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, 2000
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 10, 2000, 4,326,067 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 nine months
ended September 30, 2000 and 1999 (unaudited) 3
Consolidated Balance Sheets as of September 30, 2000 (unaudited) and
December 31, 1999 4
Consolidated Statements of Cash Flows for the three months and nine months
ended September 30, 2000 and 1999 (unaudited) 6
Notes to Interim Consolidated Financial Statements 8
Item 2
Management's Discussion and Analysis of Financial Condition and Results of
Operations 10
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, 1999
Part II. OTHER INFORMATION:
----------------------------
Item 1
Legal Proceedings 15
Item 2
Changes in Securities 15
Item 3
Defaults Upon Senior Securities 15
Item 4
Submission of Matters to a Vote of Security Holders 15
Item 5
Other Information 15
Item 6
Exhibits and Reports on Form 8-K 15
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1
------
<TABLE>
<CAPTION>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATIONS
Gross premiums written $ 39,158 $ 35,969 $ 119,105 $ 104,146
---------------- ---------------- -------------- ----------------
Net premiums earned $ 25,146 $ 27,732 $ 83,053 $ 81,711
Net investment income 1,540 1,595 4,992 5,069
Net realized investment gains 1,198 10 2,109 2,047
Commissions and fees 443 323 1,767 1,452
---------------- ---------------- -------------- ----------------
Total revenues 28,327 29,660 91,921 90,279
---------------- ---------------- -------------- ----------------
Net losses and loss adjustment expenses 16,701 14,330 58,492 33,419
Policy acquisition costs 11,991 15,543 41,052 41,466
General operating costs 3,269 3,285 11,083 11,782
Interest expense 602 593 1,852 1,640
---------------- ---------------- ------------ ----------------
Total expenses 32,563 33,751 112,479 88,307
---------------- ---------------- ------------- ----------------
Income (loss) before income taxes (4,236) (4,091) (20,558) 1,972
Provision (benefit) for income taxes (1,109) (1,345) (6,242) 613
---------------- ---------------- --------------- ----------------
Net income (loss) $ (3,127) $ (2,746) $ (14,316) $ 1,359
================ ================ ============== ================
Earnings (loss) per common share:
Basic $ (0.73) $ (0.64) $ (3.31) $ 0.31
================ ================ ============== ================
Diluted $ (0.73) $ (0.64) $ (3.31) $ 0.31
================ ================ ============== ================
COMPREHENSIVE INCOME (LOSS)
Net income (loss) $ (3,127) $ (2,746) $ (14,316) $ 1,359
Other comprehensive income (loss):
Unrealized gains(losses) on securities,
net of Income taxes of $(18) and $466 for
the three Months ended September 30, 2000
and 1999, and $(264) and $1,270 for the nine
months ended September 30, 2000 and 1999
respectively 34 (905) 512 (2,465)
Reclassification adjustment for gains included in
net income, net of income taxes of $(83) and
$58 for the three months ended September 30,
2000 and 1999, and $186 and $526 for the
nine months ended September 30, 2000
and 1999, respectively 162 (113) (361) (1,020)
---------------- ---------------- ----------------- -----------
Comprehensive income (loss) $ (2,931) $ (3,764) $ (14,165) $ (2,126)
================ ================ ================= ===========
See accompanying notes to interim consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
September 30, December 31,
2000 1999
---------------- ----------------
(unaudited)
<S> <C> <C>
Investments:
Fixedmaturities, available-for-sale (amortized cost of $77,527and $104,193 at
September 30, 2000 and December 31, 1999,
respectively) $75,187 $ 100,892
Common equity securities, available-for-sale (cost of $3,560 and $2,886 at
September 30, 2000 and December 31, 2000, respectively)
4,617 4,199
Preferred equity securities, available-for-sale (cost of $3,506 and $4,905
September 30, 2000 and December 31, 1999, respectively)
3,100 5,073
Other invested assets (cost of $4,533 and $7,725 at September 30, 2000
and December 31, 1999, respectively) 4,654 7,749
Short-term investments 3,366 2,691
-------------------- ---------------------
Total investments 90,924 120,604
Cash and cash equivalents 10,732 15,821
Accrued investment income 1,130 1,654
Agents balances and premiums receivable (less allowance for doubtful
accounts of $1,573 at September 30, 2000 and $1,260 at December
