Crop Insurance: USDA Needs to Improve Oversight of Insurance	 
Companies and Develop a Policy to Address Any Future Insolvencies
(01-JUN-04, GAO-04-517).					 
                                                                 
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. 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-517 					        
    ACCNO:   A10244						        
  TITLE:     Crop Insurance: USDA Needs to Improve Oversight of       
Insurance Companies and Develop a Policy to Address Any Future	 
Insolvencies							 
     DATE:   06/01/2004 
  SUBJECT:   Insurance						 
	     Insurance companies				 
	     Insurance losses					 
	     Risk management					 
	     Insurance regulation				 
	     Regulatory agencies				 
	     Crop insurance					 
	     Policies and procedures				 

******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO Product.                                                 **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
******************************************************************
GAO-04-517

United States General Accounting Office

                     GAO 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

                                       a

GAO-04-517

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

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.

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.

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 [email protected].

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:

Appendix II:

Appendix III:

Appendix IV:

Appendix V:

Appendix VI:

Appendix VII:

Appendix VIII:

Appendix IX:

Appendix X:

Scope and Methodology 28

Penalties and Financial Losses Associated with Marketing
CRC Plus for Rice Reduced American Growers' Surplus 30

Agent Commissions and Other Expenses Created High
Operating Costs 32

Purchase of Competitor's Crop Insurance Business Created
Additional Expenses 34

American Growers' Surplus Was Inadequate to Cover
Expenses When Underwriting Gains Did Not Materialize 35

RMA Paid Policyholders' Claims after American Growers'
Failure 37

Rain and Hail's Proposal to Purchase Selected Assets of
American Growers 40

RMA's Decision to Pay American Growers' Agent
Commissions 42

Comments from RMA 44
GAO Comments 48

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

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

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

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.

A

United States General Accounting Office Washington, D.C. 20548

June 1, 2004

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

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

The Honorable Jerry Moran

Chairman, Subcommittee on General Farm Commodities and Risk Management
Committee on Agriculture House of Representatives

                        The Honorable Collin C. Peterson

Ranking Minority Member, Subcommittee on General Farm Commodities and Risk
Management Committee on Agriculture House of Representatives

Federal crop insurance is part of an overall safety net of federal
programs for American farmers.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

1Other 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.

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

2While 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.

3Surplus 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.

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

4RMA 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.

5NAIC 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.

generally accepted government auditing standards. Appendix I contains more
detailed information on our scope and methodology.

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

In 2002, when American Growers was experiencing financial difficulties,
RMA's oversight was inadequate to evaluate the overall financial condition
of the companies participating in the program. One of RMA's primary
responsibilities is to ensure a sound system of federal crop insurance, in
part, by monitoring insurance companies' compliance with provisions of the
federal crop insurance program. However, we found that although RMA
reviewed companies' operation plans and analyzed certain financial data,

oversight procedures were insufficient to assess the overall financial
health of a company. RMA oversight procedures focused on historical
financial information-from the prior 6 to 18 months-and whether a company
had the financial resources to pay claims on policies based on past
surplus, not on whether the company would be able to cover its operating
expenses in the upcoming year. In the case of American Growers, RMA was
unaware that the company was projecting profits on crop insurance policies
sold in excess of historic averages to pay for its operating expenses, or
that failure to achieve these profits could result in the financial
failure of the company. Additionally, RMA did not routinely share
information or otherwise coordinate with state regulators on the financial
condition of companies participating in the crop insurance program. NDOI
had identified financial and management weaknesses at American Growers and
had considered planning an on-site examination of the company to determine
the extent of those weaknesses; but NDOI was unable to disclose this
information because RMA had not signed an agreement that would allow NDOI
officials to share such confidential business information with RMA. Since
the failure of American Growers, RMA has taken steps to improve its
financial oversight of companies participating in the crop insurance
program. However, at the time of our review, RMA had not developed written
policies to formalize its oversight procedures. Additionally, RMA was
working with state regulators to increase RMA-state coordination and was
working with NAIC on draft language for confidentiality agreements that
would allow state regulatory agencies to share sensitive business
information with RMA.

