Depth of Field – Feature April 2007
SIX MONTHS AFTER THE TRIPLE CROWN, THE BREEDERS CUP SHOWCASES THE WORLD’S BEST THOROUGHBRED RACEHORSES AND THE RISK OWNERS TAKE SIMPLY BECAUSE THEY CAN.
It’s 6 a.m. at Churchill Downs in Louisville, a day away from the 23rd Breeders’ Cup World Championship races, and the finest horses in the world are being saddled up and led out to the track for their last workout before thoroughbred racing’s most extraordinary day.
The familiar twin spires of Churchill Downs are not yet visible across the pitch-black oval track. There are no lights, sunrise is nearly an hour away, and it is bone-chilling cold. But there is an unmistakable air of excitement on the Backside, an area of the famous Kentucky racetrack not seen by your garden-variety racing buff. This is where the barns and stables that offer temporary lodging for the racehorses are located. For an event as prestigious as the Breeders’ Cup, hundreds of millions of dollars worth of thoroughbreds can be found in the equivalent of a few city blocks.
On this crisp October morning, the fence along the Backside track is lined with photographers and television camera crews hoping to catch a shot of past and future champions. As the horses move from their stables onto the track, the air is filled with the hiss of steam from their nostrils and the unmistakable thud and clomp of hooves on the firm dirt track.
Some take to the track immediately, walking or cantering, some heading left, some going right. Others stand quietly along the side of the track, watching closely, as if taking measure of their competition. Behind the fence, on elevated wooden viewing stands, owners, breeders, trainers and the merely curious lean against the railing, steaming cups of coffee in gloved hands, also watching closely and engaging in the sort of shorthand conversation reserved for those who know the rules and have played the game.
“The best horse I ever bought failed.”
“There’s nothing more dangerous than a 3-year-old filly in the fall.”
“Giacomo (the 50-1 winner of the 2005 Kentucky Derby). Now there’s a one-race wonder.”
Some observers are lucky enough to have a horse good enough to race in the Breeders’ Cup. Just getting there, one owner said, is a “once in a lifetime thing.” But even if they don’t have a horse in any of the Breeders’ Cup races, the true aficionados of thoroughbred racing come nonetheless. They have traveled, just as the horses do, from all corners of the globe because, for the attention paid to the Triple Crown of racing—which features the Kentucky Derby and Preakness next month and the Belmont Stakes in June—this is, hand’s down, the most important day of racing in the world.
THOROUGHBRED SUPER BOWL
The Breeders’ Cup was founded in the early 1980s by John Gaines, a Kentucky horseman, who thought horse racing needed a Super Bowl to bring all the best thoroughbreds together. John Milward, senior vice president of Wachovia Insurance Services in Lexington, Ky., who has been writing Breeders’ Cup insurance since 1982, said that back then, the Breeders’ Cup operated out of a small office at Gainesway Farm with only a single employee and a small D&O policy. Now the Breeders’ Cup is big business, and Milward is still writing its insurance, which involves multiple high-end policies for all the standard coverages, as well as event cancellation.
The Breeders’ Cup moves from track to track in the U.S. and Canada. This year, the race moves to Monmouth Park in Oceanport, N.J., and shifts from a one-day event to a two-day extravaganza. Each year the Breeders’ Cup features races of varying lengths on various surfaces for a maximum of 14 horses each—stallions, juveniles, mares and fillies. To be eligible, a horse needs not only to pay a hefty entry fee but also be sired by a Breeders’ Cup eligible stallion and have been registered upon its birth as a Breeders’ Cup eligible foal. Although “outsiders” who are not so registered can enter, the entry fee is prohibitive.
In 2006, 104 horses, including the best to compete in North America and 15 formidable European-trained stars, were entered in the Breeders’ Cup races. The highlight of the day was the $5 million Breeders’ Cup Classic, a thriller featuring two horses owned by the Dubai royal family, with Invasor outpacing Bernardini, last year’s Preakness winner and odds-on favorite, by a length.
