
greater contact with state regulators after the failure of American 
Growers, RMA has not formalized these procedures.

RMA responded to the failure of American Growers in an effective manner 
that ensured continued coverage for farmers and stability in the crop 
insurance program. Further, RMA demonstrated that the federal crop 
insurance program functioned as intended by ensuring that policyholders 
were protected. However, the failure of American Growers highlights the 
need for RMA to consider developing written policies to ensure that it 
takes the most effective and efficient actions in the event of future 
insolvencies in the federal crop insurance program. As demonstrated by 
the failure of American Growers, RMA is vulnerable to state insurance 
regulators' actions when a company fails. State regulators are vested 
with the authority to determine what supervisory action to take in 
response to the financial failure of an insurance company. 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. Better 
coordination with state regulators, regarding respective authorities 
and responsibilities in the event of future insurance provider 
insolvencies, is necessary to ensure that RMA's interests are 
protected.

Recommendations: 

To improve RMA's financial oversight of companies participating in the 
federal crop insurance program and its ability to effectively address 
future insolvencies, we recommend that the Secretary of Agriculture 
direct RMA to take the following three actions: 

(1) Develop written policies to improve financial and operational 
reviews used to monitor the financial condition of companies to include 
analyses of projected expenses, projected underwriting gains, relevant 
financial operations of holding companies, and financial data on 
planned acquisitions.

(2) Develop written agreements with state insurance regulators to 
improve coordination and cooperation in overseeing the financial 
condition of companies selling crop insurance, including the sharing of 
examination results and supporting work papers.

(3) Develop a written policy clarifying RMA's authority as it relates 
to federal/state actions and responsibilities when a state regulator 
decides to place a company under supervision or rehabilitation, or to 
liquidate the company.

Agency Comments and Our Evaluation: 

We provided USDA with a draft of this report for its review and 
comment. We received written comments from the Administrator of USDA's 
RMA. RMA agreed with our recommendations and stated that it is (1) 
formalizing the improvements in oversight that we recommended in the 
new SRA, (2) developing written agreements with state insurance 
regulators and the National Association of Insurance Commissioners 
(NAIC) to improve data sharing and oversight, and (3) clarifying RMA's 
authority as it relates to federal/state actions when a state takes 
action against a crop insurance company in its draft SRA and in 
discussions with state regulators and the NAIC.

When completed, RMA's initiatives to implement the recommendations in 
this report will improve its ability to evaluate companies overall 
financial health and to earlier detect weaknesses in companies' 
financial condition. However, to the extent that RMA cannot obtain 
enhanced disclosure and accountability through proposed changes to the 
SRA, it should implement our recommendation by modifying its 
regulations or other written policies. Finally, RMA's increased 
cooperation and coordination with state insurance regulators will 
likely strengthen oversight by both federal and state regulators and 
facilitate problem resolution should a company fail in the future.

RMA also provided technical corrections, which we have incorporated 
into the report as appropriate. RMA's written comments are presented in 
appendix IX.

As arranged with your office, unless you publicly announce its contents 
earlier, we plan no further distribution of the report until 30 days 
from its issue date. At that time we will send copies of this report to 
appropriate congressional committees; the Secretary of Agriculture; 
the Director, Office of Management and Budget; and other interested 
parties. In addition, this report will be available at no charge on 
GAO's Web site at http://www.gao.gov.

Signed by: 

Lawrence J. Dyckman: 
Director, Natural Resources and Environment: 

[End of section]

Appendixes: 

Appendix I: Scope and Methodology: 

At the request of the Chairman and Ranking Minority Member of the House 
Committee on Agriculture and the Chairman and Ranking Minority member 
of the House Subcommittee on General Farm Commodities and Risk 
Management, we reviewed USDA's actions regarding American Growers 
Insurance Company (American Growers) and their impact on the federal 
crop insurance program. 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. In 
addition, we were asked to determine what factors led to RMA 
determinations affecting a proposed sale of American Growers' assets to 
Rain and Hail LLC (Rain and Hail) and RMA's decision to guarantee that 
all American Growers' agent commissions be paid. Information related to 
the Rain and Hail proposal is provided in appendix VII. Information on 
USDA's decisions to guarantee agent commissions is provided in appendix 
VIII.

To determine the key factors leading to the failure of American 
Growers, we analyzed company documents and financial statements, 
including annual and quarterly statements for 1999 through 2002. We 
compared American Growers' expense data with expense data for other 
companies participating in the program. For this analysis, we computed 
the average expense ratios of companies participating in the crop 
insurance program, excluding the expense data from American Growers. 
Due to the timing of American Growers' failure, it did not submit an 
expense report to RMA for 2002. To capture the extent of the financial 
problems that American Growers experienced in 2002 in comparison with 
other companies, we worked closely with staff who remained at American 
Growers while it was in rehabilitation to create an expense report for 
2002. We also interviewed American Growers' management; the Nebraska 
Department of Insurance (NDOI) appointed rehabilitator for American 
Growers and other key staff; industry groups, such as the National 
Association of Insurance Commissioners (NAIC); and representatives from 
other crop insurance companies, including key Rain and Hail personnel, 
to gain an industry perspective on the failure of American Growers' and 
RMA's actions. We also contacted the National Association of Crop 
Insurance Agents; however, they did not grant our requests for an 
interview. To adjust for the general effects of inflation over time, we 
used the chain-weighted gross domestic product price index to express 
dollar amounts in inflation-adjusted 2003 dollars.

To evaluate RMA's oversight procedures we interviewed RMA staff in 
Washington, D.C. and Kansas City, Missouri, offices. We reviewed the 
guidance that RMA uses to monitor companies' compliance with the 
federal crop insurance program, including relevant laws; the Code of 
Federal Regulations, title 7, part 400; and agency guidance, including 
RMA's Crop Insurance Handbook for 2002 and the current Standard 
Reinsurance Agreement (SRA), to verify that monitoring procedures were 
met. We also reviewed RMA's files relating to the oversight of American 
Growers and approval of its SRA.

