<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-Mos
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 97,785
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 8,544
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 107,871
<CASH> 3,166
<RECOVER-REINSURE> 1,752
<DEFERRED-ACQUISITION> 13,505
<TOTAL-ASSETS> 147,651
<POLICY-LOSSES> 10,996
<UNEARNED-PREMIUMS> 31,938
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 12,500
0
0
<COMMON> 24
<OTHER-SE> 42,959
<TOTAL-LIABILITY-AND-EQUITY> 147,651
67,298
<INVESTMENT-INCOME> 3,490
<INVESTMENT-GAINS> 1,928
<OTHER-INCOME> 0
<BENEFITS> 22,134
<UNDERWRITING-AMORTIZATION> 33,709
<UNDERWRITING-OTHER> 13,351
<INCOME-PRETAX> 3,522
<INCOME-TAX> 605
<INCOME-CONTINUING> 2,917
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,917
<EPS-PRIMARY> 1.21
<EPS-DILUTED> 1.21
<RESERVE-OPEN> 8,900
<PROVISION-CURRENT> 22,515
<PROVISION-PRIOR> (659)
<PAYMENTS-CURRENT> (14,418)
<PAYMENTS-PRIOR> (5,342)
<RESERVE-CLOSE> 10,996
<CUMULATIVE-DEFICIENCY> 496
</TABLE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission file number: 1-9580
AMWEST INSURANCE GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-2672141
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6320 Canoga Avenue, Suite 300
Woodland Hills, California 91367
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 704-1111
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
Common Stock, $.01 par value American Stock Exchange, Inc.
Stock Purchase Rights Pacific Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ( X ) No ( ).
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( X ) As of March 27, 1996, 3,320,067 shares of common stock, $.01
par value, were outstanding (including approximately 951,000 shares issued in
conjunction with the Merger described herein). As of March 27, 1996, the market
value of the voting stock held by non-affiliates of the registrant, based on the
closing sales price of the registrant's common stock as reported by the American
Stock Exchange, Inc. on such date, was $27,693,322.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for the 1996 Annual
Meeting of stockholders (incorporated by reference under Part III).
<PAGE>
TABLE OF CONTENTS
Item PART I Page
1. Business 1
General 1
Products 2
Underwriting and Collateral 3
Statutory Net Premiums Written to Statutory
Policyholders' Surplus Ratio 3
Combined Ratios 4
Reinsurance 4
Reserves 5
Investments 9
Marketing and Growth 12
Competition 12
Employees 13
Government Regulation 13
2. Properties 14
3. Legal Proceedings 14
4. Submission of Matters to a Vote of Security Holders 15
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters 16
Market Information 16
Holders 16
Dividends 16
6. Selected Financial Data 17
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Results of Operations 19
The Merger 22
Liquidity and Capital Resources 22
8. Financial Statements and Supplementary Data 23
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 24
PART III
10. Directors and Executive Officers of the Registrant 25
11. Executive Compensation 25
12. Security Ownership of Certain Beneficial Owners
and Management 25
13. Certain Relationships and Related Transactions 25
PART IV
14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 26
i
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Amwest Insurance Group, Inc., a Delaware corporation ("the Company"), is an
insurance holding company engaged, through its two wholly-owned subsidiaries,
Amwest Surety Insurance Company ("Amwest Surety") and Far West Insurance Company
("Far West"), in underwriting surety bonds. The Company operates through 33
branch offices, 8 of which are located in California and the balance of which
are located in 20 other states. The Company obtains business principally through
approximately 9,000 independent agents and brokers.
The Company underwrites a wide variety of surety bonds, for small to
mid-sized surety accounts through independent agents and brokers. This type of
underwriting involves smaller companies and smaller bond amounts than typically
written by the larger multi-line insurance companies. Bonds are underwritten
using a variety of factors to help mitigate risk, including the acceptance of
full or partial collateral based on the characteristics of the account. See
"Business -Underwriting and Collateral."
According to A.M. Best Company ("Best"), an insurance company rating and
statistical service, property and casualty insurance companies wrote
approximately $2.4 billion in surety net premiums written in 1994. The Company
ranked 9th nationally when measured by net premiums written for all companies
writing surety. In California, which currently is the largest market for surety
business and where the Company has historically generated a significant portion
of its business, the Company ranked 4th when measured by gross premiums written
for all companies writing surety in 1994. As the Company's branches outside
California have matured, the percentage of business generated in California has
declined. In 1995 22.4% of the Company's business was generated in California as
compared to 25.6% in 1994.
The Company was incorporated in California on August 19, 1970 and
reincorporated in Delaware on September 11, 1987. During the year ended December
31, 1995 the Company's wholly owned subsidiaries, Amwest Surety Insurance
Company and Far West Insurance Company reincorporated from California to
Nebraska. Accordingly, the Company is now registered with the Nebraska
Department of Insurance as an insurance holding company. Amwest Surety is
licensed in all 50 states, the District of Columbia, Guam and Puerto Rico, and
Far West is licensed in 36 states and the District of Columbia. Both
subsidiaries hold certificates of authority from the United States Department of
the Treasury, which qualifies them as acceptable sureties on Federal bonds, and
are rated (a group rating) "A" (Excellent) by Best.
On November 30, 1995, an Agreement and Plan of Merger (the "Merger
Agreement") was executed by and between the Company and Condor Services, Inc.
("Condor"), an unaffiliated insurance holding company which provides property
and casualty insurance coverages and services in California and Arizona. The
merger was completed on March 14, 1996 and Condor is now part of the Amwest
group. (See Item 7, page 22 "The Merger")
The term "the Company" unless the context otherwise requires, refers to
Amwest Insurance Group, Inc. and its insurance subsidiaries, Amwest Surety and
Far West. The principal executive offices of the Company are located at 6320
Canoga Avenue, Suite 300, Woodland Hills, California 91367. The Company's
telephone number is (818) 704-1111 and its facsimile number is (818) 592-3660.
PRODUCTS
The Company's major products are:
Contract performance bonds, which guarantee the performance of specific
contractual obligations between the principal and the obligee and/or payments to
labor and material suppliers. Included within this product are contract
performance bonds which are partially guaranteed by the Small Business
Administration ("SBA").
Court bonds, which guarantee that the principal will adequately discharge
the obligations set by a court. These bonds principally consist of bail and
immigration bonds for which the agent is generally primarily liable.
Commercial Surety bonds, which includes all non-contract surety bonds
including numerous types of license and permit, miscellaneous and judicial bonds
for which the Company is primarily liable.
The following tables show, for the periods indicated, the net premiums
written, net premiums earned, losses and loss adjustment expenses and loss
ratios for the Company's three major types of bonds:
<PAGE>
<TABLE>
<CAPTION>
NET PREMIUMS WRITTEN
Years ended December 31,
1995 1994 1993
(Dollars in thousands)
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Type of Bond
Contract performance $48,227 75.1% $47,851 71.5% $ 37,299 70.8%
Court 8,571 13.3 9,531 14.2 7,930 14.6
Commercial Surety 7,473 11.6 9,593 14.3 9,102 20.0
------------- ------------- ------------- ------------- -------------- -------------
Total $64,271 100.0% $ 66,975 100.0% $ 54,331 100.0%
============= ============= ============= ============= ============== =============
</TABLE>
<TABLE>
<CAPTION>
NET PREMIUMS EARNED
Years ended December 31,
1995 1994 1993
(Dollars in thousands)
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Type of Bond
Contract performance $49,738 73.9% $ 43,353 70.1% $ 33,682 67.3%
Court 8,749 13.0 9,183 14.9 7,387 14.7
Commercial Surety 8,811 13.1 9,293 15.0 9,021 18.0
------------- ------------- ------------- ------------- -------------- -------------
Total $67,298 100.0% $ 61,829 100.0% $ 50,090 100.0%
============= ============= ============= ============= ============== =============
</TABLE>
<TABLE>
<CAPTION>
LOSSES & LOSS ADJUSTMENT EXPENSES AND LOSS RATIOS
Years ended December 31,
1995 1994 1993
(Dollars in thousands)
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Type of Bond
Contract performance $20,045 40.3% $ 11,250 36.7% $ 10,114 61.3%
Court 467 5.3 1,114 12.1 218 3.0
Commercial Surety 1,622 18.4 1,740 42.9 1,680 39.6
------------- ------------- ------------- ------------- -------------- -------------
Total $22,134 32.9% $ 14,104 22.8% $ 12,012 23.8%
============= ============= ============= ============= ============== =============
</TABLE>
The loss ratio can be substantially affected by the size and timing of
losses, as well as by underwriting standards and procedures.
UNDERWRITING AND COLLATERAL
The Company individually analyzes the risk associated with each application
it receives, except for selected categories of miscellaneous bonds. This
underwriting evaluation includes verifying the credit history and financial
resources of the applicant. The Company maintains control of the underwriting
process through the use of authority limits for each underwriter, through
committee underwriting of larger risks and through a system of limited
delegation. The Company requires many contract bonds to be collateralized and
will occasionally require collateral on other types of bonds based upon risk
characteristics. Collateral can consist of irrevocable letters of credit,
certificates of deposit, cash, savings accounts, publicly traded securities and
trust deeds or mortgages on real property. The principal form of collateral
accepted by the Company currently consists of irrevocable letters of credit and
certificates of deposit. Total collateral held as of December 31, 1995 had a
value of approximately $266,078,000. Trust deeds and mortgages on real property
held as collateral are not reflected in this figure due to the inexact nature of
their disposition values. The Company reflects in its consolidated financial
statements only funds received as collateral on which net earnings inure to the
benefit of the Company. This amounted to $37,650,000 at December 31, 1995.
STATUTORY NET PREMIUMS WRITTEN TO STATUTORY POLICYHOLDERS' SURPLUS RATIO
This ratio reflects the leverage of the Company's current volume of net
business in relation to its policyholders' surplus. There are no legal
requirements governing this ratio, but guidelines established by the National
Association of Insurance Commissioners ("NAIC") have historically provided that
the ratio should not exceed 3.0 to 1. The following table shows, for the years
indicated, the insurance subsidiaries' consolidated ratios:
<TABLE>
<CAPTION>
Years ended December 31,
1995 1994 1993 1992 1991
(Dollars in thousands)
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statutory net premiums written $64,271 $ 66,975 $ 54,331 $ 46,697 $ 50,812
Statutory policyholders' surplus 36,813 34,004 33,354 31,109 26,124
Ratio 1.75 1.97 1.63 1.50 1.95
</TABLE>
In December 1993, the NAIC adopted a Risk-Based Capital ("RBC") Model Law
for property and casualty companies. The RBC Model Law is intended to provide
standards for calculating a variable regulatory capital requirement related to a
company's current operations and its risk exposures (asset risk, underwriting
risk, credit risk and off-balance sheet risk). These standards are intended to
serve as a diagnostic solvency tool for regulators that establishes uniform
capital levels and specific authority levels for regulatory intervention when an
insurer falls below minimum capital levels. The Model Law specifies four
distinct action levels at which a regulator can intervene with increasing
degrees of authority over a domestic insurer as its financial condition
deteriorates. These RBC levels are based on the percentage of an insurer's
surplus to its calculated RBC.
A company's RBC is required to be disclosed in its statutory annual
statement, however, the detailed RBC calculation as well as a company's
corrective action plan will remain confidential. The RBC is not intended to be
used as a rating or ranking tool nor is it to be used in premium rate making or
approval. The Company has calculated it's RBC requirement as of December 31,
1995 and found that it exceeded the highest level of recommended capital
requirement.
COMBINED RATIOS
The combined ratio is the sum of (1) the ratio of losses and loss adjustment
expenses incurred (including a provision for incurred but not reported losses)
to net premiums earned (the "loss ratio") and (2) the ratio of policy
acquisition and general operating costs to net premiums earned (the "expense
ratio").
The following table shows the loss ratios, expense ratios and combined
ratios of the Company as derived from data prepared in accordance with generally
accepted accounting principles. Generally, if the combined ratio is below 100%
an insurance company has an underwriting profit; if it is above 100% the company
has an underwriting loss.
<TABLE>
<CAPTION>
Years ended December 31,
1995 1994 1993 1992 1991
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Loss Ratio 32.9% 22.8% 24.0% 22.7% 20.4%
Expense Ratio 69.9 72.0 72.5 74.4 80.6
------------- ------------- ------------- ------------- -------------
Combined Ratio 102.8% 94.8% 96.5% 97.1% 101.0%
============= ============= ============= ============= =============
</TABLE>
REINSURANCE
A reinsurance transaction occurs when an insurance company remits or "cedes"
a portion of the premium to a reinsurer as payment for the reinsurer's
assumption of a portion of the risk. Reinsurance does not legally discharge the
insurer from its primary liability for the full amount of the policies, and the
ceding company must pay the loss if the assuming company fails to meet its
obligations under the reinsurance agreement. The practice of insurers, however,
is to account for reinsured risks to the extent of the reinsurance ceded as
though they were not risks for which the original insurer is liable. The Company
evaluates and monitors the financial condition of its reinsurers in order to
minimize its exposure to significant losses from reinsurer insolvencies.
The Company purchases reinsurance for protection against liabilities in
excess of certain limits. The Company imposes stricter underwriting standards
with respect to bonds with penal amounts in excess of reinsured limits.
The Company maintains an excess of loss reinsurance treaty with a group of
reinsurers lead by Kemper Reinsurance Company and Underwriters Reinsurance
Company, (the "Kemper Treaty"). Kemper Reinsurance Company is a 32.5%
participant, Underwriters Reinsurance Company has a 32.5% participation,
Allstate Insurance Company has a 25% participation and SOREMA North America
Reinsurance Company has a 10% participation in the treaty. Kemper Reinsurance
Company is rated "A-" (Excellent), Underwriters Reinsurance Company is rated
"A+" (Superior), Allstate Insurance Company is rated "A" (Excellent) and SOREMA
North American is rated "A-" (Excellent) by Best.
The Kemper Treaty may be canceled at the election of either party by
providing notice of cancellation 90 days prior to any anniversary. The Kemper
Treaty limits the Company's exposure on any one principal (the person or entity
for whose account the surety contract is made, and whose debt or obligation is
the subject of the surety contract) to the first $500,000 of loss and to losses
in excess of $6,000,000 with an annual aggregate deductible of $7,000,000.
Coverage is provided for most types of bonds which the Company writes except SBA
guaranteed bonds and bail bonds, which are not covered by the treaty. The
reinsurers' maximum exposure under the Kemper Treaty is $21,000,000 of losses
discovered during any one contract period (October 1 to October 1).
The Company also maintains a semiautomatic bond facultative reinsurance
contract. The contract also applies to most types of bonds the Company writes
with single bond penalty limits up to $10,000,000 or multiple bonds under a
specific aggregate work program per principal with limits up to $20,000,000 for
contract surety bonds and $25,000,000 for commercial surety bonds. The Company's
retention under the contract is $6,000,000 plus 12% of the reinsured amount. The
Company's aggregate retention is additionally reinsured by the aforementioned
excess of loss reinsurance treaty, further limiting the Company's net exposure.
The Company's insurance subsidiaries also issue contract bonds under the SBA
Surety Guarantee Program. Industry practice is to account for SBA guarantees as
reinsurance transactions. The purpose of the SBA Surety Guarantee Program is to
assist small contractors, who have not established credit or who fail to meet a
surety's normal underwriting standards, in obtaining bonds. An SBA guarantee
covers between 80% and 90% of the surety's liability up to $1,250,000 per bond.
At various times, Congress has considered eliminating the Small Business
Administration program. Commencing in January, 1991, the Company voluntarily
decided to significantly scale back its SBA Surety Guarantee Program. During
1995, the SBA line of business made up only 1.5% of the Company's total premiums
written. As such, any change in the program is not expected to have a material
adverse effect on Company revenues or profits.
RESERVES
The Company maintains reserves for losses and loss adjustment expenses with
respect to both reported and unreported claims. The amount of loss reserves for
reported claims, including related loss adjustment expense reserves, is
generally based upon a case-by-case evaluation of the type of loss. All reserves
for reported claims are net of anticipated collateral and other non-reinsurance
recoveries. Reserves for incurred but not reported claims are based on Company
experience. An amount is included in the reserves for unallocated loss
adjustment expenses consisting of the costs for the Company's claims, legal and
subrogation departments to settle claims incurred prior to year end.