“You see the best racing against the best,” said Robert Reeves, president of Underwriter Safety & Claims of Tennessee, who owns and breeds thoroughbreds for racing. “This is to me, as a horse person, much more enjoyable than the Derby. It is a multinational event.”
“It’s my favorite day of the year,” says Milward, “but it’s a tough day to pick winners.’
The days leading up to the Saturday Breeders’ Cup race are a whirl of social activity, especially in Louisville, one of the greatest horse-oriented venues and host of the Breeders’ Cup for a record six times. Long before the official opening party on Thursday night, owners, trainers, breeders and other racing buffs have booked the best hotel rooms, reserved tables at the finest restaurants and made arrangements to see and be seen at every trendy place around town.
On Thursday night, they sip a bevy of specialty vodka drinks offered by Grey Goose, an official Breeders’ Cup sponsor; nibble on piles of shrimp, crab cakes, roast beef and fried Mississippi River catfish; and are entertained by The Spinners in an ornate art deco theater. On Friday, they arrive in limos to consume more elaborate vodka drinks and succulent foods at a $500-a-person, black-tie, VIP dinner featuring Grammy winner Alison Krauss.
“You have massively wealthy owners,” said Charles Hamilton of London’s Hamilton & Partners, the premier broker in London for bloodstock insurance, which is the equivalent of life insurance for thoroughbred, standardbred, quarter horses and show horses. “At the Breeders’ Cup, the social side is as important as the racing side—being socially desirable, engaging in a public display of wealth.”
How expensive is it to have a racehorse? Well, aside from the purchase price, which can easily run into the millions of dollars, it can cost $3,000 a month to train in addition to expenses such as transportation, shoeing costs, veterinary expenses and special treatments such as vitamins, Lasix injections and the like.
“It’s not unusual for a well-cared-for horse in training for a year to cost $40,000 to $50,000,” said one Californian who is part of a syndicate that owns a racehorse. “If you run in claims races, the average purse is $18,000 to $20,000, and if you win, you get 60% of that, and 3% goes to the stable hands and 10% to the jockey and 10% to the trainer, so you’re lucky to break even.”
“It’s more expensive than having children and putting them through college,” his wife adds.
SO WHY DO IT?
“Buy a horse, and you’ll see,” he says.
There is clearly something special about racehorses, even for those who can only watch them in the stands or on television and never have a chance to own one. Witness the incredible outpouring of love and support for Barbaro, the brilliant 2006 Kentucky Derby winner who shattered his right hind leg at the Preakness and fought a valiant battle before succumbing to the injury and having to be put down in January.
Barbaro was heavily insured, and his owners were able to collect on that insurance after he was euthanized. But for nine months, they absorbed the cost of his medical treatment in an effort to save him. Perhaps it was only an ending possible in storybooks, but for a period of time, it seemed as if Barbaro might actually recover and be able to breed, which would have required his rear legs to be strong enough so he could rear up and mount a mare.
The fact that the owners of Barbaro tried for months to save the animal speaks a great deal about their love for the horse.
“If that horse was a normal horse on a normal day, he would have been destroyed at the racetrack. There is no way he would have lived because it was such a horrendous injury. The insurance company would have paid the claim and moved on,” says Alex Rankin, president of Sterling Thompson Co., who in addition to his insurance career also has a 280-acre farm outside Louisville where he breeds and sells thoroughbreds.
High-Stakes Addiction
After years of observing the thoroughbred racing scene around the world, Hamilton thinks that for the very wealthy, owning a racehorse is as addictive as cocaine or heroin.
“Owning horses is a drug to these rich people,” Hamilton explains. “It is like trying to hold mercury in the palm of their hands. You can spend $11 million on a horse not knowing whether it can run and it is all a huge gamble, but it is a very public gamble. So many businessmen who buy horses are rich because they have made a huge success of business where they were able to control events and control people. But they can’t control these horses. That’s why it is a drug. There is always the next one. If spending $60 million this year doesn’t do it, there is always next year.”