To determine the effectiveness of RMA's dissolution of American 
Growers, we examined RMA's decision-making process and the costs 
associated with running American Growers' operations after its failure 
to ensure that federal crop insurance policies were serviced. We 
reviewed American Growers' financial statements and other documents. We 
used semistructured interviews to obtain the views of the Nebraska 
state commissioner; American Growers' management; representatives from 
other crop insurance companies, including key Rain and Hail personnel; 
RMA staff; NAIC officials; and, industry groups on the failure of 
American Growers and on issues related to RMA's handling of the 
dissolution. Specifically, we obtained our information from the 
officials by asking 10 structured questions in a uniform order within 
an interview that included additional unstructured, probing follow-up 
questions that were interjected at the discretion of the interviewer. 
We also used structured interviews to obtain the views of insurance 
commissioners on the failure of American Growers and on issues related 
to sharing confidential business information with RMA. In this case, we 
asked an additional three structured questions and followed up with 
additional unstructured questions as needed. We selected insurance 
commissioners in 10 states where there was at least one 2004 SRA 
holder, according to RMA data. These states were Connecticut, Indiana, 
Illinois, Iowa, Kansas, Minnesota, New York, Ohio, Pennsylvania, and 
Texas. We met with RMA officials in February 2004 to discuss our 
findings and tentative recommendations.

We conducted our review from July 2003 through May 2004 in accordance 
with generally accepted government auditing standards.

[End of section]

Appendix II: Penalties and Financial Losses Associated with Marketing 
CRC Plus for Rice Reduced American Growers' Surplus: 

As part of an overall strategy to increase the company's market share 
of the crop insurance industry, in 1997, American Growers developed and 
marketed a crop insurance product--Crop Revenue Coverage Plus (CRC 
Plus)--that was a supplement to federally reinsured crop insurance, but 
it was not subsidized or reinsured by the federal government. The 
product was a supplement to Crop Revenue Coverage (CRC), an insurance 
product that protected farmers against crop loss and low crop prices in 
the event of a low price, a low yield, or any combination of the two. 
CRC Plus allowed farmers to obtain supplemental coverage for their 
crops, in essence providing a higher level of coverage in the event of 
losses. American Growers initially marketed CRC Plus in only two states 
and covered grain, corn, sorghum, and soybean crops. In 1999, when the 
company extended CRC Plus to rice, a crop with which American Growers 
had limited actuarial experience, the company mistakenly priced the 
product too low. It then promoted the product heavily and did not 
adequately anticipate the demand for the product.

When it priced CRC Plus for rice, American Growers made a mathematical 
error--caused by the misplacement of a decimal point--that resulted in 
the insurance being sold for a lower price than it should have been. 
The low price for the policy, coupled with uncertainty in the market 
price of rice that year, resulted in a greater demand for the product 
than the company had anticipated. When American Growers realized that 
the demand for the product and associated losses would be greater than 
the company's surplus could handle, especially considering its low 
price, American Growers announced it would no longer accept 
applications at the price originally listed, effectively withdrawing 
the product from the market. However, farmers had already made 
decisions about what crop insurance they would purchase, based upon 
their belief that they could obtain the new product offered by American 
Growers. The withdrawal of the product was untimely and made it 
difficult for some farmers to find adequate insurance. As a result, 
Congress acted to extend the filing deadline for other types of 
federally reinsured crop insurance so that farmers adversely affected 
by American Growers' actions could obtain adequate insurance for their 
crops.

Finally, some farmers sued American Growers, while RMA and six states 
examined American Growers' actions. The litigation by farmers and 
regulatory actions resulted in more than $13 million in fines and 
settlements levied against American Growers in addition to losses of $6 
million. The fines, costs from litigation, and increased service costs 
resulting from the new insurance product reduced American Growers' 
surplus. As a result, American Growers' surplus dropped from $76 
million in 1998, to $60 million in 2000, a 21 percent decline over 2 
years. This decline in American Growers' surplus occurred at the same 
time the company increased the amount of insurance premium it wrote, 
from $271 million in 1998 to $307 million in 2000, an increase of 13 
percent. To lessen the impact of losses associated with the CRC Plus 
policies, American Growers accepted a $20 million loan in the form of a 
surplus note[Footnote 22] from an affiliate company to strengthen its 
surplus. American Growers also acquired commercial reinsurance coverage 
to pay for losses related to CRC Plus. This reinsurance coverage 
committed the company to future payments of more than $60 million 
through 2006.

[End of section]

Appendix III: Agent Commissions and Other Expenses Created High 
Operating Costs: 

American Growers' reported that operating expenses were higher than the 
average reported expenses of other companies participating in the 
federal crop insurance program, primarily due to American Growers' 
efforts to attract agents by paying them higher than average 
commissions and other actions designed to expand its business. From 
2000 to 2002, average commissions for American Growers' agents were 12 
percent higher than commissions for agents working for other companies. 
American Growers paid commissions that averaged about $17 for each $100 
premium it sold while other companies' agent commissions averaged $15 
for each $100 of premium.[Footnote 23]

Agents are companies' principal representatives to farmers. Farmers 
purchase crop insurance through agents who can write premium for any 
company selling crop insurance. Farmers generally develop relationships 
with specific agents and rely on agents for advice and service. 
Successful agents write more policies and may write policies with lower 
loss ratios. Agents typically receive as a commission a percentage of 
every dollar of premium in crop insurance sold to farmers. Some agents 
choose to write policies for certain companies based on commissions 
paid them by the company and on how well the company services the 
agents' clients. Higher commission rates are not the only factor 
attracting an agent to a company, but rates do play an important role. 
In an effort to increase its market share by recruiting more agents to 
sell crop insurance, American Growers paid higher agent commissions 
than other companies participating in the program.

