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 September 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 Road
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 November 11, 1999, 4,324,818 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 and Comprehensive Income
for the three months and nine months ended September 30, 1999
and 1998 (unaudited) 3
Consolidated Balance Sheets as of September 30, 1999
(unaudited) and December 31, 1998 4
Consolidated Statements of Cash Flows for the three months
and nine months ended September 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
Item 3
Quantitative and Qualitative Disclosures About Market Risk
No significant changes from the Company's Annual Report
on Form 10-K for the year ended December 31, 1998
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 16
Item 6
Exhibits and Reports on Form 8-K 16
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATIONS
Gross premiums written $ 35,969 $ 34,687 $ 104,146 $ 99,073
---------------- ---------------- ----------------- ----------------
Net premiums earned $ 27,732 $ 25,633 $ 81,711 $ 80,005
Net investment income 1,595 1,733 5,069 4,870
Net realized investment gains 10 1,901 2,047 3,786
Commissions and fees 323 674 1,452 1,402
---------------- ---------------- ----------------- ----------------
Total revenues 29,660 29,941 90,279 90,063
---------------- ---------------- ----------------- ----------------
Net losses and loss adjustment expenses 14,330 9,951 33,419 30,047
Policy acquisition costs 15,543 12,678 41,466 40,578
General operating costs 3,285 3,892 11,782 10,617
Interest expense 593 475 1,640 1,386
---------------- ---------------- ----------------- ----------------
Total expenses 33,751 26,996 88,307 82,628
---------------- ---------------- ----------------- ----------------
Income (loss) before income taxes (4,091) 2,945 1,972 7,435
Provision (benefit) for income taxes (1,345) 847 613 2,306
---------------- ---------------- ----------------- ----------------
Net income (loss) $ (2,746) $ 2,098 $ 1,359 $ 5,129
================ ================ ================= ================
Earnings (loss) per common share:
Basic $ (0.64) $ 0.49 $ 0.31 $ 1.21
================ ================ ================= ================
Diluted $ (0.64) $ 0.48 $ 0.31 $ 1.19
================ ================ ================= ================
COMPREHENSIVE INCOME (LOSS)
Net income (loss) $ (2,746) $ 2,098 $ 1,359 $ 5,129
Other comprehensive income (loss):
Unrealized gains(losses) on securities,
net of income taxes of $466 and $407 for
the three months ended September 30,
1999 and 1998, and $1,270 and $(353)
for the nine months ended September
30, 1999 and 1998, respectively (904) (790) (2,465) 685
Reclassification adjustment for gains
included in net income, net of income
taxes of $58 and $540 for
the three months ended September 30,
1999 and 1998, and $526 and $972
for the nine months ended September
30, 1999 and 1998, respectively (114) (1,049) (1,020) (1,888)
---------------- ---------------- ----------------- ----------------
Comprehensive income (loss) $ (3,764) $ 259 $ (2,126) $ 3,926
================ ================ ================= ================
</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>
September 30, December 31,
1999 1998
-------------------- ---------------------
(unaudited)
<S> <C> <C>
Investments:
Fixed maturities, available-for-sale (amortized cost of
$103,476 and $105,355 at September 30, 1999 and
December 31, 1998, respectively) $100,832 $ 107,227
Common equity securities, available-for-sale (cost of
$4,014 and $7,692 at September 30, 1999 and
December 31, 1998, respectively) 6,618 10,572
Preferred equity securities, available-for-sale
(cost of $4,457 and $4,258 at September 30, 1999
and December 31, 1998, respectively) 4,327 4,265
Other invested assets (cost of $7,071 and $4,058 at
September 30, 1999 and December 31, 1998, respectively) 7,037 4,375
Short-term investments 2,542 2,201
-------------------- ---------------------
Total investments 121,356 128,640
Cash and cash equivalents 15,509 2,431
Accrued investment income 1,530 1,470
Agents balances and premiums receivable (less allowance
for doubtful accounts of $1,265 at September 30, 1999
and $1,015 at December 31, 1998, respectively) 18,669 17,309
Reinsurance recoverable:
Paid loss and loss adjustment expenses 4,409 6,236
Unpaid loss and loss adjustment expenses 12,359 9,837
Ceded unearned premiums 6,993 8,584
Deferred policy acquisition costs 22,720 20,209
Furniture, equipment and improvements, net 6,443 6,267