Hamilton, who has been in the bloodstock insurance business for 25 years, is not exaggerating when he talks about spending $60 million on would-be champions. That is exactly how much John Ferguson, bloodstock adviser for Sheik Mohammed bin Rashid al Maktoum, the ruler of Dubai, paid at the Keeneland fall yearling sale in Lexington for more than two dozen untested prospects, including one at the jaw-dropping price of $11.7 million.
Ferguson, a Brit who has worked for the Sheik for 10 years, also purchased the three other top-priced horses at Keeneland—for $9.2 million, $8.2 million and $5.7 million, respectively—and bought 12 of the 32 yearlings that sold for more than $1 million. All that for horses that are a year old, haven’t been saddled or broken yet and don’t have a clue what racing is all about.
“A lot of people love horses and love the excitement, but from a commercial standpoint, Sheik Mohammed is hoping that one of these colts will turn out to be a champion because, if he is a champion, he will turn out to be a very valuable stallion,” says Hamilton. “He will stand stud, and that is where the money is and that is why it is a drug. The quest is to end up with the next Storm Cat.”
Storm Cat is a 24-year-old stallion who will be remembered less for his track performance than his performance in the breeding shed. He commands a record $500,000 stud fee for each live foal he sires, and for the last several years he has covered (mated with) more than 100 mares a year. This is nothing short of astonishing considering that Storm Cat is roughly 94 years old in human terms.
“His racetrack performance was impressive enough to warrant him to stand at stud, but what has made him so valuable is the success that he has had at stud,” said Rick Waldman of Overbrook Farm near Lexington, who manages Storm Cat’s “book,” meaning his stud schedule.
“Success is defined as the racing success of his progeny and the subsequent breeding success of his progeny, ” Waldman explains. The most high-priced son of Storm Cat in stud is Giant’s Causeway, a great racehorse. Another son, Forestry, was one of Storm Cat’s fastest progeny. “The most impressive thing about Storm Cat is that 16 of his sons have sired Grade I or Group I winners,” he says. Grade I is the highest caliber race a horse can run in.
So if just one of Sheik Mohammed’s purchases turns out to be a champion and becomes a successful stud, commanding perhaps $500,000 a foal, the Sheikh could make his money back in a year. And that, rather than actual winnings at the track, is what thoroughbred racing is all about.
“Everybody has a dream,” said Waldman. “One of the dreams of owning a horse is winning the Kentucky Derby, winning other big races and being a champion. But for racehorse owners who see the big picture, the ultimate dream is to have a stallion the value of Storm Cat. He has done more financially than any horse would have ever done on the racetrack.”
“That’s the pot of gold at the end of the rainbow, Hamilton agrees.
Every thoroughbred racehorse can trace its bloodlines back to three Arabian stallions, and to be registered with the Jockey Club, a foal must be produced from a full mating, no artificial insemination allowed. Only horses registered with the Jockey Club can race in thoroughbred races around the world.
“One of the more important reasons for that is so we don’t flood the market with too much of the same blood,” Waldman says. “If you artificially inseminate, you could have hundreds of foals a year from the same stallion. If that happened over many years, it would make our breed too narrow.”
Insuring the Risk
Although thoroughbred racing is a multimillion-dollar business, with most thoroughbred stallions in Kentucky valued at between $5 million and $40 million, only a fraction of them are insured for mortality. Although medical insurance for horses is available, it is more commonly purchased by owners of show horses and jumpers and really hasn’t caught on for thoroughbred racers.
What bloodstock insurance is written is primarily written in London, which has about 75% of the market, and most ends up at Lloyd’s.
Hamilton says London dominates bloodstock insurance “because it is such a high-risk business.”
“Horses don’t live for very long—the average age of a horse is between 20 and 25—and therefore it is a certainty at some point that the policy is going to pay,” he says. “Lloyd’s has based its reputation for centuries on underwriting risks that are not attractive to other people.”
Another reason London and Lloyd’s dominate the business is that the premium pool, by most standards, is not huge.
“A lot of horses are not insured, so the market is only 100 million sterling, $200 million total, and that isn’t really a large enough pool to get international insurers really interested,” Hamilton says.
