WASHINGTON (Bloomberg)—Wells Fargo & Co., ACE Ltd. and other companies that provide crop insurance to farmers will receive $6 billion less in federal funding over 10 years under a proposal by the U.S. Department of Agriculture.

Payments for administrative costs subsidized by the government would be capped at $1.3 billion next year with the limit rising to $1.37 billion in 2015, according to the final draft of the USDA's offer to companies. Insurers have 30 days to negotiate technical details before the plan is adopted, said Bill Murphy, head of the department's Risk Management Agency.

The plan, the result of negotiations that began in December, ensures “a fair and reasonable return” for companies while reducing profits the USDA considers excessive, Agriculture Secretary Tom Vilsack told reporters Thursday in Washington. “We have the framework for a stronger program.”

Farmers buy crop insurance as a backstop against natural disasters, and some decide what to plant based partly on the potential payouts. The proposed agreement specifies government reimbursement to insurers and how the USDA and private companies would share risk.

Industry returns

A USDA report in August found that the industry's average rate of return on equity was about 17% from 1989 through 2008, exceeding what the department deemed a “reasonable” rate by more than 4 percentage points.

The new Standard Reinsurance Agreement will lower average returns to about 14.5%, according to USDA calculations.

Insurers have recorded underwriting gains on their crop coverage all but one year since Midwest floods in 1993, even as prices and demand for most of the U.S. property and casualty industry have stagnated. U.S. commercial-insurance rates have dropped every quarter since 2004, according to industry data.

The profitability of crop insurance programs has been criticized by lawmakers including House Energy and Commerce Committee Chairman Henry Waxman, D-Calif., who has said the subsidies are “a waste.” The farm bill Congress passed in 2008 reduced payments and President Barack Obama, in his annual budget submission this year, proposed further cuts.

Rising payments

Annual payments to insurers rose from $1.8 billion in 2006 to an estimated $3.8 billion in 2009 as grain and oilseed prices climbed to records, according to USDA data. About $4 billion of the savings from the administrative-cost cap and limits on agent commissions will go toward reducing the federal budget deficit, and most of the rest will be channeled into USDA land- conservation programs, Mr. Vilsack said.

Using money previously set aside for farmers for general deficit reduction is disappointing, said David Graves, manager and secretary of the American Assn. of Crop Insurers, an industry group based in Washington. Mr. Graves would not comment on whether companies would accept the plan.

“We’re extremely concerned that agriculture spending is going to take a hit,” he said.

Mr. Vilsack said he expects companies to accept the proposal, in order to be eligible to offer government-supported policies for 2011 crops. Companies “were willing to accept that there needed to be changes” in response to concerns about excessive profits, he said.

Wells Fargo, based in San Francisco, and Zurich-based ACE are the largest U.S. crop insurers, each with about 16% market share, according to 2009 data from the National Assn. of Insurance Commissioners.

Nau Country Insurance Co., based in Ramsey, Minn., is ranked third, selling 11% of crop-insurance policies, and American Financial Group Inc., with headquarters in Cincinnati, is the fourth-largest with 9.1% market share.

&Copy;2010 Bloomberg News