Income taxes recoverable 1,493 951
Other assets 16,949 14,357
-------------------- ---------------------
Total assets $228,430 $216,291
==================== =====================
</TABLE>
<PAGE>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(Dollars in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------------- ---------------------
(unaudited)
<S> <C> <C>
Liabilities:
Unpaid losses and loss adjustment expenses $ 41,390 $ 42,244
Unearned premiums 54,352 51,627
Funds held 46,479 30,542
Bank indebtedness 14,500 14,500
Amounts due to reinsurers 2,411 4,393
Deferred Federal income taxes 1,662 3,185
Other liabilities 8,688 7,898
-------------------- ---------------------
Total liabilities 169,482 154,389
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: 4,316,499 at
September 30, 1999 and 4,311,580 at December 31, 1998
43 39
Additional paid-in capital 19,510 19,183
Net unrealized appreciation (depreciation) of investments carried
at market, net of income taxes (135) 3,349
Retained earnings 39,530 39,331
-------------------- ---------------------
Total stockholders' equity 58,948 61,902
-------------------- ---------------------
Total liabilities and stockholders' equity $228,430 $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 Nine months ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (2,746) $ 2,098 $ 1,359 $ 5,129
Adjustments to reconcile net income to cash provided
by operating activities:
Change in agents' balances and premiums receivable
and unearned premiums 5,141 2,831 1,365 2,502
Change in accrued investment income 27 (153) (60) (195)
Change in unpaid losses and loss adjustment
expenses 2,458 (244) (854) 1,196
Change in reinsurance recoverable on paid and
unpaid losses and loss adjustment expenses and
ceded und premiums 1,130 (7,988) 896 (8,802)
Change in amounts due to/from reinsurers 2,080 3,394 (1,982) 3,827
Change in other assets and other liabilities 951 900 (2,060) 4,026
Change in income taxes, net (1,598) 736 (270) 2,133
Change in deferred policy acquisition costs (446) 4,101 (2,511) 1,945
Net realized gain on sale of investments (9) (1,901) (2,046) (3,786)
Net realized loss on sale of fixed assets 5 - - 8
Provision for depreciation and amortization 468 660 1,415 1,409
---------------- ----------------- ----------------- ----------
Net cash provided (used) by operating
activities 7,461 4,434 (4,748) 9,392
Cash flows from investing activities:
Cash received from investments sold
prior to maturity 6,915 20,998 34,333 52,965
Cash received from investments
matured or called 3,910 5,076 10,284 11,984
Cash paid for investments acquired (9,770) (25,630) (40,698) (69,066)
Amortization of discount on bonds 41 45 134 120
Capital expenditures, net (441) (927) (1,591) (1,803)
Acquisition of agencies, net 2 - 258 (673)
---------------- ----------------- ----------------- ----------
Net cash provided (used) by investing activities 657 (438) 2,720 (6,473)
<PAGE>
Cash flows from financing activities:
Proceeds from issuance of common stock 97 202 505 921
Repurchase of common stock (170) - (170) -
Change in funds held 6,074 1,061 15,937 5,376
Dividends paid (389) (391) (1,166) (1,162)
----------------- ----------------- ---------------- ----------
Net cash provided by financing activities 5,612 872 15,106 5,135
---------------- ----------------- ----------------- -----------
Net increase in cash and cash equivalents 13,730 4,868 13,078 8,054
Cash and cash equivalents at beginning of period 1,779 6,993 2,431 3,807
---------------- ----------------- ----------------- ----------
Cash and cash equivalents at end of period $ 15,509 $ 11,861 $ 15,509 $ 11,861
================ ================= ================= ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 593 $ 475 $ 1,640 $ 1,386
Income taxes 253 114 908 1,841
</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 September 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Three months ended September 30,
Income Shares Per-Share
(Numerator) (Denominator) Amount
($ in thousands) (Dollars)
------------------- -------------------- ----------------
<S> <C> <C> <C>
Basic EPS:
1999 $ (2,746) 4,315,942 $ (.64)
1998 $ 2,098 4,294,727 $ .49
Effect of Dilutive Securities:
1999 0
1998 49,549
Diluted EPS:
1999 $ (2,746) 4,315,942 $ (.64)
1998 $ 2,098 4,344,276 $ .48
Diluted EPS for 1999 is the same as basic EPS because the result of the
calculation is antidilutive due to the net loss reported for the three
months ended September 30, 1999. Dilutive securities represent the
Company's stock options.