The loss settlement period on most of the Company's insurance claims is
relatively short. Nevertheless, it is often necessary to adjust estimates of
liability on a claim either upward or downward between the time a claim is
reported and the time of payment. The liability for unpaid loss and loss
adjustment expenses is an accounting estimate, the accuracy of which is limited
by the availability of information at the time the reserve is set. The Company
does not discount its claim reserves for financial reporting purposes. While the
Company may make implicit provisions for inflation or increasing costs in
establishing reserves for known claims, the relatively short claim to payment
period and the nature of the insured losses makes provisions for inflation or
increasing costs generally unnecessary.
<PAGE>
The following table sets forth a reconciliation of the statutory liability
for losses and loss adjustment expenses (1) for the periods shown:
<TABLE>
<CAPTION>
December 31,
1995 1994 1993
(Dollars in thousands)
------------------------------------------
<S> <C> <C> <C>
Statutory liability for losses and loss adjustment expenses at
beginning of year 7,633 $ 6,460 $ 6,608
Provision for losses and loss adjustment expenses occurring in
current year 22,401 14,983 13,747
Decrease in estimated losses and loss adjustment expenses for claims
occurring in prior years (267) (879) (1,735)
Losses and loss adjustment expense payments for claims occurring during:
Current year (14,418) (9,161) (8,672)
Prior years (5,342) (3,770) (3,488)
------------- -------------- -------------
Statutory liability for losses and loss adjustment expenses at end
of year 10,007 $ 7,633 $ 6,460
============= ============== =============
</TABLE>
(1) Amounts reflect the liability for losses and loss adjustment expenses
net of reinsurance recoverable on unpaid loss and loss adjustment expenses.
The table on page 8 discloses the cumulative development of unpaid losses
and loss adjustment expenses of the Company from 1985 through 1995. The top line
of this table depicts the estimated net liability for unpaid losses and loss
adjustment expenses recorded at the balance sheet date for each of the indicated
years. This liability represents the estimated net amount of losses and loss
adjustment expenses for claims arising in all prior years that are unpaid at the
balance sheet date, including losses that had been incurred but not reported to
the Company. The lower portion of the table shows the re-estimated amount of the
previously recorded net liability based on experience as of the end of each
succeeding year. Estimated gross liability and the re-estimated amount of
previously recorded gross liability for 1995, 1994 and 1993 are shown below the
table.
The increase or decrease in estimated losses and loss adjustment expenses
for losses occurring in prior years reflects the net effect of the resolution of
losses for other than full reserve value and subsequent readjustment of loss
values as of December 31st of the applicable years.
The difference between the reserves reported in the Company's consolidated
financial statements prepared in accordance with generally accepted accounting
principles ("GAAP") and those reported in the annual statements filed with the
Nebraska Department of Insurance in accordance with statutory accounting
principles ("SAP") is as follows:
<PAGE>
<TABLE>
<CAPTION>
December 31,
1995 1994 1993
(Dollars in thousands)
------------------------------------------
<S> <C> <C> <C>
Reserves reported on a SAP basis $10,007 $ 7,633 $ 6,460
Reinsurance recoverable on unpaid loss and loss adjustment expenses 989 1,267 2,448
------------- -------------- -------------
Reserves reported on a GAAP basis $10,996 $ 8,900 $ 8,908
============= ============== =============
</TABLE>
In accordance with Financial Accounting Standards Board Statement No. 113,
Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts, reinsurance recoverable on unpaid losses and loss adjustment expenses
are reported for generally accepted accounting practices as assets rather than
netted against the corresponding liability for such items on the balance sheet.
Since these recoverable balances are netted against the losses and loss
adjustment expense liability for statutory purposes, a SAP/GAAP difference
results.
The Company attempts to estimate reserves that are adequate and neither
deficient nor redundant. Therefore, no meaningful evaluation of estimated future
redundancies or deficiencies can be developed from the Company's prior
experience. The cumulative "redundancy/(deficiency)" shown in the table on page
8 represents the aggregate change in the estimates over prior years. For
example, the 1990 liability has developed a $2,441,000 redundancy over five
years. That amount has been reflected in income over the six years. The effect
on income for the past three years of changes in estimates of the liabilities
for losses and loss adjustment expenses is shown in the reconciliation table on
page 6. The cumulative redundancy or (deficiency) as of the end of any year is
due to a re-evaluation of reserves established in prior years at less than or
more than the reserved values as of that date.
<PAGE>
<TABLE>
<CAPTION>
CUMULATIVE LOSS DEVELOPMENT
December 31,
(Dollars in thousands)
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net liability for losses
& loss adjustment $2,535 $2,292 $3,072 $3,528 $7,739 $6,811 $6,306 $6,608 $6,461 $7,633 $10,007
expenses
Net paid (cumulative) as
of:
One year later 1,240 1,769 2,108 4,000 2,571 2,617 3,356 3,488 3,770 5,342 -
Two years later 2,063 2,017 3,461 4,021 3,206 3,296 3,620 3,829 5,016
Three years later 2,045 2,088 3,394 3,915 3,294 3,814 3,732 3,472
Four years later 2,203 2,065 3,436 3,693 4,098 4,321 3,219
Five years later 2,302 1,903 3,353 3,723 4,610 4,103
Six years later 2,094 1,802 3,419 4,519 4,582
Seven years later 2,051 1,868 3,348 4,425
Eight years later 2,037 1,830 3,325
Nine years later 2,002 1,819
Ten years later 2,001
Net liability re-estimated as of:
One year later 1,710 2,462 2,886 5,513 5,635 4,449 5,326 4,873 5,581 7,366 -
Two years later 2,266 2,114 3,618 4,650 3,364 3,927 3,858 3,296 5,202
Three years later 2,109 2,198 3,955 3,809 4,179 4,010 3,467 3,101
Four years later 2,235 2,207 3,485 4,014 4,378 4,188 3,432
Five years later 2,386 1,845 3,370 4,047 4,500 4,370
Six years later 2,017 1,806 3,428 4,480 4,881
Seven years later 2,052 1,868 3,338 4,470
Eight years later 2,037 1,827 3,325
Nine years later 2,002 1,819
Ten years later 2,001
Net Reserve Redundancy
(Deficiency): $451 $473 ($253) ($942) $2,858 $2,441 $2,874 $3,507 $1,259 $267 -
==========================================================================================================
Net redundancy
(deficiency) as a
percent of original 18% 21% (8%) (27%) 37% 36% 46% 53% 19% 3% -
net liability:
=====================================================================================================
Gross liability for losses & loss adjustment 8,906 8,900 10,996
expenses
Ceded liability for losses & loss adjustment (2,445) (1,267) (989)
expenses
-------------------------------
Net liability for losses & loss adjustment 6,461 7,633 10,007
expenses
===============================
Gross liability re-estimated 8,404 8,906
Ceded liability re-estimated (3,202) (1,540)
---------------------
Net liability re-estimated 5,202 7,366
=====================
Gross Reserve Redundancy (Deficiency) 502 (6)
=====================
</TABLE>
Note 1: The Company allocates salvage and subrogation recoverable
balances by calendar year based on its best estimate of the years for which the
accrued salvage and subrogation relates.
<PAGE>
INVESTMENTS
The Company's primary investment objectives are the protection and long-term
enhancement of surplus, flexibility to respond to changing business conditions
and the maximization of after-tax total return consistent with the Company's
business objectives. The Company has investment management agreements with two
firms to manage a significant part of the Company's investment portfolio. The
Company pays each investment manager a quarterly fee based on the market value
of the portfolio managed. The Company's arrangement with each investment manager
is terminable by either party on 60 days prior notice. With respect to each of
the investment mangers, investment guidelines have been established. These
guidelines establish limits for maturity risk, quality risk and diversification
risk. Guidelines are also established for investment grades, issue size and
effective portfolio duration.
Certain states or territories require the Company to deposit securities
issued by such states or territories as a condition of licenser. These
securities are managed in-house in accordance with guidelines established by the
various states and territories. At December 31, 1995, the market value of all
state deposits was approximately $10,975,000.
<PAGE>
The following table sets forth the composition of the Company's investment
portfolio at the dates indicated:
<TABLE>
<CAPTION>
December 31,
1995 1994 1993 1992 1991
(Dollars in thousands)
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fixed maturities, held-to-maturity, at
amortized cost:
Bonds:
U.S. Government - $ 10,850 $ 9,903 $ 10,747 $ 46,157
Mortgage backed securities - 696 - - -
States, municipalities and political
subdivisions - 3,524 2,921 1,124 1,147
Certificates of deposit, at cost - 50 50 124 225
-------------- ------------- ------------- ------------- -------------
Total - 15,120 12,874 11,995 47,529
-------------- ------------- ------------- ------------- -------------
Fixed maturities, available-for-sale, at
market (1):
Bonds: 18,755 11,434 18,235 33,636 -
U.S. Government 5,636 - - - -
Mortgage backed securities 17,723 27,904 7,845 13,831 -
States, municipalities and political
subdivisions 31,570 28,111 43,184 20,760 -
Other 17,606 8,774 4,651 3,189 -
Redeemable preferred stock, at market (1) 6,495 8,280 7,641 3,305 -
-------------- ------------- ------------- ------------- -------------
Total 97,785 84,503 81,556 74,721 -
-------------- ------------- ------------- ------------- -------------
Total fixed maturities 97,785 99,623 94,430 86,716 47,529
Common equity securities, at market (1) 5,588 5,300 2,848 2,944 5,008
Preferred equity securities, at market (1) 2,956 1,417 1,811 960 -
Other invested assets 797 - - - -
Short-term investments, at cost 745 25 155 1,174 30,935
-------------- ------------- ------------- ------------- -------------
Total investments 107,871 106,365 99,244 91,794 83,472
Interest bearing cash equivalents (2) 3,166 3,917 6,723 9,476 3,738
-------------- ------------- ------------- ------------- -------------
Total investments and cash equivalents $111,037 $ 110,282 $ 105,967 $ 101,270 $ 87,210
============== ============= ============= ============= =============
</TABLE>
(1) Market value is principally determined by quotations on national
securities exchanges. When national securities exchange quotes are not
available, quotations are determined by the Company's investment advisors.
(2) These amounts represent gross invested bank balances.
Prior to 1992, the company reported its investments in fixed maturities at
amortized cost, as the Company had historically determined that it had the
ability and intent to hold those investments to maturity. During the year ended
December 31, 1992, the Company enlisted the services of investment advisors in
an attempt to improve the return on its invested assets. In connection with this
change, the Company determined that a certain portion of its fixed maturities
should be carried at market value, because, even though management intends to
hold them for an indefinite period of time, these securities may be sold in
response to changes in interest rates, tax planning considerations or other
aspects of asset/liability management.
During 1993, the Company adopted Financial Accounting Standards Board
Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities, which requires investments to be classified in one of three
categories: held-to-maturity securities, available-for-sale securities and
trading securities. Because such securities had already been appropriately
classified as discussed above, there was no affect to the consolidated financial
statements in 1993.
During the fourth quarter of 1995 the Company concluded that it would no
longer commit to holding any security to maturity, as this limited management
from responding to changes in circumstances and perceived economic trends.
Accordingly, all invested amounts have been classified at December 31, 1995 as
available for sale.
The Company's investment results, pre-tax investment yields and effective
yields for the periods indicated were as follows:
<TABLE>
<CAPTION>
Years ended December 31,
1995 1994 1993 1992 1991
Investment Results: (Dollars in thousands)
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average invested assets (includes
short-term investments) $110,675 $ 108,125 $ 103,619 $ 94,240 $ 80,267
Net investment income:
Before income taxes 6,244 5,788 4,962 5,607 5,096
After income taxes 4,764 4,555 3,275 4,127 3,751
Average annual yield on investments:
Before income taxes 5.6% 5.4% 4.8% 6.0% 6.4%
After income taxes 4.3 4.2 3.8 4.4 4.7
Average annual return on investments:
Before income taxes 14.7% (1.5%) 8.5% 6.6% 9.7%
After income taxes 10.3 (.1) 6.3 4.8 6.9
Pre-Tax Investment Yield:
Fixed maturities 6.0% 5.8% 5.3% 5.9% 6.8%
Equity securities 3.5 2.0 3.6 28.2 1.9
Short-term investments 5.9% 6.0% 3.1% 2.2% 6.8%
Effective yield total investments 5.9% 5.7% 5.1% 6.1% 6.6%
Less investment expense (.3) ( .3) ( .3) (0.1) (0.2)
------------- ------------- ------------- ------------- -------------
Pre-tax investment yield 5.6 5.4 4.8 6.0 6.4
Effective tax rate (1) 23.7 21.3 20.1 26.4 26.4
------------- ------------- ------------- ------------- -------------
Effective yield 4.3% 4.2% 3.8% 4.4% 4.7%
============= ============= ============= ============= =============
</TABLE>
(1) The effective tax rates for the periods shown above are only those
effective tax rates applicable to investment income for the corresponding
periods
(2) Average annual return is net investment income, realized gains (losses)
and the change in unrealized gains (losses) divided by average invested
assets. The effective tax rates used for average annual return are the
effective tax rates applicable to net investment income, realized gains
(losses) and the change in unrealized gains (losses) for the
corresponding periods.
The maturity distribution of the Company's fixed maturity investments at
December 31, 1995 was as follows:
Amortized Cost Estimated
Market Value
Fixed maturities due: (Dollars in thousands)
-----------------------------------
Within 1 year $2,193 $2,200
Beyond 1 year but within 5 years 52,567 53,353
Beyond 5 years but within 10 years 23,824 24,902
Beyond 10 years but within 20 years 9,677 10,037
Beyond 20 years 7,194 7,293
----------------- -----------------
$95,455 $97,785
================= =================
MARKETING AND GROWTH
The Company markets its products in 50 states, the District of Columbia,
Guam and Puerto Rico through approximately 9,000 independent agents and brokers.
California constituted 22.4% and 25.6% of premiums written for the years ended
December 31, 1995 and 1994, respectively.
The Company also accepts business on a direct basis (i.e., without the
assistance of an agent). For the years ended December 31, 1995 and 1994, direct
business accounted for 4.6 % and 5.7%, respectively, of premiums written.
COMPETITION
The surety industry is a highly competitive industry. There are numerous firms,
particularly in the specialty market, which compete for a limited volume of
business. The largest surety company in the country has less than six percent of
the total surety market. The top ten companies collectively have less than half
of the total market. The industry is growing at an annual rate of only about
three percent which has intensified the competition within the industry.
<PAGE>
The Company primarily competes in the specialty market which is dominated by
small, regional companies. However, some of the national, standard market
companies have begun to pursue specialty market business. Pricing, service and
agent commissions are the primary competitive tools. The Company has positioned
itself to be competitive in pricing and agent commissions, but strives to exceed
its major competitors in the quality of its service. The Company believes that
its branch service network and expertise in the specialty surety niche will
enable it to compete effectively, even when challenged by the larger, better
capitalized, standard market companies.
EMPLOYEES
At December 31, 1995, the Company employed 378 people.
GOVERNMENT REGULATION
During 1995, the Company's wholly owned insurance subsidiaries, Amwest
Surety Insurance Company and Far West Insurance Company redomesticated from
California to the State of Nebraska, in part to reduce the Company's premium tax
expenses. The redomestication had no impact on the Company's physical location,
but does affect the ongoing regulation of the insurance subsidiaries and the
Company. Subsequent to the redomestication, the Company became regulated by the
Nebraska Department of Insurance as an insurance holding company because it
controls two Nebraska domiciled insurance companies. Any person who acquires or
agrees to acquire an amount of the Company's Common Stock which would cause him
to own beneficially more than 10% of such stock must obtain the prior approval
of the Nebraska Insurance Commissioner.
The Company's insurance subsidiaries are required to file with the Nebraska
Department of Insurance information concerning ownership, financial condition,
capital structure and general business operations. The Company's insurance
subsidiaries can only conduct business in states in which they are licensed.
