SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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
incorporation or organization) Identification No.)
5230 Las Virgenes Rd.
Calabasas, California 91302
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 871-2000
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 .
As of August 10, 1999, 4,328,210 shares of common stock, $.01 par
value, were outstanding.
<PAGE>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
INDEX
Part I. FINANCIAL INFORMATION:
Item 1
Consolidated Statements of Operations for the three months and
six months ended June 30, 1999 and 1998 (unaudited) 3
Consolidated Balance Sheets as of June 30, 1999 (unaudited) and
December 31, 1998 4
Consolidated Statements of Cash Flows for the three months and
six months ended June 30, 1999 and 1998 (unaudited) 6
Notes to Interim Consolidated Financial Statements 8
Item 2
Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Part II. OTHER INFORMATION:
Item 1
Legal Proceedings 16
Item 2
Changes in Securities 16
Item 3
Defaults Upon Senior Securities 16
Item 4
Submission of Matters to a Vote of Security Holders 16
Item 5
Other Information 17
Item 6
Exhibits and Reports on Form 8-K 17
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATIONS
Gross premiums written $ 36,042 $ 35,044 $ 68,177 $ 64,386
-------- -------- -------- --------
Net premiums earned ............................................................ $ 26,986 $ 27,248 $ 53,979 $ 54,372
Net investment income .......................................................... 1,705 1,560 3,474 3,137
Net realized investment gains .................................................. 1,297 1,065 2,037 1,885
Commissions and fees ........................................................... 522 515 1,129 728
-------- -------- -------- --------
Total revenues ....................................................... 30,510 30,388 60,619 60,122
-------- -------- -------- --------
Net losses and loss adjustment expenses ........................................ 10,003 11,188 19,089 20,096
Policy acquisition costs ....................................................... 12,736 13,317 25,923 27,464
General operating costs ........................................................ 4,558 3,794 8,497 7,161
Interest expense ............................................................... 493 506 1,047 911
-------- -------- -------- --------
Total expenses ........................................................ 27,790 28,805 54,556 55,632
-------- -------- -------- --------
Income before income taxes ..................................................... 2,720 1,583 6,063 4,490
Provision for income taxes ..................................................... 980 608 1,958 1,459
-------- -------- -------- --------
Net income .............................................................. $ 1,740 $ 975 $ 4,105 $ 3,031
======== ======== ======== ========
Earnings per common share:
Basic ................................................................... $ 0.40 $ 0.23 $ 0.95 $ 0.72
======== ======== ======== ========
Diluted ............................................................... $ 0.40 $ 0.22 $ 0.95 $ 0.70
======== ======== ======== ========
COMPREHENSIVE INCOME (LOSS)
Net income ..................................................................... $ 1,740 $ 975 $ 4,105 $ 3,031
Other comprehensive income (loss):
Unrealized gains(losses) on securities, net of income taxes of $253 and $49
for the three months ended June 30, 1999 and 1998, and $563 and $(982) for
the six months
ended June 30, 1999 and 1998, respectively ................................ (491) (96) (1,093) 1,907
Reclassification adjustment for gains included in
net income ............................................................... (822) (659) (1,374) (1,271)
-------- -------- -------- --------
Comprehensive income ............................................... $ 427 $ 220 $ 1,638 $ 3,667
======== ======== ======== ========
</TABLE>
See accompanying notes to interim consolidated financial statements.
