A.M. Best Co. has downgraded the financial strength rating of Amwest Insurance Group, Calabasas, California, to C- (Weak) from B (Fair). This rating action applies to Amwest Surety Insurance Company and its subsidiary, Far West Insurance Company. The rating action follows Amwest Group’s third-quarter earnings release and a formal review of the group’s financial position through September 2000.
The group’s worse than anticipated underwriting results have weakened its surplus position and elevated underwriting leverage, resulting in a violation of certain financial covenants on bank debt held by its parent holding company, Amwest Insurance Group, Inc. The group’s capitalization appears adequate to satisfy current policyholders’ obligations.
The rating downgrade follows the company’s prior downgrade to B (Weak), in the vulnerable category, in August 2000 at which time the rating was still under review pending waivers from the Union Bank of California which holds a $14.5 million loan with the parent company. Further, A.M. Best believes the group will have increased difficulty meeting its debt service requirements over the near-term, including a $5 million principal repayment coming due in September 2001 and beyond.
During the first nine months of 2000, underwriting experience deteriorated further due to increased loss severity on its contract surety book of business, eroding capital by nearly 32% since year-end 1999, despite the benefits of significant stop-loss reinsurance. Despite specific reunderwriting initiatives implemented by management in 1999 and early 2000, underwriting profitability has yet to be restored and is currently well below its peers.
Management determined that the poor underwriting experience has been contained in the Dallas branch office where significant growth was generated in recent years. Steps implemented in the third quarter 2000 to preserve and increase capital have not been effective thus far. The company has increased its utilization of quota share reinsurance to provide significant risk transfer and surplus relief.
Despite the general downturn in results, the group continues to record favorable underwriting results in its core business territory. The group has generally well-established agency/broker relationships through its local branch office network which has enabled it to continue writing business. Management continues to pursue capital raising alternatives, and has acquired quota share as well as stop loss coverage through accident year 2000.
To date, several parties have expressed interest, however no sale or merger agreements have been consummated. Effective December 11, 2000, management has entered into a co-surety arrangement with Lyndon Property Insurance Company. Given the continued slippage in underwriting results through nine months 2000, A.M. Best remains concerned with the group’s elevated leverage and its prospects for improvement going forward and continues to view Amwest Group’s rating outlook as negative.
This outlook also reflects the possibility that the parent company may not be able to refinance its bank debt, which includes a paydown of $5 million in principal due in September 2001. Furthermore, Amwest Surety faces the potential for regulatory review due to its close proximity to RBC’s company action level. Its financial strength rating is susceptible to further rating pressure unless marked improvements in both underwriting leverage and overall profitability are demonstrated throughout the remainder of the year.
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