Each of the insurance subsidiaries are subject to varying degrees of regulation
and supervision in the states in which they conduct business. This regulation
relates to such matters as the adequacy of reserves, the type and quality of
investments, minimum capital and surplus requirements, risk-based capital
requirements, deposit of securities with state insurance authorities for the
benefit of policyholders, restrictions on dividends, periodic examination of the
insurers' affairs, claims handling procedures, and annual and other reports
required to be filed with the state insurance commissioners on the financial and
other condition of these companies.
The insurance subsidiaries are also regulated by the United States
Department of the Treasury as acceptable sureties for Federal bonds. During
1994, the Department of the Treasury changed its minimum requirement for bonding
Federal obligations from $25,000 to $100,000. This change could reduce the
number of Federal bonds written, however, the Company believes that it will not
have a material affect on the Company's business.
See discussion regarding Proposition 103 at Item 3 - "Legal Proceedings."
<PAGE>
ITEM 2. PROPERTIES
The Company leases all of its office space which, as of December 31, 1995,
totaled approximately 135,000 square feet. The home office aggregates
approximately 53,000 square feet. In addition, the Company leases and subleases
approximately 18,000 square feet of office space in the same building as home
office. Branch locations range from 270 to 4,600 square feet. See Note 12 of
Notes to Consolidated Financial Statements.
On January 26, 1996, the Company entered into a lease agreement for new home
office space in the City of Calabasas, located approximately 7 miles from its
current home office. The expected occupancy date for this office space is spring
1997. The lease term is for a period of 15 years and covers approximately 63,000
square feet. The Company also has the option to purchase this new home office
building and land three years into the lease period at a predetermined rate for
the building, with the value of land based on then existing market rates.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time named as a defendant in various lawsuits
incidental to its surety business. Listed below are recent developments in
certain legal proceedings involving the Company or its insurance subsidiaries:
Proposition 103 - California voters passed Proposition 103, an insurance
initiative which required a rollback in insurance rates for policies (and bonds)
written or renewed during the twelve month period beginning November 8, 1988 and
provided that changes in insurance premiums after November 8, 1988 must be
submitted for approval of the California Insurance Commissioner prior to
implementation. While the Proposition has the most significant impact on
automobile insurance, its provisions, as written, also apply to other property
and casualty insurers including surety insurers.
On August 26, 1990, the State of California enacted Insurance Code Section
1861.135 ("Section 1861.135") exempting surety insurance from the rate rollback
and prior approval provisions of Proposition 103. Section 1861.135 does not
affect Proposition 103's prohibition against excessive, inadequate or
discriminatory rates. Due to the enactment of Section 1861.135, the Company
terminated a previously established reserve for potential premium rebates.
Subsequently, the Department of Insurance ("Department") and Voter Revolt
brought a motion for writ of mandate challenging the validity of Section
1861.135. On March 21, 1991, the Los Angeles Superior Court concluded that
Section 1861.135 did not violate the California Constitution or provisions of
Proposition 103. The Department and Voter Revolt appealed. On December 7, 1993,
the Second District Court of Appeal overturned Section 1861.135 by a 2-1 vote.
On February 24, 1994, the California Supreme Court agreed to hear the Company's
petition for review, thereby staying the Court of Appeals opinion. On December
14, 1995, the Supreme Court of the State of California affirmed the decision of
the Second District Court of Appeal, overturning Insurance Code Section
1861.135, which exempted the surety insurance industry from major provisions of
Proposition 103. Accordingly, the Company is no longer exempted from the rate
rollback and prior approval provisions contained in Proposition 103.
<PAGE>
The Company accrued $2,000,000 during the quarter ended December 31, 1995
representing the Company's best estimate of its rollback obligations pursuant to
Proposition 103, the exact amount of which has not yet been determined. Such
estimate was based on a variety of factors, including but not limited to, the
profitability of the Company in California during 1989 (the rollback period), a
review of the various regulations promulgated by the Department of Insurance,
and a review of rollback obligations of other insurance companies, including a
surety company. Pursuant to the provisions of Proposition 103, the rollback
amount will ultimately be determined by complex California Department of
Insurance formulas but is statutorily limited to a maximum of 20% of California
written premiums during 1989, plus accrued interest thereon. In the event that
the Company's rollback obligation were eventually determined to be the statutory
maximum, it could approximate $7,500,000 which is $5,500,000 in excess of the
Company's best estimate of its ultimate rollback liability. While the current
accrual represents management's best estimate of the Company's Proposition 103
rollback obligations, no assurances can be given that a final settlement with
the California Department of Insurance will not result in a rollback amount
which could have a significant adverse impact on the Company's future earnings,
although it is not anticipated that such result would materially adversely
impact the Company's financial position. Until a final settlement is reached
with the California Department of Insurance, no assurances can be given as to
the ultimate amount of premiums to be refunded to policyholders.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
The Company's Common Stock has been traded on the American Stock Exchange
under the symbol AMW since June 25, 1987 and on the Pacific Stock Exchange under
the symbol AMW since April 21, 1988. The following table sets forth, for the
periods indicated, the high and low sale prices per share as reported on the
American Stock Exchange. This table also sets forth the amount per share of cash
dividends paid by the Company with respect to its Common Stock for each of the
indicated periods.
Period High Low Dividends
- ------ ---- --- ---------
1993
First Quarter $11 1/2 $9 3/8 $.07
Second Quarter 11 3/8 9 3/4 .07
Third Quarter 11 1/8 9 3/4 .07
Fourth Quarter 13 1/4 10 3/8 .07
1994
First Quarter $14 1/2 $12 $.09
Second Quarter 14 1/4 12 1/2 .09
Third Quarter 13 7/8 12 1/8 .09
Fourth Quarter 12 3/8 11 1/8 .09
1995
First Quarter 15 1/4 11 3/4 .10
Second Quarter 15 14 1/8 .10
Third Quarter 15 1/8 14 1/4 .10
Fourth Quarter 18 1/4 14 7/8 .10
On March 27, 1996, the closing price of the Company's Common Stock on the
American Stock Exchange was $14.25 per share.
HOLDERS
As of March 27, 1996, there were 289 holders of record of the Company's
Common Stock. However, based on available information, the Company believes that
the total number of stockholders, including beneficial stockholders, exceeds
1,000.
DIVIDENDS
The Company began paying cash dividends in 1986. The Company's ability to
pay cash dividends is subject to certain regulatory and contractual
restrictions. See Item 7 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" and Notes
8 and 9 of Notes to Consolidated Financial Statements.
In addition to regulatory and contractual restrictions, the payment, amount
and timing of future dividends by the Company will depend upon the Company's
operating results, overall financial condition, capital requirements and general
business condition, as well as other factors deemed relevant by the Board of
Directors.
ITEM 6. SELECTED FINANCIAL DATA
The selected data presented on page 18 under the captions "Summary of
Earnings," "Year End Financial Position" and "Operating Ratios" for, and as of
the end of, each of the years in the five year period ended December 31, 1995,
are derived from the consolidated financial statements of Amwest Insurance
Group, Inc. and subsidiaries, which financial statements have been audited by
KPMG Peat Marwick LLP, independent auditors. The consolidated financial
statements as of December 31, 1995 and 1994 and for each of the years in the
three year period ended December 31, 1995 and the report thereon are included
elsewhere in this Annual Report on Form 10-K.
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
Year ended December 31,
1995 1994 1993 1992 1991
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Earnings:
Net premiums earned $67,298 $61,829 $50,090 $48,254 $48,487
Underwriting expenses 69,194 58,584 48,323 46,842 48,974
------------------------------------------------------------------
Underwriting income (loss) (1,896) 3,245 1,767 1,412 (487)
Net investment income 6,244 5,788 4,962 5,607 5,096
Interest expense (2,754) (2,761) (3,077) (3,351) (3,141)
Realized gains (losses) 1,928 (320) 1,787 728 2,217
------------------------------------------------------------------
Income before income taxes and extraordinary item 3,522 5,952 5,439 4,396 3,685
Provision for income taxes 605 1,364 1,398 998 192
------------------------------------------------------------------
Income before extraordinary item 2,917 4,588 4,041 3,398 3,493
Extraordinary item - - (249) - -
------------------------------------------------------------------
Net income 2,917 $4,588 $3,792 $3,398 $3,493
==================================================================
Per share:
Income before extraordinary item $1.21 $1.91 $1.70 $1.44 $1.42
Extraordinary item - - (0.10) - -
------------------------------------------------------------------
Net income $1.21 $1.91 $1.60 $1.44 $1.42
==================================================================
Dividends $0.40 $0.36 $0.28 $0.28 $0.28
==================================================================
Weighted average number of shares outstanding 2,409 2,408 2,375 2,360 2,461
==================================================================
Year End Financial Position:
Total investments $107,871 $106,365 $99,244 $91,794 $83,472
Total assets 147,651 146,831 140,692 134,404 122,684
Bank indebtedness 12,500 12,500 12,500 12,264 12,228
Total stockholders' equity 42,983 35,994 36,383 31,749 28,885
Average stockholders' equity 39,488 36,189 34,066 30,317 27,433
Stockholders' equity per share 18.15 15.42 15.43 13.52 12.16
Operating Ratios:
Loss & loss adjustment expenses 32.89% 22.80% 23.98% 22.70% 20.36%
Policy acquisition costs 50.09% 51.59% 49.41% 51.84% 54.86%
General operating expenses 16.87% 20.36% 23.08% 22.53% 25.79%
Proposition 103 expense 2.97% - - - -
------------------------------------------------------------------
Combined ratios 102.82% 94.75% 96.47% 97.07% 101.01%
==================================================================
Return on stockholders' equity 7.38% 12.68% 11.13% 11.21% 12.73%
==================================================================
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations Year ended December 31, 1995 compared to year ended
December 31, 1994
Premiums written decreased 0.6% from $70,486,000 in 1994 to $70,083,000 in
1995. The decrease in premiums written is attributable primarily to the court
and non-contract product lines, while the contract performance product line
experienced a slight increase in premium. Premium growth in the contract
performance line is attributable to increased volume in the central region and
the acquisition of Basic Bonding of Louisiana in February of 1995.
Net premiums earned increased 8.8% from $61,829,000 in 1994 to $67,298,000
in 1995. The increase in net premiums earned reflects the increased premium
writings in the latter half of 1994 which were earned during 1995. The Company
earns premiums ratably over the estimated bond terms.
Net losses and loss adjustment expenses increased 56.9% from $14,104,000 in
1994 to $22,134,000 in 1995. This resulted in an increase in the loss and loss
adjustment expense ratio from 22.8% in 1994 to 32.9% in 1995. The increased loss
ratio is primarily attributable to increased loss severity in the contract
performance product line.
Policy acquisition costs as a percentage of net premiums earned decreased
from a ratio of 51.6% or $31,898,000 in 1994 to 50.1% or $33,709,000 in 1995.
The decrease is attributable to a combination of an increase in contingent
commissions recorded by the Company from its reinsurers based on the experience
of the excess of loss treaty and increased average commission rates paid to
agents in 1995.
General operating costs also decreased as a percentage of net premiums
earned from 20.3% or $12,582,000 in 1994 to 16.9% or $11,351,000 in 1995. The
decrease in the actual amount of general operating costs is primarily
attributable to earthquake related charges and the loss on subleasing a portion
of the Company's headquarters facility during 1994 together with decreased bonus
accruals during 1995 due to less profitable results in 1995 versus 1994.
On December 14,1995 the Supreme Court of the State of California affirmed
the decision of the Second District Court of Appeal overturning Insurance Code
Section 1861.135 which exempted the surety insurance industry from major
provisions of proposition 103. Accordingly the Company will no longer be
exempted from the rate rollback and prior approval provisions contained in
Proposition 103.
The Company accrued $2,000,000 during the quarter ended December 31, 1995
representing the Company's best estimate of its rollback obligations pursuant to
Proposition 103, the exact amount of which has not yet been determined. Such
estimate was based on a variety of factors, including but not limited to, the
profitability of the Company in California during 1989 (the rollback period), a
review of the various regulations promulgated by the Department of Insurance,
and a review of rollback obligations of other insurance companies, including a
surety company. Pursuant to the provisions of Proposition 103, the rollback
amount will ultimately be determined by complex California Department of
Insurance formulas but is statutorily limited to a maximum of 20% of California
written premiums during 1989, plus accrued interest thereon. In the event that
the Company's rollback obligation were eventually determined to be the statutory
maximum, it could approximate $7,500,000 which is $5,500,000 in excess of the
Company's best estimate of its ultimate rollback liability. While the current
accrual represents management's best estimate of the Company's Proposition 103
rollback obligations, no assurances can be given that a final settlement with
the California Department of Insurance will not result in a rollback amount
which could have a significant adverse impact on the Company's future earnings,
although it is not anticipated that such result would materially adversely
impact the Company's financial position. Until a final settlement is reached
with the California Department of Insurance, no assurances can be given as to
the ultimate amount of premiums to be refunded to policyholders.
Underwriting income (loss) decreased from income of $3,245,000 for the year
ended December 31, 1994 to an underwriting loss of $1,896,000 for the year ended
December 31, 1995. Excluding the Proposition 103 accrual, the Company would have
had underwriting income of $104,000 for the year ended December 31,1995. The
combined ratio increased from 94.8% in 1994 to 102.8% in 1995.
Interest expense increased 25.7% from $840,000 in 1994 to $1,056,000 in 1995
due to an increase in the interest rate on the bank indebtedness. The $12,500
000 in outstanding indebtedness has a variable rate which averaged 6.7% during
1994 but increased to an average rate of 8.5% during 1995 due to higher average
short term interest rates in 1995 versus 1994. The interest rate on the
Company's bank indebtedness at December 31, 1995 was 7.9375%. Collateral
interest expense decreased 11.6% from $1,921,000 in 1994 to $1,698,000 in 1995.
This decrease is attributed to an overall reduction in funds held as collateral
during 1995. At December 31, 1994 and 1995, the collateral balances accrued
interest daily at an average rate of 3.9% and 3.5% per annum, respectively.
Net investment income and realized investment gains (losses) increased 49.5%
from $5,468,000 in 1994 to $8,172,000 in 1995. This increase is primarily due to
an increase in realized gains (losses) on sales of investments from a loss of
$320,000 in 1994 to a gain of $1,928,000 in 1995. This change of $2,248,000 was
augmented by slightly higher yields on larger invested balances during 1995.
Such higher yields were predominately attributable to investments made prior to
the general decline in interest rates during 1995.
Income before income taxes decreased 40.8% from $5,952,000 in 1994 to
$3,522,000 in 1995 due to the factors outlined above. Excluding the Proposition
103 accrual income before income taxes decreased to $5,522,000 in 1995.
The effective tax rate was 23% for the year ended December 31, 1994 as
compared to 17.2% for the year ended December 31,1995 . The lower effective tax
rate in 1995 is attributed to a greater amount of income before income taxes
derived from tax-advantaged securities in 1995.
Net income decreased 36.4% from $4,588,000 in 1994 to $2,917,000 in 1995 due
to the factors outlined above. Excluding the accrual of the Proposition 103
premium refund net income decreased by 7.7% to $4,237,000.
Year ended December 31, 1994 compared to year ended December 31, 1993
Premiums written increased 22% from $57,713,000 in 1993 to $70,486,000 in
1994. The increase in premiums written is attributable primarily to the court
and contract performance product lines. Premium growth in the contract
performance line is attributable to increased volume in all regions and the
acquisition of the Bond Experts Insurance Agency in June 1993. The full impact
of this acquisition was not realized until 1994.
Net premiums earned increased 23% from $50,090,000 in 1993 to $61,829,000 in
1994. Net premiums earned reflects the increased premium writings in 1994. The
Company earns premiums ratably over the bond terms.
Net losses and loss adjustment expenses increased 17.4% from $12,012,000 in
1993 to $14,104,000 in 1994. The loss and loss adjustment expense ratio
decreased slightly from 24.0% in 1993 to 22.8% in 1994.
Policy acquisition costs increased from $24,749,000 in 1993 to $31,898,000
in 1994, an increase of 28.9%. The increase is attributable to a combination of
increased expenses associated with the increase in premium writings, an increase
in the average commission rates paid to agents in 1994 and a reduction in
contingent commissions paid by the Company's reinsurers to the Company based on
the experience of the excess of loss treaty. These factors caused policy
acquisition costs to rise from 49.4% of net earned premium in 1993 to 51.6% in
1994. General operating costs increased 12% from $11,562,000 in 1993 to
$12,582,000 in 1994. This increase is less than the increase in premiums written
of 22%. General operating cost control continues to be one of management's
primary objectives. The Company's ratio of general operating costs and expenses
to net premiums earned decreased from 23.1% in 1993 to 20.3% in 1994.