American Growers also funded some expenses not directly related to the 
sale and service of federally funded crop insurance, such as trips to 
resort locations. These expenses, among others, created operating costs 
that were greater than the average operating expenses of other 
companies in the industry. Overall, American Growers' expenses, as a 
percentage of premium sold, were about 11 percent higher than the 
average expenses of the other companies. In other words, American 
Growers had expenses of about $30 for every $100 of premium it sold 
while other companies had expenses of about $27 for every $100 of 
premium sold. Salaries at American Growers averaged 15 percent higher 
than at other companies. In addition, American Growers spent twice the 
rate as other companies on advertising; and American Growers' expenses 
for equipment, including computer equipment, was twice that of other 
companies. In addition to the fact that American Growers' expenses, as 
a percent of premium sold, were higher than those of other companies, 
American Growers' expenses were also higher than the amount of RMA's 
reimbursement to the company.

RMA provides companies a reimbursement to cover their expenses related 
to the sale and service of crop insurance. This reimbursement is a 
preestablished percentage of premiums to reimburse companies for the 
expenses associated with selling and servicing federal crop insurance. 
The reimbursement rate is set at a level to cover the companies' costs 
to sell and service crop insurance policies. These costs include agent 
commissions, staff and office expenses required to process policies and 
claims, and loss adjusting expenses. In 1998, Congress reduced the 
amount of reimbursement from a cap of 27 cents per dollar of premium a 
company sells to 24.5 cents per dollar of premium. This reduction 
occurred after our 1997 report[Footnote 24] revealed that companies 
were basing their request for higher reimbursement rates on numerous 
expenses that were not directly related to the sale and service of crop 
insurance, such as trips to resorts, noncompete clauses associated with 
company mergers, and company profit-sharing arrangements. Under the 
current reimbursement arrangement, companies have no obligation to 
spend their payment on expenses related to crop insurance; they may 
spend the payment in any way they choose. We found that American 
Growers spent more than its reimbursement by paying above average-rates 
for agent commissions, marketing efforts, and other items not directly 
related to the sale and service of federal crop policies, such as 
tickets to sporting events and trips to resorts for agents.[Footnote 
25]

[End of section]

Appendix IV: Purchase of Competitor's Crop Insurance Business Created 
Additional Expenses: 

On June 6, 2001, Acceptance Insurance Companies Inc., (Acceptance) and 
its subsidiaries, including American Growers, acquired the crop 
insurance business of IGF Insurance Company (IGF) from Symons 
International Group, Inc. Acceptance and its subsidiaries raised funds 
for this purchase by selling most of its noncrop insurance subsidiaries 
between September 1999 and July 2001, as part of a larger business 
strategy to focus on and expand American Growers' crop insurance 
business.

American Growers, through its parent corporation Acceptance, acquired 
most of IGF's book of crop insurance policies, in addition to obtaining 
leased office space, company cars, and related staff to service these 
policies. A senior manager at American Growers said that the company's 
strategy was to achieve operational efficiencies by combining the 
operations of the two companies. However, he said that this goal was 
not achieved as quickly as the company had planned. For example, 
American Growers had planned on combining the companies' two computer 
systems; but it was unable to successfully do so, requiring it to keep 
two staffs of information technology specialists.

After the acquisition, American Growers grew from the company with the 
third largest volume of premium sold to being the largest. However, 
this growth also came with higher costs. American Growers' expenses 
increased 63 percent, from 2000 to 2001, the years before and after the 
purchase of IGF. In 2000, American Growers had about $117 million in 
expenses, but its expenses increased to $191 million in 2001. While the 
amount of premium American Growers wrote increased, from about $291 
million in 2000 to $450 million in 2001, a 54 percent increase, the 
amount of surplus the company kept only increased from $57 million in 
2000 to $75 million in 2001, a 31 percent increase. In 2002, American 
Growers wrote nearly $632 million in premiums, but without adding to 
the $75 million reserve.

[End of section]

Appendix V: American Growers' Surplus Was Inadequate to Cover Expenses 
When Underwriting Gains Did Not Materialize: 

American Growers' high expenses led them to spend more than RMA was 
reimbursing it for the sale and service of crop insurance. In 2001, for 
every $100 RMA provided American Growers to sell and service crop 
insurance, the company was spending $130. To pay for its expenses in 
excess of RMA's reimbursement, American Growers planned on making 
underwriting profits from the sale of crop insurance. When setting its 
budget for 2002, American Growers predicted it would receive an 18 
percent underwriting gain from policies it serviced under the federally 
reinsured crop program. However, American Growers' 10-year history of 
underwriting gains in the program was only 16 percent.[Footnote 26]

American Growers based its 2002 budget on achieving over $86 million in 
underwriting gains that year. The company's profit projections were 
based, in part, on retaining a higher percentage of the risk for the 
policies it sold than in past years. By retaining a higher percentage 
of the risk on policies, American Growers could increase its profits if 
claims were low. Conversely, the company increased its exposure to loss 
if claims were high.

However, widespread drought impacted the company's ability to achieve 
these gains. In June 2002, more than one-third of the contiguous U.S. 
was in severe to extreme drought. Total losses for the crop insurance 
program increased 33 percent from 2001. In 2001, total losses to the 
program were over $3 billion. In 2002, total losses increased to over 
$4 billion. For the category of policies for which American Growers 
retained a higher level of risk, the loss ratio in 2002 was about 40 
percent higher than in 2001, resulting in the payment of $114 in claims 
for every $100 it received in premiums for those policies.

