Best Drops Amwest Group Rating to ‘B’

On Aug. 28, 2000, the financial strength rating of Amwest Group was downgraded from “A-” (Excellent) to “B” (Fair) by A.M. Best Co. The downgrade, applicable to Amwest Surety Insurance Company and its wholly owned subsidiary, Far West Insurance Group, followed the release of the group’s worse-than-anticipated underwriting results as revealed in the release of its second-quarter 2000 results.

Amwest Group’s parent is the publicly-traded insurance holding company, Calabasas, Calif.-based Amwest Insurance Group Inc., primarily an underwriter of surety bonds which also writes property/casualty insurance through Amwest Surety Insurance Co., Condor Insurance Co. (Condor) and Far West Insurance Co.

Neil Pont, executive vice president for Amwest Insurance Group Inc., said that in order for Amwest to continue to compete in the marketplace as it has in the past, there must be a reduction in underwriting leverage.

“The way to do that of course is to have a capital infusion,” Pont said. “What we’re seeking to do is to look to the marketplace, either through an investor or through a strategic partner, to provide that capital to allow us to continue with the business plan that we have in place.”

In the consolidated statements of operations for Amwest Insurance Group Inc. and subsidiaries for the second-quarter 2000, a net loss of $11,992,000, or $2.77 per share was reported. For the same period a year earlier, the company had reported a net income of $1,740,000, or $0.40 per share. For the six months ended June 30, 2000, the company reported a net loss of $11,189,000, compared to a net income of $4,105,000 reported for the corresponding 1999 period.

Second-quarter 2000 operating results, excluding net realized investment gains and special charges, likewise took a slide, with a loss of $11,831,000 compared with operating income of $1,093,000 for the second quarter of 1999. Also for the quarter ended June 30, 2000, premiums written increased to $43,275,000 from $36,042,000 for the same period in 1999.

With regard to the second-quarter report, Pont said the dramatic increase in losses was primarily due to a geographical area in the country—Texas.

“We have pretty significant steps to close the underwriting loop which allowed those losses to occur,” Pont said. “In surety, one doesn’t necessarily realize the loss until well after the account has been written…We anticipated, due to our review of underwriting practices in Texas quite some time ago, that we needed to make some changes.”

Pont added that on a going-forward basis, certain underwriting initiatives already implemented by Amwest would allow for a normalization of the loss ratio.

“That’s the auditing [and] the levels of authority which we extend to our field underwriters,” Pont said. “We have reviewed all of the component pieces which go into field underwriting and have heightened the underwriting process.”

Best took a separate rating action on Condor Insurance Company (Condor), also a part of Amwest Insurance Group Inc., which was downgraded from “B” to “D” (Poor).

Condor is domiciled in Nebraska and is licensed in that state as well in Arizona and California. It also operates in Oregon on a surplus lines or non-admitted basis. An A.M. Best company profile notes that Condor’s main product offering is a commercial package policy for members of The Safety Association, a group comprised of approximately 2,000 specialized local trucking operators.

Because the preponderance of the business that Amwest writes is in the surety arena, Pont downplayed the impact the Condor downgrade would make on overall group results.

But what effect could a downgrade by A.M. Best from “A” to “B” have on a bonding company? There is a general perception that it could have a significant impact on that company’s ability to continue transacting business at previous levels or to solicit new accounts.

“It depends on the amount of business that is written to the principal and eventually to the obligee,” Pont said. “Some obligees require a rated paper. Some do not. In the case of Amwest, we have a mix. A fairly large percentage of the business that we write at Amwest really is not dependent upon a rated paper…[However,] it’s important to us that the company be returned to an ‘A’ rated status as soon as possible, and that’s what we’re working toward.”

Topics Profit Loss Underwriting