QBE set to benefit from US crop insurance business

The Australian Financial Review (AFR) has provided an interesting insight into the political fight between President Obama and the US Congress and its potential to wipe millions in annual premiums from QBE Insurance’s (ASX: QBE) crop insurance business. Crop insurance covers a wide range of risks that can affect farmers such as drought, flood, fire, disease, wildlife and earthquakes.

QBE, which purchased NAU Country Insurance in 2010, is the second largest crop insurer in the USA writing 107,000 insurance policies valued at US$1.5 billion per annum. With over 90% of the value of these premiums being government-sponsored multi-peril crop insurance, QBE’s crop insurance business is highly dependent on government policy.

With the US government subsidy worth around $9 billion a year it’s been in the cross-hairs of the President, who is desperate to find savings. According to the report in the AFR, the founder of NAU has played an instrumental role in successfully lobbying Congress to reject President Obama’s attempts to reign in the costs associated with US government subsidy of crop insurance.

It’s a pleasing outcome for QBE shareholders given that NAU has thus far proved to be an expensive purchase due to severe adverse weather conditions in the past few years. A continuation of government subsidies coupled with more benign weather should allow QBE to reap the rewards from the NAU purchase going forward. It’s also a reminder that investors need to be aware of just how reliant insurers and financial service providers can be on government policies.

Like the US crop insurance business, domestic health insurers such as listed player NIB Holdings (ASX: NHF) are also reliant of government co-funding of health benefits and at the mercy of changes in government regulation and policy surrounding Medicare, the PBS and private health subsidies.

Likewise, financial planning businesses such as those owned by AMP (ASX: AMP) and IOOF (ASX: IFL) have had to restructure their business models in response to government-mandated changes which put an end to the old structure of trailing commissions and forced a shift to upfront fee-for-service payments.

Foolish takeaway

Investing requires a balancing of risk and reward with the ideal investments being those that carry a low risk but a high reward. While some industries are more prone to government regulation and interference than others; investors must weigh up regulatory risks when considering any investment.

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Motley Fool contributor Tim McArthur owns shares in QBE Insurance and NIB Holdings.

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