When the underwriting gains American Growers had predicted did not 
materialize, losses and expenses depleted the company's surplus. As a 
result, NDOI, which regulates insurance companies domiciled in that 
state, declared that the company was operating in a hazardous financial 
condition and placed the company in supervision, and later 
rehabilitation. On November 22, 2002,[Footnote 27] NDOI took steps to 
protect American Growers' policyholders by issuing a state order of 
supervision.[Footnote 28] NDOI ordered the supervision because the 
company's surplus declined from about $75 million for the year ending 
December 31, 2001, to about $11 million as of September 2002. According 
to the order, the decline in American Growers' surplus--in excess of 
50 percent within a 9-month period--rendered the company financially 
hazardous to the public and its policyholders. Under the order of 
supervision, American Growers could not sell any new insurance 
policies or conduct business beyond those that are routine in the day-
to-day operations of its business, without the approval of the 
supervisor appointed by NDOI.

On December 20, 2002, NDOI obtained a court order that placed American 
Growers into rehabilitation under the auspices of NDOI.[Footnote 29] 
Under rehabilitation, NDOI appointed a rehabilitator who took control 
of American Growers to oversee the orderly termination of the company's 
business and to allow for an orderly transfer of policies to other 
companies. The NDOI-appointed rehabilitator assumed the 
responsibilities of the board of directors and officers and took 
control of the day-to-day management of the company.

[End of section]

Appendix VI: RMA Paid Policyholders' Claims after American Growers' 
Failure: 

RMA worked in conjunction with NDOI and remaining American Growers' 
staff to ensure that claims were paid (see table 4).[Footnote 30] The 
claims that were filed resulted from policyholder losses from the 1999 
through 2003 crop seasons--primarily the 2002 crop season.

Table 4: Claims Paid to Policyholders After American Growers' Failure: 

Dollars in millions.

Year: 2002; November; 
Claims: Number of claims: 10,383; 
Claims: Amount: $ 65.3; 
Cumulative Claims: Number of claims: 10,383; 
Cumulative Claims: Amount: $65.3.

Year: 2002; December; 
Claims: Number of claims: 16,531; 
Claims: Amount: $140.9; 
Cumulative Claims: Number of claims: 26,914; 
Cumulative Claims: Amount: $206.2.

Year: 2003; January; 
Claims: Number of claims: 11,815; 
Claims: Amount: $110.5; 
Cumulative Claims: Number of claims: 38,729; 
Cumulative Claims: Amount: $316.7.

Year: 2003; February; 
Claims: Number of claims: 6,515; 
Claims: Amount: $67.0; 
Cumulative Claims: Number of claims: 45,244; 
Cumulative Claims: Amount: $383.7.

Year: 2003; March; 
Claims: Number of claims: 2,032; 
Claims: Amount: $20.2; 
Cumulative Claims: Number of claims: 47,276; 
Cumulative Claims: Amount: $403.9.

Year: 2003; April; 
Claims: Number of claims: 4,286; 
Claims: Amount: $4.9; 
Cumulative Claims: Number of claims: 51,562; 
Cumulative Claims: Amount: $408.8.

Year: 2003; May; 
Claims: Number of claims: 468; 
Claims: Amount: $4.2; 
Cumulative Claims: Number of claims: 52,030; 
Cumulative Claims: Amount: $413.0.

Year: 2003; June; 
Claims: Number of claims: 176; 
Claims: Amount: $2.0; 
Cumulative Claims: Number of claims: 52,206; 
Cumulative Claims: Amount: $415.0.

Year: 2003; July[A]; 
Claims: Number of claims: 172; 
Claims: Amount: $(4.4); 
Cumulative Claims: Number of claims: 52,378; 
Cumulative Claims: Amount: $410.6.

Year: 2003; August; 
Claims: Number of claims: 124; 
Claims: Amount: $.2; 
Cumulative Claims: Number of claims: 52,502; 
Cumulative Claims: Amount: $410.8.

Year: 2003; September[A]; 
Claims: Number of claims: 44; 
Claims: Amount: $(2.4); 
Cumulative Claims: Number of claims: 52,546; 
Cumulative Claims: Amount: $408.4.

Year: 2003; October; 
Claims: Number of claims: 74; 
Claims: Amount: $.2; 
Cumulative Claims: Number of claims: 52,620; 
Cumulative Claims: Amount: $408.6.

Year: 2003; November; 
Claims: Number of claims: 49; 
Claims: Amount: $.8; 
Cumulative Claims: Number of claims: 52,669; 
Cumulative Claims: Amount: $409.4.

Year: 2003; December; 
Claims: Number of claims: 12; 
Claims: Amount: $.5; 
Cumulative Claims: Number of claims: 52,681; 
Cumulative Claims: Amount: $409.9.

Total; 
Claims: Number of claims: 52,681; 
Claims: Amount: $409.9; 
Cumulative Claims: Number of claims: 52,681; 
Cumulative Claims: Amount: $409.9. 

Source: GAO analysis of RMA data.

Notes: This table reflects both claims and adjustments to claims that 
reduced the amount of claims--the amount of claims are net claims.

Dollar totals do not add up due to rounding.

[A] The amount of claims shown for July 2003 and September 2003 are 
negative claims due to adjustments.

[End of table]

After NDOI took control of American Growers, the company had about $35 
million in cash. These funds were used, in part, to pay American 
Growers' staff and support staff operating under the auspices of NDOI 
to pay policyholder claims. When American Growers' cash reserves were 
reduced to $10 million, RMA reimbursed NDOI for additional costs of 
$40.5 million to operate the company. When RMA began reimbursing NDOI 
in February 2003, the vast majority of policyholder claims had been 
paid (see Fig. 1). About $317 million, or 77 percent, of the 
approximately $410 million in claims were paid by the end of January 
2003.

