By John Miller and Brenna Hughes Neghaiwi
ZURICH (Reuters) - Zurich Insurance Group AG (VX:ZURN) will pay up to $1.05 billion (£704.6 million) to buy a U.S. agricultural crop insurer from Wells Fargo & Co (N:WFC), the Swiss company said on Friday.
Zurich will buy Rural Community Insurance Services (RCIS) for $675 million, plus excess capital at the date of closing, an amount now estimated at up to $375 million.
Wells Fargo had previously launched an auction for RCIS, with about $2.1 billion in gross written premiums in 2014, after it piled up losses related to extreme weather in recent years, analysts said.
Zurich's purchase of the business deploys a share of the $3 billion in spare cash that the Swiss insurer has pledged to use for small-scale acquisitions and returns to investors. It had abandoned a more ambitious bid for Britain's RSA Insurance Group Plc (L:RSA) earlier this year.
"The acquisition of RCIS will increase risk diversity of our general insurance business by leveraging the crop exposure, which has low correlation to the rest of our book," General Insurance Chief Executive Kristof Terryn said.
RCIS insures one in six U.S. farmers, Zurich said, providing risk management for more than 130 crops on over 90 million acres, roughly nine times the land area of Switzerland.
While Zurich said buying the crop insurance business will help diversify its risks, analysts said the U.S.-based insurer has been saddled by losses linked to recent extreme weather.
"In the last four years, the profitability of the business being purchased had an average gross combined ratio of 102.2 percent and an average loss of $26 million," analysts from DZ Bank AG said in a note.
"The reason, at least in part, was unusually high crop damage caused by drought. This acquisition may make sense strategically, but given RCIS's recent results it is expensive."
A ratio over 100 percent means the insurer pays out more in claims than it reaps in premiums.
In addition to extreme weather including drought and flooding, low interest rates also contributed to making crop insurance businesses less attractive to banks.
Wells Fargo has been looking to unload the crop insurance unit since at least August, as regulatory restrictions on U.S. banks were also forcing some of them to reconsider underwriting insurance policies.
The deal is expected to close by the end of the first quarter of 2016, Zurich said.
Shares in Zurich Insurance were up 0.6 percent at 1330 GMT, outperforming a 0.1 percent lower European sector index (SXIP).