</TABLE>
<PAGE>
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Premiums written increased 4% and 5% from $34,687,000 and $99,073,000
for the three months and nine months ended September 30, 1998,
respectively, as compared to $35,969,000 and $104,146,000 for the three
months and nine months ended September 30, 1999, respectively.
The premium growth was due to premium increases in the surety product
lines. Premiums for the surety business increased 8% from $26,594,000
and $76,437,000 for the three months and nine months ended September
30, 1998, respectively, to $28,773,000 and $82,722,000 for the three
months and nine months ended September 30, 1999, respectively. The
increase is attributable to increased writings primarily in the court
and commercial surety operations.
Premiums for the property and casualty business decreased 11% and 5%
from $8,093,000 and $22,636,000 for the three months and nine months
ended September 30, 1998, respectively, to $7,196,000 and $21,424,000
for the three months and nine months ended September 30, 1999,
respectively. The decrease is primarily due to discontinuation of the
California and Arizona Private Passenger Automobile and California
Homeowners programs during 1999.
Net premiums earned increased 8% and 2% from $25,633,000 and
$80,005,000 for the three months and nine months ended September 30,
1998, respectively, as compared to $27,732,000 and $81,711,000 for the
three months and nine months ended September 30, 1999, respectively.
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. The growth in net premiums earned for
the nine months ended September 30, 1999 was lower than growth in
premiums written due to higher premium cessions in 1999 versus 1998 on
the surety quota share reinsurance program which began in July 1998.
Net investment income decreased 8% from $1,733,000 for the three months
ended September 30, 1998 to $1,595,000 for the three months ended
September 30, 1999, and increased 4% from $4,870,000 for the nine
months ended September 30, 1998 to $5,069,000 for the nine months ended
September 30, 1999. The decrease for the three months ended September
30, 1999 is primarily due to a decrease in the amount of average
invested assets from $127,320,000 at September 30, 1998 to $122,668,000
at September 30, 1999. Net realized investment gains decreased from
$1,901,000 and $3,786,000 for the three months and nine months ended
September 30, 1998, respectively, to $10,000 and $2,047,000 for the
three months and nine months ended September 30, 1999, respectively.
The investments sold during the three months and nine months ended
September 30, 1999 were primarily equity securities and certain fixed
income investments including mortgage-backed and municipal bond
securities.
Commissions and fees decreased 52% from $674,000 for the three months
ended September 30, 1998 to $323,000 for the three months ended
September 30, 1999, and increased 4% from $1,402,000 for the nine
months ended September 30, 1998 to $1,452,000 for the nine months ended
September 30, 1999. The decrease for the three months ended September
30, 1999 is primarily due to a decrease in fees charged to the
policyholders on the property and casualty business due to
discontinuation of the California and Arizona Private Passenger
Automobile and California Homeowners program in 1999.