31, 1999, respectively) 19,826 15,365
Contract settlement funds and collateral receivable 22,578 16,270
Reinsurance recoverable:
Paid loss and loss adjustment expenses 6,409 5,401
Unpaid loss and loss adjustment expenses 36,435 21,903
Ceded unearned premiums 18,062 6,747
Deferred policy acquisition costs 19,734 22,147
Furniture, equipment and improvements, net 5,262 5,635
Income taxes recoverable 4,753 1,472
Goodwill 4,363 4,129
Other assets 11,599 4,547
-------------------- ---------------------
Total assets $251,807 $241,695
==================== =====================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(Dollars in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
2000 1999
--------------- ----------------
(unaudited)
<S> <C> <C>
Liabilities:
Unpaid losses and loss adjustment expenses $ 76,030 $ 56,466
Unearned premiums 62,640 51,736
Funds held 43,328 50,271
Bank indebtedness 14,500 14,500
Amounts due to reinsurers 3,151 2,181
Deferred Federal income taxes (445) 494
Other liabilities 9,991 9,245
-------------------- ---------------------
Total liabilities 209,195 184,893
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: 4,324,248 at
September 30, 2000 and 4,328,592 at December 31, 1999
43 43
Additional paid-in capital 19,699 19,724
Net unrealized appreciation (depreciation) of investments carried
at market, net of income taxes (1,035) (1,186)
Retained earnings 23,905 38,221
-------------------- ---------------------
Total stockholders' equity 42,612 56,802
-------------------- ---------------------
Total liabilities and stockholders' equity $251,807 $241,695
==================== =====================
See accompanying notes to interim consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Dollars in thousands)
Three months ended Nine months ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (3,127) $ (2,746) $ (14,316) $ 1,359
Adjustments to reconcile net income to cash provided
by operating activities:
Change in agents' balances and premiums receivable
and unearned premiums 3,013 5,141 6,443 1,365
Change in accrued investment income 455 27 524 (60)
Change in unpaid losses and loss adjustment expenses
7,264 2,458 19,564 (854)
Change in reinsurance recoverable on paid and
unpaid losses and loss adjustment expenses and
ceded unearned premiums (10,162) 1,130 (26,854) 896
Change in amounts due to/from reinsurers (1,154) 2,080 970 (1,982)
Change in other assets and other liabilities (5,316) 951 (12,847) (2,060)
Change in income taxes, net (80) (1,598) (4,298) (270)
Change in deferred policy acquisition costs (323) (446) 2,413 (2,511)
Net realized gain on sale of investments (491) (9) (1,402) (2,046)
Net realized loss on sale of fixed assets 41 5 49 -
Provision for depreciation and amortization 437 468 1,341 1,415
---------------- ----------------- ----------------- ---------
Net cash provided (used) by operating
activities (9,443) 7,461 (28,413) (4,748)
Cash flows from investing activities:
Cash received from investments sold
prior to maturity 25,733 6,915 50,736 34,333
Cash received from investments
matured or called 1,073 3,910 4,444 10,284
Cash paid for investments acquired (10,420) (9,770) (23,820) (40,698)
Amortization of discount on bonds (46) 41 (51) 134
Capital expenditures, net (596) (441) (1,017) (1,591)
Acquisition of agencies, net - 2 - 258
---------------- ----------------- ----------------- ----------
Net cash provided by investing activities
15,744 657 30,292 2,720
Cash flows from financing activities:
Proceeds from issuance of common stock 19 97 71 505
Repurchase of common stock - (170) (96) (170)
Change in funds held (658) 6,074 (6,943) 15,937
Dividends paid - (389) - (1,166)
---------------- ----------------- ---------------- ----------
Net cash provided (used) by financing activities
(639) 5,612 (6,968) 15,106
---------------- ----------------- ---------------- ----------
Net increase (decrease) in cash and cash equivalents
5,662 13,730 (5,089) 13,078
Cash and cash equivalents at beginning of period 5,070 1,779 15,821 2,431
---------------- ----------------- ----------------- ----------
Cash and cash equivalents at end of period $ 10,732 $ 15,509 $ 10,732 $ 15,509
================ ================= ================= ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 602 $ 593 $ 1,852 $ 1,640
Income taxes - 253 152 908
See accompanying notes to interim consolidated financial statements.
