insurance premiums on a 16 million dollar race horse

[bcassidy]

OK, I think there is an interesting question here because the reason we see so many young horses going to the breeding shed so early is because the insurance premiums make it prohibative to race them once they have established their value as a potential stud. How will Coolmore handle this? What are the premiums likely to be for this one? Do they go pedal to the metal and try to get a grade 1 win as a two year old and hopefully a BC juvenile win and then retire him to stud next year or do they go slow and then race him as a 3 yr old hoping to win the KD and some of the other classics and then retire him. I can't imagine this one racing long under any circumstances. They have to make his few starts very productive and get him into the breeding shed early. What do others think?

[Intrinsic Worth]

He's a Forestry and will be injured before he races. That's the scenerio I expect.

However, they will have to manage his career very carefully if he actually does make it to the races. If he gets some nice graded wins this year, they can retire him from some fake injury and send him to stud. If he doesn't get a graded win this year, they will most defnintely have to continue with him next year. I just hope people don't breed to this horse because he sold for 16M. His sire hasn't even proved himself yet and is definitely one of the worst (he and FuPeg are neck and neck) 100M stallion standing this year.

[bcassidy]

Intrinsic Worth--you make some good points but what about the insurance question I asked. Care to take a shot at it again?

[Intrinsic Worth]

I'm not an insurance agent, I don't know what the premiums of a 16M horse would be.

All the horse needs is one graded win to retire, that's it. Look at Footstepsinthesand, the "undefeated wonder" who only made 3 starts and is now retired.

You can presume that high premiums will keep this horse from having any real racing career beyond one or two graded wins.

Along with him needing a graded win, Forestry is going to have to do better than 64th on the general sire list this year to warrant an outrageous stud fee for his son.

[Lei Owen]

Intrinsic Worth--you make some good points but what about the insurance question I asked. Care to take a shot at it again?

Don't have a clue how the thoroughbred industry is, but I can tell you what it would cost to insure a quarterhorse with our insurance company. 3.5% of purchase price. Homegrown's, 3 times the stud fee. Broodmares, 2.8% purchase price. Yearly. This is mortality. A rider can be added for medical and major medical. The insurance can be increased only with training and winning's.

Using these figures, that 16M colt would cost $560,000 to insure. And it's not even tax deductiable. I tried, with the arguement that it's part of the up-keep. Accountant wouldn't buy it.

[FOS]

hi bcassidy

As you might imagine...a lot can come into play when determining/setting a rate...but in general one might expect to pay (on a non-deductible policy) 4.5% to 6% of the gross insured value (for a horse in race training). Certainly there is much to take into account.

I would expect that Coolmore has one or more HUGE policies in place at all times. Who knows, Magnier and/or an associate and/or Coolmore entity might be a player in the insurance underwriting game also.

Getting down to the nitty gritty I would expect in the case of a VERY BIG player...as is Coolmore/Magnier et al...that a premium in the vicinity of 4% (more or less) of the gross insured value (on a non-deductible basis) would be a reasonable approximation of what they might expect to pay re: a racehorse. In some cases there can be incentives (in the form of premium credits and/or percentage refunds) that an insured might be eligible for in the event there are No Claims (or whatever the insured and insuror might agree upon in advance of the policy being issued) within the policy period.

If the colt's on a deductible policy the rate can and will drop dramatically...depending on the deductible percentage/amount connected to the policy...and the magnitude of the policy and claims history of the insured.

Respectfully

[bcassidy]

Lei Owen--I assume broodmare mortality insurance is significantly less than a policy on a racing 2 yr old. Yes/no?
FOS--great input and I would think you are exactly right, they probably have a blanket policy for all of their holdings. It certainly wouldn't surprise me to find out they underwrite their own insurance. As long as they are not using any commercial paper for the purchases they might be much better off if they didn't take any insurance policies at all.
I believe there are two rules of thumb in insurance. First, only insure for the loss you can't afford to handle on your own and second, whatever you decide to do--- be consistent. As an example of both, some large and wealthy companies underwrite their own health coverage and probably have a catastrophic policy on top of their own in the event of a large natural disaster like an earthquake, etc. An example of the second would be if you take mortality insurance on one horse with a value of let's say 1,000,000 dollars then every horse you own with that value should also be insured.
If the insurance premiums are only 4-6% of value, why do so many colts retire so early (with their owners claiming the cost of insurance is prohibitive) is it because their value can be significantly higher than 16 million? Smarty Jones was purportedly valued at 39M; Afleet Alex must have been valued at 20M plus. Any thoughts on this? My best to all.

[Morningside]

when you have a diversified portfolio, you don't need to get insurance. essentially, you're insuring yourself. however, when you have one asset that is significantly more valuable than the rest of the portfolio, then one should consider getting insurance on the difference. my guess is that they probably won't insure him, but if they do they might insure him for 8M or something like that....
insurance premiums on racing stock is usually 6%

[HR LLC]

Morninside,
Could you answer this question for me. How would the seller avoid the capital gains hit from turning a 425k assest into a 16 million asset in less than a year. I assume they could use LKE(like kind exchange) to purchase more horses or they could offset some of the gains from previous year losses, etc.

What would be the best strategy to avoid the 39.6% capital gain tax??

[FOS]

hi bcassidy

We've touched on mortality premiums/coverages...but nothing re: breeding and/or related risks coverages and premiums.

There is plenty to consider (not the least of which is Infertility...and Stallion Availability etc)...and the premiums for a complete package can be in the 10% vicinity.
Respectfully

[Morningside]

hr llc, the 15.5M of short term capital gains will be taxed as ordinary income, and I don't think they can avoid getting hit with the taxes.

what would be the best strategy? - buy weanlings to sell as 2YOs, if the new Equine Equity law passes (holding period would go from 24 mos to 12 mos).

[Lei Owen]

Bcassidy... Yes.

[roving boy]

Another aspect of insurance on a top value horse (i.e. Smarty Jones) is capacity. Smarty Jones could not be insured to full value when still racing because there was not enough market capacity.

Coolmore self-insures with a very few exceptions.

[bcassidy]

thanks to all, One day, it would be nice to have to figure this stuff out with some good professionals---I hope we all get that challenge one day. That's what keeps us all going in the lean times---right!

[FOS]

hi roving boy

Coolmore self-insures with a very few exceptions.

Respectfully...could you please be more specific as to how "Coolmore self-insures" (your words)?

Could you also share how Coolmore determines the "very few exceptions"?

Thanks for sharing your insights.

Best to you.

Respectfully