<PAGE>
Net losses and loss adjustment expenses increased 44% and 11% from
$9,951,000 and $30,047,000 for the three months and nine months ended
September 30, 1998, respectively, to $14,330,000 and $33,419,000 for
the three months and nine months ended September 30, 1999,
respectively. The increase is primarily due to a number of significant
losses in the contract surety product line. The loss and loss
adjustment expense ratio for the surety business increased from 32% and
28% for the three months and nine months ended September 30, 1998,
respectively, to 53% and 32% for the three months and nine months ended
September 30, 1999, respectively. The loss and loss adjustment expense
ratio for the property and casualty business decreased from 63% and 73%
for the three months and nine months ended September 30, 1998,
respectively, to 48% and 72% for the three months and nine months ended
September 30, 1999, respectively. The 48% loss ratio for the three
months ended September 30, 1999 includes the impact of the aggregate
stop loss reinsurance treaty. The stop loss treaty covers all lines of
business, however, the entire impact for the 1999 year was applied to
property and casualty business since the layer penetrated was
established primarily to eliminate excess property and casualty
business losses. Exclusive of this benefit, the loss and loss
adjustment expense ratio for the property and casualty business for the
three months ended September 30, 1999 was 67%.
Policy acquisition costs increased as a percentage of net premiums
earned from 49%, or $12,678,000, to 56%, or $15,543,000, for the three
months ended September 30, 1998 and September 30, 1999, respectively.
The ratio remained constant at 51%, or $40,578,000 and $41,466,000, for
the nine months ended September 30, 1998 and September 30, 1999,
respectively. The increase in expense ratio for the three months ended
September 30, 1999 is primarily due to a decline in writings
attributable to the discontinued California and Arizona private
passenger automobile programs in the property and casualty division,
increased commission expense on the surety business, a decreased ceding
commission on the surety quota share reinsurance program and the
elimination of quota share reinsurance on the discontinued property and
casualty programs which generated ceding commission in 1998.
General operating costs decreased as a percentage of net premiums
earned from 15%, or $3,892,000 to 12%, or $3,285,000, for the three
months ended September 30, 1998 and September 30, 1999, respectively,
and the ratio increased from 13%, or $10,617,000 to 14%, or
$11,782,000, for the nine months ended September 30, 1998 and September
30, 1999, respectively. The decrease in costs for the three months
ended September 30, 1999 is primarily attributable to reduced bonus
accruals due to comparative financial results.
Interest expense increased 25% and 18% from $475,000 and $1,386,000 for
the three months and nine months ended September 30, 1998,
respectively, to $593,000 and $1,640,000 for the three months and nine
months ended September 30, 1999, respectively. The increase is
attributable to an increase in average funds held on which the Company
pays interest from $27,721,000 for the nine months ended September 30,
1998 to $38,511,000 for the nine months ended September 30, 1999.
Income before income taxes decreased from income of $2,945,000 and
$7,435,000 for the three months and nine months ended September 30,
1998, respectively, to a loss of $4,091,000 and income of $1,972,000
for the three months and nine months ended September 30, 1999,
respectively, due to the factors outlined above.
The effective tax rate was 29% and 31% for the three months and nine
months ended September 30, 1998, respectively, as compared to a benefit
of 33% and an effective tax rate of 31% for the three months and nine
months ended September 30, 1999, respectively. 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 nine months ended September 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.
<PAGE>
Net income decreased from $2,098,000 and $5,129,000 for the three
months and nine months ended September 30, 1998, respectively, to net
loss of $2,746,000 and net income of $1,359,000 for the three months
and nine months ended September 30, 1999, respectively, due to the
factors outlined above.
Liquidity and Capital Resources
As of September 30, 1999, the Company held total cash and cash
equivalents and invested assets of $136,865,000. This amount includes
an aggregate of $46,479,000 in funds held as collateral which is shown
as a liability on the Company's consolidated balance sheets. As of
September 30, 1999, the Company's invested assets consisted of
$100,832,000 in fixed maturities, $6,618,000 in common equity
securities, $4,327,000 in preferred equity securities, $7,037,000 in
other invested assets and $2,542,000 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 September 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, 2001. The interest rate at September 30, 1999 was 7.1%. 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 $233,000. The Company
also has an 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 $4,434,000 and $9,392,000 in cash from operating
activities for the three months and nine months ended September 30,
1998, respectively, as compared to generating $7,461,000 and using
$4,748,000 for the three months and nine months ended September 30,
1999, respectively. The Company used $438,000 and $6,473,000 in cash
from investing activities for the three months and nine months ended
September 30, 1998, respectively, as compared to generating $657,000
and $2,720,000 for the three months and nine months ended September 30,
1999. The Company generated $872,000 and $5,135,000 in cash from
financing activities for the three months and nine months ended
September 30, 1998, respectively, as compared to generating $5,612,000
and $15,106,000 for the three months and nine months ended September
30, 1999, respectively.