</TABLE>
<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, 1999.
(2) Bank Covenant
The Company has entered into a revolving credit agreement, as amended,
with Union Bank for $15,000,000. At September 30, 2000, $14,500,000 of
the $15,000,000 line is currently utilized and the remaining $500,000
is no longer available pursuant to the discussion below. The bank loan
has a variable rate of interest and has amortizing principal payments.
The first installment is due September 30, 2001. The interest rate at
September 30, 2000 was 9.75%.
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 currently in violation of Section 5.13 of the revolving
credit agreement pertaining to a minimum of $32,500,000 in policyholder
surplus, Section 5.14 pertaining to a maximum operating leverage ratio
of 3:1, and Section 5.15 pertaining to maintaining an A.M. Best rating
of A- or better for Amwest Surety Insurance Company and its
subsidiaries. On August 30, 2000, the Company received notification
from Union Bank acknowledging violation of these financial covenants
and stating that no further borrowings are possible under the Credit
Agreement and all outstanding Eurodollar Rate Borrowings will, at the
expiration of the applicable interest period, be converted into Base
Rate Borrowings. In addition, the debt was reassigned to the Special
Asset Group ("SAG") for purposes of future negotiations. The Company is
currently working to provide the SAG with pertinent information
regarding an action plan and will attempt to negotiate new terms and
covenants, however, no assurance can be given that the Company would be
successful in doing so. Should the Company be unsuccessful in
negotiating new terms and covenants, the Company could be deemed to be
in default and all sums then owing shall be due and immediately
payable.
(3) Reinsurance
The Company has made numerous changes to its reinsurance programs
including entering into a 35% quota share agreement with Swiss
Reinsurance America Corporation effective April 1, 2000. The term of
the agreement is 21 months ending on December 31, 2001. In-force
premiums on bonds written from January 1, 2000 to March 31, 2000 were
also ceded into this contract.
The Company also renewed the Aggregate Stop Loss Reinsurance Contract
with Underwriters Reinsurance Company (Barbados), Inc. effective April
1, 2000. The term of the agreement is three years ending on April 1,
2002. The treaty covers losses, excluding allocated loss adjustment
expenses, for all lines of business in excess of 40% through 46% of net
earned premiums.
<PAGE>
With respect to the Company's property and casualty business, a
Multiple Line Excess of Loss Reinsurance Agreement with Swiss
Reinsurance America Corporation was entered effective July 1, 2000
which reinsures the Company on both property and liability coverage for
losses in excess of $300,000 per event up to $1,000,000. In addition,
on the same effective date, the Company entered into a Multiple Line
Excess of Loss Reinsurance Agreement with Swiss Reinsurance America
Corporation, which reinsures the Company's monthly commercial
transportation policies for losses in excess of $75,000 per event up to
$300,000. The term of each of these contracts expire on July 1, 2001.
Similar catastrophe coverages to those in the prior year are still in
effect for the property and casualty business.
(4) Earnings Per Share
Basic EPS is calculated based on the weighted average number of common
shares outstanding and diluted EPS includes the effects of dilutive
potential common shares. The calculation of basic and diluted EPS for
the three months ended September 30, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
Three months ended September 30,
Income Shares Per-Share
(Numerator) (Denominator) Amount
($ in thousands) (Dollars)
------------------- -------------------- ----------------
<S> <C> <C> <C>
Basic EPS:
2000 $ (3,127) 4,322,295 $ (.73)
1999 $ (2,746) 4,315,942 $ (.64)
Effect of Dilutive Securities:
2000 0
1999 0
Diluted EPS:
2000 $ (3,127) 4,322,295 $ (.73)
1999 $ (2,746) 4,315,942 $ (.64)
</TABLE>
Diluted EPS for 1999 and 2000 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 and 2000. Dilutive
securities represent the Company's stock options.
<PAGE>
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Gross premiums written increased 9% and 14% from $35,969,000 and
$104,146,000 for the three months and nine months ended September 30,
1999, respectively, to $39,158,000 and $119,105,000 for the three
months and nine months ended September 30, 2000, respectively.