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

agreements RMA is vulnerable to state insurance regulators' actions when a
company fails.

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

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

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

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

insurance companies, which would sell, service, and share in the risk of
federal crop insurance policies. In 1996, Congress created an independent
office called RMA to supervise FCIC operations and to administer and
oversee the federal crop insurance program.

Federal crop insurance offers farmers various types of insurance coverage
to protect against crop loss and revenue loss. Multiperil crop insurance
is designed to minimize risk against crop losses due to nature-such as
hail, drought, and insects-and to help protect farmers against loss of
production below a predetermined yield, which is calculated using the
farmer's actual production history. Buy-up insurance, the predominant form
of coverage, provides protection at different levels, ranging from 50 to
85 percent of production. Catastrophic insurance provides farmers with
protection against extreme crop losses. Revenue insurance, a newer crop
insurance product, provides protection against losses in revenue
associated with low crop market prices in addition to protecting against
crop loss. RMA, through FCIC, pays a portion of farmers' premiums for
multiperil and revenue insurance, and it pays the total premium for
catastrophic insurance. However, farmers still must pay an administrative
fee for catastrophic insurance.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

6Farmers with limited resources may have this fee waived. 77 U.S.C. 1501
(et seq.).

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

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

9U.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).

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.

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

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

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

Finally, the company relied on large underwriting gains to pay for its
expenses, rather than RMA's reimbursement. When these gains did not
materialize due to widespread drought in 2002, the company's surplus
dropped to a level that prompted NDOI to take control of the company. In
its 2002 operating budget, American Growers projected profits in excess of
its 10-year average and relied on these anticipated profits to cover the

company's operating expenses and to further its growth. The company's
profit projections were based, in part, on retaining a higher percentage
of the risk for the policies it sold than in past years. By retaining a
higher percentage of the risk on the policies, American Growers could
increase its profits if claims were low. Conversely, the company increased
its exposure to loss if claims were high. However, profits did not
materialize as the result of widespread drought, which caused overall
federal crop insurance program losses to increase from $3 billion in 2001
to $4 billion in 2002. When American Growers' expenses and losses dropped
the company's surplus below statutory minimums, NDOI declared the company
to be in a hazardous financial condition and took control of the
company-first placing the company under supervision in November 2002 and
then in rehabilitation in December 2002. Appendix V provides additional
details on the decline in American Growers' surplus.

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

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

RMA's Procedures Were In 2002, when American Growers failed, data provided
to RMA by the Inadequate to Evaluate companies participating in the
federal crop insurance program provided an Companies' Overall overall
picture of company operations and complied with RMA's

regulations. However, the information provided was typically 6 to
18Financial Condition months old; and, according to an RMA official, the
agency's oversight focused primarily on whether a company had financial
resources to pay

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

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.

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

Ratio requirement American Growers' ratio Ratio (percent) (percent)

                  Two-year overall operating ratio      < 100             122 
                                  Investment yield    4.5 to 10     
                                 Change in surplus    -10 to +50    
               Combined ratio after policyholders'                  
                                         dividends      < 115             145 
                        Two year change in surplus      > -10       
                                 Return on surplus       > -5       

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

companies had 7 or more failed ratios, 1 had 6-the same number as American
Growers, and 13 companies had 4 or fewer failed ratios.

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

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

Ratio requirement American Growers' ratio Ratio (percent) (percent)

Change in net writings -33 to +33

                Two-year overall operating ratio       <100               105 
                                Investment yield     4.5 to 10     
                    Liabilities to liquid assets       <105               117 
                                 Quick liquidity        >20        

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

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.

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 RMA did not routinely coordinate with state
regulators regarding the Oversight with State financial condition of
companies participating in the federal crop insurance Insurance Regulators
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.

because it lacked an agreement with state insurance regulators regarding
the sharing of confidential financial and examination records.