Mortality insurance is expensive, with annual premiums running roughly between 2 .5% and 6% of the value of the animal.
“It’s expensive, but if something happens and you find your horse dead in the morning, it’s well worth it,” says Dan Hayden, the manager of Sugar Maple Farm in Hudson Valley, N.Y.
It is less the cost of the premiums than the wealth of the owners that explains why so few buy mortality insurance, Hamilton says.
“You don’t have to own a horse to have a perfectly satisfactory life, so it is a luxury item,” he says. “If you can afford to buy it, you can afford to lose it.”
Dead or Alive
DON’T OVER-INSURE OR THAT HORSE YOU COVERED MIGHT END UP DEAD.
When it comes to bloodstock insurance, there is a substantial human factor involved—the “moral hazard,” as Charles Hamilton of Hamilton & Partners, London’s leading bloodstock writer, explains.
“It is often said you are insuring the owner of the horse rather than the horse itself,” he says. “If you have an owner who has a bit of paper that says dead the horse is worth $100,000 but he knows perfectly well it is useless and never going to win a race, if that horse falls ill, you might not struggle as hard as you would otherwise to help it get better. You might delay calling the vet because the horse dead is worth more than the horse alive.”
As a result, it is “critical for insurers to not over-insure horses because that increases the moral hazard. The insured value of the horse must not exceed its market value.”
To help place a proper value on a horse means gathering a great deal of information.
“People analyze the bloodstock scene, sales results, data from prize money and other race data, so a fairly reasonable stab can be made to giving a horse an accurate market value,”
Hamilton explains.
Perhaps the greatest mortality insurance scandal involved the death of Alydar, the runner-up to Affirmed in all three Triple Crown races in 1978. When Alydar was retired and put out to stud, he was bringing in nearly $1 million a week in fees initially.
But by 1990, Alydar’s stud fees were not generating that much revenue. One night, he sustained a terrible leg injury that coincided with the call of a $15 million bank loan taken out by the president of Calumet Farms, J. T. Lundy. Although Alydar was treated, complications developed, and eventually, the horse had to be put down.
Lundy collected $36 million in death benefits on the horse, which allowed him to pay off his creditors, but it was only a temporary fix. Calumet Farms subsequently went bankrupt, and Lundy ended up being convicted of fraud and bribery related to the Texas savings and loan scandal and the demise of the famed Kentucky farm.
Although it was never proven that Lundy sacrificed Alydar for insurance money, that was the strong suspicion in the industry and among federal prosecutors in Houston who convened a grand jury to investigate it. However, no one was ever indicted.
“The bloodstock industry revolves around gossip,” says Hamilton, “therefore you tend to hear things on the grapevine. Some trainers have bad reputations, some owners have bad reputations. You normally would only get away with it once, then you would find it difficult to get insurance.”
“There’s no official way of stopping fraud,” he says, “but if you are heavily involved in the business, you’ve got a nose for it.”
A VERY SHEIK SPORT
Arab sheiks are making their mark in the sport.
Thoroughbred racing once was known as the Sport of Kings but these days, the Sport of Sheiks might seem a more accurate description.
Sheik Mohammed bin Rashid al Maktoum, the ruler of Dubai, an oil-rich desert kingdom on the Persian Gulf, is an avid horseman. He and members of his family have built an extensive racing and breeding operation around the world, and for many years their horses have dominated the European racing scene.
So far, the race that has eluded him is the Kentucky Derby, and Sheik Mohammed is determined to change that. After years of buying and breeding horses best suited for Europe’s grass tracks, the Sheik, his brother and his son have switched strategies and are now buying horses whose bloodlines best suit them for racing on American dirt.
At the Breeders’ Cup, Sheik Mohammed’s Bernardini, the winner of six races in a row including the 2006 Preakness, was the heavy favorite in the Classic but finished second by a length to Invasor, owned by his brother, Sheik Hamdan. In all, the Maktoums sent out eight horses, all considered contenders, in different races. Racing buffs said the Maktoum horses were as impressive a collection as any owner had ever taken to the Breeders’ Cup.
