a

GAO

United States General Accounting Office

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
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. 

Highlights of GAO-04-517, a 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 

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. 

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. 

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. 
Page i GAO-04-517 Crop Insurance

Contents

Letter 1

Results in Brief 4

Background 6

Company Decisions Contributed to American Growers’ Failure 9

RMA Financial Oversight Was Inadequate to Identify American 

Growers’ Financial Weaknesses 11

RMA Effectively Protected American Growers’ Policyholders but 

Lacked a Policy to Efficiently Address Insolvencies 19

Conclusions 24

Recommendations 25

Agency Comments and Our Evaluation 26

Appendixes

Appendix I: Scope and Methodology 28

Appendix II: Penalties and Financial Losses Associated with Marketing 

CRC Plus for Rice Reduced American Growers’ Surplus 30

Appendix III: Agent Commissions and Other Expenses Created High 

Operating Costs 32

Appendix IV: Purchase of Competitor’s Crop Insurance Business Created 

Additional Expenses 34

Appendix V: American Growers’ Surplus Was Inadequate to Cover 

Expenses When Underwriting Gains Did Not Materialize 35

Appendix VI: RMA Paid Policyholders’ Claims after American Growers’ 

Failure 37

Appendix VII: Rain and Hail’s Proposal to Purchase Selected Assets of 

American Growers 40

Appendix VIII: RMA’s Decision to Pay American Growers’ Agent 

Commissions 42

Appendix IX: Comments from RMA 44

GAO Comments 48

Appendix X: GAO Contacts and Staff Acknowledgments 49

GAO Contacts 49

Acknowledgments 49

Tables Table 1: Comparison of Ratio Requirements and American 

Growers’ 6 Failed Ratios for December 2000 14
Contents

Page ii GAO-04-517 Crop Insurance

Table 2: Comparison of Ratio Requirements and American 

Growers’ 5 Failed Ratios for December 2001 15

Table 3: RMA Costs Incurred in the Dissolution of American 

Growers as of March 2004 22

Table 4: Claims Paid to Policyholders After American Growers’ 

Failure 37

Figure Figure 1: American Growers’ Policyholders Claims Paid vs. RMA 

Reimbursements 38

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

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Page 1 GAO-04-517 Crop Insurance

United States General Accounting Office

Washington, D.C. 20548

A

June 1, 2004 Letr

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.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 

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. 
Page 2 GAO-04-517 Crop Insurance

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.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 2002.3

 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 

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. 
Page 3 GAO-04-517 Crop Insurance

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.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)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 

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. 
Page 4 GAO-04-517 Crop Insurance

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, 
Page 5 GAO-04-517 Crop Insurance

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 
Page 6 GAO-04-517 Crop Insurance

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 
Page 7 GAO-04-517 Crop Insurance

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.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.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 

6

Farmers with limited resources may have this fee waived.

7

7 U.S.C. 1501 (et seq.). 
Page 8 GAO-04-517 Crop Insurance

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.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 report9

 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 

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). 
Page 9 GAO-04-517 Crop Insurance

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.,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 

10Acceptance 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.
Page 10 GAO-04-517 Crop Insurance

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 
Page 11 GAO-04-517 Crop Insurance

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 
Page 12 GAO-04-517 Crop Insurance

claims on crop insurance policies and not on the overall financial health of 

the company.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 Act12 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. 

11RMA also reviewed other company information, such as its stock price and private 

reinsurance agreements. 

127 U.S.C. 1501 (et seq).
Page 13 GAO-04-517 Crop Insurance

When approving a company to participate in the crop insurance program, 

RMA analyzes it according to 16 financial ratios set forth in RMA 

regulations.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.14 The 16 financial 

ratios include such things as (1) change in net writings, (2) 2-year overall 

operating ratio,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.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.

13The 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.

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

15The 2-year operating ratio measures the profitability of a company and is a principal 

determinant of a company’s financial stability and solvency.

