09/25/2015 3:11PM

First-year infertility insurance crucial for stallions

Barbara Livingston
Hall of Famer Cigar proved sterile at stud, resulting in a record insurance payout.

The pedigree, performance, and hype that follow a first-year stallion into the breeding shed mean little if he is unable to get mares in foal.

On average, roughly 4 1/2 to five out of every 100 potential new stallions are deemed infertile or subfertile in their debut seasons due to a natural defect.

To counter that risk, stallion owners often purchase first-year congenital infertility insurance, in which a claim can be filed if the stallion fails to impregnate at least 60 percent of the approved mares he covers in his first year at stud. If something is wrong with the horse, insurance can help recoup a major investment on a stallion that proves sterile, like Hall of Famer Cigar, or subfertile, like top European runner Al Kazeem.

A variety of factors go into assessing risk for first-year infertility insurance, but the most obvious method is the one nobody is allowed to test.

Prior to signing on a first-year infertility policy – an agreement that could result in a seven- or eight-figure settlement under certain conditions – stallion prospects cannot undergo a test breeding or have their semen tested for potency and overall viability.

On the surface, this appears to put insurance companies at a significant disadvantage, but Michael Levy of Muirfield Insurance said the coverage wouldn’t exist without that stipulation.

“If people could check it, then they wouldn’t necessarily want to buy insurance, and on the flip side, if the sample is evaluated and found to be deficient, we don’t want to give you insurance,” Levy said. “This is the industry that exists.

“It’s that unknown,” he continued. “It’s that chance of ‘the hurricane might not hit this year so let’s not insure the house.’ It may or may not. That’s really the premise of insurance – buying protection for your asset from the unknown.”

In lieu of testing the semen, Levy said the best gauge for fertility is measuring a stallion prospect’s testicles with an ultrasound machine to determine total volume. Simply put, the bigger the better.

Other factors that go into defining risk for underwriting purposes include the stallion’s medication history, physical appearance (strong, masculine-looking horses are favored), the reputation of the farm where he will stand, and his pedigree.

“The Northern Dancer sire line has had issues in the past, whether it be infertility or subfertility,” Levy said. “The Raise a Native sire line and the Bold Ruler sire line seem to be overly fertile, even when a lot of them are ridglings – in terms of Bold Ruler’s line through Seattle Slew and A.P. Indy. There’s some of that that goes into the underwriting of the risk.”

Cost for first-year infertility insurance is based on the stallion’s valuation, which is usually the syndication value or a multiplication of the proposed stud fee. Cost can vary due to the number of mares proposed to be bred, or a very high valuation. The range for fertility coverage is usually between 5 percent and 7 percent of the stallion’s value, but a variety of factors can alter the range.

For example, if a stallion is syndicated for $10 million with a 5.5 percent premium, first-year congenital infertility insurance would cost $550,000.

If the stallion is syndicated, it is then offered to each member to accept or decline. Share owners may purchase their own individual mortality insurance, but first-year infertility coverage must be purchased from the same source, as determined by the stallion manager.

“The extra expense of the insurance just becomes part of the cost of the stallion,” Levy said. “To know that that asset will, barring other incidents, be a usable asset to recoup your investment over the years, most people buy it.

“The one-time cost is expensive, but you are insuring your asset to be a source of revenue for the next 15 years.”

Levy said the minimum valuation for a stallion to be considered for first-year infertility insurance is typically $1 million, as a stallion worth less might not get the minimum required mares in his first season, especially in a regional market.

He also noted the important distinction between value at auction and stallion valuation. A yearling that hammers for seven figures does not automatically qualify for a million-dollar valuation at stud.

Stallions must cover a minimum of 20 qualified mares – mares under the age of 18 who are either being bred for the first time or have had foals in two of the past three years – and impregnate less than 60 percent to qualify for a claim under the industry standard. The insurance company then takes over ownership of the stallion, but settlements are often negotiated to return the horse’s paperwork to his owner to pension him, return him to training, or try him again at stud.

“If there’s a potential claim, the book really comes into scrutiny,” said Pope McLean Jr. of Crestwood Farm. “We’ve never cashed in on stallion infertility insurance, but lots of times if a horse is syndicated, it can be wise for shareholders to buy, because you could be left without anything.

“Every situation’s different. Some stallions are more closely held, so it’s up to them to decide what they’re doing. I think we just kind of approach each stallion differently and look at what it costs and what we think it’s worth.”

The poster boy for first-season infertility insurance was Cigar, who arrived at Ashford Stud in Versailles, Ky., for the 1997 breeding season with high expectations but defective sperm. He failed to impregnate any of the 34 mares he covered through mid-March of that year, often after repeated attempts, prompting owners Coolmore and Allen Paulsen to activate a record $25 million claim with Italian insurance underwriter Assicuazion Generali.

The insurance company took ownership of Cigar after the claim and moved him to the Paris, Ky., farm of stallion reproductive specialist Phil McCarthy after the season with hopes that rest and seclusion from the stressful public eye would salvage his fertility. He was observed daily for a year and a half, and his semen was analyzed by researchers in the U.S., Europe, and Australia before he was finally placed in the care of the Kentucky Horse Park to live as a pensioner.

Because congenital infertility insurance only covers stallions with natural defects, policies for accident, sickness, or disease are also popular, and relatively inexpensive. However, ASD claims are rarely made, as the kinds of issues that would make a stallion prospect permanently unable to breed are often life-threatening.

Had Kentucky Derby winner Barbaro survived his battle with laminitis and had ASD coverage, Levy said he would have likely qualified for a claim, as his condition probably would have rendered him permanently unable to cover mares.

When breeding rights are secured for a horse in training, the purchaser may opt for additional coverage to their standard first-year infertility policy called “Endorsement Option A,” which protects investors if a horse undergoes a career-ending incident and survives to go to stud the following year, but fails to breed the required 20 mares due to injury. Horses undergo the standard fertility risk analysis at the time of insurance and do not have to go through the process again when they retire.

“If something happens to that horse – he gets injured or sick, colics, arthrodesis surgery, or whatever – and he lives, but he can’t breed the minimum amount of mares in the following year, then they have a claim,” Levy said. “At that point in time, they have to make the decision whether they’re going to make the claim and give the horse to the insurance company, which they negotiate out. That’s a product that has been developed to take care of the risk of ‘what if?’

“We did a policy last year on a very good 2-year-old that was purchased by people that are going to stand him at stud and insured him with the ‘Option A,’ and cleared him for fertility when he retires. When you have this ‘Option A’ attached to a racehorse, they are prequalified for stallion infertility coverage even though they are still racing ... [and] eligible for fertility insurance no matter what happens.”