<PAGE>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------------------- ---------------------
(unaudited)
<S> <C> <C>
Investments:
Fixedmaturities, available-for-sale (amortized cost of $104,145 and $105,355 at
June 30, 1999 and December 31, 1998, respectively)
$102,537 $107,227
Common equity securities, available-for-sale (cost of $4,124 and $7,692 at June
30, 1999 and December 31, 1998, respectively)
6,837 10,572
Preferred equity securities, available-for-sale (cost of $4,417 and $4,258 at
June 30, 1999 and December 31, 1998, respectively)
4,695 4,265
Other invested assets (cost of $7,478 and $4,058 at June 30,
1999 and December 31, 1998, respectively) 7,430 4,375
Short-term investments 2,482 2,201
-------------------- ---------------------
Total investments 123,981 128,640
Cash and cash equivalents 1,779 2,431
Accrued investment income 1,557 1,470
Agents balances and premiums receivable (less allowance for doubtful accounts of
$1,015 at June 30, 1999 and December 31, 1998,
respectively) 22,237 17,309
Reinsurance recoverable:
Paid loss and loss adjustment expenses 5,140 6,236
Unpaid loss and loss adjustment expenses 11,941 9,837
Ceded unearned premiums 7,810 8,584
Deferred policy acquisition costs 22,274 20,209
Furniture, equipment and improvements, net 6,475 6,267
Income taxes recoverable 121 951
Other assets 17,904 14,357
-------------------- ---------------------
Total assets $221,219 $216,291
==================== =====================
</TABLE>
<PAGE>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(Dollars in thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------------------- ---------------------
(unaudited)
<S> <C> <C>
Liabilities:
Unpaid losses and loss adjustment expenses $ 38,932 $ 42,244
Unearned premiums 52,779 51,627
Funds held 40,405 30,542
Bank indebtedness 14,500 14,500
Amounts due to reinsurers 331 4,393
Deferred Federal income taxes 2,411 3,185
Other liabilities 8,689 7,898
-------------------- ---------------------
Total liabilities 158,047 154,389
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: 4,316,977 at June
30, 1999 and 4,311,580 at December 31, 1998 43 39
Additional paid-in capital 19,583 19,183
Net unrealized appreciation of investments carried at market, net
of income taxes 881 3,349
Retained earnings 42,665 39,331
------------------- ---------------------
Total stockholders' equity 63,172 61,902
-------------------- ---------------------
Total liabilities and stockholders' equity $221,219 $216,291
==================== =====================
</TABLE>
See accompanying notes to interim consolidated financial statements.
<PAGE>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,740 $ 975 $ 4,105 $ 3,031
Adjustments to reconcile net income to cash provided
by operating activities:
Change in agents' balances and premiums receivable
and unearned premiums (699) 3,138 (3,776) (329)
Change in accrued investment income 58 15 (87) (42)
Change in unpaid losses and loss adjustment expenses (110) 1,907 (3,312) 1,440
Change in reinsurance recoverable on paid and
unpaid losses and loss adjustment expenses and
ceded unearned premiums 2,854 (1,585) (234) (814)
Change in amounts due to/from reinsurers (6,250) 289 (4,062) 433
Change in other assets and other liabilities (1,988) 2,631 (3,011) 3,126
Change in income taxes, net 326 (451) 1,327 1,397
Change in deferred policy acquisition costs (1,565) (1,852) (2,065) (2,156)
Net realized gain on sale of investments (1,297) (1,066) (2,037) (1,885)
Net realized (gain)loss on sale of fixed assets (1) 6 (5) 8
Provision for depreciation and amortization 454 356 947 749
---------------- --------------- ---------------- --------------
Net cash provided (used) by operating activities
(6,478) 4,363 (12,210) 4,958
Cash flows from investing activities:
Cash received from investments sold prior to
maturity 12,489 15,214 27,418 31,967
Cash received from investments matured or called
3,613 3,347 6,374 6,908
Cash paid for investments acquired (13,907) (23,207) (30,928) (43,436)
Amortization of discount on bonds 47 42 93 75
Capital expenditures, net (495) (488) (1,150) (876)
Acquisition of agencies, net - (73) 256 (673)
---------------- --------------- ---------------- ------------
Net cash provided (used) by investing activities
1,747 (5,165) 2,063 (6,035)
<PAGE>
Cash flows from financing activities:
Proceeds from issuance of common stock 51 540 409 719
Change in funds held 2,566 940 9,863 4,315
Dividends paid (389) (390) (777) (771)
--------------- ---------------- ---------------- ------------
Net cash provided by financing activities
2,228 1,090 9,495 4,263
---------------- --------------- ---------------- ------------
Net increase (decrease) in cash and cash equivalents
(2,503) 288 (652) 3,186
Cash and cash equivalents at beginning of period 4,282 6,705 2,431 3,807
---------------- --------------- ---------------- ------------
Cash and cash equivalents at end of period $ 1,779 $ 6,993 $1,779 $6,993
================ =============== ================ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 493 $ 506 $ 1,047 $ 911
Income taxes 654 1,565 655 1,727
</TABLE>
See accompanying notes to interim consolidated financial statements.