Figure 1: American Growers' Policyholders Claims Paid vs. RMA 
Reimbursements: 

[See PDF for image]

[End of figure]

According to an RMA official, while the costs of reimbursing American 
Growers' operations may appear excessive, relative to the amount of 
claims paid, the claims that had been paid before February 2003, were 
those that could be expeditiously handled. The claims that remained to 
be paid--beginning in February 2003--were those that required follow-up 
to determine the accuracy of reported information, were difficult to 
process due to missing information, or had other problems. 
Additionally, although claims had been paid and policies transferred, 
staff were still needed to process the transfer of policy-related 
paperwork to other companies and resolve lingering issues, such as 
claims with missing information.

[End of section]

Appendix VII: Rain and Hail's Proposal to Purchase Selected Assets of 
American Growers: 

Prior to NDOI's declaration of its hazardous financial condition, 
American Growers was working to strengthen its financial condition by 
selling its insurance business to another insurance provider. In 
September 2002, as losses associated with that year's extensive drought 
began to materialize, American Growers realized that the company's 
operating expenses and crop losses were outpacing its income and 
surplus and advised NDOI and RMA accordingly. To improve its financial 
condition, American Growers attempted to sell its crop insurance 
business to another insurance company. On November 18, 2002, American 
Growers' parent company, Acceptance, signed a nonbinding letter of 
intent setting forth preliminary terms for the company to sell portions 
of its crop insurance business to Rain and Hail LLC (Rain and Hail) for 
over $20 million pending regulatory approval.

Rain and Hail asked RMA for authority to transfer American Growers' 
policies without having to cancel each policy and rewrite them under 
its own name--a concession that would have facilitated the bulk 
transfer of the policies. In the past, RMA had allowed this type of 
transfer only if the acquiring company agreed to (1) accept all the 
policies previously underwritten by the company being purchased and (2) 
assume all past liability for those policies. According to RMA, Rain 
and Hail did not want to assume any past liabilities for the policies 
and wanted to retain the right to select agents and policyholders with 
whom it wished to contract. According to RMA, Rain and Hail's intention 
was to not accept past liabilities regarding disputed claims, 
compliance issues, litigation or regulatory issues associated with 
American Growers' policies and ultimately to acquire only about one-
third of American Growers' business.

In a letter dated November 25, 2002, RMA rejected Rain and Hail's 
request for exemptions from RMA rules regarding the bulk transfer of 
policies. The agency was concerned that waiving the existing rules 
regarding potential liabilities and future policy placement would not 
protect the interests of policyholders and taxpayers or the integrity 
of the federal crop insurance program. RMA was concerned that if it 
approved the sale of American Growers' policies to Rain and Hail, it 
could have left a significant number of policyholders without 
insurance. It also may have left a disproportionate number of poor 
performing policies for other insurance providers to assume. Since 
reinsured companies are required to accept all policyholders that apply 
for insurance regardless of their loss history, RMA was concerned that 
its decision would be unfair to other insurance providers and that any 
future denial of similar exemptions to other companies would be 
challenged as arbitrary and capricious. As a result, RMA informed Rain 
and Hail that it could not grant the exemptions it requested.[Footnote 
31]

Accordingly, Rain and Hail announced that it was withdrawing its offer 
to purchase American Growers' business. When we discussed this issue 
with Rain and Hail, it concurred that its company was unwilling to 
accept the past liabilities associated with American Growers' policies, 
but denied it was not willing to accept all of American Growers' 
policyholders. Senior managers at Rain and Hail said their company was 
unwilling to accept the past liabilities associated with American 
Growers' policies because they did not have adequate time to assess the 
extent of any such liabilities and the financial implications for Rain 
and Hail. However, these managers said that Rain and Hail was willing 
to accept any farmer who wanted a policy from the company, but they 
stated that the company wanted to retain the right to select which 
agents it would use to sell and service crop insurance policies.

Whether the sale of American Growers' policies to Rain and Hail could 
have saved taxpayers all or some of the costs of the dissolution if the 
proposed sale had been completed is unclear. A Rain and Hail 
representative stated that the sale would have provided a cash infusion 
that could have prevented the failure of American Growers. An 
Acceptance representative stated that the sale might have allowed 
American Growers to pay remaining claims without having to come under 
control of NDOI. However, depending on the details, even with the cash 
infusion from the sale of assets to Rain and Hail, the company may 
still have been found to be in a financially hazardous condition.

[End of section]

Appendix VIII: RMA's Decision to Pay American Growers' Agent 
Commissions: 

After consultation with NDOI, RMA agreed to pay American Growers' agent 
commissions in full, despite the fact that they were paid higher than 
industry averages.[Footnote 32] RMA believed several factors, any one 
of which could have resulted in the disruption of policyholders' 
coverage, warranted paying agent commissions in full. First, RMA agreed 
to pay agent commissions in full, in part, because NDOI's position was 
that as long as American Growers was under the rehabilitation order 
instead of in liquidation, the company's contracts were valid, 
enforceable legal obligations that had to be paid. Second, RMA was 
concerned that some agents may have refused to continue to service 
policyholders if they knew they would not get paid for their work, and 
RMA needed agents' cooperation in ensuring the timely collection of 
premiums and transfer of policies to other crop insurance companies. 
Third, RMA was concerned that some agents, particularly small agents, 
could go out of business if not paid their commissions and would 
therefore be unable to service claims or transfer policies. Finally, 
RMA was concerned that some agents may have deducted their commissions 
from policyholder premiums, which could have made it more difficult for 
RMA to determine which policyholders had paid the premiums on their 
policies.

While RMA could have potentially achieved cost savings of about 
$800,000 by not paying some of American Growers' agents' commissions--
the portion of their $7.6 million in commissions that exceeded industry 
averages--agents' response to such a decision could have also disrupted 
service to policyholders and caused RMA to incur additional costs.

