Protecting A Legend: Insurance Costs Behind A Triple Crown Winner

As American Pharoah rests in his stall at Churchill Downs, recovering from his Triple Crown victory, his connections will be mapping out the horse's next moves. Trainer Bob Baffert and owner Ahmed Zayat have already said the colt will continue to run this year, and the declaration has some wondering—how expensive is it to insure a newly-minted sports legend running at 35 miles per hour?

The short answer, according to Joe Brown Nicholson, owner of Nicholson Insurance Agency? Very.

Nicholson does not have first-hand knowledge of the coverage surrounding American Pharoah but insures numerous Thoroughbreds in Central Kentucky. Currently, Nicholson said, it's likely that Pharoah carries a mortality policy that would reimburse his owners in the event of his untimely death.

It is typical for a horse's valuation for insurance purposes to increase as the horse becomes more successful, and American Pharoah's win on Saturday certainly boosted his value. The challenge in trying to put a number on the horse's worth is of course, the last Triple Crown winner was 37 years ago, so there's no modern model from which to draw. Nicholson said his best educated guess was that the horse could be insured for between $20 million and $30 million.

“Fair market value for the horse would retail between $25 and $30 million,” agreed Michael Levy, president at Muirfield Insurance in Lexington, Ky. “The owners of the horse decide how much they would like to insure the horse for, and the insurance company either agrees or disagrees, but in most cases they agree.”

The premium on mortality insurance is a percentage of the horse's value. Typically, Levy said the premium for a racehorse is between four and five percent of the animal's total value for one year of coverage.

It is unlikely that an insurance company would voice an opinion in the management of the horse as far as when he should be retired.

“They roll with it, regardless,” said Nicholson. “The company is charging more of a rate for racing than a breeding animal, but they're not going to intervene with the management of the horse.”

Since Pharoah's greatest value will be as a breeding animal, it's also likely that his current mortality policy carries an endorsement insuring his breeding abilities against loss due to accident, illness, or disease. This endorsement is usually inexpensive, Levy said, as it is rarely claimed. In order to be claimed, the horse must suffer an accident, illness, or disease that renders him permanently unable to cover mares, but which he also survives. One example of this, Levy said, was probably Barbaro; it's likely that the damage to the 2006 Kentucky Derby winner's hind legs would have rendered him incapable of covering mares, but had he survived laminitis, such an endorsement would have been payable in his case.

When American Pharoah does retire, he will probably need a congenital first-season infertility policy for his first year at stud. This policy insures the horse's ability to cover mares and get a certain percentage of them (typically 60 percent) in foal during that first season. Such policies require that there be no prior testing of the horse's fertility, so everyone involved enters the deal with the same amount of information.

Valuation for the purposes of this policy is based on a formula – Nicholson uses the horse's stud fee, multiplied by the number of mares he's expected to cover, multiplied by either three or four. The three and four are intended to represent the first three or four years of the horse's stud career, since it's expected that he will maintain the same stud fee for the first three years of his career.

Levy multiplies the horse's stud fee by 300 to get a valuation for infertility insurance and said the premium for an infertility policy is about five to six percent. The responsibility for that premium, he said, probably falls on Coolmore as the owner of breeding rights to the horse.

It's still unknown what Pharoah's stud fee could be (and it likely depends in part upon his remaining race career), or how many mares he'd be likely to attract. If he draws a stud fee of $100,000, for example, and a book of 120 mares, his valuation could be between $30 million to $36 million, according to the two formulas.

After the first year, there's no need for fertility insurance, so the mortality policy will be the primary one on the horse.

For a large policy like American Pharoah's, Levy said several insurance companies will form syndicates to share the burden of the risk. Most companies have a cap that they are allowed to insure one horse for—around $2.5 million to $5 million—and must collaborate to come up with the total coverage requested by the owner. Lloyd's of London is the name most often thrown around in the media for outrageously-sized policies, Levy said, but technically the company is a banner over a group of dozens of syndicates.

It's important to remember that owners are not required to insure a horse for its entire fair market value, and sometimes it's best that they take a lower valuation to save themselves money in premiums. Insurance is based on each owner's financial needs and is meant to cover for what they cannot afford to lose. It may not make sense to pay a few million dollars on an enormous insurance policy.

Some larger farms avoid this problem by creating captive insurance, essentially a mini self-insurance group established by a large stud farm. The farm pays a set amount into an account each year and collects from that account if one of its horses can no longer breed, crossing its fingers that there is enough in the pot at any given time to cover whatever claim it may make.

One thing owners can't do is over-insure a horse with the hope of making a profit. The underwriter of an insurance policy keeps in close contact with the horse's managers through a breeding season to monitor his fertility rate and can reassess the horse's value from year to year as appropriate. In the event of any kind of medical disaster, insurance agents are the second phone call for a manager or trainer after the veterinarian, and agents remain up-to-date on the treatment program for the horse to verify that there is no foul play afoot.

With a value this high, a lot of people are sure to be monitoring American Pharoah's every move.

“Right now, the horse has done something that no other horse has done in 37 years, so he's at the apex of performance already,” said Nicholson. “If he wins the Classic, would he go up some more? Yeah, probably so. I think he's reached near the ceiling.”