<PAGE>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
(unaudited)
(1) Basis of Presentation
The interim consolidated financial statements presented herein are
unaudited and, in the opinion of management, reflect all adjustments
necessary for a fair presentation of results for such periods. All such
adjustments are of a normal, recurring nature. The results of
operations for any interim period are not necessarily indicative of
results for the full year. These consolidated financial statements
should be read in conjunction with the consolidated financial
statements and notes thereto contained in the Company's Annual Report
on Form 10-K for the year ended December 31, 1998.
(2) Stock Dividend
On April 15, 1999, the Company paid a 10% stock dividend to
stockholders of record as of March 31, 1999. All share and per share
amounts included in the accompanying consolidated financial statements
and notes are based on the increased number of shares giving
retroactive effect to the stock dividend.
(3) Earnings Per Share
Basic EPS is calculated based on the weighted average number of common
shares outstanding and diluted EPS includes the effects of dilutive
potential common shares. The calculation of basic and diluted EPS
for the three months ended June 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Three months ended June 30,
Income Shares Per-Share
(Numerator) (Denominator) Amount
($ in thousands) (Dollars)
------------------- -------------------- ----------------
<S> <C> <C> <C>
Basic EPS:
1999 $ 1,740 4,318,254 $ .40
1998 $ 975 4,248,499 $ .23
Effect of Dilutive Securities:
1999 6,910
1998 110,615
Diluted EPS:
1999 $ 1,740 4,325,164 $ .40
1998 $ 975 4,359,114 $ .22
</TABLE>
<PAGE>
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Premiums written increased 3% and 6% from $35,044,000 and $64,386,000
for the three months and six months ended June 30, 1998, respectively,
to $36,042,000 and $68,177,000 for the three months and six months
ended June 30, 1999, respectively.
The premium growth was due to premium increases in the surety product
lines. Premiums for the surety business increased 6% and 8% from
$27,208,000 and $49,842,000 for the three months and six months ended
June 30, 1998, respectively, to $28,916,000 and $53,949,000 for the
three months and six months ended June 30, 1999, respectively. The
increase is attributable to increased writings in the commercial surety
and court operations.
Premiums for the property and casualty business decreased 9% and 2%
from $7,836,000 and $14,544,000 for the three months and six months
ended June 30, 1998, respectively, to $7,126,000 and $14,228,000 for
the three months and six months ended June 30, 1999, respectively. The
decrease is primarily due to discontinuation of the Arizona Private
Passenger Automobile and California Homeowners programs in 1999.
Net premiums earned decreased 1% from $27,248,000 and $54,372,000 for
the three months and six months ended June 30, 1998, respectively, to
$26,986,000 and $53,979,000 for the three months and six months ended
June 30, 1999, respectively. The decrease is primarily attributable to
an increase in premiums ceded by the Company pursuant to its quota
share reinsurance treaties. The Company generally earns premiums
ratably over the assigned bond terms for the surety business and the
policy term for the specialty property and casualty business.
Net investment income increased 9% and 11% from $1,560,000 and
$3,137,000 for the three months and six months ended June 30, 1998,
respectively, to $1,705,000 and $3,474,000 for the three months and six
months ended June 30, 1999, respectively. The increase is due to an
increase in the amount of average invested assets from $124,340,000 at
June 30, 1998 to $126,311,000 at June 30, 1999, and higher investment
yields in 1999 due to rising interest rates in 1999. Realized
investment gains increased from $1,065,000 and $1,885,000 for the three
months and six months ended June 30, 1998, respectively, to $1,297,000
and $2,037,000 for the three months and six months ended June 30, 1999,
respectively. The investments sold during the three months and six
months ended June 30, 1999 were primarily equity securities and certain
fixed income investments including mortgage-backed and municipal bond
securities.
Commissions and fees increased 1% and 55% from $515,000 and $728,000
for the three months and six months ended June 30, 1998, respectively,
to $522,000 and $1,129,000 for the three months and six months ended
June 30, 1999, respectively. The increase is primarily due to an
increase in fee income from the Liberty Retail Bail division which was
purchased in May, 1998.