Underwriting income increased from $1,767,000 in 1993 to $3,245,000 in 1994.
The combined ratio decreased from 96.5% in 1993 to 94.8% in 1994.
Interest expense decreased 20% from $1,050,000 in 1993 to $840,000 in 1994
due to the decrease in the interest rate on the bank indebtedness obtained from
the refinancing in August 1993. The interest rate on bank indebtedness prior to
refinancing was 10.58%. The refinanced debt has a variable rate which was 5.75%
and 8.375% at December 31, 1993 and 1994, respectively. Collateral interest
expense decreased 5% from $2,027,000 in 1993 to $1,921,000 in 1994. This
decrease is attributed to an overall reduction in interest rates payable on
collateral balances. These rates are adjusted at various times throughout the
year in accordance with general market conditions. At December 31, 1993 and
1994, the collateral balances accrued interest daily at an average rate of 4.0%
and 3.9% per annum, respectively.
Net investment income and realized investment gains (losses) decreased 19.0%
from $6,749,000 in 1993 to $5,468,000 in 1994. This decrease is primarily due to
an decrease in realized gains (losses) on sales of investments from a gain of
$1,787,000 in 1993 to a loss $320,000 in 1994. This change of $2,107,000 was
partially offset by higher yields on larger invested balances during 1994.
Income before income taxes and extraordinary item increased 9% from
$5,439,000 in 1993 to $5,952,000 in 1994 due to the factors outlined above.
The effective tax rate, including the effective rate on the extraordinary
loss, was 25% for the 1993 period as compared to an effective rate of 23% for
the 1994 period. The lower effective tax rate in 1994 is attributed to a greater
amount of investment income derived from tax-advantaged securities in 1994.
Extraordinary loss from early extinguishment of debt of $249,000, net of
income tax benefit of $128,000, was recorded during 1993 due to the refinancing
of $12,300,000 of bank indebtedness which was completed in August 1993. The
Company incurred a prepayment penalty associated with the existing loan which
was accrued in the second quarter of 1993. There were no extraordinary items
incurred during 1994.
Net income increased 21% from $3,792,000 in 1993 to $4,588,000 in 1994 due
to the factors outlined above.
MERGER
On November 30, 1995, an Agreement and Plan of Merger (the "Merger
Agreement") was executed by and between the Company and Condor Services, Inc.
("Condor"), an unaffiliated insurance holding company which provides property
and casualty insurance coverages and services in California and Arizona. Special
meetings of the stockholders of Condor and Amwest were held on March 14,1996 at
which the Merger Agreement was approved and adopted and the transaction was
consummated later that day.
Effective with such closing of the merger (the "Merger"), the separate
existence of Condor ceased. In the Merger, each outstanding share of Condor's
Common Stock (other than shares owned by Condor as treasury stock or by Amwest
or its subsidiaries, all of which were canceled) were converted into the right
to receive 0.5 of a share of Amwest Common Stock. No fractional shares of Amwest
Common Stock were issued in the Merger. After the Merger, there were
approximately 3,320,000 shares of Amwest Common Stock outstanding.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1995, the Company had total cash and cash equivalents and
investments of $111,037,000. Included in these amounts is an aggregate of
$37,650,000 in funds held as collateral which are shown as a liability on the
Company's consolidated balance sheet. As of December 31, 1995, the Company's
investment balances were comprised of $97,785,000 in fixed maturities held at
market, $5,588,000 in common equity securities, $2,956,000 in preferred equity
securities, $797,000 in other invested assets and $745,000 in short-term
investments.
The Company's off balance sheet collateral which primarily consists of
irrevocable letters of credit and certificates of deposit declined from
$251,051,000 at December 31, 1994 to $228,428,000 at December 31, 1995. This
decrease is primarily attributable to increased contract performance writings
utilizing the Company's preferred rates which generally require less collateral
due to the stronger financial position of the contractor as compared to
generally higher collateral amounts for the Company's non-preferred business.
In addition, cash collateral declined from $46,926,000 at December 31, 1994
to $37,650,000 at December 31, 1995. The Company reflects in its consolidated
financial statements only funds received as collateral on which net earnings
inure to the benefit of the Company. The decline in this amount is primarily
attributed to decreased writings in those lines of business for which cash
collateral is generally accepted. These include contractor's license bonds,
sales tax bonds and various court appeal bonds. The amount of cash collateral
can also be impacted by the timing and payment of claims activity related to
draws on irrevocable letters of credit and certificates of deposit.
At various times from 1989 through 1995, the Company has engaged in programs
to repurchase its common stock on the open market. During 1995, the Company
repurchased and retired 15,000 shares for a cost of $226,000, before brokerage
commissions and fees. From January 1, 1989 through December 31, 1995, the
Company has repurchased and retired 299,200 shares at an aggregate cost of
approximately $3,020,000 before brokerage commissions and fees.
Because the Company depends primarily on dividends from its insurance
subsidiaries for its net cash flow requirements, absent other sources of cash
flow, the Company cannot pay dividends materially in excess of the amount of
dividends that could be paid by the insurance subsidiaries to the Company. See
Note 8 of Notes to Consolidated Financial Statements.
On December 30, 1988, the Company borrowed $12,300,000 (the "1988 Loan")
pursuant to a credit agreement with Security Pacific National Bank of which
$10,000,000 was contributed on that date to the surplus of Amwest Surety. See
Note 10 of Notes to Consolidated Financial Statements.
On August 6, 1993, the Company entered into a revolving credit agreement
with Union Bank for $12,500,000 which refinanced the 1988 Loan. This loan was
amended on April 24,1995. The loan has a variable rate based upon fluctuations
in the London Interbank Offered Rate (LIBOR) with amortizing principal payments
beginning July 15, 1996 and maturing July 15, 2000. The interest rate at
December 31, 1995 was 7.9375%. The credit agreement contains certain financial
covenants with respect to capital expenditures, business acquisitions, liquidity
ratio, leverage ratio, tangible net worth, net profit and dividend payments.
The Company is a party to a lease with Trillium/Woodland Hills regarding its
corporate headquarters. Such lease contains provisions for scheduled lease
charges and escalations in base rent over the lease term. The Company's minimum
commitment with respect to this lease in 1996 (without cost of living
escalation) is approximately $2,058,000. This lease expires in July 1998. See
Note 12 of Notes to Consolidated Financial Statements.
Other than the Company's obligations with respect to funds held as
collateral, the Company's obligations to pay claims as they arise, the Company's
commitments to pay principal and interest on the bank debt, the Company's
obligation under Proposition 103 and lease expenses as noted above, the Company
has no significant cash commitments.
The Company believes that its cash flows from operations and other present
sources of capital are sufficient to sustain its needs for the remainder of
1996.
The Company generated $4,866,000, $10,963,000 and $2,037,000 in cash from
operating activities in the fiscal years ended December 31, 1993, 1994 and 1995,
respectively. The Company used $5,022,000, $15,140,000 and generated $7,206,000
in cash for investing activities for the fiscal years ended December 31, 1993,
1994 and 1995, respectively. The Company used $2,597,000, generated $1,371,000
and used $9,994,000 in cash from financing activities for the fiscal years ended
December 31, 1993, 1994 and 1995, respectively. The cash used for investing
activities in 1993 and 1994 was funded principally by operating activities.
The effect of inflation on the revenues and net income of the Company during
all three periods discussed above was not significant.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements required in response to this section
are submitted as part of Item 14(a) of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information regarding Directors and Executive Officers of the
Registrant, reference is made to the Registrant's definitive proxy statement for
its Annual Meeting of Stockholders to be held on May 31, 1996, which will be
filed with the Securities and Exchange Commission within 120 days after December
31, 1995, and which is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
For information regarding executive compensation, reference is made to the
Registrant's definitive proxy statement for its Annual Meeting of Stockholders
to be held on May 31, 1996, which will be filed with the Securities and Exchange
Commission within 120 days after December 31, 1995, and which is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
For information regarding security ownership of certain beneficial owners
and management, reference is made to the Registrant's definitive proxy statement
for its Annual Meeting of Stockholders to be held on May 31, 1996, which will be
filed with the Securities and Exchange Commission within 120 days after December
31, 1995, and which is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information regarding certain relationships and related transactions,
reference is made to the Registrant's definitive proxy statement for its Annual
Meeting of Stockholders to be held on May 31, 1996, which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 1995, and
which is incorporated herein by reference.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements
The index to the consolidated financial statements appears on page 32.
(b) Reports on Form 8-K
The Company filed the following reports on Form 8-K during the three
months ended December 31, 1995:
On November 30, 1995, the Company entered into an Agreement and Plan of
Merger with Condor Services, Inc., a Delaware corporation, pursuant to
which the Company will acquire Condor Services, Inc. This was reported as
an Item 2 matter.
On December 15, 1995, the Company issued a press release announcing the
affirmation by the Supreme Court of the State of California pertaining to
the decision by the Second District Court of Appeal overturning Insurance
Code Section 1861.135 which exempted surety from major provisions of
California Proposition 103. This was reported as an Item 5 matter.
(c) Exhibits
3.1 Restated Certificate of Incorporation of the Company as amended
to date. (Incorporated by reference to Exhibit 3(3)(a) to the
Company's Form 8-B Registration Statement No. 1-9580.)
3.2 Bylaws of the Company (Incorporated by reference to Exhibit 3.2
of the Company's 1990 Form 10-K.)
4.1 Specimen Common Stock Certificate. (Incorporated by reference
to Exhibit 3(4) to the Company's Form 8-B Registration Statement
No. 1-9580.)
10.1 Lease Agreement dated April 1, 1986, by and between Amwest
Insurance Group, Inc. and Trillium/Woodland Hills. (Incorporated
by reference to exhibit 10.9 to the Company's 1986 Form 10-K.)
10.2 First amendment to Lease Agreement dated January 30, 1987, by
and between Amwest Insurance Group, Inc. and Trillium/Woodland
Hills. (Incorporated by reference to 10.13 to the Company's
1987 Form 10-K.)
10.3 Second amendment to Lease Agreement dated June 11, 1987, by and
between Amwest Insurance Group, Inc.and Trillium/Woodland Hills.
(Incorporated by reference to 10.14 to the Company's 1987 Form
10-K.)
10.4 Third amendment to Lease Agreement dated September 1, 1988, by
and between Amwest Insurance Group, Inc. and Trillium/Woodland
Hills. (Incorporated by reference to 10.15 to the Company's
1988 Form 10-K.)
10.5 Fourth amendment to Lease Agreement dated November 20, 1989, by
and between Amwest Insurance Group, Inc. and Trillium/Woodland
Hills. (Incorporated by reference to 10.15 to the Company's
1989 Form 10-K.)
10.6 Fifth amendment to Lease Agreement dated December 20, 1989, by
and between Amwest Insurance Group, Inc. and Trillium/Woodland
Hills. (Incorporated by reference to 10.16 to the Company's
1989 Form 10-K.)
10.7 Sixth amendment to Lease Agreement dated December 31, 1989, by
and between Amwest Insurance Group, Inc. and Trillium/Woodland
Hills. (Incorporated by reference to 10.17 to the Company's
1989 Form 10-K.)
10.8 Contract between the Company and Hewlett-Packard Company, dated
September 16, 1991. (Incorporated by reference to 10.22 to the
Company's 1991 Form 10-K.)
10.9 Lease Agreement dated June 16, 1992 by and between Amwest
Insurance Group, Inc. and Hewlett-Packard Company. (Incorporated
by reference to 10.18 to the Company's 1992 Form 10-K.)
10.10 First Excess of Loss Reinsurance Contract effective October 1,
1992 issued to Amwest Surety Insurance Company and Far West
Insurance Company by a group of reinsurers lead by Kemper
Reinsurance Company. (Incorporated by reference to 10.19 to the
Company's 1992 Form 10-K.)
10.11 Investment Management Agreement between the Company and AAM
Advisors, Inc., dated August 11, 1992. (Incorporated by
reference to 10.21 to the Company's 1992 Form 10-K.)
10.12 Contract between the Company and Scudder, Stevens & Clark, Inc.,
dated August 13, 1992. (Incorporated by reference to 10.22 to
the Company's 1992 Form 10-K.)
10.13 Revolving Credit Agreement dated August 6, 1993 between Amwest
Insurance Group, Inc. and Union Bank. (Incorporated by reference
to 10.13 to the Company's 1993 Form 10-K.)
10.14 First Amendment to the First Excess of Loss Reinsurance Contract
effective October 1, 1993. (Incorporated by
reference to 10.14 to the Company's 1993 Form 10-K.)
10.15 Semiautomatic Bond Quota Share Reinsurance Contract effective
October 1, 1993 issued to Amwest Surety Insurance Company by
Kemper Reinsurance Company and Underwriters Reinsurance Company.
(Incorporated by reference to 10.15 to the Company's 1993 Form
10-K.)
10.16 First Excess of Loss Reinsurance Contract effective October 1,
1994 issued to Amwest Surety Insurance Company and Far West
Insurance Company by a group of reinsurers lead by Kemper
Reinsurance Company. (Incorporated by reference to 10.16 to the
Company's 1994 Form 10-K.)
10.17 Semiautomatic Contract Surety Reinsurance Agreement effective
March 1, 1994 issued to Amwest Surety Insurance Company and Far
West Insurance Company by a group of reinsurers lead by Kemper
Reinsurance Company.
(Incorporated by reference to 10.17 to the Company's 1994 Form
10-K.)
10.18 First amendment to the Revolving Credit Agreement (incorporated
by reference to 19.1 to the Company's March 31, 1995 Form 10-Q.)
10.19 Agreement and Plan of Merger dated November 30, 1995 by and
between the Amwest Insurance Group, Inc. and Condor Services,
Inc., a Delaware corporation (incorporated by reference to Annex
A to the Company's Form S-4 Registration Statement No.333-00119.
10.20 Stockholder Agreement dated November 30, 1995 by and between the
Amwest Insurance Group, Inc. and Guy A. Main, stockholder of
Condor Services, Inc. (incorporated by reference to Annex B to
the Company's Form S-4 Registration Statement No. 333-00119.)
10.21 Lease Agreement dated January 24, 1996 by and between Amwest
Insurance Group, Inc. and ACD2, a California corporation
(incorporated by reference to 10.24 to the Company's Form S-4
Registration Statement No. 333-00119)
10.22 Option Agreement dated January 24, 1996 by and between Amwest
Insurance Group, Inc. and ACD2, a California corporation
(incorporated by reference to 10.25 to the Company's Form S-4
Registration Statement No. 333-00119)
Management Contracts and Compensatory Plans: (10.23 through 10.27)
10.23 Stock Option Plan of the Company, as amended. (Incorporated by
reference to Exhibit 4.1 to the Company's Form S-8 Registration
Statement No. 33-82178.)
10.24 Form of Indemnity Agreement between the Company and Individual
Directors and Certain Officers Designated by the Company's Board
of Directors. (Incorporated by reference to Exhibit 3(10) to
the Company's Form 8-B Registration Statement No. 1-9580.)
10.25 Form of Senior Executive Severance Agreement entered into by the
Company and certain officers. (Incorporated by reference to
10.20 to the Company's 1989 Form 10-K.)
10.26 Rights Agreement dated as of May 10, 1989 executed by the
Company and Bankers Trust Company of California, N.A., as rights
agent. (Incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement on Form 8-A dated May 11,
1989.)
10.27 Non-Employee Director Stock Option Plan of the Company.
(Incorporated by reference to Exhibit 4.2 to the
Company's Form S-8 Registration Statement No. 33-82178.)
11.1 Statement regarding computation of per share earnings.
(See Note 1 of Notes to Consolidated Financial Statements.)
22.1 List of Subsidiaries of Registrant. (Incorporated by reference
to Exhibit 3(22) to the Company's Form 8-B
Registration Statement No. 1-9580.)