The Maktoum family has a number of farms in central Kentucky, and for the last few years, they have been spending millions of dollars on American horses at venues such as the fall yearling sale at Keeneland. They move those horses back and forth between Dubai, England and America as they target the world’s best races.
But they also have been buying up promising youngsters that others have developed, a trend not appreciated by some racing veterans, including The Washington Post’s storied racing commentator, Andrew Beyer.
“None of these purchases required special insight or judgment—just the willingness to pay an outlandish price,” wrote Beyer in a column prior to last year’s Breeders’ Cup. “Buying up all the competition is not exactly sport as most people define it.”
Acknowledging that his criticism could “smack of xenophobia,” Beyer says he nonetheless believes that if the sheiks dominate U.S. racing, they will “harm the sport in an important, if intangible way” by taking away the human stories that surround the Triple Crown races.
John Milward, senior vice president of Wachovia Insurance Services in Lexington, who writes the insurance for Sheik Hamdan’s Shadwell Stable among other leading Kentucky racing and breeding operations, disagrees.
“They’ve been trying to win the Derby for a long time. It’s not like they’re new to the game. I’ve insured the Arab farms for many years, and they are tremendous corporate citizens in central Kentucky,” Milward says. “They are extremely loyal and a great employer. They have done a great deal for the thoroughbred industry here.”
Milward also dismisses out of hand Beyer’s concerns that the Maktoum influence will strip racing of its human side.
“You still have the $17,000 Seattle Slews that win the Triple Crown,” he says. “That’s the wonderful thing about the thoroughbred business. There is not a 2-year-old owner in the country that doesn’t have a glimmer of hope of winning the Kentucky Derby.”
Equine Insurance Options
LOTS OF COVERAGES EXIST, BUT MEDICAL HAS YET TO CATCH ON.
Although bloodstock, or mortality, insurance is placed on a relatively small number of thoroughbred racehorses, there are a number of other insurance products that are widely purchased by individuals involved in training, breeding and racing.
Alex Rankin, president of Sterling Thompson Co. of Louisville, who also is a major horse breeder, says a breeding farm needs all the standard property exposures for its buildings and equipment, as well as general liability and auto coverage for cars, trailers and farm vehicles.
“There is a fairly significant exposure with the running of a farm and the handling of horses because horses, especially thoroughbreds, are what they are. There is an old saying that a horse is an animal that goes through life trying to self-destruct. What humans do is try to keep that from happening,” Rankin says.
Coverage of this sort would apply if a horse should kick or bite someone or if the animal should break loose and run onto a road and get hit by a car.
Horse breeding operations also need coverage for horse legal liability coverage, which is called in the equine industry “care, custody and control” coverage.
“If you board horses, you have the obligation for their care. If you are negligent, their owners will come after you for the value of the horse,” he says.
This coverage would cover anything from a fire that destroys a barn to a farmhand who leaves a gate open by mistake.
For example, Dan Hayden, the manager of Sugar Maple Farm in Hudson Valley, N.Y., says his farm lost a stallion earlier this year when one horse got loose, ran to a fence and began fighting with another stallion. The two stallions were fighting and galloping away, and one ran into a fence and was killed.
“The owners of the stallion claimed against our insurance and got paid,” says Hayden.
In addition, there is the issue of employee exposure, essentially workers compensation coverage. In Kentucky, agriculture operations or farms are not required to carry workers comp, Rankin says, “but we encourage most of our clients to carry private workers compensation for their employees.”
Racetracks and events such as the Breeders’ Cup also need a full range of coverage, including coverage for trainers and injured jockeys and care and custody insurance. For example, Keeneland has care and custody insurance that covers only the short time that horses are boarded there in advance of the fall sales, as well as the time the horse is in the auction ring.
Horse owners can also insure their stallions for fertility in case they are not able to successfully stand stud. Major medical coverage, although available, has yet to catch on for thoroughbred racehorses but is frequently placed on show horses and jumpers. Although insurance is expensive, especially as a horse ages, major medical claims are relatively common for jumpers and medical coverage can run into thousands of dollars.