Industry opinion varied on whether RMA should have paid agent 
commissions in full. According to the former chief executive officer of 
American Growers, high commissions paid to agents contributed to 
American Growers' and other companies' financial troubles. One company 
executive expressed concerns that RMA's actions might make it more 
difficult for companies that are holding the line on agent commissions 
to continue to hold commissions at a reasonable level. Another 
representative was concerned that agents were going to work for the 
company that paid the highest commissions, regardless of the company's 
financial health, because RMA had shown that agents would receive their 
commission regardless of the company's status. However, one crop 
insurance company representative was concerned about the consequences 
of not paying agent commissions, particularly since the agents were not 
directly responsible for the company's failure. Representatives also 
stated that RMA was correct in paying agent commissions to ensure agent 
cooperation, to not drive smaller agents into bankruptcy, and to 
maintain the integrity of the federal crop insurance program.

Finally, RMA's actions in paying full agent commissions could have 
implications for the future of the federal crop insurance program, but 
it is unclear how future company and agent practices may be affected by 
RMA's decisions. RMA's actions could suggest that it might provide 
similar financial support in the event of future insolvencies, 
regardless of company and agent practices. For example, RMA's actions 
could have set a precedent for high agent commissions, a key factor in 
the failure of American Growers, which could, in turn, be a factor in 
other insolvencies. However, RMA has stated that it plans to consider 
each new situation on a case-by-case basis and that agents and 
companies should not expect the same treatment as in the case of 
American Growers. RMA said that a managing general agent had recently 
gone out of business and that RMA had not stepped in to provide relief 
to agents.[Footnote 33]

[End of section]

Appendix IX: Comments from RMA: 

United States Department of Agriculture:
Risk Management Agency:
1400 Independence Avenue, SW Stop 0801: 
Washington, DC 20250-0801:

USDA:

TO: Lawrence J. Dyckman:
Director, Natural Resources and Environment 
General Accounting Office:

Signed by: 

FROM: Ross J. Davidson, Jr. 
Administrator:

SUBJECT: Risk Management Agency: USDA Needs to Improve Oversight of 
Insurance Companies and Develop a Policy to Address any Future 
Insolvencies, Audit Number GAO-04-517:

APR 28 2004:

Thank you for providing the United States Department of Agriculture 
(USDA) and the Risk Management Agency (RMA) with your draft report, 
"USDA Needs to Improve Oversight of Insurance Companies and Develop a 
Policy to Address any Future Insolvencies." I would like to offer the 
following comments for your consideration, and ask that a copy of this 
response be included in your final report.

General Comments:

The Risk Management Agency (RMA) would like to recognize the GAO for 
the professional manner in which this audit was conducted. RMA was 
actively involved in the run-off of American Growers policies at the 
time of the audit, and the GAO auditors were cognizant of the workload 
and flexible in their requests for audit assistance from the RMA staff 
who were assigned to the American Growers activity.

While RMA understands that GAO does not recognize actions until they 
are concluded, many of the problems encountered with American Growers 
have been recognized and are being addressed through the current 
Standard Reinsurance Agreement (SRA) negotiations. The proposed changes 
to the SRA will formalize a system of enhanced insurance company 
disclosures and accountabilities consistent with the Agency's current 
authority and will help RMA to more efficiently and effectively deal 
with insolvencies and clarify the roles and responsibilities of the 
companies and RMA in the event of another catastrophic failure. The 
proposed SRA also contains provisions that will provide RMA with 
information that should help to highlight future problems and provide 
RMA additional time to preempt situations similar to the American 
Growers failure. RMA will report the changes made to the SRA once the 
negotiations have been completed.

General (Technical) Comments:

In reading the draft, we noted a few general items in addition to the 
responses to the specific recommendations that could be clarified to 
assist both the casual reader of this report as well as anyone familiar 
with insurance industry practices and the Federal crop insurance 
program specifically.

RMA would suggest that where the report discusses the State of 
Nebraska's takeover of the company the draft be modified to reflect 
that the State's first action was to place the company under 
supervision for some time before they moved into rehabilitation. This 
is an important point, because the State has different authorities 
depending on whether a company is under supervision, rehabilitation or 
liquidation. For example, while a company is under supervision, the 
State has less authority to abrogate existing contracts. This impacted 
RMA's flexibility in working with the State and the company in the 
weeks and months following the first action of the State.

The report may also give the reader the impression that all agents who 
sell crop insurance receive commissions. While this was true in the 
case of American Growers, some companies employ captive agents who 
receive salaries rather than commissions and some use a combination of 
salaried and contracted agents. For clarity, the statements referring 
to the industry as a whole should either be modified or changed to 
reference American Growers only. The same is also true relative to loss 
adjusters in that companies may employ or contract their loss adjusters 
or use a combination of both salaried or contracted adjusters in order 
to ensure service to their policyholders.

GAO Recommendation 1:

Develop written policies to improve financial and operational reviews 
used to monitor the financial condition of companies to include 
analyses of projected expenses, projected underwriting gains, relevant 
financial operation of holding companies, and financial data on planned 
acquisitions.

USDA Response:

As stated above, much of the improvement in monitoring the companies is 
intended to be achieved through the enhanced disclosures and 
accountabilities incorporated in the draft SRA. However, in the 
interim, for the 2004 reinsurance year, RMA requested additional 
financial documentation from the companies to be included with their 
Plan of Operations to help ensure the program integrity and stability 
of the crop insurance program. At that time, a financial analysis 
template (FAT) was developed to convert financial data into meaningful 
ratios, charts, graphs, and reports that more accurately depict the 
existing and future financial strength of the company. This was used 
for the 2004 SRA approval process and will again be used for the 2005 
SRA approval process when companies will again be required to provide 
additional financial documentation with their Plan of Operations. RMA 
is using a modification of the FAT to assist in a quarterly financial 
analysis of each SRA holder and managing general agent (MGA) to 
determine both of their financial strengths. In addition, written 
procedures are in place for the yearly approval of SRA holders and 
applicants and their MGAs to ensure they all have the financial and 
operational ability to fulfill their obligations under the SRA.