Gross premiums written for the surety business decreased 2% from
$28,773,000 for the three months ended September 30, 1999 to
$28,200,000 for the three months ended September 30, 2000 and increased
7% from $82,722,000 for the nine months ended September 30, 1999 to
$88,861,000 for the nine months ended September 30, 2000. The increase
is attributable to increased writings primarily in the court and
commercial surety operations partially offset by decreased writings in
the contract surety product line. For the quarterly comparison, a
higher percentage decrease in writings within the contract surety
product accounted for the reduction.
Gross premiums written for the property and casualty business increased
52% and 41% from $7,196,000 and $21,424,000 for the three months and
nine months ended September 30, 1999, respectively, to $10,958,000 and
$30,244,000 for the three months and nine months ended September 30,
2000, respectively. The increase is primarily due to increased writings
in the commercial trucking product, the California specialty motorcycle
program and the Florida homeowners program.
The Company anticipates decreased gross premiums as a result of the
recent A.M. Best rating reduction, a refined market focus, the
requirement to reduce operating leverage for rating purposes and the
need to safeguard policyholders' surplus. Although the magnitude of
these reductions are not yet determinable, the Company expects the
fourth quarter premium writings to be negatively impacted.
Net premiums earned decreased 9% from $27,732,000 for the three months
ended September 30, 1999 to $25,146, 000 for the three months ended
September 30, 2000, and increased 2% from $81,711,000 for the nine
months ended September 30, 1999 to $83,053,000 for the nine months
ended September 30, 2000. The growth in net premiums earned for the
nine months ended September 30, 2000 was lower than the growth in
premiums written due to higher reinsurance premium cessions in 2000
versus 1999 on the Company's surety quota share reinsurance contract.
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 decreased 3% and 2% from $1,595,000 and
$5,069,000 for the three months and nine months ended September 30,
1999, respectively, to $1,540,000 and $4,992,000 for the three months
and nine months ended September 30, 2000, respectively. The decrease
for the three months ended September 30, 2000 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 increased from $10,000 and $2,047,000 for the three
months and nine months ended September 30, 1999, respectively, to
$1,198,000 and $2,109,000 for the three months and nine months ended
September 30, 2000, respectively. The investments sold during the three
months and nine months ended September 30, 2000 were primarily equity
securities and certain fixed income investments including
mortgage-backed and municipal bond securities.
<PAGE>
Commissions and fees increased 37% and 22% from $323,000 and $1,452,000
for the three months and nine months ended September 30, 1999 to
$443,000 and $1,767,000 for the three months and nine months ended
September 30, 2000, respectively. The increase is primarily
attributable to an increase in fees charged to the policyholders
related to increased premium writings in the California specialty
motorcycle program as well as an increase in fee income on the funds
control business.
Net losses and loss adjustment expenses increased 17% and 75% from
$14,330,000 and $33,419,000 for the three months and nine months ended
September 30, 1999, respectively, to $16,701,000 and $58,492,000 for
the three months and nine months ended September 30, 2000,
respectively, due to significant adverse development for the 1999 loss
year, increases in net reserves for the 2000 loss year to bring it in
line with the development trends of the 1999 loss year, and changes in
the Company's reinsurance program which resulted in an increase in
retained losses. The majority of the adverse development results from
claims on contract bonds with larger penal amounts (generally in excess
of $1,000,000) which have developed more slowly than smaller, less
complex obligations.
The loss and loss adjustment expense ratio for the surety business
increased from 53% and 32% for the three months and nine months ended
September 30, 1999, respectively, to 69% and 67% for the three months
and nine months ended September 30, 2000, respectively, and the loss
and loss adjustment expense ratio for the property and casualty
business increased from 48% and 72% for the three months and nine
months ended September 30, 1999, respectively, to 58% and 80% for the
three months and nine months ended September 30, 2000, respectively.
Policy acquisition costs decreased as a percentage of net premiums
earned from 56%, or $15,543,000, and 51%, or $41,466,000, for the three
months and nine months ended September 30, 1999, respectively, to 48%,
or $11,991,000 and 49%, or $41,052,000, for the three months and nine
months ended September 30, 2000, respectively. The decrease is
primarily attributable to higher ceding commissions pursuant to the
Company's surety quota share reinsurance.
