ACSTAR CEO warns against repeating past mistakes
By Dennis Pillsbury
Henry Nozko, Jr., President and CEO of ACSTAR Insurance Co.
Ultimately, nobody won," Henry W. Nozko, Jr., says of the soft surety market that dominated the decade of the '90s. "The result of the overly competitive pricing was several fatalities in the surety business and a number of other companies chose to leave the market," Nozko, president and CEO of ACSTAR Insurance Co., New Britain, Connecticut, continues. "Today, companies that accounted for 25% of the total surety market are no longer in the business. Contractors often are unable to find coverage at any price and the line for many agents has become their biggest headache.
"What is key now is that we all learn from the mistakes of the past and not repeat them!" Nozko declaims.
During the decade of the '90s, Nozko explains, "surety was not a problem for any agent anywhere. There was a lot of capacity. Terms were not a problem. Companies weren't requiring personal indemnification. Pricing was below $10 per $1,000. The product was almost a giveaway and there were plenty of insurers willing to give it away. For the 10-year period, losses generally ran at about $600 million and less per year."
Then came the millenium.
"Surety claims exploded into a mushroom of losses in 2000," Nozko says. "Direct actual losses totaled $1.1 billion in that year." In 2001, that number grew to $2.7 billion, followed by $2.3 billion in 2002. "And that trend is continuing," Nozko notes. "Losses will be over $2 billion again in 2003. That means that over the current three-year period, the industry will have paid out more in losses than during the entire decade of the '90s."
Increased demand
Further exacerbating the problem is the fact that the private sector has reacted to recent contractor failures by requiring surety bonds. McDonald's and WalMart, for example, both are requiring bonds from any contractors with which they work. This has served to increase the demand for surety at a time when capacity has shrunk. And the burgeoning losses have resulted in much more stringent underwriting from the companies that represent the remaining capacity for this line of business.
"I don't think we can count on any new capacity entering this market and picking up the slack," Nozko predicts. "Any new money will look at surety, see that no one has made any money in this business and invest elsewhere. For a period of time, agents will have to learn to deal with the current landscape.
"What is key now is that we all learn from the mistakes of the past and not repeat them!"
--Henry Nozko, Jr.
"Everybody was in on creating this landscape during the previous decade," Nozko says. "Each participant in the surety transaction has to take one-third of the blame--the contractor, the agent and the surety company. The contractor treated the bond like a commodity and would go to the agent who would not educate about the importance of a relationship with a surety company but would shop around, and the surety companies would cut the price and ease up on the terms to try and write the business."
Doing things differently
Nozko points out that ACSTAR proved to be a more consistent market during this period and, as a result, has been able to provide capacity to clients that stayed with it during the soft market, as well as to contractors that are well-run businesses. "We came from the construction business and understand what it takes to perform a bonded project," he explains.
ACSTAR, along with its sister company, United Coastal Insurance Co., is a member of the ACMAT Group. The ultimate parent, ACMAT Corp., commenced operations in 1950 as a construction company specializing in building construction. The insurance companies were formed in 1985 in response to availability and affordability problems that existed in the construction industry. The insurer currently has an A- rating from A.M. Best but hopes for a higher rating. In its write-up on the company, A.M. Best said it "is encouraged by management's continuing program to reduce the amount of financial leverage at the parent to levels that are more consistent with the company's conservative operating strategy. Given the company's conservative balance sheet, improved market conditions, continued strong operating results, and reduced financial leverage at ACMAT Corporation, A.M. Best views the rating outlook as positive."
Nozko notes that a number of construction firms have been with ACSTAR for 15 years or more. "These firms were looking for a consistent market that would remain behind them regardless of market conditions or 'shock' losses. We were writing the business at about $15 per $1,000 during the soft market, which was high for then. However, we have continued to charge that rate, and those contractors who stayed with us are enjoying what today is a much lower than average rate.
"Of course," he admits, "these contracting firms are the exception rather than the rule, but their experience should prove instructive. Many contractors that shopped around during the soft market now are having trouble finding coverage at any price. Most surety companies are requiring personal indemnification, several years of certified financial statements and a clean loss history. That leaves a lot of firms without coverage."
On the other hand, ACSTAR does not have any specific underwriting requirements. "We understand construction and look at each company individually," Nozko says. "We understand that many small contractors might not have complete certified financials, but that does not necessarily make them poor risks."
He concludes by urging agents to use due diligence in determining which companies to use in placing surety business. "Look for companies that have provided a consistent market during both soft and hard markets. The surety relationship needs to be viewed like a banking relationship. It is a long-term relationship that should be cherished. If the industry--agents and surety companies--works together to educate contractors about the importance of this relationship and the benefits of a long-term relationship, I believe we can look forward to a new way of doing surety business where all parties in the transaction win." *
For more information:
ACSTAR Insurance Company
Web Site: www.acstarins.com