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

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

RMA's lack of an agreement for sharing information with NDOI prevented the
state from disclosing sensitive business information on American Growers.
NDOI officials identified financial and management weaknesses directly or
indirectly affecting American Growers during its periodic reviews as early
as 2000. Beginning in 2001, and continuing through August 2002, NDOI was
internally discussing the possibility of conducting a targeted examination
of Acceptance, including its subsidiary-American Growers. However, in
September 2002, due to other priorities and resource constraints, NDOI
decided to postpone an on-site examination of the company until 2003. RMA
called the state insurance regulator in May 2002, and again in September
2002, asking whether there were any special inquiries or actions pending
by the state regarding American Growers and

whether American Growers was listed on the state's list of companies at
risk. NDOI acknowledged to RMA that it had asked American Growers to
provide additional information regarding its first quarterly submission
for 2002; however, NDOI explained that this was not unusual because a
number of other companies also had outstanding inquiries. NDOI explained
that most of its information is considered public and could be furnished
to RMA if requested. However, NDOI's work products, including its list of
companies most at risk, company examination reports, and associated work
papers were considered confidential. As a result, NDOI required that a
confidentiality agreement be signed before they could share the
information. On September 20, 2002, NDOI began drafting a confidentiality
agreement so it could share information about American Growers with RMA.
However, this agreement was not completed before American Growers'
failure.

Since the failure of American Growers, RMA has begun working with NAIC on
draft language for confidentiality agreements that would allow state
regulatory agencies to share confidential business information with RMA.
However, at the conclusion of our review, no written confidentiality
agreements had been formalized.

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

RMA worked with NDOI to effectively manage the failure of American Growers
by ensuring that policyholder claims were paid and crop insurance coverage
was not disrupted. However, servicing the company's crop insurance
policies cost RMA more than $40 million for such things as paying agent
commissions and staff salaries. Further, RMA lacked a written policy that
clearly defined its relationship to state actions in handling company
insolvencies. While NDOI accommodated RMA's interests by not immediately
liquidating American Growers' assets so that policyholders could be
served, without a written agreement in place, other actions such as
liquidation could have limited RMA's flexibility to protect policyholders
and maintain stability in the federal crop insurance program.

RMA Effectively Protected RMA effectively protected American Growers'
policyholders after the American Growers' company's failure by ensuring
that farmers' claims were paid and that their Policyholders crop insurance
coverage was not disrupted. After NDOI obtained an order

of supervision, NDOI and RMA signed a memorandum of understanding that
specified that American Growers, under NDOI appointed management, would
pay claims and service policies with American Growers' funds. RMA

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

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

On December 18, 2002, RMA issued procedures for transferring existing
policies written under American Growers to other insurance providers
approved under the federal crop insurance program. Under these procedures,
American Growers was to notify its agents that all of its policies must be
placed with another insurance provider. The agents had the primary
responsibility to transfer the policies. By April 2003, RMA transferred or
assigned a total of 349,185 policies-all which were eligible-to other
companies in the federal crop insurance program reflecting about $576.4
million in premiums.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.

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.

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

                              Type of costs Amount

                     Payroll, payroll taxes, benefits $8.4

Agent commissions

Space leases including costs to break leases, rental, equipment
maintenance, and other

Severance

Premiums to reinsurers

Claims overpaymentsa

Health insurance

Otherb

                                  Total $40.5

Source: GAO analysis of RMA data.

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

bOther 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

company until all the policies had been serviced. If the state had
liquidated the company, it would have sold all the company's property and
assets, creditors may have initiated legal actions over the existing
assets (including premiums owed by policyholders), and there was the
possibility of a freeze on the payment of any claims. Furthermore,
liquidation would have left RMA with a number of crop policies to service,
with no way of servicing them.

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

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

Prior to American Growers' insolvency, RMA had not reached an agreement
with NDOI that addressed RMA's interests in the case of insolvency
including the state's financial responsibilities. RMA argues that while it
does not have a written policy to address insolvencies, it does have
flexibility to assess the situation when it occurs and use the most
efficient way to ensure that policyholders do not face a service
disruption. While the lack of a written policy and agreements may allow
greater flexibility, the

absence of specific framework may also result in state regulator decisions
detrimental to RMA and the federal crop insurance program. A policy
describing state and RMA authorities and responsibilities when a state
decides to act against an insolvent company would provide RMA some
assurance that the federal government's interests are protected.

