Amwest Surety Placed Under Order of Supervision

By | May 21, 2001

Calabasas, Calif.-based Amwest Insurance Group Inc. recently announced that its subsidiary, Amwest Surety Insurance Company (Amwest Surety), had agreed to be placed under an Administrative Order of Supervision by the Director of Insurance for Nebraska, the state where Amwest Surety is domiciled.

“What we have been trying to do is get some reinsurance that would remove some of our exposure,” said Charles Schultz, chairman of the board and CEO for Amwest Insurance Group. “The inability to complete the reinsurance transactions that we were hoping to get would obviously be a major factor in the Nebraska DOI’s decision to put [Amwest Surety] into supervision.”

The publicly-traded insurance holding company, Amwest Insurance Group, is primarily an underwriter of surety bonds through Amwest Surety and Far West Insurance Co. (collectively referred to as the Amwest Group).

According to a release from the Nebraska Department of Insurance, the Order of Supervision was submitted by Director L. Tim Wagner on May 8, 2001. David Krumm, chief financial examiner of the Nebraska DOI, was appointed supervisor.

Schultz stated that Amwest Surety had experienced substantial underwriting losses on surety business written in 1998, 1999 and 2000. “Losses occurred in various parts of the country in various types of surety bonds,” he said.

“Specifically why the Nebraska department came in is the fact that Amwest could not fully execute their reinsurance program with Swiss Re,” said Brian McArdle, financial analyst for A.M. Best, which downgraded its “C-” (Weak) financial strength rating (FSR) on Amwest Surety to “E” (Under Regulatory Supervision) subsequent to the Nebraska Order. Standard & Poor’s also revised its “CCCpi” FSR on Amwest Surety to “R” after the Nebraska Order.

“[The Nebraska department] has not replaced the management at this point,” Schultz said. “The existing management and staff continue to operate as they had done before, subject to the supervision of the department—and subject to an extensive list of things which the company cannot do with respect to its operations without the approval of the department.

“In the case of [Amwest Surety], the company is not permitted to write any new business or renew any business. Beyond that, there are a number of things, such as entering into reinsurance arrangements and so forth, changing compensations of senior executives…which cannot be done without the department’s approval.”

“I believe [Amwest] had some transactions with Swiss Re throughout the course of 2000 at various points because there were several carriers issuing paper that allowed Amwest to write surety bonds,” McArdle said. “Being that they no longer had the ‘A-‘ rating, they couldn’t write certain sized bonds—they couldn’t write in certain regions. [Also] certain municipalities require a certain rating in order to do public work and such by contractor. There were several reinsurers that were looking at the acquisition of Amwest…There were several suitors that just never came to fruition. During those periods of due diligence, those suitors were allowing Amwest to use their paper…Swiss Re was one of them.”

However, McArdle indicated that although Amwest had not yet come to full terms with Swiss Re (hence the breakdown of negotiations and Order of Supervision), there are indications that the companies will be going into discussions again in the next few weeks. “The regulator said he’s going to more or less take part going forward to try and bring Swiss Re back to the table,” McArdle said.

“An insurance company like Amwest…is sort of in continual discussions with reinsurers with respect to the particular portfolio of reinsurance,” Schultz said. “We have been trying to get some reinsurance that would improve our surplus on one hand and reduce our premium writing on the other.”

According to the Nebraska department’s order, Amwest Surety is notified “that it shall convey and conduct a hearing in less than 60 days to determine whether Amwest Surety has complied with the following conditions as set forth in the Order.”

Those conditions require that Amwest Surety: is possessed of the premium surplus and capital stock required by insurance laws; has filed a risk-based capital plan and all necessary adjustments thereto as requested by the Director of Supervision; has filed periodic reports and monthly financial statements in the form and upon the dates requested by the Director of Supervision. In addition, it is required that the company’s continued operation will not be hazardous to the public or holders of its policies or certificates.

“After a period of time, the supervising department evaluates the situation and decides what further course they choose to take,” Schultz said. “They can remove the [supervision] order, or they can continue it. Or they can move into more total control up to and including first an order of conservation…and then it can go into an order of liquidation depending on their assessment of what needs to be done with the department.”

On Aug. 28, 2000, A.M. Best downgraded the “A-” FSR on Amwest Group to “B” following the release of the group’s worse-than-anticipated underwriting results as reported in its second-quarter 2000 results.

“They had bank debt that was coming due, and they had basically defaulted on the covenants of the bank loans,” McArdle explained. “In theory, the bank could’ve pulled $14 million out of the company…which would significantly reduce their capitalization and really put them in a vulnerable position…Ultimately the bank debt was written off, but the losses that had occurred over that period on the book were just devastating to Amwest Surety.” McArdle indicated that the group’s FSR was again lowered in December of 2000.

When asked what impact Amwest’s acquisition of the p/c company Condor Insurance Co. several years ago may have had on some of these negative results, Schultz said, “I wouldn’t say whether it’s contributed to this or not. We have subsequently essentially determined that we no longer wanted to continue in the p/c business and are in the process of disposing of the last business that was in force in the trucking business.” Schultz also indicated Condor had been merged into one of the other companies, Far West, some time ago.

In terms of Far West (a subsidiary of Amwest Surety), which Schultz indicated there were no plans to sell at this time, McArdle said that A.M. Best was “leaving a ‘C-‘ rating on it, which basically [indicates] a weak capital position. But the insurance department feels it is a going concern, which means Far West will keep on existing as an entity.”

“Any action with respect to Far West or Amwest Surety itself would require the concurrence of the insurance department,” Schultz said. “So at the moment there’s nothing specific on that.

“In past months to improve the situation, the company had essentially changed its underwriting standards,” he concluded. “It’s no longer writing the larger bonds that contributed to the losses, and there’s been substantial downsizing of the company. But essentially we’ll just have to wait and see how the process plays out.”

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