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INSURANCE—Amwest Insurance Group Takes a Ratings Hit

A downgrading by an insurance rating firm has led the chairman and founder of Calabasas-based Amwest Insurance Group to step down. On Dec. 26, Richard H. Savage, who was then chairman of Amwest, became chairman emeritus, replaced by Charles L. Schultz, formerly senior vice president and chief financial officer of Farmers Insurance Group. Schultz also became interim chief executive officer. A week and a half earlier, A.M. Best Co. had downgraded the ratings of two Amwest subsidiaries, Amwest Surety Insurance Co. and Far West Insurance Co., from B to C-minus. The most recent action by A.M. Best follows an earlier downgrading to B in August 2000. A.M. Best Vice President Karen Horvath said the rating firm’s action was the result of substantial underwriting losses in Amwest’s corporate surety business and a $14.5 million loan from Union Bank of California that is in technical default. Amwest sells bonds to contractors guaranteeing the timely completion of their construction projects. If a project falls behind schedule or is abandoned by the contractor, Amwest must pay the value of the bond. Phillip Huff, treasurer and senior vice president, said contract surety amounted to about 36 percent of Amwest’s business in the third quarter of 2000. Amwest had recently expanded its corporate surety business in the Dallas area, where, Horvath said, most of the underwriting losses occurred when it had to make payments on bonds for several large projects. “The Dallas branch began underwriting larger accounts than they’ve done before,” she said. “They didn’t have the experience they had in California and, when the losses came in, they came in pretty rapidly.” Schultz was reluctant to pin all the blame on the company’s Dallas operations but said, “that was one office where losses occurred.” “Unfortunately,” Schultz said, “when a contractor goes down, bonds have to be paid.” Huff said, “The most adverse actions were in 1999 and worked their way through in 2000.” Losses recorded in 2000 Amwest reported a net loss in the third quarter ended Sept. 30, 2000 of $3.1 million, or 73 cents per share, compared to a net loss of $2.8 million, or 64 cents per share, for the corresponding period in 1999. For the nine months ending Sept. 30, the company’s net loss was $14.3 million, or $3.31 per share, compared to a net income of $1.4 million, or $3.63 per share, for the same period in 1999. The operating loss for the first nine months of 2000 was $15.7 million, compared to an operating income of $8,000 during the same period in 1999. Amwest’s stock price, with a high of $8.75 in March 2000, hovered around $5 per share most of the year, plunging first in November and again last month after the downgrading. On Dec. 15, the day of the ratings announcement, Amwest stock hit a low of 75 cents. By Jan. 4, the stock had moved back to $1.56. After A.M. Best’s first downgrading in August, Amwest closed two of its 32 branch offices (in St. Louis and Pittsburgh) and reduced its staff by 10 percent. “Staff cuts will probably continue to be made,” Schultz said. “That addresses the expense side.” Amwest has also hired the DL Cargile Consulting Group to develop a strategic plan. Previously, it retained the San Francisco banking firm of Cochran, Caronia & Co., also to develop “strategic alternatives.” In the meantime, the A.M. Best downgrading makes it difficult to do corporate surety business at all, since few contractors will accept bonds from companies with such low ratings. “It is extremely significant,” Schultz said. “Agents and brokers are reluctant to place business with a company with a rating of C-minus.” Horvath said the ratings dilemma causes A.M. Best “to have concerns on a going-forward basis.” “This is a rating-sensitive business, so this is a very serious situation,” she said. Huff said Amwest must first “enter into and successfully negotiate with the bank. Then we have to infuse some surplus into the company or scale back underwriting, either by reinsuring or not writing the business at all.” In September, following the first downgrade, Michael Klein, a Reno-based investor, offered public shareholders $6 per share and said he was seeking more than $20 million in equity financing from a “nationally-recognized venture capital firm” to fund the deal. Klein, through Pacificor Inc., an investment firm he controls, already owns 251,400 shares of Amwest, about 5.8 percent of the outstanding stock. Although the deal with Klein has yet to come to fruition, Schultz declined to comment on its status. “It is possible there will be further discussions,” Schultz said. “I can’t say otherwise.” Besides the underwriting losses, in its report, A.M. Best also noted the sizable loan with Union Bank and a $5 million principal payment due in September. “It’s questionable whether they will be able to make those payments or refinance the debt,” Horvath said. Nevertheless, Schultz is optimistic about Amwest’s prospects. “We’ve got to see if we can correct the underwriting problem,” he said. “And we want to see what we can work out with the bank. We will hope that A.M. Best will review the rating.”

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