<PAGE>
Other Matters
Year 2000 issues:
The Company has summarized below 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 and the claims 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 has
modified its ABS system in order for it to be used for probate
production and claims processing. The Company expects to implement the
modified ABS system in the fourth quarter of 1999. The Company is
currently in the final stages of testing a new Y2K compliant claims
system to be implemented during the fourth quarter.
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 implementing its recently
developed commercial lines system to replace the non-Y2K compliant
system supplied by an outside vendor.
<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 commercial
lines systems. In all three of these cases, the underlying previously
utilized systems had 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 (largely because such
systems were Y2K compliant when installed). 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 has 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 the recently modified commercial transportation
products, a deterioration in premiums written or losses incurred in the
Company's surety and other specialty businesses, the ability to achieve
increased percentage writings of commercial surety and court products,
a reduction in the investment yield earned on the Company's investment
portfolio, or a 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 and loss adjustment expenses 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 Nine months ended Year ended
September 30, September 30, December 31,
Type of Bond 1999 1998 1999 1998 1998 1997
------------ ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Surety
Gross premiums written $28,773 $26,594 $82,722 $76,437 $ 102,270 $ 82,611
Net premiums earned 20,638 19,887 63,533 63,449 84,166 70,565
Net losses and loss adjustment
expenses 10,955 6,308 20,343 17,905 23,262 20,013
Loss ratio and loss adjustment
expense ratio 53% 32% 32% 28% 28% 28%
Property & Casualty
Gross premiums written $7,196 $8,093 $21,424 $22,636 $ 30,549 $ 25,480
Net premiums earned 7,094 5,746 18,178 16,556 21,805 21,585
Net losses and loss adjustment
expenses 3,376 3,643 13,077 12,142 17,569 14,644
Loss ratio and loss adjustment
expense ratio 48% 63% 72% 73% 81% 68%
Total Company
Gross premiums written $ 35,969 $ 34,687 $ 104,146 $ 99,073 $132,819 $108,091
Net premiums earned 27,732 25,633 81,711 80,005 105,971 92,150
Net losses and loss adjustment
expenses 14,330 9,951 33,419 30,047 40,831 34,657
Loss ratio and loss adjustment
expense ratio 52% 39% 41% 38% 39% 38%
</TABLE>
<PAGE>
PART II - OTHER INFORMATION
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
Items 1-5: LEGAL PROCEEDINGS, CHANGE IN SECURITIES,
DEFAULTS UPON SENIOR SECURITIES, SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS,
OTHER INFORMATION
None
Item 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See the Exhibit Index on page 18.
(b) Reports on Form 8-K
There were no reports filed on Form 8-K
during the three months ended September 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: November 11, 1999 by: /s/ JOHN E. SAVAGE
----------------------------
John E. Savage
President, Chief Executive Officer
and Chief Operating Officer
(Principal Executive Officer)
by: /s/ STEVEN R. KAY
----------------------------
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 security
holders, 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 Page 19
WAIVER AND AMENDMENT NO. 3
This Waiver and Amendment No. 3 dated as of August 30, 1999 (the
"Waiver and Amendment") to the Restated Revolving Credit Agreement dated as of
July 10, 1996, as amended by that certain Waiver and Amendment No.1 dated as of
September 30, 1997, and that certain Waiver and Amendment No. 2 dated as of
February 10, 1999 (the "Credit Agreement") between AMWEST INSURANCE GROUP, INC.
(the"Borrower") and UNION BANK OF CALIFORNIA, N.A. (the"Bank") is entered into
between Borrower and Bank.
WHEREAS, the Borrower desires, and the Bank is willing upon the terms
and conditions hereinafter set forth, to
(a) amend the Section 1.1 definition of Maturity Date;
(b) waive compliance with Section 2.12 Mandatory Commitment
Reductions, as amended, for the September 30, 1999 Revolving Commitment
Reduction Date, and
(c) amend the Credit Agreement to: modify Section 2.12 Mandatory
Commitment Reductions.