16According 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.
Page 14 GAO-04-517 Crop Insurance

Table 1: Comparison of Ratio Requirements and American Growers’ 6 Failed Ratios 

for December 2000

Source: GAO analysis of RMA data.

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 

Ratio

Ratio requirement 

(percent)

American Growers’ ratio 

(percent)

Two-year overall operating ratio < 100 122

Investment yield 4.5 to 10 13

Change in surplus -10 to +50 -22

Combined ratio after policyholders’ 

dividends < 115 145

Two year change in surplus > -10 -18

Return on surplus > -5 -40
Page 15 GAO-04-517 Crop Insurance

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

Source: GAO analysis of RMA data.

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 

Ratio

Ratio requirement

(percent)

American Growers’ ratio

(percent)

Change in net writings -33 to +33 51

Two-year overall operating ratio <100 105

Investment yield 4.5 to 10 15

Liabilities to liquid assets <105 117

Quick liquidity >20 9
Page 16 GAO-04-517 Crop Insurance

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.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 

17Forward-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.
Page 17 GAO-04-517 Crop Insurance

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;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 

18In 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. 
Page 18 GAO-04-517 Crop Insurance

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 
Page 19 GAO-04-517 Crop Insurance

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 
Page 20 GAO-04-517 Crop Insurance

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.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 

19An additional 30,231 American Growers’ policies were not transferred because the 

policyholder had not been planting, the farmer was deceased, or other reasons.
Page 21 GAO-04-517 Crop Insurance

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.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.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. 

20As of February 2004, 19 claims remained unsettled due to litigation, problem claims, and 

other reasons.

21RMA will incur additional costs for staff that are employed until all claims are paid.
Page 22 GAO-04-517 Crop Insurance

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

2004

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.

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

Type of costs Amount

Payroll, payroll taxes, benefits $8.4

Agent commissions 7.6

Space leases including costs to break leases, rental, equipment 

maintenance, and other 

 6.8

Severance 6.4

Premiums to reinsurers 4.3

Claims overpaymentsa 3.6 

Health insurance 2.1

Otherb 1.3

Total $40.5
Page 23 GAO-04-517 Crop Insurance

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 
Page 24 GAO-04-517 Crop Insurance

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 
Page 25 GAO-04-517 Crop Insurance

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. 
Page 26 GAO-04-517 Crop Insurance

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
Page 27 GAO-04-517 Crop Insurance

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.

Lawrence J. Dyckman

Director, Natural Resources

 and Environment
Page 28 GAO-04-517 Crop Insurance

Appendix I

Scope and Methodology ApApenednxidexiIs

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 inflationadjusted 2003 dollars.
Appendix I

Scope and Methodology

Page 29 GAO-04-517 Crop Insurance

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. 
Page 30 GAO-04-517 Crop Insurance

Appendix II

Penalties and Financial Losses Associated 

with Marketing CRC Plus for Rice Reduced 

American Growers’ Surplus ApendxiI

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’ 
Appendix II

Penalties and Financial Losses Associated 

with Marketing CRC Plus for Rice Reduced 

American Growers’ Surplus

Page 31 GAO-04-517 Crop Insurance

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 note1

 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.

1

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. 
Page 32 GAO-04-517 Crop Insurance

Appendix III

Agent Commissions and Other Expenses 

Created High Operating Costs ApendxiI

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.1

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 

1

Not all agents receive the same commission rate.
Appendix III

Agent Commissions and Other Expenses 

Created High Operating Costs

Page 33 GAO-04-517 Crop Insurance

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 report2

 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.3

2

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).

3

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.
Page 34 GAO-04-517 Crop Insurance

Appendix IV

Purchase of Competitor’s Crop Insurance 

Business Created Additional Expenses ApendxiIV

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. 
Page 35 GAO-04-517 Crop Insurance

Appendix V

American Growers’ Surplus Was Inadequate to 

Cover Expenses When Underwriting Gains 

Did Not Materialize ApendxiV

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.1

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, 2002,2

 NDOI took steps to protect American Growers’ 

1

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.