General operating costs increased as a percentage of net premiums
earned from 12%, or $3,285,000 to 13%, or $3,269,000, for the three
months ended September 30, 1999 and September 30, 2000, respectively,
and the ratio decreased from 14%, or $11,782,000 to 13%, or
$11,083,000, for the nine months ended September 30, 1999 and September
30, 2000, respectively. The increase in general and administrative
ratio for the three months ended September 30, 2000 is reflective of
decreased net premiums earned for the three months ended September 30,
2000.
Interest expense increased 2% and 13% from $593,000 and $1,640,000 for
the three months and nine months ended September 30, 1999,
respectively, to $602,000 and $1,852,000 for the three months and nine
months ended September 30, 2000, respectively. The increase is
attributable to an increase in average funds held on which the Company
pays interest from $38,511,000 for the nine months ended September 30,
1999 to $46,800,000 for the nine months ended September 30, 2000.
Income before income taxes decreased from loss of $4,091,000 and income
of $1,972,000 for the three months and nine months ended September 30,
1999, respectively, to a loss of $4,236,000 and $20,558,000 for the
three months and nine months ended September 30, 2000, respectively,
due to the factors outlined above.
The effective tax rate was a benefit of 33% and an effective tax rate
of 31% for the three months and nine months ended September 30, 1999,
respectively, as compared to a benefit of 26% and 30% for the three
months and nine months ended September 30, 2000, 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. Changes
to the Company's estimated effective tax rate are recorded quarterly.
<PAGE>
Net results decreased from a 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, to net loss of $3,127,000 and $14,316,000 for the
three months and nine months ended September 30, 2000, respectively,
due to the factors outlined above.
Liquidity and Capital Resources
As of September 30, 2000, the Company held total cash and cash
equivalents and invested assets of $101,656,000. This amount includes
an aggregate of $43,328,000 in funds held as collateral, which is shown
as a liability on the Company's consolidated balance sheets. As of
September 30, 2000, the Company's invested assets consisted of
$75,187,000 in fixed maturities, $4,617,000 in common equity
securities, $3,100,000 in preferred equity securities, $4,654,000 in
other invested assets and $3,366,000 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, 2000, $14,500,000 of
the $15,000,000 line is currently utilized and the remaining $500,000
is no longer available. The bank loan has a variable rate of interest
and has amortizing principal payments. The first installment is due
September 30, 2001. The interest rate at September 30, 2000 was 9.75%.
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 currently in violation of Section 5.13 of the revolving
credit agreement pertaining to a minimum of $32,500,000 in policyholder
surplus, Section 5.14 pertaining to a maximum operating leverage ratio
of 3:1, and Section 5.15 pertaining to maintaining an A.M. Best rating
of A- or better for Amwest Surety Insurance Company and its
subsidiaries. On August 30, 2000, the Company received notification
from Union Bank acknowledging violation of these financial covenants
and stating that no further borrowings are possible under the Credit
Agreement and all outstanding Eurodollar Rate Borrowings will, at the
expiration of the applicable interest period, be converted into Base
Rate Borrowings. In addition, the debt was reassigned to the Special
Asset Group ("SAG") for purposes of future negotiations. The Company is
currently working to provide the SAG with pertinent information
regarding an action plan and will attempt to negotiate new terms and
covenants, however, no assurance can be given that the Company would be
successful in doing so. Should the Company be unsuccessful in
negotiating new terms and covenants, the Company could be deemed to be
in default and all sums then owing shall be due and immediately
payable.
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 2000 is approximately $223,000. The Company
also has the option to purchase this office building and land
commencing on April 27, 2000 and extending for a seven months period at
a predetermined rate for the building, with the value of land based on
then existing market rates. The Company has exercised such option in
the second quarter of 2000 and currently anticipates closing by
December 1, 2000.
<PAGE>
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 generated $7,461,000 and used $4,748,000 in cash from
operating activities for the three months and nine months ended
September 30, 1999, respectively, as compared to using $9,443,000 and
$28,413,000 for the three months and nine months ended September 30,
2000, respectively. The significant increase noted in cash used from
operating activities for the nine months ended September 30, 2000 was
primarily attributed to higher frequency and severity of losses,
primarily within the contract surety product line, and the resulting
claim payments. The Company generated $657,000 and $2,720,000 in cash
from investing activities for the three months and nine months ended
September 30, 1999, respectively, as compared to generating $15,744,000
and $30,292,000 for the three months and nine months ended September
30, 2000. The Company generated $5,612,000 and $15,106,000 in cash from
financing activities for the three months and nine months ended
September 30, 1999, respectively, as compared to using $639,000 and
$6,968,000 for the three months and nine months ended September 30,
2000, respectively.