Net losses and loss adjustment expenses decreased 11% and 5% from
$11,188,000 and $20,096,000 for the three months and six months ended
June 30, 1998, respectively, to $10,003,000 and $19,089,000 for the
three months and six months ended June 30, 1999, respectively. This
decrease was driven by the surety business where the loss and loss
adjustment expense ratio decreased from 31% and 27% for the three
months and six months ended June 30, 1998, respectively, to 18% and 22%
for the three months and six months ended June 30, 1999, respectively.
The loss and loss adjustment expense ratio for the property and
casualty operations increased from 80% and 79% for the three months and
six months ended June 30, 1998, respectively, to 112% and 88% for the
three months and six months ended June 30, 1999, respectively,
primarily due to an increase of $1,800,000 for prior accident years,
primarily relating to the 1997 underwriting year for the commercial
trucking product.
<PAGE>
Policy acquisition costs decreased as a percentage of net premiums
earned from 49%, or $13,317,000, and 51%, or $27,464,000, for the three
months and six months ended June 30, 1998, respectively, to 47%, or
$12,736,000, and 48%, or $25,923,000, for the three months and six
months ended June 30, 1999, respectively. The decrease is primarily
attributable to an increase in ceding commissions earned by the Company
pursuant to its quota share reinsurance treaties.
General operating costs increased as a percentage of net premiums
earned from 14%, or $3,794,000, and 13%, or $7,161,000, for the three
months and six months ended June 30, 1998, respectively, to 17%, or
$4,558,000, and 16%, or $8,497,000, for the three months and six months
ended June 30, 1999, respectively. The increase is primarily
attributable to accrued severance expenses relating to personnel
changes in the property and casualty operations during 1999 as well as
higher bonus accruals in 1999 due to improved profitability.
Interest expense decreased 3% from $506,000 to $493,000 for the three
months ended June 30, 1998 and June 30, 1999, respectively, and
increased 15% from $911,000 to $1,047,000 for the six months ended June
30, 1998 and June 30, 1999, respectively. The increase is attributable
to an increase in average funds held on which the Company pays interest
from $25,274,000 for the six months ended June 30, 1998 to $35,474,000
for the six months ended June 30, 1999. This is partially offset by a
decrease in the interest rate on the bank indebtedness from an average
rate of 7.5% for the six months ended June 30, 1998 to an average rate
of 6.9% for the six months ended June 30, 1999.
Income before income taxes increased from $1,583,000 and $4,490,000 for
the three months and six months ended June 30, 1998, respectively, to
$2,720,000 and $6,063,000 for the three months and six months ended
June 30, 1999, respectively, due to the factors outlined above.
The effective tax rate was 38% and 32% for the three months and six
months ended June 30, 1998 as compared to an effective tax rate of 36%
and 32% for the three months and six months ended June 30, 1999. The
primary reason for the variance from the corporate income tax rate of
34% is tax advantaged income received on a portion of the Company's
investment portfolio offset by certain non-deductible expenses. The
Company has recorded for the six months ended June 30, 1999 its
estimated effective tax rate for the year based on current underwriting
and investment income recorded.
Changes to the Company's estimated effective tax rate are recorded
quarterly.
Net income increased from $975,000 and $3,031,000 for the three months
and six months ended June 30, 1998, respectively, to $1,740,000 and
$4,105,000 for the three months and six months ended June 30, 1999,
respectively, due to the factors outlined above.
<PAGE>
Liquidity and Capital Resources
As of June 30, 1999, the Company held total cash and cash equivalents
and invested assets of $125,760,000. This amount includes an aggregate
of $40,405,000 in funds held which is shown as a liability on the
Company's consolidated balance sheets. As of June 30, 1999, the
Company's invested assets consisted of $102,537,000 in fixed
maturities, $6,837,000 in common equity securities, $4,695,000 in
preferred equity securities, $7,430,000 in other invested assets and
$2,482,000 in short-term investments, including certificates of deposit
with original maturities less than one year.
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. The State of Nebraska regulates, through
the Office of the Insurance Commissioner, the amount of dividends which
can be paid by a domestic insurance company utilizing various formula
methodology.