24.1 Consent of KPMG Peat Marwick LLP for incorporation by reference
of their opinion to the Registration Statements Nos. 33-11020,
33-24243, 33-38128 and 33-82178 on Form S-8 and in Registration
Statements Nos. 33-28645 and 33-37984 on Form S-3 of Amwest
Insurance Group, Inc. (See page 62 of the Consolidated Financial
Statements.)
(d) Schedules
Independent Auditors' Report.
Index to financial statement schedules.
Schedule Caption
I Summary of Investments-Other Than Investments in Related
Parties at December 31, 1995.
II Condensed Financial Information of the Registrant.
Items omitted are not applicable or not required for Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMWEST INSURANCE GROUP, INC.
Date: March 27, 1996 By: /s/ JOHN E. SAVAGE
-------------------
John E. Savage
President, Chief Operating Officer,
Co-Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Signature Title Date
Chairman of the Board and
Co- Chief Executive Officer
/s/ RICHARD H. SAVAGE (Principal Executive Officer) March 27,1996
- ------------------------
Richard H. Savage
President, Chief Operating Officer,
Co- Chief Executive Officer and Director
/s/ JOHN E. SAVAGE March 27,1996
- ------------------------
John E. Savage
Senior Vice President, Chief Financial
Officer, Treasurer and Director
(Principal Financial and Principal
/s/ STEVEN R. KAY Accounting Officer) March 27,1996
- ------------------------
Steven R. Kay
Senior Vice President and
/s/ ARTHUR F. MELTON Director March 27,1996
- ------------------------
Arthur F. Melton
Senior Vice President and
/s/ NEIL F. PONT Director March 27,1996
- ------------------------
Neil F. Pont
/s/ THOMAS R. BENNETT Director March 27,1996
- ------------------------
Thomas R. Bennett
/s/ BRUCE A. BUNNER Director March 27,1996
- ------------------------
Bruce A. Bunner
/s/ EDGAR L. FRASER Director March 27,1996
- ------------------------
Edgar L. Fraser
/s/ JONATHAN K. LAYNE Director March 27,1996
- ------------------------
Jonathan K. Layne
/s/ CHARLES L. SCHULTZ Director March 27, 1996
- ------------------------
Charles L. Schultz
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report 33
Consolidated Financial Statements:
Consolidated Statements of Operations for the Years
Ended December 31, 1995, 1994 and 1993 34
Consolidated Balance Sheets as of December 31, 1995 and 1994 35
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1994 and 1993 37
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1995, 1994 and 1993 39
Notes to Consolidated Financial Statements 40
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Amwest Insurance Group, Inc.:
We have audited the accompanying consolidated balance sheets of Amwest
Insurance Group, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of operations, cash flows and changes in
stockholders' equity for each of the years in the three year period ended
December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Amwest
Insurance Group, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1995, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
February 7, 1996, except at to Note 14 which is dated as of March 14, 1996.
<PAGE>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
Years ended December 31,
1995 1994 1993
----------------- ---------------- -----------------
<S> <C> <C> <C>
Underwriting Revenues:
Net premiums written $ 64,271 $ 66,975 $ 54,331
Net change in unearned premiums 3,027 (5,146) (4,241)
----------------- ---------------- -----------------
Net premiums earned 67,298 61,829 50,090
----------------- ---------------- -----------------
Underwriting Expenses:
Net losses and loss adjustment expenses 22,134 14,104 12,012
Policy acquisition costs 33,709 31,898 24,749
General operating costs and expenses 11,351 12,582 11,562
Proposition 103 expense 2,000 - -
----------------- ---------------- -----------------
Total underwriting expenses 69,194 58,584 48,323
----------------- ---------------- -----------------
Underwriting income (loss) (1,896) 3,245 1,767
Net investment income 6,244 5,788 4,962
Interest expense (1,056) (840) (1,050)
Collateral interest expense (1,698) (1,921) (2,027)
Net realized gains (losses) 1,928 (320) 1,787
----------------- ---------------- -----------------
Income before income taxes and extraordinary item 3,522 5,952 5,439
----------------- ---------------- -----------------
Provision for income taxes (benefit):
Current 1,820 987 882
Deferred (1,215) 377 516
----------------- ---------------- -----------------
Total provision for income taxes 605 1,364 1,398
----------------- ---------------- -----------------
Income before extraordinary item 2,917 4,588 4,041
Extraordinary item:
Loss from early extinguishment of debt, net of income taxes - - (249)
----------------- ---------------- -----------------
Net income $ 2,917 $ 4,588 $ 3,792
================= ================ =================
Earnings Per Common Share:
Income before extraordinary item $ 1.21 $ 1.91 $ 1.70
Extraordinary item - - (.10)
----------------- ---------------- -----------------
Net income $ 1.21 $ 1.91 $ 1.60
================= ================ =================
Weighted average number of common shares outstanding 2,409,478 2,408,063 2,374,998
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
1995 1994
----------------- ----------------
ASSETS
<S> <C> <C>
Investments:
Fixed maturities, held-to-maturity (market value of $14,469 at
December 31, 1994) $ - $ 15,120
Fixed maturities, available-for-sale (amortized cost of $95,455
and $88,056 at December 31, 1995 and 1994, respectively) 97,785 84,503
Common equity securities, available-for-sale (cost of $4,014
and $4,814 at December 31, 1995 and 1994, respectively) 5,588 5,300
Preferred equity securities, available-for-sale (cost of $2,847
and $1,500 at December 31, 1995 and 1994, respectively) 2,956 1,417
Other invested assets (cost of $703 at December 31, 1995) 797 -
Short-term investments 745 25
----------------- ----------------
Total investments 107,871 106,365
Cash and cash equivalents 3,166 3,917
Accrued investment income 1,314 1,450
Agents' balances and premiums receivable (less allowance for doubtful
accounts of $375 at December 31, 1995 and 1994) 7,410 7,002
Reinsurance recoverable:
Paid loss and loss adjustment expenses 763 1,152
Unpaid loss and loss adjustment expenses 989 1,267
Ceded unearned premiums 2,941 1,666
Deferred policy acquisition costs 13,505 15,250
Furniture, equipment and improvements, net 2,510 2,101
Other assets 7,182 6,661
----------------- ----------------
Total assets $ 147,651 $ 146,831
================= ================
</TABLE>
<PAGE>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(Dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31,
1995 1994
----------------- ----------------
LIABILITIES
<S> <C> <C>
Unpaid losses and loss adjustment expenses $ 10,996 $ 8,900
Unearned premiums 31,938 33,689
Funds held as collateral 37,650 46,926
Current Federal income taxes 197 313
Deferred Federal income taxes 3,500 2,014
Bank indebtedness 12,500 12,500
Amounts due to reinsurers 198 183
Other liabilities 7,689 6,312
----------------- ----------------
Total liabilities 104,668 110,837
----------------- ----------------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 1,000,000 shares authorized: issued
and outstanding; none - -
Common stock, $.01 par value, 10,000,000 shares authorized: issued
and outstanding; 2,367,964 at December 31, 1995 and 2,334,089
at December 31, 1994 24 24
Additional paid-in capital 9,443 9,221
Net unrealized appreciation (depreciation) of investments carried at
market, net of income taxes 2,710 (2,080)
Retained earnings 30,806 28,829
----------------- ----------------
Total stockholders' equity 42,983 35,994
----------------- ----------------
Total liabilities and stockholders' equity $ 147,651 $ 146,831
================= ================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
1995 1994 1993
---------------- ----------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,917 $ 4,588 $ 3,792
Add extraordinary item, net of income taxes - - 249
---------------- ----------------- ----------------
Net income from operations 2,917 4,588 4,041
Adjustments to reconcile net income to cash provided by operating
activities:
Change in agents' balances, premiums receivable and
unearned premiums (2,159) 4,378 2,472
Change in accrued investment income 136 157 (58)
Change in unpaid losses and loss adjustment expenses
2,096 (8) (133)
Change in reinsurance recoverables and ceded
unearned premiums (608) 1,254 2,320
Change in amounts due to reinsurers 15 62 (65)
Change in reinsurance funds held, net 1,000 (1,115) (1,241)
Change in other assets and other liabilities (144) 871 (1,988)
Change in income taxes, net (1,098) 235 313
Change in deferred policy acquisition costs 1,745 (2,216) (1,243)
Net realized (gain) loss on sale of fixed maturities (1,169) 344 (1,194)
Net realized gain on sale of equity securities (909) (75) (616)
Accretion of premium on bonds (779) 1,028 880
Net realized loss on sale of fixed assets 7 1 54
Provision for depreciation and amortization 987 1,459 1,324
---------------- ----------------- ----------------
Net cash provided by operating activities 2,037 10,963 4,866
---------------- ----------------- ----------------
Cash flows from investing activities:
Cash received from investments sold, matured, called or repaid:
Investments held-to-maturity - 1,604 4,436
Investments available-for-sale 85,942 60,057 81,103
Cash paid for investments acquired:
Investments held-to-maturity - (2,027) (4,989)
Investments available-for-sale (77,333) (73,828) (85,220)
Capital expenditures, net (1,403) (946) (352)
---------------- ----------------- ----------------
Net cash provided (used) by investing activities 7,206 (15,140) (5,022)
---------------- ----------------- ----------------
<PAGE>
Cash flows from financing activities:
Amortization of bank indebtedness - - 36
Redeemable warrants - - (179)
Repayment of bank indebtedness - - (12,300)
Issuance of bank indebtedness - - 12,500
Proceeds from issuance of common stock 448 104 280
Repurchase of common stock (226) (417) -
Increase (decrease) in funds held as collateral (9,276) 2,536 (2,275)
Dividends paid (940) (852) (659)
---------------- ----------------- ----------------
Net cash provided (used) by financing activities (9,994) 1,371 (2,597)
---------------- ----------------- ----------------
Net decrease in cash and cash equivalents (751) (2,806) (2,753)
Cash and cash equivalents at beginning of year 3,917 6,723 9,476
---------------- ----------------- ----------------
Cash and cash equivalents at end of year $ 3,166 $ 3,917 $ 6,723
================ ================= ================
Supplemental disclosure of cash flow information: Cash paid during the year for:
Interest $ $ 2,761 $ 3,077
2,754
Income taxes 1,848 941 938
Cash received during the year on:
Investments sold $ $ 57,700 $ 74,226
63,166
Investments held to maturity 22,776 3,961 11,313
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except share data)
Years ended December 31, 1995, 1994, and 1993
<TABLE>
<CAPTION>
Net
unrealized
Common stock appreciation
----------------------- (depreciation)
$.01 Additional of Total
Shares issued par paid-in investments Retained stockholders'
value capital carried at earnings equity
market
-------------- -------- -------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 2,347,665 $ 23 $ 9,254 $ 512 $ 21,960 $ 31,749
Issuance of common stock pursuant to
the exercise of options 10,424 1 101 - - 102
Expiration of redeemable warrants - - 179 - - 179
Change in net unrealized appreciation
of investments carried at market - - - 1,220 - 1,220
Cash dividends - - - - (659) (659)
Net income - - - - 3,792 3,792
-------------- -------- -------------- --------------- -------------- --------------
Balance at December 31, 1993 2,358,089 24 9,534 1,732 25,093 36,383
Repurchase of common stock (35,000) (1) (417) - - (418)
Issuance of common stock pursuant to
the exercise of options 11,000 1 104 - - 105
Change in net unrealized depreciation
of investments carried at market - - - (3,812) - (3,812)
Cash dividends - - - - (852) (852)
Net income - - - - 4,588 4,588
-------------- -------- -------------- --------------- -------------- --------------
Balance at December 31, 1994 2,334,089 24 9,221 (2,080) 28,829 35,994
Repurchase of common stock (15,000) - (226) - - (226)
Issuance of common stock pursuant to
the exercise of options 48,875 - 448 - - 448
Change in net unrealized appreciation
of investments carried at market - - - 4,790 - 4,790
Cash dividends - - - - (940) (940)
Net income - - - - 2,917 2,917
-------------- -------- -------------- --------------- -------------- --------------
Balance at December 31, 1995 2,367,964 $ 24 $ 9,443 $ 2,710 $ 30,806 $ 42,983
============== ======== ============== =============== ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994, and 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Amwest Insurance Group, Inc., (the "Company") through its wholly-owned insurance
subsidiaries, is primarily engaged in underwriting surety bonds. The Company
operates through 33 branch offices, 8 of which are located in California and the
balance of which are located in 20 other states. In 1995 and 1994, respectively,
the Company's business generated in California was 22.4% and 25.6%. The Company
obtains business principally through approximately 9,000 independent agents and
brokers.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Amwest Insurance Group, Inc. and its wholly-owned subsidiaries, Amwest Surety
Insurance Company ("Amwest Surety"), Far West Insurance Company ("Far West") and
Far West Bond Services ("FWBS). The consolidated financial statements have been
prepared in conformity with generally accepted accounting principals ("GAAP")
which differ in some respects from those followed in reports to insurance
regulatory authorities. All material intercompany transactions and balances have
been eliminated.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that effect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Deferred Policy Acquisition Costs
Acquisition costs related to unearned premiums, consisting of commissions,
premium taxes, salaries and other acquisition costs, are deferred and amortized
to income ratably over the estimated term of the bond. These costs vary with and
are related to the production of business.
Policy acquisition costs incurred and amortized to income are as follows:
Years ended December 31,
1995 1994 1993
(Dollars in thousands)
---------------------------------------------
Balance at beginning of year $ 15,250 $ 13,034 $ 11,791
Costs deferred during the year 31,964 34,114 25,992
Amortization charged to expense (33,709) (31,898) (24,749)
---------- ---------- ----------
Balance at end of year $ 13,505 $ 15,250 $ 13,034
========== ========== ==========
<PAGE>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994, and 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings Per Share
Earnings per share is calculated based on the weighted average number of common
shares outstanding, adjusted for stock options which are considered common stock
equivalents.
Federal Income Taxes
Deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying the applicable tax rate to differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities. The effect on deferred taxes of a change in tax rates is recognized
in income in the period that includes the enactment date.
Cash and Cash Equivalents
The cash and cash equivalents shown on the statements of cash flows include cash
and short-term, highly liquid investments (those with original maturities when
purchased of ninety days or less).
Funds Held as Collateral
The Company accepts various forms of collateral for issuance of its surety
bonds, including cash, trust deeds or mortgages on real property, irrevocable
letters of credit, certificates of deposit, savings accounts and publicly traded
securities. The Company's policy is to record in the accompanying consolidated
financial statements only funds received as collateral on which earnings inure
to the benefit of the Company. These funds are not restricted as to withdrawal
or usage, are not segregated by the company and are invested on an ongoing
basis. At December 31, 1995, the related collateral balances accrue interest
daily at an average rate of 3.5% per annum and are due and payable (together
with accrued interest) to the collateral owner upon exoneration of the
underlying liability.
Investments
Fixed maturities include bonds, notes and redeemable preferred stock. In
connection with establishing its investment objectives, the Company determined
that it needed to maintain flexibility to respond to changes in interest rates,
tax planning considerations or other aspects of asset/liability management.
Since the Company does not purchase fixed maturity investments with a view
towards resale, the fixed maturities have been classified as
"available-for-sale" and are carried at market value. This "available-for-sale"
classification does not denote a trading account. During the fourth quarter of
1995, the Company concluded that it would no longer commit to holding any
security to maturity, as this limited management from responding to changes in
circumstances and perceived economic trends. Accordingly, all invested amounts
have been classified at December 31, 1995 as "available-for-sale".
Market values for fixed maturities are obtained from a national quotation
service. Temporary unrealized investment gains and losses on fixed maturities,
available-for-sale are credited or charged directly to stockholders' equity, net
of applicable tax affect. When a decline in the value of fixed maturities is
considered to be other than temporary, a loss is recognized in the consolidated
statement of operations.
<PAGE>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994, and 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Equity securities are carried at market value. Net unrealized appreciation
(depreciation) on equity securities, to the extent that there is no other than
temporary impairment of value, is credited or charged directly to stockholders'
equity, net of the related deferred Federal income tax affect. Market values for
equity securities are principally determined by quotations on national
securities exchanges. When a decline in value is considered other than
temporary, a loss is recognized in the consolidated statement of operations.
Realized gains and losses are determined using the specific identification
method.
Short-term investments consist primarily of certificates of deposit with
original maturities of less than one year and greater than 90 days and are
stated at cost which, approximates market value.
