In Horse Racing, Kentucky Derby Is Just the Beginning

Bloodstock Coverage

At last month’s Kentucky Derby, 18 horses competed for a $2 million guaranteed purse, with an estimated $50 million in wagers being placed. But those values are dwarfed by the amount of insurance out on the track.

To put it into perspective, Ken Rice, Underwriting Director at Atain Insurance Companies, approximates the insured value. “Assuming a conservative earning potential for each horse of $10 million per year and extrapolating those earnings out for 10 years with an at-value insurance policy,”  Rice says, “you’re looking at about $1.8 billion of insurance value represented at the Derby.”

With so much money on the line the stakes are high in the niche bloodstock insurance market.

A Lifecycle of Revenue

While $1 million per year in a racehorse’s earnings on the track is impressive, this amount is often minimal when compared to their lifetime revenue potential from stud fees, or the earnings received from breeding.

In the stud market, pedigree is king. Horses with genetics in the highest demand, can earn more than $250,000 per stud, and generate up to 200 studs a year.

Rice recalls one Atain-insured horse whose lineage extends directly back to Secretariat, the American Thoroughbred racehorse that won the U.S. Triple Crown in 1973. The horse earned about $500,000 during a relatively mediocre, three-year racing career. Due to his genetics, his owners quickly shifted him to the stud market, where he likely generated tens of millions of dollars annually, with the potential to maintain that income for decades.

“Some of these horses can live into their thirties,” Rice says. “Their race productivity might change, but their genes won’t.”

Pets vs. Profits

Bloodstock is a highly lucrative market, and insurance policies are built to provide for income losses in the absence of the horse. When writing a bloodstock insurance policy, “it’s very important to insure for value,” according to Manny Manuelidis, Associate Vice President, Claims and Litigation, Atain.  Policies can project for multiple years whether the horse is being bred, is a family pet, works in horse-drawn carriages or the circus.

In the stud market, pedigree is king. Horses with genetics in the highest demand, can earn more than $250,000 per stud, and generate up to 200 studs a year.

Insurance premiums can range from 2.5 to 6.5 percent of the horse’s value, says Manuelidis, depending on factors like breed, usage and age of the animal.

So, how do you calculate the value of a horse?

It is all determined by what the marketplace will support. For a family horse, the math is relatively straightforward. While an equestrian pet will likely have tremendous sentimental value for the family, its market value, like that of a car or property, will essentially equal the cost of replacing it with a comparable horse.

For a race horse however, earning potential is an important factor.

“An owner might purchase a three-year-old horse for market value before it has had success in racing,” says Rice. “But in a few years, that horse may be earning $5 to $10 million a year through breeding.”

There is no better example than American Pharaoh, the 2015 Kentucky Derby and Preakness Stakes winner that is also favored to win next month’s Belmont Stakes.  A victory would mean the Triple Crown, an illustrious achievement not captured by any horse since 1978.

Despite the success of American Pharaoh on the track, his owners have already sold the breeding rights and it is expected that the Belmont will be his racing finale.

“The horse will have mares waiting and the owner is going to start with the highest bidder,” Rice says.

It therefore comes as no surprise that whether it is based on performance or genetics, a race horse’s reputation is often worth more in retirement.