The Company has entered into a revolving credit agreement, as amended,
with Union Bank for $15,000,000. At June 30, 1999, $14,500,000 of the
$15,000,000 line is currently utilized leaving $500,000 currently
available. The bank loan has a variable rate of interest based upon
fluctuations in the London Interbank Offered Rate (LIBOR) and has
amortizing principal payments. The first installment is due September
30, 2000. The interest rate at June 30, 1999 was 6.7%. 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 ACD2 for its corporate
headquarters. This lease has a term of 15 years and contains provisions
for scheduled lease charges. The Company's minimum commitment with
respect to this lease in 1999 is approximately $466,000. The Company
also has the option to purchase this office building and land
commencing on April 27, 2000 and extending for a six month period at a
predetermined rate for the building, with the value of land based on
then existing market rates.
Other than the Company's obligations with respect to funds held as
collateral, the Company's obligation to pay claims as they arise, the
Company's commitments to pay principal and interest on the bank debt
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 at
least the remainder of 1999.
The Company generated $4,363,000 and $4,958,000 in cash from operating
activities for the three months and six months ended June 30, 1998,
respectively, as compared to using $6,478,000 and $12,210,000 for the
three months and six months ended June 30, 1999, respectively. The
increase in usage of funds during the six months ended June 30, 1999 is
primarily attributable to the timing of loss and reinsurance payments
as well as an increase in agents balances and premiums receivable
related to increased premiums written. There has been no significant
increase in agents balance bad debt write offs, which is closely
monitored by the Company. The Company used $5,165,000 and $6,035,000 in
cash from investing activities for the three months and six months
ended June 30, 1998, respectively, as compared to generating $1,747,000
and $2,063,000 for the three months and six months ended June 30, 1999,
respectively. The Company generated $1,090,000 and $4,263,000 in cash
from financing activities for the three months and six months ended
June 30, 1998, respectively, as compared to generating $2,228,000 and
$9,495,000 for the three months and six months ended June 30, 1999,
respectively.
<PAGE>
Other Matters
Year 2000 issues:
The Company has summarized its exposure to Y2K issues by four general
categories which are:
1. Corporate Systems
2. Surety Specific Systems
3. Property and Casualty Systems
4. Third Party (Vendor) Systems
The Company's state of readiness with respect to each of these
categories is as follows:
Corporate Systems:
The Company has four significant corporate wide applications which
include Oracle financials, the system providing electronic interface
between Oracle financials and the Company's bank, fixed asset
accounting, payroll, and corporate e-mail. The Company has completed
its assessment of these systems and believes that all of these systems
are Y2K compliant. This conclusion is based on either certifications
received from the third party vendor(s) supplying the system or testing
performed by the Company for internally developed or modified systems.
Surety Specific Systems:
The Company has fourteen surety specific systems which vary in their
significance from critical (such as the surety production system
commonly known as ABS) to non-critical applications which only affect a
small portion of the surety business (such as several retail bail
production systems). The Company has completed its assessment of its
fourteen surety specific systems and believes that all of the mission
critical surety specific systems are Y2K compliant other than the
Company's probate production system, cash collateral system and one
bail system. This conclusion is based on either certifications received
from the third party vendor(s) supplying the system or testing
performed by the Company for internally developed or modified systems.
The Company is currently in the process of modifying its ABS system in
order for it to be used for probate production and is proceeding with
completing system changes for the cash collateral and bail systems. The
Company expects that these modifications will be completed during the
third quarter of 1999, and will be implemented immediately thereafter.
Property and Casualty Systems:
The Company has four mission critical systems for its property and
casualty operations. These include a personal lines system supplied by
an outside vendor, a commercial lines system also supplied by an
outside vendor, a system for electronic transmission of the Company's
program business and data replicating software supplied by an outside
vendor. The Company has completed its assessment of these four systems
and believes that the personal lines system, the internally developed
system for electronic transmission of program business and the data
replicating system are Y2K compliant while the commercial lines system
is not Y2K compliant. This conclusion is based on either certifications
received from the third party vendor(s) supplying the system or testing
performed by the Company for internally developed or modified systems.
The Company is currently in the process of developing a new commercial
lines system to replace the non-Y2K compliant system supplied by an
outside vendor. The Company currently estimates that this system will
be completed and installed during the third quarter of 1999.
