Article

Costs squeeze armored carriers

While it may be impossible to determine just how much emotional damage was done to our national psyche by the events of Sept. 11, the economic aftereffects of the attacks on New York City and Washington, D.C. have been somewhat easier to calculate.

October 30, 2002

While it may be impossible to determine just how much emotional damage was done to our national psyche by the events of Sept. 11, the economic aftereffects of the attacks on New York City and Washington, D.C. have been somewhat easier to calculate.

Take the insurance industry, for example, which expects to pay up to $80 billion in claims resulting from 9-11, according to Mark Coons, president and chief executive officer of American Special Risk. Coons said the industry's previous largest loss occurred after Hurricane Andrew in 1992, when insurance companies paid close to $20 billion in claims.

Much of that cost will be passed along to customers in rate increases. While this impacts nearly all businesses that purchase commercial insurance, some face larger increases than others.

Armored car carriers, who already pay a premium for their premiums because of the labor-intensive, high-risk nature of their business, say some of their insurance costs have doubled.

Mike Tawney, executive vice president of risk management for Loomis Fargo, compared the armored business to another industry that was hard hit by 9-11, the airlines. Both businesses share a number of expenses that fluctuate along with the overall economy, including insurance, fuel and labor, Tawney said.

Not just 9-11

Even before 9-11, insurance costs were growing, Coons said. In addition to 9-11, which will cut deeply into their reserves, insurance companies -- much like individual investors -- are suffering from declining stock prices.

Until the market turned bearish, companies generated significant income by investing premiums. But that investment income has dropped dramatically. According to the Insurance Information Institute, insurers paid out $53 billion more in claims than they took in from premiums in 2001, but made only $37 billion from investments. A year earlier, investments brought a $9.5 billion surplus.

The insurance industry is a cyclical one that, driven by competition, alternates between "hard" markets characterized by rising rates and "soft" ones in which rates fall, Coons said. This shift normally occurs every few years.

For the past decade, however, the market had been in a "soft" phase. Because of declining profits, Coons said, most insurance companies had already raised their commercial rates 5 percent to 15 percent before 9-11 and had plans to raise rates another 5 percent to 10 percent in 2002. Now those increases will be much steeper.

Bad apples

Before 9-11, the armored car industry was already suffering from the negative publicity resulting from the March 2001 bankruptcy of Hammonton, N.J.-based Tri-State Armored Services amid allegations that company officials stole up to $50 million of customers' cash. Former owner Barry Chesla and several others later pleaded guilty to money laundering.

Then in December, Michael Schwartz, the owner of Jersey City, N.J.-based Schwartz Armored LLC, vanished with $5 million of ATM vault cash, then turned up dead in a Florida apartment, an apparent suicide. His roommate, Christopher Lacroix, in March pleaded guilty to recovering stolen property and remains under investigation in Schwartz's death.

Because of those incidents, Coons said, "Not many companies want to write that business. The number of companies willing to write policies for armored car companies is drying up, and the ones still doing it are charging more."

Ted Capaldi, executive vice president of Moorestown, N.J.-based Shields Business Solutions, which provides armored car services in addition to ATM sales and maintenance, believes that smaller operators bear the brunt of such bad publicity. "Some people feel more comfortable with Brinks or Loomis because you don't read about them going out of business," he said.

All customers should review their armored carriers' insurance policies closely, Capaldi said. "Everybody wants to see a certificate of insurance, but that tells you nothing. It doesn't tell you what the exclusions are. If the owner takes money, are you covered? That's where the rubber meets the road."

Insurance costs are rising across the board, Loomis Fargo's Tawney said, not just in areas such as workers compensation that are closely related to 9-11. Directors and officers (D and O) liability insurance, for instance, continues to spiral upward in the wake of corporate accounting scandals at Enron and WorldComm.

Costs of doing business

According to a white paper called "The 2001 Insurance Crisis," written by Tawney, the company expected several of its premiums to increase by at least 100 percent when they came up for renewal last January.

While Tawney did not confirm that amount, he said, "We experienced some very significant increases, and we were forced to pass some of those increases along to our customers."

"When you've planned your budget and you've allowed for a 15 percent (insurance) rate increase and (insurers) come back with 30 percent, you've got to make up that remaining 15 percent somehow," said Steven Klein, director of business development for Guardian Armored Servicesand president of the Independent Armored Car Operators Association. "More than likely, you'll have to pass along some of those increases to the customer. How and when you do so depends on your individual business model."

In addition to insurance, 9-11 sent the armored industry's labor costs soaring. Hoke Smith, president and chief executive officer of Carrollton, Texas-based Mobile Express Capital Corporation, said his labor costs "skyrocketed" after Sept. 11 when anyone licensed to carry a firearm became a hot commodity. The Dallas/Fort Worth airport, for example, began recruiting security personnel with starting salaries of $12.65 an hour.

Smith said his company dropped its armored car business in March after five years of servicing mostly retail customers in three states. Now Mobile Express focuses on its ATM placement business.

"We were going to have to take on a lot more risk and invest a lot more capital to remain profitable," Smith said. "We didn't want to get into a hole we couldn't get out of."

"Customers want providers to get their money to the ATMs on time, safely and at a low cost," said Capaldi, of Shields Business Solutions. "But you've got a couple of contradictory items there. Employees are expensive, the process is expensive, the risk is high, and insurance costs are rising. The declining prices we've seen in the business over the past few years are an unnatural phenomenon."

For the most part, Guardian's Klein said, customers seem to understand when rate increases are dictated by the higher costs of doing business. Many carriers exercised contract clauses in 2001 that allowed them to implement fuel surcharges when gasoline prices rose above $1.50. Those charges were largely accepted by customers, he said.

Rock bottom rates

Yet many armored car carriers have hesitated to raise prices because of an intensely competitive environment that Dusty Field, president of Cary, N.C.-based U.S. Armored LLC, likened to the retail ATM business.

"You've got some companies that are going after market share at any cost. They bid low to get the contracts just so they can say they are in a certain number of states," Field said. "But if you keep renegotiating your contracts on price alone, the value of the business declines with each contract."

Loomis Fargo's Tawney agreed that armored companies that have built their strategies around being the lowest-cost provider will be squeezed especially hard by the current business climate.

"The reluctance to raise prices, while admirable, is not always rational," he said. "Sometimes it becomes irrational to a degree that it drives companies out of business."