Conclusions	The failure of American Growers, at the time, the largest
participant in the federal crop insurance program was caused by the
cumulative effect of company decisions over several years, and triggered
by a drought that forced the company to severely deplete its surplus to
cover operating expenses. Reviewing the causes underlying American
Growers' failure and RMA's actions provides a valuable opportunity to
identify shortcomings in the financial oversight of companies
participating in the federal crop insurance program and reforms necessary
to strengthen RMA's oversight and RMA's ability to respond to an insurance
provider insolvency.

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

RMA responded to the failure of American Growers in an effective manner
that ensured continued coverage for farmers and stability in the crop
insurance program. Further, RMA demonstrated that the federal crop

insurance program functioned as intended by ensuring that policyholders
were protected. However, the failure of American Growers highlights the
need for RMA to consider developing written policies to ensure that it
takes the most effective and efficient actions in the event of future
insolvencies in the federal crop insurance program. As demonstrated by the
failure of American Growers, RMA is vulnerable to state insurance
regulators' actions when a company fails. State regulators are vested with
the authority to determine what supervisory action to take in response to
the financial failure of an insurance company. While NDOI accommodated
RMA's interests by allowing RMA to fund the operation of the company long
enough to pay farmers' claims, other actions available to the state,
including liquidation, could have increased RMA's costs or limited RMA's
flexibility in protecting policyholders. Better coordination with state
regulators, regarding respective authorities and responsibilities in the
event of future insurance provider insolvencies, is necessary to ensure
that RMA's interests are protected.

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

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

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

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

Agency Comments and Our Evaluation

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

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

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

As arranged with your office, unless you publicly announce its contents
earlier, we plan no further distribution of the report until 30 days from
its issue date. At that time we will send copies of this report to
appropriate

congressional committees; the Secretary of Agriculture; the Director,
Office of Management and Budget; and other interested parties. In
addition, this report will be available at no charge on GAO's Web site at
http://www.gao.gov.

Lawrence J. Dyckman Director, Natural Resources and Environment

Appendix I

Scope and Methodology

At the request of the Chairman and Ranking Minority Member of the House
Committee on Agriculture and the Chairman and Ranking Minority member of
the House Subcommittee on General Farm Commodities and Risk Management, we
reviewed USDA's actions regarding American Growers Insurance Company
(American Growers) and their impact on the federal crop insurance program.
Specifically, we agreed to determine (1) what key factors led to the
failure of American Growers, (2) whether Risk Management Agency (RMA)
procedures were adequate for monitoring crop insurance companies'
financial condition, and (3) how effectively and efficientlyRMA handled
the dissolution of American Growers. In addition, we were asked to
determine what factors led to RMA determinations affecting a proposed sale
of American Growers' assets to Rain and Hail LLC (Rain and Hail) and RMA's
decision to guarantee that all American Growers' agent commissions be
paid. Information related to the Rain and Hail proposal is provided in
appendix VII. Information on USDA's decisions to guarantee agent
commissions is provided in appendix VIII.

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

Appendix I Scope and Methodology

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.

Appendix II

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

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

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

Finally, some farmers sued American Growers, while RMA and six states
examined American Growers' actions. The litigation by farmers and
regulatory actions resulted in more than $13 million in fines and
settlements levied against American Growers in addition to losses of $6
million. The fines, costs from litigation, and increased service costs
resulting from the new insurance product reduced American Growers'

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

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.

1Surplus 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.

Appendix III

Agent Commissions and Other Expenses Created High Operating Costs

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

1Not all agents receive the same commission rate.

Appendix III Agent Commissions and Other Expenses Created High Operating
Costs

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

2U.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).

3In 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.

Appendix IV

Purchase of Competitor's Crop Insurance Business Created Additional
Expenses

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

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

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

Appendix V

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

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

1As 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.

2On 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

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.

3The Insurers Supervision, Rehabilitation, Liquidation Act, Neb. Rev.
Stat. 44-4809(2)(a)(i).