<PAGE>
Third Party (Vendor) Systems:
In addition to the above systems where the Company is primarily
responsible for assessing, analyzing and implementing Y2K compliant
systems, the Company may also be affected by any of the agents,
brokers, suppliers, financial institutions or others with whom the
Company does business who may be materially affected by Y2K problems
and thus indirectly affect the Company. Where appropriate, the Company
has inquired as to the state of readiness with respect to these third
parties, but the Company has not performed any independent Y2K testing
of these systems as the Company does not believe that such independent
testing would be cost justified.
Costs to Address the Year 2000 Issues:
The majority of the costs associated with system development of year
2000 compliant systems have been associated with the development of the
ABS surety production system and the property and casualty personal and
commercial lines systems. In all three of these cases, the underlying
previously utilized systems had significant business related flaws,
such that they needed to be replaced without regard to year 2000
compliance issues. The Company does not believe that the incremental
costs of making the replacement systems Y2K compliant were or will be
significant. Further, for those systems which have been modified solely
to assure Y2K compliance, the Company does not believe that these costs
are material.
Risks of the Company's Year 2000 Issues:
The Company has analyzed the risks associated with the year 2000 issues
and concluded that the biggest risk which the Company can have a
reasonable influence toward preventing is the lack of Y2K compliance by
the commercial lines property and casualty production system. The
commercial lines represent approximately $20,000,000 of written
premiums for the Company and the lack of a Y2K compliant system for
this business could have a significant adverse impact on the Company's
results.
The Company has also reviewed the underwriting risks associated with
its insureds for both the property and casualty and surety products and
believes that the major risk with respect to Y2K non-compliance relates
to the surety product. Should Y2K problems affect the ability of the
Company's principals to complete projects and pay subcontractors on a
timely basis it could have a material adverse affect on the Company's
surety loss ratio. Further, should Y2K problems affect the ability of
obligees to pay for work performed on bonded projects, liquidity issues
for principals could also impact the Company's surety loss ratio. The
Company is unable to estimate the affect such risks will have on the
Company's financial results.
Contingency Plans:
Due to the potential for sweeping problems associated with the Y2K
issue, the Company believes that any contingency plan for addressing
Y2K must be flexible and part of a broad based disaster recovery plan.
The Company's experience with disaster recovery (the Northridge
earthquake) has led it to believe that a rigid disaster recovery plan
will be less effective than a flexible plan which analyzes the specific
problems associated with each unique disaster and proposes solutions
based on the problems encountered. Other than for the specific internal
systems which are not currently Y2K compliant and for which the Company
is developing contingency plans (substantially based on temporary
manual intervention), the Company believes that a broad based disaster
recovery plan will be more effective in addressing the multitude of
potential Y2K problems. The Company has developed a disaster recovery
plan and will use this plan in responding to scenarios created by the
Y2K problem.
<PAGE>
Other issues:
Certain statements contained in this Form 10-Q regard matters which are
not historical facts and are forward looking statements. Because such
forward looking statements include risks and uncertainties, actual
results may differ materially from those expressed in or implied by
such forward looking statements. Factors that could cause actual
results to differ materially include, but are not limited to: the
ineffectiveness of changes made by management, poor results from the
Company's new non-premium income generating programs, a deterioration
in premiums written or losses incurred in the Company's surety and
other specialty businesses, a reduction in the investment yield earned
on the Company's investment portfolio, or general economic decline. The
Company undertakes no obligation to release publicly the results of any
revisions to these forward looking statements that may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
The table on the next page shows, for the periods indicated, the gross
premiums written, net premiums earned, net losses and loss adjustment
expenses and loss ratios for the Company's specialty property and
casualty operations and surety operations.
