Insurance Firm Unravels Quickly

By LAURENCE DARMIENTO

Staff Reporter

When a Nebraska judge one Friday last December declared that all bail bonds from Amwest Insurance Group Inc. would be insolvent in two days, 100,000 criminal defendants nationwide suddenly faced the prospect of being hauled back to jail.

Calabasas-based Amwest had been a leading underwriter of bail bonds, and the judge’s unexpected action threw the industry in turmoil, forcing some defendants back to court while others paid up for new bonds from new carriers.

“Some defendants were wigging out. They were afraid of being arrested and they had a good point,” said Francisco Rodriguez, owner of Hollywood Bail Bonds, one of the many services caught in the squeeze. “One judge saw a defendant at 10 a.m. and ordered him to get a new bond by 4 p.m. I got panic calls from the lawyer and defendant. I did succeed in getting there before 4 p.m.”

The confusion lasted about a month, as most judges either released defendants on their own recognizance or gave them time to find new bonds. But the financial woes involving Amwest will take a lot longer to untangle.

Until recently, Amwest was a reliable and profitable leader in the franchise surety bond business. The company sold surety bonds to mom-and-pop contractors, guaranteeing their ability to complete a job. It also underwrote millions of dollars in bail bonds nationwide for relatives desperate to get their loved ones out of jail.

But in the latter half of the 1990s, Amwest, which was closely held by founder Richard Savage and his son John, had grander visions. It diversified into commercial vehicle insurance through an acquisition, and, in a decision that would come to haunt it, decided to increase the value of the bonds it was underwriting for contractors.

The result was messy. In 2000 just a year after the elder Savage stepped down as co-chief executive, handing Amwest’s reins to his son company losses drew the attention of insurance regulators in Nebraska, where its subsidiaries had reincorporated for tax reasons.

Then, in 2001, regulators wound up liquidating its subsidiary Amwest Surety Insurance Co. and its primary subsidiary, Far West Insurance Co. The holding corporation filed for Chapter 11 bankruptcy protection.

‘Bad decisions’

“The thing that amazes me and my fellow regulators was the speed that the company came down,” said Tim Wagner, Nebraska’s director of insurance. “The management of the company made the decision that its future lied in another direction. It was bad decisions and poor management.”

The younger Savage, who assumed the chief executive post in May 1999 after six years of sharing it, declined to respond in any detail. His father, who now lives in Washington State, could not be reached for comment.

“It’s over and I have to move forward,” said the son, who now operates Savage Insurance Services Inc. in Woodland Hills. “There can’t be anything good that comes out of it. I don’t want to get into pointing fingers.”

The company, which was incorporated in California in 1970, began operations as a licensed insurer in 1976. It was founded by the elder Savage, who formed a bail bond agency in 1958.

At first, Amwest focused on bail bonds. But it also underwrote other surety business, especially contract performance bonds for smaller contractors.

“They had a market niche. They were very successful,” said Lyle Sandlin, owner of Hallmark Associates Insurance Services, a Downey insurance brokerage.

The company ranked among the nation’s top 10 surety underwriters, according to its 1995 annual report.

Then in 1996 Amwest branched out, completing a merger with Condor Services Inc., which underwrote automotive and other coverage for the trucking industry, among a variety of property and casualty lines.

It also expanded its surety business. In 1997 the company said it had the capacity to write accounts up to $25 million and individual bonds up to $20 million. In 1998 the individual bond amount rose to $25 million, and regulators say that figure reached $30 million by the time of the collapse.

“The Amwest of 10 years ago was a company that wrote for small contractors and took collateral when it wrote for these contractors,” said one company official. “When you start writing bonds for much, much larger you are underwriting those contractors not based on collateral, you are underwriting as if you were a bank and issuing a loan.”

Relaxing its standards

And despite the booming economy, the insurance market was relatively soft, with an oversupply of bonding capacity. As a result, Amwest had to relax underwriting standards to win new business. “They created capacity where capacity wasn’t needed,” Sandlin said.

The company was writing for contractors who wanted to grow but might not have had the cash flow that other surety companies required.

“You are assuming an incredible amount of risk,” said Brian McArdle, an A.M. Best analyst. “These contractors were showing the promise of being able to complete the jobs.” But once the economy weakens, he added, “those contractors fold first.”

Amwest Surety, the subsidiary that was writing larger bonds, saw its volume of direct premiums grow from $76.5 million in 1997 to $102.7 million in 2000.

At the same time, its combined ratio, the most direct measure of an insurer’s underwriting success, deteriorated. (A ratio of 100 means an insurer is paying out $1 dollar of losses for every dollar of income. Anything over 100 signifies a loss.)

The ratio rose from the mid-90s in 1998 to just over 100 in 1999. By 2000 it ballooned to nearly 176 meaning it was paying out $1.76 in claims for every $1 in premiums.

“There was a total management failure, and management starts at the top,” said Michael FitzGibbons, an attorney appointed by Wagner to oversee Amwest Surety’s liquidation. FitzGibbons said he believes company managers did not have the expertise to oversee the much higher level of risk that was being taken on.

Another complication: Amwest, looking for larger premiums, was now working with larger brokerages that may have funneled poorer risks. “You’re a broker. You got a risk. Who you going to send it to?” FitzGibbons said.

Deteriorating position

By 1999, the company had started to pull back, announcing it would stop writing some non-core lines. In early 2000 it pulled out of all non-surety lines, eliminated its quarterly dividend, cut staff and closed branch offices. Then at the end of that year the younger Savage stepped down as chief executive, and Amwest hired an investment bank to shop it around.

A move to sell the company to Michael Klein, an Internet entrepreneur, fell apart about a year ago, spawning a lawsuit by Klein. The suit alleges that Amwest and the younger Savage committed fraud by failing to disclose how precarious the company’s financial condition was.

John Savage’s attorney, Larry Rothstein, declined to discuss the allegations in detail, but said they will be “vigorously defended” in court.

Finally, Nebraska regulators stepped in when Amwest Surety failed to reach a new agreement with its reinsurers. It was placed on official supervision in May and one month later came the move to liquidate.

An actuarial audit found its subsidiary, Far West, had underestimated its reserve needs by $5 million. “It was insolvent,” said Wagner, who had that company liquidated in November.

The holding company, meanwhile, filed for Chapter 11 bankruptcy protection in July, declaring assets of $8.4 million and debts of $18 million.

Liquidators working for the state of Nebraska have sent out over 10,000 notices to potential claimants who may have suffered losses. But it’s unclear how much, if anything, claimants will be paid. As of Sept. 30, Amwest Surety had $58.9 million in assets and $96.1 million in liabilities. Far West’s figures have not yet been calculated.

Jose Velasco, the company’s bankruptcy attorney, said a reorganization plan is under consideration. That would involve a company creditor taking over the bankrupt company to start some kind of insurance business. The attraction would be $7 million in losses that could be used as a tax benefit.

Meanwhile, Rodriguez, who had 200 bonds underwritten by Amwest oustanding at the time of the insolvency says he’s not only sorry for himself, but for the company.

“Everybody in there was top notch. They were very, very professional,” said Rodriguez. “The bail bonds were a gold mine for them. That’s not what sank the ship.”