Losses and Loss Adjustment Expenses
The liability for unpaid losses and loss adjustment expenses is based upon the
accumulation of individual case estimates for losses reported prior to the close
of the accounting period plus estimates of unreported claims. The liability is
stated net of anticipated salvage and subrogation recoverable and other
non-reinsurance recoveries.
Management believes that the reserves for losses and loss adjustment expenses at
December 31, 1995 are adequate to cover the ultimate net cost of losses and
claims to date; however, such amounts are necessarily based on estimates and any
differences between estimates and ultimate payments are reflected in the
Consolidated Statements of Operations in the period in which such estimates are
changed.
Premium Income Recognition
For bonds with a known term (such as contractor's license, sales tax and most
miscellaneous bonds), premiums are recognized as income ratably over the term of
the bond. For bonds on which the Company has significant experience in and
information available for estimating the term (such as most court bonds and
customs bonds), premiums are recognized as income over the estimated term of the
bond. For other bonds with indefinite terms (generally contract performance
bonds), the Company estimates a term of twelve months, and premiums are
recognized ratably over such period, unless information comes to the Company's
attention that the obligation guaranteed has already been discharged, in which
case all remaining unearned premiums are immediately recognized as earned.
Reinsurance
In the normal course of business, the Company seeks to reduce the loss that may
arise from catastrophes or other events that cause unfavorable underwriting
results by reinsuring certain levels of risk in various areas of exposure with
other insurance enterprises or reinsurers. Amounts recoverable from reinsurers
are estimated in a manner consistent with the claim liability associated with
the reinsured bond.
<PAGE>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994, and 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Extraordinary Loss from Early Extinguishment of Debt
On August 6, 1993, the Company entered into a revolving credit agreement with
Union Bank for $12,500,000. The proceeds from the loan were used to refinance
the Company's bank indebtedness of $12,300,000 prior to its maturity on December
31, 1993. The Company incurred a prepayment penalty associated with the
refinanced loan, resulting in an extraordinary charge to income during 1993 of
$249,000, net of income tax benefits of $128,000.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments", and Statement of Financial Accounting Standards
No. 119, "Disclosures about Derivative Financial Instruments and Fair Value of
Financial Instruments", require disclosure of estimated fair value information
about financial instruments, for which it is practicable to estimate that value.
Under Statement of Financial Accounting Standards No. 115, the Company
categorizes all of its investments in debt and equity securities as available
for sale. Accordingly, all investments, including cash and short term
investment, are carried on the balance sheet at their fair value. The carry
amounts and fair values for investment securities are disclosed in Note 3 and
were drawn from standard trade data sources such as market and broker quotes.
The estimated fair value of bank indebtedness equals its carrying value, which
was based on the bank loan's variable interest rate which approximates the rates
currently available today. The carry amounts and fair values for the bank
indebtedness is disclosed in Note 10.
Risk-Based Capital
In December 1993, the NAIC adopted a risk-based capital formula for property
casualty insurance companies which establishes recommended minimum capital
requirements. The formula has been designed to capture the widely varying
elements of risks undertaken by writers of different lines of insurance having
differing risk characteristics, as well as writers of similar lines where
differences in risk may be related to corporate structure, investment policies,
reinsurance arrangements and a number of other factors. The Company has
calculated its risk-based capital requirement as of December 31, 1995 and found
that it exceeded the highest level of recommended capital requirement.
Stock-Based Compensation
During October, 1995, the Financial Accounting Standards Board ("FASB") issued a
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"). The disclosure provisions are effective for fiscal
years beginning after December 15, 1995. Presently, management expects to
continue use of the accounting methods presented by Accounting Principles Board
Opinion No. 25 and expand its disclosure of stock-based compensation as
permitted by FAS 123. Accordingly, adoption of this pronouncement is not
expected to have a material effect on the consolidated financial statements of
the Company.
Reclassifications
Certain amounts in the accompanying consolidated financial statements for 1993
and 1994 have been reclassified to conform with the 1995 financial statement
presentation.
<PAGE>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994, and 1993
(2) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND FINANCIAL
INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK
The vast majority of the collateral held by the Company does not qualify for
inclusion in the accompanying consolidated financial statements. The Company's
policy is to record in the accompanying consolidated financial statements only
those funds received as collateral on which earnings inure to the benefit of the
Company. Most of the off-balance sheet collateral is in the form of irrevocable
letters of credit and certificates of deposit.
On a case-by-case basis, loss reserves are reduced for that portion that can be
recovered through liquidation of collateral. To the extent that these collateral
items prove to be worth less than the face or notional value, the Company may
incur additional losses. However, the Company believes that since the quality of
collateral funds are evaluated prior to the setting of loss reserves on a
case-by-case basis, any differences between face or notional value and ultimate
disposition value will generally be minor.
A summary of off-balance sheet collateral held by the Company as of December 31
is as follows:
December 31,
1995 1994
(Dollars in thousands)
---------------------------------
Off-Balance Sheet Collateral:
Irrevocable letters of credit $ 138,463 $ 158,016
Certificates of Deposit 35,249 40,116
Other Collateral 54,716 52,919
--------------- -----------------
Total Off-Balance Sheet Collateral $ 228,428 $ 251,051
================ =================
Trust deeds and mortgages on real property held as collateral are not reflected
in the above figures due to the inexact nature of their disposition values.
During both 1995 and 1994, the Company received approximately 9% of its total
collateral recoveries from trust deeds and mortgages on real property.
The Company's off-balance-sheet collateral, most notably irrevocable letters of
credit, is taken on behalf of principals located in every geographical region of
the country. The Company does not believe there to be noteworthy concentration
of credit risk in any single area.
<PAGE>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994, and 1993
(3) INVESTMENTS
A summary of net investment income is as follows:
<TABLE>
<CAPTION>
Years ended December 31,
1995 1994 1993
(Dollars in thousands)
---------------------------------------------------
<S> <C> <C> <C>
Gross investment income:
Fixed maturities $ 5,939 $ 5,650 $ 4,802
Equity securities 267 111 154
Cash and short-term investments 346 323 274
Investment expense (308) (296) (268)
---------------- ----------------- ----------------
Net investment income $ 6,244 $ 5,788 $ 4,962
================ ================= ================
Gross realized gains:
Fixed maturities $ 1,498 $ 296 $ 1,489
Equity securities 1,138 262 662
Gross realized losses:
Fixed maturities (329) (639) (298)
Equity securities (229) (188) (43)
Other assets (150) (51) (23)
---------------- ----------------- ----------------
Net realized gains (losses) $ 1,928 ($ 320) $ 1,787
================ ================= ================
</TABLE>
A summary of the accumulated net unrealized appreciation (depreciation) on
investments carried at market and the applicable deferred Federal income taxes
is shown below:
<TABLE>
<CAPTION>
December 31,
1995 1994
(Dollars in thousands)
-----------------------------------
<S> <C> <C>
Gross unrealized appreciation:
Fixed maturities $ 2,728 $ 148
Equity securities 1,820 715
Other invested assets 94 -
Gross unrealized (depreciation):
Fixed maturities (398) (3,701)
Equity securities (138) (314)
----------------- -----------------
Net unrealized appreciation (depreciation) on investments
carried at market 4,106 (3,152)
Deferred Federal income taxes (1,396) 1,072
----------------- -----------------
Net unrealized appreciation (depreciation), net of deferred
Federal income taxes $ 2,710 ($ 2,080)
================= =================
</TABLE>
<PAGE>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994, and 1993
(3) INVESTMENTS (CONTINUED)
A summary of the net increase (decrease) in unrealized investment gains (losses)
less applicable deferred Federal income taxes is as follows:
<TABLE>
<CAPTION>
Years ended December 31,
1995 1994 1993
(Dollars in thousands)
---------------------------------------------------
<S> <C> <C> <C>
Fixed maturities, available-for-sale $ 5,883 ($ 5,430) $ 1,935
Common equity securities, available- for-sale 1,089 (233) (58)
Preferred equity securities, available- for-sale 192 (113) (28)
Other invested assets 94 - -
---------------- ----------------- ----------------
Total 7,258 (5,776) 1,849
Deferred Federal income taxes (2,468) 1,964 (629)
---------------- ----------------- ----------------
Net increase (decrease) in unrealized investment
gains (losses), net of deferred Federal income
taxes $ 4,790 ($ 3,812) $ 1,220
================ ================= ================
</TABLE>
The Company's insurance subsidiaries are required to deposit securities in
several of the states in which it conducts business as a condition of licensure.
These investments are included in the "Fixed maturities" and "Short-term
investments" captions within the accompanying consolidated balance sheets. As of
December 31, 1995 and 1994, the market value of these deposits was approximately
$10,975,000 and $7,987,000, respectively.
The amortized cost and estimated market values of investments in fixed
maturities are as follows:
<TABLE>
<CAPTION>
December 31, 1995
(Dollars in thousands)
----------------- ---------------- ----------------- ----------------
Gross Gross
Amortized Cost Unrealized Unrealized Estimated
Fixed maturities, available-for-sale Gains Losses Market Value
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Bonds:
U.S. Government $ 18,192 $ 578 ($ 15) $ 18,755
Asset backed securities 5,542 94 - 5,636
Mortgage backed securities 17,547 307 (131) 17,723
States, municipalities and political
subdivisions 30,874 702 (6) 31,570
Industrial and miscellaneous 16,827 921 (167) 17,581
----------------- ---------------- ----------------- ----------------
Total 88,982 2,602 (319) 91,265
Redeemable preferred stock 6,448 126 (79) 6,495
Certificates of Deposit 25 - - 25
----------------- ---------------- ----------------- ----------------
Total $ 95,455 $ 2,728 ($ 398) $ 97,785
================= ================ ================= ================
</TABLE>
<PAGE>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994, and 1993
(3) INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
December 31, 1994
(Dollars in thousands)
---------------------------------------------------------------------
Gross Gross
Amortized Cost Unrealized Unrealized Estimated
Fixed maturities, held-to-maturity: Gains Losses Market Value
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Bonds:
U.S. Government $ 10,850 $ 43 ($ 269) $ 10,624
Mortgage backed securities 696 20 (11) 705
States, municipalities and political
subdivisions 3,524 41 (475) 3,090
----------------- ---------------- ----------------- ----------------
Total 15,070 104 (755) 14,419
Certificates of Deposit 50 - - 50
----------------- ---------------- ----------------- ----------------
Total $ 15,120 $ 104 ($ 755) $ 14,469
================= ================ ================= ================
</TABLE>
<TABLE>
<CAPTION>
----------------- ---------------- ----------------- ----------------
Gross Gross
Amortized Cost Unrealized Unrealized Estimated
Fixed maturities, available-for-sale Gains Losses Market Value
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Bonds:
U.S. Government $ 11,988 $ - ($ 554) $ 11,434
Mortgage backed securities 28,731 9 (836) 27,904
States, municipalities and political
subdivisions 29,157 11 (1,057) 28,111
Industrial and miscellaneous 9,303 124 (653) 8,774
----------------- ---------------- ----------------- ----------------
Total 79,179 144 (3,100) 76,223
Redeemable preferred stock 8,877 4 (601) 8,280
----------------- ---------------- ----------------- ----------------
Total $ 88,056 $ 148 ($ 3,701) $ 84,503
================= ================ ================= ================
</TABLE>
<PAGE>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994, and 1993
(3) INVESTMENTS (CONTINUED)
The amortized cost and estimated market value of fixed maturities at December
31, 1995, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
Maturity distribution of fixed
maturities, available-for-sale: Amortized Cost Estimated
Market Value
(dollars in thousands)
-----------------------------------
Due in 1 year or less $ 2,193 $ 2,200
Due after 1 year through 5 years 52,567 53,353
Due after 5 years through 10 years 23,824 24,902
Due after 10 years through 20 years 9,677 10,037
Due after 20 years 7,194 7,293
----------------- -----------------
Total bonds and sinking fund preferred stock $ 95,455 $ 97,785
================= =================
Proceeds from the sale of available-for-sale securities during 1995 and 1994
were $63,166,000 and $57,700,000, respectively. Gross gains of $2,636,000 and
$558,000 and gross losses of $558,000 and $827,000 were realized on those sales
in 1995 and 1994, respectively.
Securities with an amortized cost of $11,285,000 were transferred from
held-to-maturity to available-for-sale during 1995. An unrealized gain of
$532,000 related to these securities is included in the net unrealized
appreciation (depreciation) of investments carried at market component of
stockholders' equity. This transfer was made at December 31, 1995 because the
Company concluded that it would no longer commit to holding any security to
maturity, as this limited management from responding to changes in circumstances
and perceived economic trends.
(4) FURNITURE, EQUIPMENT AND IMPROVEMENTS
Furniture, equipment and improvements are recorded at historical cost.
Depreciation and amortization of furniture and equipment is calculated using the
straight-line method over estimated useful lives from 3 to 5 years. Amortization
of leasehold improvements is calculated using the straight-line method over the
estimated useful lives of the assets or the term of the lease, whichever is
shorter.
<PAGE>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994, and 1993
(4) FURNITURE, EQUIPMENT AND IMPROVEMENTS (CONTINUED)
December 31,
1995 1994
Summary of Furniture, Equipment and (Dollars in thousands)
Improvements: -----------------------------------
Furniture $ 2,150 $ 2,113
Equipment 5,345 4,245
Improvements 2,678 2,598
----------------- -----------------
Total fixed assets 10,173 8,956
Less accumulated depreciation (7,663) (6,855)
----------------- -----------------
Furniture, equipment and
improvements, net $ 2,510 $ 2,101
================= =================
Depreciation expense for the years ended December 31, 1995, 1994 and 1993 was
$987,000, $1,429,000 and $1,288,000, respectively.
(5) INCOME TAXES
Amwest Insurance Group, Inc. and subsidiaries each file separate income tax
returns. A reconciliation of the corporate federal tax with the financial
statement effective tax for the years ended December 31, 1995, 1994 and 1993
are as follows:
Years ended December 31,
1995 1994 1993
(Dollars in thousands)
--------------------------------------
Computed tax expense at statutory rate $ 1,197 $ 2,023 $ 1,849
Tax-advantaged interest income (424) (561) (506)
Change in valuation allowance (50) (150) -
State taxes 42 45 (18)
Other, net (160) 7 73
------------- ------------- -----------
Total provision for income taxes $ 605 $ 1,364 $ 1,398
============= ============= ===========
<PAGE>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994, and 1993
(5) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant portions
of the deferred tax liability and the deferred tax asset at December 31, 1995
and 1994 are presented below.
Years ended December 31,
1995 1994
(Dollars in thousands)
-------------------------------
Deferred tax liabilities:
Deferred policy acquisition costs ($ 4,592) ($ 5,185)
Unrealized investment gains (1,396) -
Unearned contingent commission (332) (108)
Tax depreciation in excess of book (26) (66)
Bad debt reserve (51) (270)
Discount on salvage & subrogation reserves (259) (180)
Other (31) (14)
------------- -----------------
Total gross deferred tax liabilities (6,687) (5,823)
------------- -----------------
Deferred tax assets:
Unearned premiums 1,972 2,178
Unrealized investment losses - 1,072
Discount on loss reserves 380 310
Proposition 103 reserve 680 -
Accrued vacation 187 48
Deferred compensation 115 -
Alternative minimum tax credit 60 288
Other 93 263
------------- -----------------
Total gross deferred tax assets 3,487 4,159
Less: valuation allowance (300) (350)
------------- -----------------
Net deferred tax assets 3,187 3,809
------------- -----------------
Total net deferred tax liability ($ 3,500) ($ 2,014)
============ =================
During 1995, the Company collected significant amounts related to the salvage
and subrogation fresh start adjustment. Collection of these amounts increased
the Company's ability to retain the full benefit of that adjustment.
Accordingly, the valuation allowance was reduced from $350,000 to $300,000. The
ultimate realization of deferred tax assets is dependent upon the reversal of
deferred credits and the generation of future taxable income during the periods
in which those temporary differences become deductible. Management considers
primarily the scheduled reversal of deferred tax liabilities and tax planning
strategies in making this assessment and believes such amounts are realizable.