<PAGE>
TABLE 1
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
SUMMARY OF PREMIUMS AND LOSSES BY PRODUCT LINE
(Dollars in thousands)
<TABLE>
<CAPTION>
Three months ended Six months ended Year ended
June 30, June 30, December 31,
Type of Bond 1999 1998 1999 1998 1998 1997
------------ ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Surety
Gross premiums written $28,916 $27,208 $53,949 $49,842 $ 102,270 $ 82,611
Net premiums earned 21,395 21,631 42,895 43,562 84,166 70,565
Net losses and loss adjustment
expenses 3,747 6,689 9,388 11,597 23,262 20,013
Loss and loss adjustment expense
ratio 18% 31% 22% 27% 28% 28%
Property & Casualty
Gross premiums written $ 7,126 $ 7,836 $14,228 $14,544 $30,549 $25,480
Net premiums earned 5,591 5,617 11,084 10,810 21,805 21,585
Net losses and loss adjustment
expenses 6,256 4,499 9,701 8,499 17,569 14,644
Loss and loss adjustment expense
ratio 112% 80% 88% 79% 81% 68%
Total Company
Gross premiums written $36,042 $35,044 $68,177 $64,386 $132,819 $108,091
Net premiums earned 26,986 27,248 53,979 54,372 105,971 92,150
Net losses and loss adjustment
expenses 10,003 11,188 19,089 20,096 40,831 34,657
Loss and loss adjustment expense
ratio 37% 41% 35% 37% 39% 38%
</TABLE>
<PAGE>
PART II - OTHER INFORMATION
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
Items 1-3: LEGAL PROCEEDINGS, CHANGE IN SECURITIES, DEFAULTS UPON
SENIOR SECURITIES
None
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of stockholders was held on
May 21, 1999.
(b) (i) The following directors were elected to serve
until the 2002 Annual Meeting of Stockholders or
until their successors have been duly elected and
qualified:
John E. Savage
Guy A. Main
Thomas R. Bennett
(ii) The other directors whose terms of office
continued after the meeting are:
Richard H. Savage
Steven R. Kay
Neil F. Pont
Bruce A. Bunner
Robert W. Kleinschmidt
Arthur F. Melton
Roland D. Miller
Charles L. Schultz
(c) (i) Of the 3,850,628 shares represented at the
meeting, the directors named in (b) (i) above were
elected by the following votes:
No. of Votes Received
Withhold
Name For Authority
John E. Savage 3,847,148 3,480
Guy A. Main 3,843,642 6,986
Thomas R. Bennett 3,845,696 4,932
<PAGE>
Item 5: OTHER INFORMATION
None
Item 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See the Exhibit Index on page 19.
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the
three months ended June 30, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements 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: August 10, 1999 by: /s/ JOHN E. SAVAGE
-------------------------------------
John E. Savage
President, Co-Chief Executive Officer
and Chief Operating Officer
(Principal Executive Officer)
by: /s/ STEVEN R. KAY
------------------------------------
Senior Vice-President,
Chief Financial Officer,
Treasurer and Director
(Principal Financial and
Principal Accounting Officer)
<PAGE>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit
Number
Description Location
2 Plan of acquisition, reorganization,
arrangement, liquidation or succession None
4 Instruments defining the rights of
securityholders, including indentures Not required
11 Statement re computation of per share
earnings Page 8, Note 3
15 Letter re unaudited interim financial information None
18 Letter re change in accounting principles None
19 Previously unfiled documents None
20 Report furnished to security holders None
23 Published report regarding matters submitted
to vote of security holders None
24 Consents of experts and counsel None
25 Power of attorney None
28 Additional exhibits None
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000780118
<NAME> SIOBHAN HORTON
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 102,537
<EQUITIES> 11,532
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 123,981
<CASH> 1,779
<RECOVER-REINSURE> 17,081
<DEFERRED-ACQUISITION> 22,274
<TOTAL-ASSETS> 221,219
<POLICY-LOSSES> 38,932
<UNEARNED-PREMIUMS> 52,779
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 14,500
0
0
<COMMON> 43
<OTHER-SE> 63,129
<TOTAL-LIABILITY-AND-EQUITY> 221,219
26,986
<INVESTMENT-INCOME> 1,705
<INVESTMENT-GAINS> 1,297
<OTHER-INCOME> 522
<BENEFITS> 10,003
<UNDERWRITING-AMORTIZATION> 12,736
<UNDERWRITING-OTHER> 4,558
<INCOME-PRETAX> 2,720
<INCOME-TAX> 980
<INCOME-CONTINUING> 1,740
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,740
<EPS-BASIC> .40
<EPS-DILUTED> .40
<RESERVE-OPEN> 42,244
<PROVISION-CURRENT> 18,934
<PROVISION-PRIOR> 4,798
<PAYMENTS-CURRENT> 6,584
<PAYMENTS-PRIOR> 20,460
<RESERVE-CLOSE> 38,932
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