On-site financial and operational reviews are conducted on each company 
at least once in a three-year period. A review plan that contains 
tasks, objectives, and items to be reviewed is in place. To improve our 
monitoring of the companies, the plan is reviewed periodically and 
modified as RMA's needs change or issues are identified.

The additional financial information received for the 2004 and 2005 
Plans of Operations review and approval, including projected expenses, 
underwriting gains, etc., needs to be provided as a matter of course in 
the annual Plan of Operation review and approval process. This 
additional information disclosure requirement has been added to 
Appendix III of the draft 2005 SRA to formalize the process.

GAO Recommendation 2:

Develop written agreements with state insurance regulators to improve 
coordination and cooperation in overseeing the financial condition of 
companies selling crop insurance, including the sharing of examination 
results and supporting work papers.

USDA Response:

RMA is currently developing two agreements. One standard agreement will 
be executed with each individual state to obtain and share information 
on a confidential basis regarding a crop insurance company's financial 
and market conduct performance. This would include any state 
examination information and documentation obtained by the state as well 
as RMA sharing its financial analysis information and documentation 
with the state. This agreement will form the foundation of a 
"collaborative effort" between RMA and state insurance regulators in 
the review, examination and regulation of crop insurance companies.

The second agreement will be executed with the National Association of 
Insurance Commissioners (NAIC) for the purposes of accessing regulatory 
data reported to the NAIC by each individual state. The NAIC databases 
contain insurance company financial information and analysis results as 
well as regulatory data regarding crop insurance agents, loss 
adjusters, etc.

GAO Recommendation 3:

Develop a written policy clarifying RMA's authority as it relates to 
federal/state actions and responsibilities when a state regulator 
decides to place a company under supervision or rehabilitation, or to 
liquidate the company.

USDA Response:

RMA has utilized the existing agreement with the State of Nebraska in 
the supervision of American Growers Insurance Company and "lessons 
learned" documented during this process to draft changes to the SRA. 
One change specifies that RMA must be promptly notified by the company 
of any regulatory action to be taken against a crop insurance company 
if such action would affect the company's ability to perform its 
obligations under the SRA and the state must obtain RMA's approval 
before such action may be taken. The draft SRA also sets forth RMA's 
requirements and processes to ensure that the interests of Federal crop 
insurance policyholders and taxpayers are protected in the event the 
company is unable to fulfill its obligations under the SRA by requiring 
RMA approval of actions taken a company or service provider, the 
orderly transfer of policies to other companies to:

ensure uninterrupted service; preserving the ability to use the 
company's systems, records and equipment to run out the business; 
ensuring receipt of all funds in the possession of the company or owed 
to the company related to the Federal crop insurance policies; and 
preserving the highest priority in liquidation. In addition, RMA will 
work with the states and the NAIL to outline the respective roles, 
duties and responsibilities in this collaborative relationship between 
the states and RMA in the supervision, rehabilitation or liquidation 
process. RMA may employ the SRA, Federal regulation, memoranda of 
understanding or other appropriate means as needed to ensure maximum 
effectiveness of these changes.

Thank you for the opportunity to comment on this report. If you have 
any questions, please contact Michael Hand, Deputy Administrator for 
Compliance, at (202) 720-0642. 

The following are GAO's comments on the Risk Management Agency's letter 
dated April 28, 2004: 

GAO Comments: 

1.Per RMA's suggestion, we have provided additional details in this 
report noting that NDOI placed American Growers under supervision on 
November 22, 2002, and later placed the company under rehabilitation on 
December 20, 2002. RMA suggests that the state's initial action 
impacted its flexibility in working with the state and the company. As 
we note in our conclusions, better coordination with state regulators 
regarding respective authorities and responsibilities in the event of 
future insurance provider insolvencies is necessary to ensure that 
RMA's interests are protected.

2.We revised the report to note that some agents are paid a salary 
rather than receiving commissions on the premiums from policies sold. 
American Growers' agents received commissions, as do most agents who 
sell and service crop insurance.

3.At the time of our review, we noted written procedures based on 
regulations for the yearly review and approval of SRA holders and 
applicants. However, as noted in this report, these procedures were 
insufficient to assess the overall financial health of a company. To 
the extent that the final SRA does not fully address oversight 
weaknesses identified in our report, RMA should take action to modify 
its regulations or other written policies.

4.RMA on-site financial and operational reviews do not appear to focus 
on the overall financial health of a company, but rather on internal 
controls. However, as a minimum, RMA should coordinate these reviews 
with state regulators who periodically review company operations.

[End of section]

Appendix X: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

Lawrence J. Dyckman (202) 512-9692 Ronald E. Maxon, Jr. (214) 777-5659: 

Acknowledgments: 

In addition to the individuals named above, David W. Bennett, John W. 
Delicath, Tyra DiPalma-Vigil, Jean McSween, and Bruce Skud made key 
contributions to this report.

(360375): 

FOOTNOTES

[1] Other safety net programs include price support programs such as 
counter cyclical payments and marketing assistance loans, and disaster 
assistance for farmers who experience extreme losses due to a natural 
disaster. 

[2] While most companies pay their agents a commission to sell and 
service crop insurance policies, some companies pay agents a salary. 
American Growers paid its agents a commission.

[3] Surplus is defined as the amount by which an insurance company's 
assets exceed its liabilities, as reported in its annual statement. 
Companies can use surplus funds to pay policy losses. 

[4] RMA contracts with the Center for Agribusiness Excellence at 
Tarleton State University to provide data warehousing and data mining 
services for agricultural data, including analyses of crop insurance 
sales and claims data.

