NEW YORK -- Jim Saunders wasn't too surprised when he learned
recently that his next $10,000 ARC bond will cost him $375, more
than double the old rate of $150.
The owner of MCL Travel in Issaquah, Wash., Saunders has friends
in the insurance business who had told him rates for all kinds of
coverage were rising because the insurance industry has taken some
hard hits lately.
Saunders said his new underwriter (the old one got out of the
ARC bond business) is looking more closely at credit scores, both
for travel agencies and owners.
He also counted himself one of the lucky ones because "I only
have to write a bigger check," while growing numbers of agencies
are being required to provide collateral -- and a few can't get
renewed at all.
Based on his experience, Saunders advises colleagues to plan
ahead for their next bond renewal: "Get your own credit reports,
and get them as clean as possible."
A couple of experts in the ARC bonding business buttressed
Saunders' observations and added background information and
pointers of their own.
They said agents are subject to stiffer collateral and
underwriting requirements and are paying more for bonds for two
reasons.
First, the surety industry has suffered major losses due to some
recent business implosions (Enron, for example), the 9/11 attacks
and the sagging economy.
Secondly, insurers have lost money on ARC bonds in recent
years.
Mike Tracy, vice president for underwriter Hess Egan Hagerty and
L'Hommedieu in Chevy Chase, Md., calls it a "horrendous loss
ratio."
In the last 20 years, Tracy said, he has seen about 25 insurers
move into and out of the ARC bonding business, some of them twice.
Not so today.
Tracy, as well as Linda Bourgeois, vice president for New
Orleans broker International Sureties, identified only two national
and one regional insurer still in the field.
Bourgeois said bond prices began to climb before 9/11, and
insurers were becoming more demanding of collateral, too.
But things have been getting tighter ever since: Whereas about
8% to 10% of the 5,000 bonds her brokerage writes involved a
collateral requirement before 9/11, that percentage now is 25% to
30%.
Tracy said that among his firm's 1,500 or so agency customers,
about 5% have to provide collateral for a renewal, up about three
percentage points from a year ago.
In addition, he said, starting about three years ago, Hess Egan
occasionally has required agencies to obtain a bank line of credit
in order to keep the bond.
Besides looking at credit ratings, Bourgeois said, insurers are
looking at other financial indicators, including cash and how long
an agency has had the cash.
As to bond prices themselves, Bourgeois said she sees rates
averaging $300 for a $10,000 bond compared with $100 before prices
started to climb.
On the other hand, she said, "These are the first hikes in more
than 12 years."
One mitigating factor is that agencies have been able to
reduce their bond requirement, which is based on cash sales, as
credit card sales
become the norm. Cash sales now account for less than 16% of
agency ARC sales, down from 25% a decade ago.
ARC bond renewal tips
NEW YORK -- Insurance firms Hess Egan Hagerty and L'Hommedieu in
Chevy Chase, Md., and International Sureties of New Orleans offered
the following additional tips:
• Keep agency and personal credit clean. "Don't max out the
credit cards," said Linda Bourgeois, vice president for
International Sureties.
• Place as much air business on credit cards as possible to keep
the ARC bond size down.
• Arrange a home-equity loan or other line of credit before
there is a problem. Mike Tracy, vice president for Hess Egan, said
this is a good business practice for agents who see a potential for
cash-flow problems.
• Use the services of your accounting expert to a greater
degree, Tracy said. This way, he added, agents will be better
businesspeople and "better able to anticipate possible
problems."
• Finally, Tracy said, for some reason, a few agents are
"continually dilatory" about providing information requested by the
bonding companies. Given the ARC bond is a kind of "license to do
business," retailers need to be responsive to such requests, he
said. -- N.G.