Private crop insurers, a group led by Wells Fargo & Co. and Ace Ltd., may face losses that exceed $5 billion if this year’s U.S. drought is worse than one in 1988, Standard & Poor’s said.

Hot, dry weather across much of the Midwest has damaged crops, led to a rally in corn and soybean futures, and boosted insurance loss estimates. The U.S. subsidizes farmers’ premiums for so-called multiperil coverage, which protects against a loss of revenue or production as a result of drought, hail, wind, frost or other natural causes. Private insurers sell and administer the coverage in the U.S. In return, the federal government backstops the firms with payments and reinsurance.

“Insurers with higher concentrations of premiums in the most-affected states, such as Kansas, Illinois, Kentucky, Indiana, Missouri and Tennessee, will see a larger share of the losses,” S&P analysts led by Jason Porter said in a report.

Losses among crop insurers will vary depending on how much government and private reinsurance they use, S&P said. The companies can withstand the losses because of capital levels and revenue from other businesses, according to the ratings firm.

“Underwriting losses will be a drag on earnings, but by themselves, will not affect the capital of most insurers that we rate,” S&P said. “We do not expect to take any rating actions solely because of crop insurance losses.”

Mike Bares, a spokesman for San Francisco-based Wells Fargo, the largest bank on the U.S. West Coast, had no immediate comment. Ace’s Stephen Wasdick didn’t immediately respond to an e-mail seeking comment.

American Financial

American Financial Group Inc., which sells crop insurance along with property, casualty and supplemental health protection, last month reduced its earnings projection for the year, saying the drought will weigh on results. Evan Greenberg, chairman and chief executive officer of Ace, said in July that the dry conditions would affect second-half earnings, while Wells Fargo said that month that it’s too early to speculate on the drought’s effects on the bank.

Wells Fargo’s Rural Community Insurance Co. was the largest approved provider of crop insurance in 2011 with $1.79 billion in policy sales, according to National Association of Insurance Commissioners data compiled by S&P. Zurich-based Ace was No. 2 with $1.67 billion in sales, followed by QBE Insurance Group Ltd.’s NAU Country Insurance Co.

Soybeans climbed to an all-time high today, and corn reached a record $8.49 a bushel on Aug. 10 on the Chicago Board of Trade. The Department of Agriculture has slashed its corn harvest forecast by 27 percent since June, after declaring more than half of U.S. counties as disaster areas amid drought conditions that stretched from California to New York.