FLS has been in business since 1999, a period of 9 years. We have always had mortality insurance on all of our horses. As we have been monitoring the situation going forward into 2008 we are disbanding the practice of insuring horses for mortality.
Permit us to explain why.
There comes a point in time when one is throwing good money behind bad. Mortality insurance appears to be one of these instances. For what we pay collectively on insurance premiums, we could buy another horse each season. In our opinion, the expense versus the potential return is simply not worth it.
If a horse needed to be euthanized, most owner's simply write it off as one would do with any non-performing investment. Mortality insurance does not protect against career-ending injury or being non-competitive, but only against mortality.
And even then there are strict rules (with the insurance company) in that before any horse is ever put down it first must be approved by a State Veterinarian. Barbaro being kept alive for as long as he was, was probably a move orchestrated by the insurance company because of the large payout involved. And, if you are fortunate to own a horse of that value, then a business decision must be made concerning mortality insurance.
When FLS commenced buying babies several years ago we were divided about paying for mortality insurance. Our trainer thought it a waste of money because babies rarely, if ever, broke down. Not that it couldn't happen, because it could. And, although some of us tended to agree, we still decided to continue the practice of insuring our horses.
Well, last summer we noticed some startling changes within the equine insurance industry. It has always been that we would insure our horse(s) for the price we paid at auction. But later on, if it was necessary to enter a horse in the claiming ranks, whatever the claiming price it raced for (i.e., $50,000 claiming price), IF the horse were to break down in the race and was euthanized, despite what the horse was insured for, all we could ever collect was the claiming price. Hypothetically, if we purchased and insured a horse for $100,000, and he raced for a claiming tag of $50,000, all we could collect is $50,000.
And after the race, we would call the Insurance Agent and adjust the coverage to reflect the claiming price. Well, the premiums continued to go up and up over the years. At last check, a gelding insured for $50,000 or greater cost 5.4% annually; plus a 1.6% premium surcharge. Basically, insuring a horse for one year is the equivalent of one to two months of training expenses.
Well, one of these situations occurred whereas we notified our agent to lower the insurance coverage after the race. We expected a credit toward our next quarterly premium. Instead we received an invoice for a premium increase adjustment. It had to be a mistake or so I thought?
Upon calling our agent we were so informed that it was no mistake. The equine insurance industry unilaterally decided that horses racing for less than a claiming tag of $50,000 were statistically more likely to break down. Thus, they had now increased their rates from 5.4% to 7.2% plus the 1.6% premium surcharge. This represented an increase in premium of 33.3%. Therefore, by reducing coverage to the true amount, it actually increased the cost of insuring the horse.
In essence, it proved more cost effective to pay for coverage of $50,000, although we never could collect on it. In other words, mortality insurance is now pure madness as the premiums have spiraled continually upward.
Thus, we made the decision to drop the mortality insurance on all of our horses as of January 1, 2008.
Please realize that we take this situation very seriously. But, statistically, in nearly 30 years in the racing business we have never seen one of our horses in our barn break down in which he/she had to be euthanized.
At some point we needed to draw the line regardless of not having a safety net. The economics of this game are tough enough without making it any tougher. Although it is yours, the partner's money, paying this expense it is something we could no longer justify.
In the event that any FLS horse(s) ever does break down and needs to be euthanized we will simply write off the FMV of the investment on your K-1 at year-end.
Keep in mind, that if the horse doesn't need to be euthanized but had to be retired, we would never be able to collect on the insurance anyway.
Should you disagree with this management decision, you can always elect at your own expense, to purchase your own mortality insurance up to the amount of your investment.
In our humble opinion, the decision to discontinue the practice of paying annual premiums for mortality insurance is long overdue; regardless of whatever may happen tomorrow. We can no longer justify this expense to our partners. We do hope that you understand our logic.