In consideration of the premises and the agreements, provisions and
covenants herein contained, the parties hereto hereby agree, on the terms and
subject to the conditions set forth herein, as follows:
1. Amendment to Section 1.1 Definitions. The definition of
Maturity Date in Section 1.1 is hereby amended to read: "Maturity Date means
September 30, 2003."
2. Waiver of Section 2.12 of the Credit Agreement. The Bank hereby
waives compliance with Section 2.12 Mandatory Commitment Reductions for the
September 30, 1999 Revolving Commitment Reduction Date provided that the
provisions of Section 2 following remain in full force and effect.
3. Amendment to Section 2.12 of the Credit Agreement. Delete the table
contained in Section 2.12 Mandatory Commitment Reductions as amended in its
entirety and replace it with the following table:
Revolving Commitment
Commitment Reduction Date Reduction
September 30, 1999 $0
September 30, 2000 $0
September 30, 2001 $5,000,000
September 30, 2002 $5,000,000
September 30, 2003 $5,000,000
<PAGE>
4. Representations and Warranties. The Borrower represents and
warrants to the Borrower that:
(a) before and after giving effect to this Amendment, the
representations and warranties set forth in Article I I I of the Credit
Agreement are true and correct in all material respects with the same effect as
if made on the date hereof, except to the extent such representations and
warranties expressly relate to an earlier date.
(b) before and after giving effect to this Amendment, no
Event of Default or Default has occurred and is continuing.
5. Conditions to Effectiveness. This Amendment shall become effective
as of the date first written above when the Bank shall have received executed
originals of the following:
(a) the counterpart of this Amendment that bears the
signature of the Borrower, and (b) such other documents,
certificates, opinions and instruments in connection with
this Amendment
No. 3 as shall be reasonably requested by the Bank.
6. Expenses. The Borrower agrees to reimburse the Bank for its
out-of-pocket expenses in connection with the Amendment.
7. Applicable Law. This Amendment shall be governed by, and construed
in accordance with, the laws of the State of California.
8. Counterparts. This Amendment may be executed in two or more
counterparts, each of which shall constitute an original, but all of which when
taken together shall constitute but one contract.
9. Credit Agreement. Except as specifically stated herein, the
provisions of the Credit Agreement are and shall remain in full force and
effect.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed by their respective authorized officers as of the day and year
first written above.
UNION BANK OF CALIFORNIA, N.A. AMWEST INSURANCE GROUP, INC.
BY: James R. Fothergill BY: Steven R. Kay
Title: Vice President Title: Senior Vice President and CFO
"Bank"
BY: Phillip E. Huff
Title: Vice President and Treasurer
"Borrower"
<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> JUL-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 100,832
<EQUITIES> 10,945
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 121,356
<CASH> 15,509
<RECOVER-REINSURE> 16,768
<DEFERRED-ACQUISITION> 22,720
<TOTAL-ASSETS> 228,430
<POLICY-LOSSES> 41,390
<UNEARNED-PREMIUMS> 54,352
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 14,500
0
0
<COMMON> 43
<OTHER-SE> 58,905
<TOTAL-LIABILITY-AND-EQUITY> 228,430
27,732
<INVESTMENT-INCOME> 1,595
<INVESTMENT-GAINS> 10
<OTHER-INCOME> 323
<BENEFITS> 14,330
<UNDERWRITING-AMORTIZATION> 15,543
<UNDERWRITING-OTHER> 3,285
<INCOME-PRETAX> (4,091)
<INCOME-TAX> (1,345)
<INCOME-CONTINUING> (2,746)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,746)
<EPS-BASIC> (.64)
<EPS-DILUTED> (.64)
<RESERVE-OPEN> 42,244
<PROVISION-CURRENT> 36,375
<PROVISION-PRIOR> 3,480
<PAYMENTS-CURRENT> 18,011
<PAYMENTS-PRIOR> 22,698
<RESERVE-CLOSE> 41,390
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