<PAGE>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994, and 1993
(6) RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The following table sets forth a reconciliation of the liability for losses and
loss adjustment expenses for the periods shown:
<TABLE>
<CAPTION>
December 31,
1995 1994 1993
(Dollars in thousands)
-----------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 8,900 $ 8,908 $ 9,040
Less: reinsurance recoverable on unpaid
loss and loss adjustment expenses (1,267) (2,448) (2,432)
------------ -------------- -------------
Net balance at beginning of year 7,633 6,460 6,608
Provision for losses and loss adjustment
expenses occurring in current year 22,401 14,983 13,747
(Decrease) increase in estimated losses and loss
adjustment expenses for claims occurring in
prior years (267) (879) (1,735)
Losses and loss adjustment expense payments
for claims occurring during:
Current year (14,418) (9,161) (8,672)
Prior years (5,342) (3,770) (3,488)
------------ -------------- -------------
Net balance at end of year 10,007 7,633 6,460
Plus: reinsurance recoverable on unpaid
loss and loss adjustment expenses 989 1,267 2,448
------------ -------------- -------------
Balance at end of year $ 10,996 $ 8,900 $ 8,908
============ ============== =============
</TABLE>
The increase or decrease in estimated losses and loss adjustment expenses for
losses occurring in prior years reflects the net effect of the resolution of
losses for other than full reserve value and subsequent readjustment of loss
values as of December 31st of the applicable years.
(7) REINSURANCE
The Company cedes insurance to reinsurers and the Small Business Administration
("SBA") under reinsurance treaties that cover individual risks or entire classes
of business. Although the ceding of insurance does not discharge the Company
from its primary liability to its bondholder, the insurance company that assumes
the coverage assumes the related liability, and it is the practice of insurers
for accounting purposes to treat reinsured risks, to the extent of the
reinsurance ceded, as though they were risks for which the original insurer is
not liable.
<PAGE>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994, and 1993
(7) REINSURANCE (CONTINUED)
The Company evaluates and monitors the financial condition of its reinsurers in
order to minimize its exposure to significant losses from reinsurer
insolvencies. The reinsurance recoverables and ceded unearned premium reported
on the accompanying balance sheet would represent a liability of the Company if
all reinsurers were unable to meet existing obligations under reinsurance
agreements.
The following amounts represent the deductions for reinsurance ceded for the
years ended December 31, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
Years ended December 31,
1995 1994 1993
(Dollars in thousands)
--------------------------------------------------
<S> <C> <C> <C>
Net premiums written:
Premiums written $ 69,855 $ 70,485 $ 57,682
Premiums assumed 228 1 31
Premiums ceded (5,812) (3,511) (3,382)
--------------- ----------------- ----------------
Net premiums written 64,271 66,975 54,331
=============== ================= ================
Net change in unearned premiums:
Direct 1,751 (5,229) (4,244)
Ceded 1,276 83 3
--------------- ----------------- ----------------
Net change in unearned premiums 3,027 (5,146) (4,241)
=============== ================= ================
Net loss and loss adjustment expenses:
Losses and loss adjustment expenses 22,543 16,257 15,722
Reinsurance recoveries (409) (2,153) (3,710)
--------------- ----------------- ----------------
Net losses and loss
adjustment expenses $ 22,134 $ 14,104 $ 12,012
================ ================= ================
</TABLE>
The Company maintains an excess of loss reinsurance treaty with a group of
reinsurers lead by Kemper Reinsurance Company and Underwriters Reinsurance
Company, (the "Kemper Treaty"). Kemper Reinsurance Company is a 32.5%
participant, Underwriters Reinsurance Company has a 32.5% participation,
Allstate Insurance Company has a 25% participation and SOREMA North America
Reinsurance Company has a 10% participation in the treaty.
<PAGE>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994, and 1993
(7) REINSURANCE (CONTINUED)
The Kemper Treaty may be canceled at the election of either party by providing
notice of cancellation 90 days prior to any anniversary. The Kemper Treaty
limits the Company's exposure on any one principal (the person or entity for
whose account the surety contract is made, and whose debt or obligation is the
subject of the surety contract) to the first $500,000 of loss and to losses in
excess of $6,000,000 with an annual aggregate deductible of $7,000,000. Coverage
is provided for most types of bonds which the Company writes except SBA
guaranteed bonds and bail bonds, which are not covered by the treaty. The
reinsurers' maximum exposure under the Kemper Treaty is $21,000,000 of losses
discovered during any one contract period (October 1 to October 1). Pursuant to
the terms of this excess of loss treaty, the Company receives a percentage of
the profit, if any, on the treaty in the form of contingent commissions.
Contingent commissions in the amount of $2,226,000, $366,000 and $2,365,000 were
recognized under the profit sharing provisions of the treaty for the years ended
December 31, 1995, 1994 and 1993, respectively.
The Company also maintains a semiautomatic bond facultative reinsurance
contract. The contract also applies to most types of bonds the Company writes
with single bond penalty limits up to $10,000,000 or multiple bonds under a
specific aggregate work program per principal with limits up to $20,000,000 for
contract surety bonds and $25,000,000 for commercial surety bonds. The Company's
retention under the contract is $6,000,000 plus 12% of the reinsured amount. The
Company's aggregate retention is additionally reinsured by the aforementioned
excess of loss reinsurance treaty, further limiting the Company's net exposure.
The Company's insurance subsidiaries also issue contract bonds under the SBA
Surety Guarantee Program. Industry practice is to account for SBA guarantees as
reinsurance transactions. The purpose of the SBA Surety Guarantee Program is to
assist small contractors, who have not established credit or who fail to meet a
surety's normal underwriting standards, in obtaining bonds. An SBA guarantee
covers between 80% and 90% of the surety's liability up to $1,250,000 per bond.
(8) RESTRICTIONS ON DIVIDENDS
As a holding company, the Company depends primarily on dividends from its
insurance subsidiaries for its cash flow requirements. The Company's insurance
subsidiaries are subject to state regulations which restrict their ability to
pay dividends. These regulations restrict the amount of stockholder dividends
which may be paid within any one year without the approval of the Department of
Insurance in their state of domicile. In 1993 and 1994 Amwest Surety and Far
West were domiciled in California. The California Insurance Code provides that
amounts may be paid as dividends on an annual noncumulative basis without prior
approval up to a maximum of the greater of (1) statutory net income for the
preceding year or (2) 10% of statutory policyholders' surplus as of the
preceding December 31. In 1995, Amwest Surety and Far West redomesticated to the
state of Nebraska. The Nebraska Insurance Code provides that amounts may be paid
as dividends on an annual basis without prior approval up to a maximum of the
lesser of (1) statutory net income, excluding realized capital gains, for the
preceding year plus any carryforward net income from the previous two calendar
years that have not already been paid out as dividends or (2) 10% of statutory
policyholders' surplus as of the preceding December 31. Amwest Surety can pay
$3,681,000 in dividends to the Company during 1996 without prior approval. For
the years ended December 31, 1995, 1994 and 1993, Amwest Surety paid dividends
of $2,000,000, $1,000,000 and $500,000, respectively, to Amwest Insurance Group,
Inc.
<PAGE>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994, and 1993
(8) RESTRICTIONS ON DIVIDENDS (CONTINUED)
The Company's credit agreements also contain restrictions on the payment of
dividends (see Note 10).
(9) RECONCILIATION OF STATUTORY ACCOUNTING PRINCIPLES TO GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
The reconciliation of consolidated policyholders' surplus and net income as
reported under Statutory Accounting Principles to the corresponding
stockholders' equity and net income balances prepared in accordance with
Generally Accepted Accounting Principles is presented below:
<TABLE>
<CAPTION>
December 31,
1995 1994
Reconciliation of consolidated statutory policyholders'
surplus to stockholders' equity: (Dollars in thousands)
-----------------------------------
<S> <C> <C>
Consolidated statutory policyholders' surplus $ 36,813 $ 34,004
Stockholders' deficit of holding company (7,659) (8,647)
----------------- -----------------
Adjusted statutory policyholders' surplus 29,154 25,357
Deferred acquisition costs 13,505 15,250
Deferred Federal income taxes (3,526) (2,080)
Unearned contingent commission 976 318
Fixed maturities held at market 2,336 (4,109)
Agents' balances greater than 90-days 865 794
Proposition 103 reserve (2,000) -
Other non-admitted assets 1,673 464
----------------- -----------------
Stockholders' equity $ 42,983 $ 35,994
================= =================
</TABLE>
<PAGE>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994, and 1993
(9) RECONCILIATION OF STATUTORY ACCOUNTING PRINCIPLES TO GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CONTINUED)
<TABLE>
<CAPTION>
Years ended December 31,
1995 1994 1993
Reconciliation of consolidated statutory net income (Dollars in thousands)
to net income: ---------------------------------------------------
<S> <C> <C> <C>
Consolidated statutory net income $ 5,759 $ 3,328 $ 4,194
Net income (loss) of holding company 76 184 (178)
---------------- ----------------- ----------------
Adjusted statutory net income 5,835 3,512 4,016
Interest on surplus note (1,115) (1,115) (1,115)
Change in deferred acquisition costs (1,745) 2,216 1,243
Change in unearned contingent commission 659 318 -
Change in agents' balances greater than 90-days 71 - 228
Change in deferred Federal income taxes 1,212 (343) (580)
Proposition 103 expense (2,000) - -
---------------- ----------------- ----------------
Net income $ 2,917 $ 4,588 $ 3,792
================ ================= ================
</TABLE>
(10) BANK INDEBTEDNESS
On August 6, 1993, the Company entered into a revolving credit agreement with
Union Bank for $12,500,000. The debt agreement was amended on April 24, 1995 to
increase the amount available under the revolving line of credit from
$12,500,000 to $15,000,000. The amounts available are reduced by $2,500,000 each
year beginning on July 15, 1995 and ending on July 15, 2000. Accordingly at
December 31, 1995, $12,500,000 is available under the revolving line of credit,
all of which is currently utilized. The bank loan has a variable rate based upon
fluctuations in the London Interbank Offered Rate (LIBOR) and amortizing
principal payments. The interest rate at December 31, 1995 was 7.9375%. The
credit agreement contains certain financial covenants with respect to capital
expenditures, business acquisitions, liquidity ratio, leverage ratio, tangible
net worth, net profit and dividend payments.
Balance
(Dollars in thousands)
--------------------------
Summary of debt maturity schedule:
July 15, 1996 $ 2,500
July 15, 1997 2,500
July 15, 1998 2,500
July 15, 1999 2,500
July 15, 2000 2,500
The bank loan has a variable interest rate which approximates the rates
currently available today. Accordingly, estimated fair value of the debt is
equal to the statement value of $12,500,000.
<PAGE>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994, and 1993
(11) OTHER LIABILITIES
The following table is a summary of other liabilities at December 31, 1995 and
1994:
December 31
1995 1994
(Dollars in thousands)
-----------------------------------
Accrued salaries, fringe benefits
and other compensation $ 2,008 $ 2,381
Premium taxes payable 308 1,235
Accrued rent payable 932 932
General accounts payable (52) 688
Accrued payable - SBA 102 248
Dividends payable 237 213
Loss on sub-lease 459 459
Proposition 103 reserve 2,000 -
Other 1,695 156
----------------- -----------------
Total other liabilities $ 7,689 $ 6,312
================= =================
(12) COMMITMENTS AND CONTINGENCIES
The Company is subject to certain claims arising in the ordinary course of its
operations. The Company believes that the ultimate resolution of such matters
will not materially affect its consolidated financial condition.
At December 31, 1995, the Company occupied office space under various operating
leases in addition to a leased mini-computer that have remaining noncancellable
lease terms in excess of one year. Rental expenses of approximately $3,787,000,
$3,726,000 and $3,775,000 for the years ended December 31, 1995, 1994 and 1993,
respectively, have been charged to operations in the accompanying consolidated
statements of operations.
Balance
(Dollars in thousands)
--------------------------
Summary of minimum future annual
rental commitments:
1996 $ 3,553
1997 3,191
1998 1,950
1999 427
2000 and thereafter 164
--------------------------
Total minimum payments 9,285
Sublease income (415)
--------------------------
Total $ 8,870
==========================
<PAGE>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994, and 1993
(13) PROPOSITION 103
On November 8, 1988, California voters passed Proposition 103, an insurance
initiative which required a rollback in insurance rates for policies (and bonds)
written or renewed during the twelve month period beginning November 8, 1988 and
provided that changes in insurance premiums after November 8, 1988 must be
submitted for approval of the California Insurance Commissioner prior to
implementation. While the Proposition has the most significant impact on
automobile insurance, its provisions, as written, also apply to other property
and casualty insurers including surety insurers.
On August 26, 1990, the State of California enacted Insurance Code Section
1861.135 ("Section 1861.135") exempting surety insurance from the rate rollback
and prior approval provisions of Proposition 103. Section 1861.135 does not
effect Proposition 103's prohibition against excessive, inadequate or
discriminatory rates. Due to the enactment of Section 1861.135, the Company
terminated a previously established reserve for potential premium rebates.
Subsequently, the Department of Insurance ("Department") and Voter Revolt
brought a motion for writ of mandate challenging the validity of Section
1861.135. On March 21, 1991, the Los Angeles Superior Court concluded that
Section 1861.135 did not violate the California Constitution or provisions of
Proposition 103. The Department and Voter Revolt appealed. On December 7, 1993,
the Second District Court of Appeal overturned Section 1861.135 by a 2-1 vote.
On February 24, 1994, the California Supreme Court agreed to hear the Company's
petition for review, thereby staying the Court of Appeals opinion. On December
14, 1995, the Supreme Court of the State of California affirmed the decision of
the Second District Court of Appeal, overturning Insurance Code Section
1861.135, which exempted the surety insurance industry from major provisions of
Proposition 103. Accordingly, the Company is no longer exempted from the rate
rollback and prior approval provisions contained in Proposition 103.
The Company accrued $2,000,000 during the quarter ended December 31, 1995
representing the Company's best estimate of its rollback obligations pursuant to
Proposition 103, the exact amount of which has not yet been determined. Such
estimate was based on a variety of factors, including but not limited to, the
profitability of the Company in California during 1989 (the rollback period), a
review of the various regulations promulgated by the Department of Insurance,
and a review of rollback obligations of other insurance companies, including a
surety company. Pursuant to the provisions of Proposition 103, the rollback
amount will ultimately be determined by complex California Department of
Insurance formulas but is statutorily limited to a maximum of 20% of California
written premiums during 1989, plus accrued interest thereon. In the event that
the Company's rollback obligation were eventually determined to be the statutory
maximum, it could approximate $7,500,000 which is $5,500,000 in excess of the
Company's best estimate of its ultimate rollback liability. While the current
accrual represents management's best estimate of the Company's Proposition 103
rollback obligations, no assurances can be given that a final settlement with
the California Department of Insurance will not result in a rollback amount
which could have a significant adverse impact on the Company's future earnings,
although it is not anticipated that such result would materially adversely
impact the Company's financial position. Until a final settlement is reached
with the California Department of Insurance, no assurances can be given as to
the ultimate amount of premiums to be refunded to policyholders.
<PAGE>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994, and 1993
(14) MERGER AGREEMENT
On November 30, 1995, an Agreement and Plan of Merger (the "Merger Agreement")
was executed by and between the Company and Condor Services, Inc. ("Condor"), an
unaffiliated insurance holding company which provides property and casualty
insurance coverages and services in California and Arizona. Special meetings of
the stockholders of Condor and Amwest were held on March 14, 1996 at which the
Merger Agreement was approved and adopted and the transaction was consummated
later that day..
Effective with such closing of the merger (the "Merger"), the separate existence
of Condor ceased. In the Merger, each outstanding share of Condor's Common Stock
(other than shares owned by Condor as treasury stock or by Amwest or its
subsidiaries, all of which were canceled) were converted into the right to
receive 0.5 of a share of Amwest Common Stock. No fractional shares of Amwest
Common Stock were issued in the Merger. After the Merger, there were
approximately 3,320,000 shares of Amwest Common Stock outstanding.
The information below indicates on a pro forma basis, amounts as if the Condor
pooling of interests merger had occurred for all years presented.