2

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.
Appendix V

American Growers’ Surplus Was Inadequate 

to Cover Expenses When Underwriting Gains 

Did Not Materialize

Page 36 GAO-04-517 Crop Insurance

policyholders by issuing a state order of supervision.3 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.4

 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.

3

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

4

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. 
Page 37 GAO-04-517 Crop Insurance

Appendix VI

RMA Paid Policyholders’ Claims after 

American Growers’ Failure ApendxiVI

RMA worked in conjunction with NDOI and remaining American Growers’ 

staff to ensure that claims were paid (see table 4).1

 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

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. 

1

As of February 2004, 19 claims remain unsettled due to litigation, problem claims, and other 

reasons.

Dollars in millions

Year

Claims Cumulative Claims

Number of 

claims Amount

Number of 

claims Amount

2002

November 10,383 $ 65.3 10,383 $65.3

 December 16,531 140.9 26,914 206.2

2003

 January 11,815 110.5 38,729 316.7

 February 6,515 67.0 45,244 383.7

 March 2,032 20.2 47,276 403.9

 April 4,286 4.9 51,562 408.8

 May 468 4.2 52,030 413.0

 June 176 2.0 52,206 415.0

 Julya 172 (4.4) 52,378 410.6

 August 124 .2 52,502 410.8

 Septembera 44 (2.4) 52,546 408.4

 October 74 .2 52,620 408.6

 November 49 .8 52,669 409.4

 December 12 .5 52,681 409.9

Total 52,681 $409.9 52,681 $409.9
Appendix VI

RMA Paid Policyholders’ Claims after 

American Growers’ Failure

Page 38 GAO-04-517 Crop Insurance

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

-20

0

20

40

60

80

100

120

140

160

Nov-02 Jan-03 Mar-03 May-03 Jul-03 Sep-03 Nov-03 Jan-04 Mar-04

Claims

Reimbursement

Source: GAO analysis of RMA data.

Millions of dollars
Appendix VI

RMA Paid Policyholders’ Claims after 

American Growers’ Failure

Page 39 GAO-04-517 Crop Insurance

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. 
Page 40 GAO-04-517 Crop Insurance

Appendix VII

Rain and Hail’s Proposal to Purchase Selected 

Assets of American Growers ApendxiVI

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 
Appendix VII

Rain and Hail’s Proposal to Purchase 

Selected Assets of American Growers

Page 41 GAO-04-517 Crop Insurance

be challenged as arbitrary and capricious. As a result, RMA informed Rain 

and Hail that it could not grant the exemptions it requested.1

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. 

1

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.
Page 42 GAO-04-517 Crop Insurance

Appendix VIII

RMA’s Decision to Pay American Growers’ 

Agent Commissions ApendxiVI

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.1

 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, 

1

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. 
Appendix VIII

RMA’s Decision to Pay American Growers’ 

Agent Commissions

Page 43 GAO-04-517 Crop Insurance

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-bycase 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.2

2

A managing general agent is a company that acts on behalf of the insurance company in 

selling and servicing policies.
Page 44 GAO-04-517 Crop Insurance

Appendix IX

Comments from RMA ApendxiIX

Note: GAO comments 

supplementing those in 

the report text appear 

at the end of this 

appendix.
Appendix IX

Comments from RMA

Page 45 GAO-04-517 Crop Insurance

See comment 1.

See comment 2.

See comment 3.

See comment 4.
Appendix IX

Comments from RMA

Page 46 GAO-04-517 Crop Insurance
Appendix IX

Comments from RMA

Page 47 GAO-04-517 Crop Insurance
Appendix IX

Comments from RMA

Page 48 GAO-04-517 Crop Insurance

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.
Page 49 GAO-04-517 Crop Insurance

Appendix X

GAO Contacts and Staff Acknowledgments ApendxiX

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)
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