4NDOI 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.

Appendix VI

RMA Paid Policyholders' Claims after American Growers' Failure

RMA worked in conjunction with NDOI and remaining American Growers' staff
to ensure that claims were paid (see table 4).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

                              Dollars in millions

Claims Cumulative Claims Number of

Number of claims Amount

                            Year 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 
      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.

aThe amount of claims shown for July 2003 and September 2003 are negative
claims due to adjustments.

1As of February 2004, 19 claims remain unsettled due to litigation,
problem claims, and other reasons.

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

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 Millions of dollars

160

140

120

100

80

60

40

20

0 Nov-02 Jan-03 Mar-03 May-03 Jul-03 Sep-03 Nov-03 Jan-04 Mar-04 -20

Claims Reimbursement

Source: GAO analysis of RMA data.

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

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.

Appendix VII

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

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

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

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

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

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.

1According 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.

Appendix VIII

RMA's Decision to Pay American Growers' Agent Commissions

After consultation with NDOI, RMA agreed to pay American Growers' agent
commissions in full, despite the fact that they were paid higher than
industry averages.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,

1After 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

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

2A managing general agent is a company that acts on behalf of the
insurance company in selling and servicing policies.

                                  Appendix IX

                               Comments from RMA

Note: GAO comments supplementing those in the report text appear at the
end of this appendix.

Appendix IX Comments from RMA

                                 See comment 1.

                                 See comment 2.

                                 See comment 3.

                                 See comment 4.

Appendix IX Comments from RMA Appendix IX Comments from RMA

                         Appendix IX Comments from RMA

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

GAO Comments 1.

2.

3.

4.

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.

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.

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.

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.

Appendix X

                     GAO Contacts and Staff Acknowledgments

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

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

GAO's Mission	The General Accounting Office, the audit, evaluation and
investigative arm of Congress, exists to support Congress in meeting its
constitutional responsibilities and to help improve the performance and
accountability of the federal government for the American people. GAO
examines the use of public funds; evaluates federal programs and policies;
and provides analyses, recommendations, and other assistance to help
Congress make informed oversight, policy, and funding decisions. GAO's
commitment to good government is reflected in its core values of
accountability, integrity, and reliability.

Obtaining Copies of GAO Reports and Testimony

The fastest and easiest way to obtain copies of GAO documents at no cost
is through the Internet. GAO's Web site (www.gao.gov) contains abstracts
and fulltext files of current reports and testimony and an expanding
archive of older products. The Web site features a search engine to help
you locate documents using key words and phrases. You can print these
documents in their entirety, including charts and other graphics.

Each day, GAO issues a list of newly released reports, testimony, and
correspondence. GAO posts this list, known as "Today's Reports," on its
Web site daily. The list contains links to the full-text document files.
To have GAO e-mail this list to you every afternoon, go to www.gao.gov and
select "Subscribe to e-mail alerts" under the "Order GAO Products"
heading.

Order by Mail or Phone	The first copy of each printed report is free.
Additional copies are $2 each. A check or money order should be made out
to the Superintendent of Documents. GAO also accepts VISA and Mastercard.
Orders for 100 or more copies mailed to a single address are discounted 25
percent. Orders should be sent to:

U.S. General Accounting Office 441 G Street NW, Room LM Washington, D.C.
20548

To order by Phone: 	Voice: (202) 512-6000 TDD: (202) 512-2537 Fax: (202)
512-6061

To Report Fraud, Contact:

Web site: www.gao.gov/fraudnet/fraudnet.htmWaste, and Abuse in E-mail:
[email protected] Federal Programs Automated answering system: (800)
424-5454 or (202) 512-7470

Public Affairs	Jeff Nelligan, Managing Director, [email protected] (202)
512-4800 U.S. General Accounting Office, 441 G Street NW, Room 7149
Washington, D.C. 20548

                               Presorted Standard
                              Postage & Fees Paid
                                      GAO
                                Permit No. GI00

United States
General Accounting Office
Washington, D.C. 20548-0001

Official Business
Penalty for Private Use $300

Address Service Requested
*** End of document. ***