<PAGE>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994, and 1993
(14) MERGER AGREEMENT (CONTINUED)
<TABLE>
<CAPTION>
Years ended December 31,
1995 1994 1993
----------------- ---------------- -----------------
<S> <C> <C> <C>
Underwriting Revenues:
Net premiums written $ 82,143 $ 86,435 $ 76,326
Net change in unearned premiums 3,027 (5,146) (4,241)
----------------- ---------------- -----------------
Net premiums earned 85,170 81,289 72,085
----------------- ---------------- -----------------
Underwriting Expenses:
Net losses and loss adjustment expenses 35,265 28,737 28,468
Policy acquisition costs 38,070 36,607 28,925
General operating costs and expenses 14,309 15,616 14,400
Loss on broker misappropriation of funds - - 1,870
Proposition 103 expense 2,000 - -
----------------- ---------------- -----------------
Total underwriting expenses 89,644 80,960 73,663
----------------- ---------------- -----------------
Underwriting income (loss) (4,474) 329 (1,578)
Net investment income 7,780 7,417 6,433
Interest expense (1,056) (840) (1,050)
Collateral interest expense (1,698) (1,921) (2,027)
Net unrealized gains (losses) on trading securities 83 (80) (3)
Net realized gains (a) 2,176 65 2,331
Recovery on misappropriation of funds 890 - -
Commissions and fees 777 1,379 815
Other revenue 20 44 27
----------------- ---------------- -----------------
Income before income taxes and extraordinary item 4,498 6,393 4,948
----------------- ---------------- -----------------
Provision for income taxes (benefit):
Current 2,044 975 485
Deferred (1,215) 377 516
----------------- ---------------- -----------------
Total provision for income taxes 829 1,352 1,001
----------------- ---------------- -----------------
Income before extraordinary item 3,669 5,041 3,947
Extraordinary item:
Loss from early extinguishment of debt, net of income taxes - - (249)
----------------- ---------------- -----------------
Net income $ 3,669 $ 5,041 $ 3,698
================= ================ =================
Earnings Per Common Share (b):
Income before extraordinary item $ 1.10 $ 1.50 $ 1.20
Extraordinary item - - (.08)
----------------- ---------------- -----------------
Net income $ 1.10 $ 1.50 $ 1.12
================= ================ =================
Weighted average number of common shares outstanding 3,340,851 3,350,118 3,298,104
</TABLE>
<PAGE>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994, and 1993
(14) MERGER AGREEMENT (CONTINUED)
(a) Net realized gains were adjusted for the year ended December 31, 1993
pursuant to sale transactions of Condor Common Stock made by a wholly-owned
subsidiary of Amwest. For the year ended December 31, 1993, the investment in
Condor Common Stock was reduced from 212,850 shares at January 1, 1993 to 97,350
shares at December 31, 1993 resulting in a reduction in realized investment
gains, net of income taxes of $335,000.
(b) Pro forma weighted average number of common shares outstanding for the years
ended December 31, 1995, 1994 and 1993 are based upon Amwest's and Condor's
combined historical weighted average shares, after adjustment of Condor's
historical number of shares by the Conversion Number and excluding any Condor
shares held in treasury or owned by Amwest.
(15) STOCKHOLDER RIGHTS PLAN
On May 10, 1989, the Board of Directors adopted a Stockholder Rights Plan and
declared a dividend of one Stock Purchase Right (a "Right") for each share of
common stock outstanding on May 22, 1989. Each Right becomes exercisable on the
tenth business day after a person or group (other than the Company and certain
related parties) has acquired or commenced a tender or exchange offer to acquire
20% or more of the Company's common stock, or upon consummation of certain
mergers, business combinations or sales of the Company's assets. If the Rights
become exercisable, a holder will be entitled to purchase in certain cases (i)
one one-hundredth of a share of Series A Junior Participating Preferred Stock,
$.01 par value, at the then current exercise price (initially $50), (ii) shares
of common stock, $.01 par value, having a market price equal to two times the
then current exercise price, or (iii) in case of a merger, common stock of the
acquiring corporation having a market value equal to two times the then current
exercise price.
The Company is entitled to redeem the Rights at $.01 per Right under certain
circumstances. The rights do not have voting or dividend rights, and cannot be
traded independently from the Company's common stock until such time as they
become exercisable.
(16) RETIREMENT PLAN
In January, 1992, the Company adopted a 401(k) savings plan entitled the Amwest
Surety Insurance Company 401(k) Plan (the "Plan"). Employees eligible for
participation in the Plan must have attained one year of service and be at least
21 years of age. The Plan provides for employer matching contributions at 50%,
up to a maximum of the first 6% of the employee contribution and become fully
vested at the end of 5 years of employment. Total expense to the Company during
1995, 1994 and 1993 amounted to $275,000, $263,000 and $175,000, respectively.
<PAGE>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994, and 1993
(17) STOCK OPTIONS AND WARRANTS
The Company has a Stock Option Plan and a Non-Employee Director Stock Option
Plan ("the Plans") pursuant to which it has reserved an aggregate of 751,000
shares of its Common Stock, subject to adjustment for reorganizations,
recapitalizations, stock splits or similar events. Shares of Common Stock
subject to the unexercised portions of any options granted under the Plans which
expire, terminate or are canceled may again be subject to options under the
Plans.
The per share exercise price of options under the Plans may not be less than
100% of the fair market value of the underlying Common Stock on the date of the
grant of the option (110% of such fair market value with respect to Incentive
Options granted to an individual who owns more than 10% of the total combined
voting power of all classes of stock of the Company or any subsidiary or parent
corporation).
Activity pursuant to the plans is as follows:
<TABLE>
<CAPTION>
Stock Option Plans Warrants
---------------------------------- ----------------------------------
Option Warrant Price
Shares Price Shares
---------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1992 199,675 $ 5.37-15.68 50,000 13.50
Granted in 1993 52,000 10.40-11.83 - -
Exercised in 1993 (10,425) 5.37-11.13 - -
Canceled in 1993 (31,375) 8.38-14.25 (50,000) 13.50
---------------- ----------------- ----------------- ----------------
Outstanding at December 31, 1993 209,875 $ 5.37-15.68 - -
Granted in 1994 86,700 13.88-14.25 - -
Exercised in 1994 (11,000) 8.38-11.13 - -
Canceled in 1994 (8,625) 8.38-14.25 - -
---------------- ----------------- ----------------- ----------------
Outstanding at December 31, 1994 276,950 $ 5.37-15.68 - -
Granted in 1995 106,000 14.25-14.88 - -
Exercised in 1995 (48,875) 5.37-14.25 - -
Canceled in 1995 (5,125) 8.38-13.88 - -
---------------- ----------------- ----------------- ----------------
Outstanding at December 31, 1995 328,950 $ 8.38-15.68 - -
================ ================= ================= ================
</TABLE>
Of the 328,950 stock options outstanding at December 31, 1995, 154,488 are
available for exercise at prices ranging from $8.38 to $15.68.
<PAGE>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION (UNAUDITED)
QUARTERLY FINANCIAL INFORMATION
The quarterly results for the years ended December 31, 1995, 1994 and 1993 are
set forth in the following table:
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
---------------- ----------------- ----------------- ----------------
First Second Quarter Third Fourth
Quarter Quarter Quarter
---------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
1995
Premiums written $ 16,209 $ 19,267 $ 18,622 $ 15,757
Net premiums earned 16,720 16,822 16,937 16,819
Net investment income 1,591 1,632 1,564 1,457
Net realized gains 67 542 620 699
Total revenues 18,378 18,996 19,121 18,975
Net income (loss) 927 972 1,041 (23)
Earnings (loss) per share .39 .40 .43 (.01)
---------------- ----------------- ----------------- ----------------
First Second Quarter Third Fourth
Quarter Quarter Quarter
---------------- ----------------- ----------------- ----------------
1994
Premiums written $ 15,223 $ 18,423 $ 20,059 $ 16,780
Net premiums earned 14,044 14,195 15,836 17,754
Net investment income 1,271 1,355 1,477 1,634
Net realized gains (losses) (104) (146) 35 (105)
Total revenues 15,211 15,404 17,348 19,283
Net income 1,134 324 376 2,754
Earnings per share .47 .13 .16 1.15
---------------- ----------------- ----------------- ----------------
First Second Quarter Third Fourth
Quarter Quarter Quarter
---------------- ----------------- ----------------- ----------------
1993
Premiums written $ 11,802 $ 15,093 $ 16,128 $ 14,659
Net premiums earned 11,899 11,797 12,594 13,800
Net investment income 1,309 1,412 1,127 1,142
Net realized gains 1,224 235 195 133
Total revenues 14,432 13,444 13,916 15,075
Net income 1,226 114 1,273 1,178
Earnings per share .52 .04 .54 .40
</TABLE>
<PAGE>
SCHEDULE I
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
SUMMARY OF INVESTMENTS-
OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D
Amount
as shown on
Type of investment Cost Value balance sheet
<S> <C> <C> <C>
Fixed Maturities:
Bonds:
United States Government and government
agencies and authorities $ 32,281 $ 33,021 $ 33,021
States, municipalities and political subdivisions 30,874 31,569 31,569
Foreign governments - - -
Public utilities - - -
Convertibles and bonds with warrants attached - - -
All other corporate bonds 25,827 26,675 26,675
--------------- --------------- ---------------
Total bonds 88,982 91,265 91,265
Certificates of deposit 25 25 25
Redeemable preferred stock 6,448 6,495 6,495
--------------- --------------- ---------------
Total fixed maturities 95,455 97,785 97,785
Equity securities:
Common stocks:
Public utilities - - -
Banks, trust and insurance companies 1,261 2,299 2,299
Industrial, miscellaneous and all other 2,753 3,289 3,289
Non-redeemable preferred stocks 2,847 2,956 2,956
--------------- --------------- ---------------
Total equity securities 6,861 8,544 8,544
Mortgage loans on real estate - XXXXXXX -
Real estate - XXXXXXX -
Policy loans - XXXXXXX -
Other long-term investments 703 XXXXXXX 797
Short-term money-market investments 745 XXXXXXX 745
--------------- --------------- ---------------
Total investments $ 103,764 XXXXXXX $ 107,871
=============== =============== ===============
</TABLE>
<PAGE>
SCHEDULE II
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION (Parent Company Only)
STATEMENT OF OPERATIONS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31,
1995 1994 1993
<S> <C> <C> <C>
REVENUES:
Management fee income, net $ 59 $ 275 $ 106
Equity in income of subsidiaries 2,848 4,395 3,970
Net investment income 76 76 68
------------ ------------ -------------
Income before income taxes 2,983 4,746 4,144
Provision for income taxes 66 158 103
------------ ------------ -------------
Income before extraordinary item 2,917 4,588 4,041
Extraordinary item - - (249)
------------ ------------ -------------
Net income $ 2,917 $ 4,588 $ 3,792
============ ============ =============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
SCHEDULE II (continued)
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION (Parent Company Only)
BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
1995 1994
<S> <C> <C>
ASSETS:
Total investments $ 51,637 $ 45,558
Cash and cash equivalents 1,374 1,562
Accrued investment income 10 10
Income taxes receivable 65 12
Deferred Federal income tax asset 45 66
Due from affiliates 94 -
Furniture, equipment and improvements 730 947
Other assets 1,877 1,769
-------------- --------------
Total assets $ 55,832 $ 49,924
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Bank indebtedness $ 12,500 $ 12,500
Due to affiliates - 153
Other liabilities 349 1,277
-------------- --------------
Total liabilities 12,849 13,930
-------------- --------------
Stockholders' Equity:
Common stock and additional paid in capital 9,467 9,245
Net unrealized appreciation (depreciation)
on equity securities, net of taxes 2,710 (2,080)
Retained earnings 30,806 28,829
-------------- --------------
Total stockholders' equity 42,983 35,994
-------------- --------------
Total liabilities and stockholders'
equity $ 55,832 $ 49,924
============== ==============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
SCHEDULE II (continued)
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION (Parent Company Only)
STATEMENT OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
1995 1994 1993
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,917 $ 4,588 $ 3,792
Add extraordinary item - - 249
Less equity in income of subsidiary (2,848) (4,395) (3,970)
------------- -------------- --------------
Net income from operations 69 193 71
Adjustments:
Change in income taxes, net 159 (204) (3)
Change in accrued investment income - - (8)
Change in due (to) from affiliates (247) 55 98
Change in other assets / liabilities (1,036) 128 (1,144)
Dividend received from affiliate 2,000 1,000 500
Provision for depreciation and amortization 465 563 609
Realized gain on sale of securities - - (10)
Realized gain on sale of fixed assets 6 - (9)
------------- -------------- --------------
Net cash provided (used) 1,416 1,735 104
------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash received from investments sold, matured,
called or repaid - - 1,602
Cash paid for investments acquired - - (2,601)
Amortization of premium on bonds (632) 632 9
Capital expenditures, net (254) (277) (52)
------------- -------------- --------------
Net cash provided (used) (886) 355 (1,042)
------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt issuance - - 12,500
Proceeds from common stock issuance 448 104 280
Redeemable warrants - - (179)
Repayment of debt - - (12,300)
Repurchase of common stock (226) (417) -
Amortization of bank indebtedness - - 36
Dividends paid (940) (852) (659)
------------- -------------- --------------
Net cash from financing activities (718) (1,165) (322)
------------- -------------- --------------
Net increase (decrease) (188) 925 (1,260)
Cash and cash equivalents, beginning 1,562 637 1,897
------------- -------------- --------------
Cash and cash equivalents, ending $ 1,374 $ 1,562 $ 637
============= ============== ==============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
SCHEDULE II (continued)
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION (Parent Company Only)
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying condensed financial statements include the accounts of
Amwest Insurance Group, Inc. (the "Parent Company"). The Parent
Company's wholly-owned subsidiaries, Amwest Surety Insurance Company,
Far West Insurance Company and Far West Bond Services are not presented
as consolidated entities on these condensed financial statements.
2. Material Contingencies
The Parent Company is the subject of certain claims arising in the
ordinary course of its operations. The Parent Company believes that the
ultimate resolution of such matters will not materially affect its
financial condition.
3. Long-Term Obligations and Guarantees
On August 6, 1993, the Parent Company entered into a revolving credit
agreement with Union Bank for $12,500,000. The debt agreement was
amended on April 24, 1995 to increase the amount available under the
revolving line of credit from $12,500,000 to $15,000,000. The amounts
available are reduced by $2,500,000 each year beginning on July 15,
1995 and ending on July 15, 2000. Accordingly at December 31, 1995,
$12,500,000 is available under the revolving line of credit, all of
which is currently utilized. The bank loan has a variable rate based
upon fluctuations in the London Interbank Offered Rate (LIBOR) and
amortizing principal payments.
3. Merger Agreement
On November 30, 1995, an Agreement and Plan of Merger (the "Merger
Agreement") was executed by and between the Parent Company and Condor
Services, Inc. ("Condor"), an unaffiliated insurance holding company
which provides property and casualty insurance coverages and services
in California and Arizona. The Merger Agreement was approved at special
meetings of the stockholders of Condor and the Parent Company held on
March 14, 1996.
<PAGE>
The Board of Directors
Amwest Insurance Group, Inc.:
We consent to incorporation by reference in registration statements Nos.
33-11020, 33-24243 and 33-38128 on Form S-8 and in registration statements Nos.
33-28645 and 33-37984 on Form S-3 of Amwest Insurance Group, Inc. of our reports
dated February 7, 1996, relating to the consolidated balance sheets of Amwest
Insurance Group, Inc. and subsidiaries as of December 31, 1995 and 1994 and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows and related schedules for each of the years in the three-year
period ended December 31, 1995, which reports appear in the December 31, 1995
annual report on Form 10-K of Amwest Insurance Group, Inc.
KPMG PEAT MARWICK LLP
Los Angeles, California
March 28, 1996
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Amwest Insurance Group, Inc.:
Under date of February 7, 1996, we reported on the consolidated balance sheets
of Amwest Insurance Group, Inc. and subsidiaries as of December 31, 1995 and
1994, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1995 as contained in the annual report on Form 10-K
for the year 1995. In connection with our audits of the aforementioned
consolidated financial statements, we also have audited the related financial
statement schedules as listed in the accompanying index. These financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement schedules
based on our audits.
In our opinion, the related financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Los Angeles, California
February 7, 1996