[5] NAIC is a nonregulatory organization composed of the heads of the 
insurance departments of the 50 states, the District of Columbia, and 
the four U.S. territories. The organization encourages uniformity and 
cooperation among the various states and territories as they 
individually regulate the insurance industry. 

[6] Farmers with limited resources may have this fee waived.

[7] 7 U.S.C. 1501 (et seq.). 

[8] Since 1999, the administrative and operating expenses reimbursement 
cannot exceed 24.5 percent of the companies' net book premium. 

[9] U.S. General Accounting Office, Crop Insurance: Opportunities Exist 
to Reduce Government Costs for Private-Sector Delivery, GAO/RCED-97-70 
(Washington, D.C.: Apr. 17, 1997). 

[10] Acceptance was incorporated in Ohio as National Fast Food Corp in 
1968, reincorporated in Delaware in 1969 and thereafter operated under 
the names NFF Corp (1971 to 1973); Orange-co, Inc., (1987-1992); 
Stoneridge Resources, Inc., (1987 to 1992); and renamed Acceptance in 
1992. American Growers and Acceptance were domiciled in Nebraska. 
However, their principal offices were located in Council Bluffs, Iowa.

[11] RMA also reviewed other company information, such as its stock 
price and private reinsurance agreements. 

[12] 7 U.S.C. 1501 (et seq).

[13] The 16 ratios include 11 ratios developed by the NAIC, 3 ratios 
used by A.M. Best Company, and 2 ratios specifically calculated by RMA 
for the federal crop insurance program. NAIC maintains the Insurance 
Regulatory Information System (IRIS) to assist state insurance 
departments in identifying significant changes in the operations of an 
insurance company, such as changes in its product mix, large 
reinsurance transactions, or certain changes in operations. Among other 
things, IRIS is intended to assist state regulators in establishing 
priorities for scheduling on-site examinations of insurance companies 
and to clarify the scope and focus of each examination. A.M. Best 
Company provides ratings used to assess insurance companies' financial 
strength.

[14] The financial information provided by the company is based on its 
prior year's activities. 

[15] The 2-year operating ratio measures the profitability of a company 
and is a principal determinant of a company's financial stability and 
solvency.

[16] According to 7 C.F.R. 400.172, the company may submit a financial 
management plan acceptable to RMA to eliminate each deficiency 
indicated by the ratios, or an acceptable explanation as to why a 
failed ratio does not accurately represent the company's operations, or 
have a binding agreement with a reinsurance company that qualifies the 
company to assume financial responsibility in the event the reinsurance 
company fails to meet its obligations under RMA's reinsured policies.

[17] Forward-looking information generally reflects a company's current 
best estimate regarding its future operations. RMA requested forward-
looking financial data in 2003, to use in deciding whether to grant 
approval to participating companies to sell and service crop insurance 
policies in the 2004 crop year.

[18] In 1993, NAIC instituted formal regulatory risk-based capital 
requirements. NAIC's risk-based capital system uses a formula that 
establishes the minimum amount of capital and surplus necessary for an 
insurance company to support its overall business operations. That 
amount is compared to the company's actual statutory capital to 
determine whether a company is technically solvent. The NAIC's risk-
based capital system limits the amount of risk a company can take on by 
requiring higher amounts of capital for bearing higher amounts of risk. 
Failure to maintain minimum capital and surplus adequate to support the 
company's particular risks, including the risks associated with its 
underwriting and investment activities, may subject it to regulatory 
action by its state insurance commissioner. 

[19] An additional 30,231 American Growers' policies were not 
transferred because the policyholder had not been planting, the farmer 
was deceased, or other reasons.

[20] As of February 2004, 19 claims remained unsettled due to 
litigation, problem claims, and other reasons.

[21] RMA will incur additional costs for staff that are employed until 
all claims are paid.

[22] Surplus notes are a form of debt that insurers can issue. Because 
the loan was provided as a surplus note, it was recorded as surplus 
instead of as a liability; and, as such, NDOI would have had to approve 
any repayment of this surplus note. 

[23] Not all agents receive the same commission rate.

[24] U.S. General Accounting Office Crop Insurance: Opportunities Exist 
to Reduce Government Costs for Private-Sector Delivery, GAO/RCED-97-70 
(Washington, D.C.: Apr. 17, 1997).

[25] In 2003, seven companies reported expenses in excess of RMA's 
reimbursement for selling and servicing federal crop insurance. RMA is 
currently reviewing company expenditures to determine if expenses 
reported are accurate.

[26] As an example of the effect of a higher projected return, on a 
retained premium base of $480 million, 18 percent is $86 million and 16 
percent is $76 million, a difference of $10 million.

[27] On this same date, RMA notified American Growers that its SRA was 
suspended and the company was to cease and desist from selling any new 
insurance policies.

[28] The Insurers Supervision, Rehabilitation, Liquidation Act, Neb. 
Rev. Stat. 44-4809(2)(a)(i).

[29] NDOI did not invoke its option to liquidate the company, which 
entails closing the company, selling off all of its assets, and 
distributing proceeds to creditors in order of legal precedence. 

[30] As of February 2004, 19 claims remain unsettled due to litigation, 
problem claims, and other reasons.

[31] According to RMA, nothing in its refusal to approve Rain and 
Hail's requested exemption constituted a disapproval of the sale. RMA 
has stated that it did not have the authority to approve or disapprove 
the sale provided that all SRA requirements were met.

[32] After consultation with NDOI, RMA agreed to pay agent commissions 
in full, both parties agreed that they were not obligated to pay about 
$6 million in bonuses, based on agent performance, that agents believed 
they were due under existing contracts with American Growers. RMA did, 
however, pay about $429,000 in bonuses to agents with an affiliated 
company because a review of the contract showed that American Growers 
had a binding obligation with the company to make these payments. 

[33] A managing general agent is a company that acts on behalf of the 
insurance company in selling and servicing policies.

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