As a result of significant operating losses experienced during the nine
months of 2000, the Company's capital levels have materially decreased.
The Company is currently undergoing an intensive analysis of operations
designed to improve operating results by refining the Company's market
focus, decreasing net retention levels on our property and casualty
business and significantly reducing operating expenses. The Company
believes that such actions will also improve the recent negative
trends of cash outflows from operating activities. Additionally, the
Company believes it must quickly raise additional capital or
enter into one or more strategic alliances which would provide
same. The Company has engaged Cochran, Caronia, & Co. LLC, an
investment-banking firm, to immediately seek strategic alliances
or other capital-raising alternatives on behalf of the Company.
No assurance can be given such efforts will succeed.
Other Matters
Year 2000 issues:
The Company did not experience material Year 2000 problem and does not
expect to incur any significant additional costs related to Year 2000
matters.
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, 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, the lack of adherence
by branch personnel to Company underwriting guidelines, the ability of
the Company to obtain a waiver or amendment regarding a covenant
included in the Company's revolving bank credit agreement, failure of
the Company to raise additional capital or to successfully consummate a
strategic alliance, 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.
<PAGE>
The table on this 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.
<TABLE>
<CAPTION>
TABLE 1
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
SUMMARY OF PREMIUMS AND LOSSES BY PRODUCT LINE
(Dollars in thousands)
Three months ended Nine months ended Year ended
September 30, September 30, December 31,
------------- ------------- ------------
Type of Bond 2000 1999 2000 1999 1999 1998
------------ ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Surety
Gross premiums written $28,200 $28,773 $88,861 $82,722 $ 108,184 $ 102,270
Net premiums earned 18,740 20,638 61,675 63,533 85,500 84,166
Net losses and loss adjustment
expenses 12,975 10,955 41,303 20,343 27,373 23,262
Loss ratio and loss adjustment
expense ratio 69% 53% 67% 32% 32% 28%
Property & Casualty
Gross premiums written $10,958 $7,196 $30,244 $21,424 $ 28,304 $ 30,549
Net premiums earned 6,406 7,094 21,378 18,178 25,044 21,805
Net losses and loss adjustment
expenses 3,726 3,376 17,189 13,077 20,937 17,569
Loss ratio and loss adjustment
expense ratio 58% 48% 80% 72% 84% 81%
Total Company
Gross premiums written $ 39,158 $ 35,969 $ 119,105 $ 104,146 $136,488 $132,819
Net premiums earned 25,146 27,732 83,053 81,711 110,544 105,971
Net losses and loss adjustment
expenses 16,701 14,330 58,492 33,419 48,310 40,831
Loss ratio and loss adjustment
expense ratio 66% 52% 70% 41% 44% 39%
</TABLE>
<PAGE>
PART II - OTHER INFORMATION
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
Items 1-4: LEGAL PROCEEDINGS, CHANGE IN SECURITIES, DEFAULTS UPON
--------- SENIOR SECURITIES, SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
None
Item 5: OTHER INFORMATION
------ -----------------
Effective October 6, 2000, Neil F. Pont resigned as
the Company's Senior Vice President and as a member of its
Board of Directors. He also resigned from all positions with
the Company's subsidiaries in order to pursue other business
interests.
Item 6: EXHIBITS AND REPORTS ON FORM 8-K
------
(a) Exhibits
See the Exhibit Index on page 17.
(b) Reports on Form 8-K
The Company filed one Form 8-K during the three
months ended September 30, 2000:
The report dated August 30, 2000 included an Item
5 matter and Press Release announcing A.M. Best's
rating change.
<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 14, 2000 by: /s/ JOHN E. SAVAGE
-----------------------
John E. Savage
President, Co-Chief Executive
Officer
and Chief Operating Officer
(Principal Executive Officer)
by: /s/ PHILLIP E. HUFF
-----------------------
Phillip E. Huff
Senior Vice-President,
Treasurer
(Principal Financial and
Principal Accounting Officer)
<PAGE>
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit
Number Description Location
2 Plan of acquisition, reoganization, 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 4
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
