-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FYaB3QFHdAC9h+sBE5z7obbG8PNc5BX0rgMMk0eerdmOXLJlsstk3oEVxrPUV98d r0g4CY4eeH0afgwD4IIXvg== 0000780118-00-000007.txt : 20000331 0000780118-00-000007.hdr.sgml : 20000331 ACCESSION NUMBER: 0000780118-00-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMWEST INSURANCE GROUP INC CENTRAL INDEX KEY: 0000780118 STANDARD INDUSTRIAL CLASSIFICATION: SURETY INSURANCE [6351] IRS NUMBER: 952672141 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09580 FILM NUMBER: 586635 BUSINESS ADDRESS: STREET 1: 5230 LAS VIRGENES RD CITY: CALABASAS STATE: CA ZIP: 91302 BUSINESS PHONE: 8188712000 MAIL ADDRESS: STREET 1: 5230 LAS VIRGENES RD CITY: CALABASAS STATE: CA ZIP: 91302 EX-27 1 FDS --
7 1,000 U.S. Dollars 12-mos Dec-31-1999 Jan-01-1999 Dec-31-1999 1 0 0 100,892 9,272 0 0 120,604 15,821 27,304 22,147 241,695 56,466 51,736 0 0 14,500 0 0 43 56,759 241,695 110,544 7,055 3,913 2,736 48,310 57,723 15,432 516 76 440 0 0 0 440 .10 .10 32,407 47,412 898 (20,029) (26,125) 34,563 (898)
10-K 2 AMWEST INSURANCE GROUP, INC. FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 Identification No.) incorporation or organization) 5230 Las Virgenes Road Calabasas, California 91302 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (818) 871-2000 Securities registered pursuant to Section 12(b)of the Act: Title of each class Name of each exchange on which registered Common Stock, $.01 par value American Stock Exchange, Inc., Pacific Stock Exchange, Inc. Preferred Stock Purchase Rights American Stock Exchange, Inc., Pacific Stock Exchange, Inc. Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ). Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X) As of March 29, 2000, 4,333,093 shares of common stock, $.01 par value, were outstanding. As of March 29, 2000, the aggregate market value of the voting stock held by non-affiliates of the registrant, based on the closing sales price of the registrant's common stock as reported by the American Stock Exchange, Inc. on such date, was $22,196,729. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive proxy statement for the 2000 Annual Meeting of stockholders (incorporated by reference under Part III). TABLE OF CONTENTS Item PART I Page 1. Business 1 General 1 Products 2 Underwriting 4 Statutory Net Premiums Written to Statutory Policyholders' Surplus Ratio 6 Combined Ratios 7 Reinsurance 7 Reserves 9 Investments 13 Marketing and Growth 15 Competition 15 Employees 16 Government Regulation 16 2. Properties 17 3. Legal Proceedings 17 4. Submission of Matters to a Vote of Security Holders 17 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters 18 Market Information 18 Holders 18 Dividends 18 6. Selected Financial Data 19 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 20 Results of Operations 20 Liquidity and Capital Resources 23 Other Matters 24 7A. Quantitative and Qualitative Disclosures about Market Risk 25 8. Financial Statements and Supplementary Data 26 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 26 PART III 10. Directors and Executive Officers of the Registrant 27 11. Executive Compensation 27 12. Security Ownership of Certain Beneficial Owners and Management 27 13. Certain Relationships and Related Transactions 27 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 28 i PART I ITEM 1. BUSINESS GENERAL Amwest Insurance Group, Inc., a Delaware corporation ("the Company"), is an insurance holding company engaged, through its wholly-owned subsidiaries, Amwest Surety Insurance Company ("Amwest Surety"), Condor Insurance Company ("Condor") and Far West Insurance Company ("Far West") in underwriting surety bonds nationwide, commercial automobile insurance in the state of California and, to a lesser extent, other property and casualty coverages in various parts of the United States. Surety bonds are predominately written through 30 branch and field offices located throughout the United States. Both the surety and property and casualty products are marketed through independent agents with a small percentage of the Company's business written directly to the insured. The Company's surety division underwrites a wide variety of surety bonds for small to mid-sized surety accounts through independent agents and brokers. Currently, the Company has the capacity to write bonds up to $25 million. In order to protect the Company from major losses on the larger accounts, the Company purchases reinsurance from a consortium of Treasury listed reinsurers. Bonds are underwritten using a variety of factors to help mitigate risk, including the acceptance of full or partial collateral and the usage of funds control where appropriate. See "Reinsurance" and "Business -Underwriting and Collateral." The Company's property and casualty division primarily writes insurance packages which consist principally of commercial automobile liability and physical damage and, to a lesser extent, general liability and other related coverages for insureds involved in general trucking including sand and gravel, transit mix, logging, farm to market, intermodal trucking, less than total load (LTL), newspaper distribution, tow truck and limousine services industries. The Company also offers homeowners insurance in Florida and Hawaii and motorcycle insurance in New York and California. In addition to these, the Company has offered personal lines coverage for private passenger automobile insurance in Arizona and California and homeowners insurance in California. However, these personal lines products have been discontinued and are in run-off. See Note 18 of Notes to Consolidated Financial Statements for financial information about segments. The Company was incorporated in California on August 19, 1970 and redomesticated in Delaware on September 11, 1987. The Company's insurance subsidiaries, Amwest Surety, Condor and Far West, are domiciled in Nebraska. Accordingly, the Company is registered with the Nebraska Department of Insurance as an insurance holding company. Amwest Surety is licensed in all 50 states, the District of Columbia, Guam and Puerto Rico, Far West is licensed in 45 states and the District of Columbia and Condor is licensed in California, Arizona, Idaho, Montana, Nebraska, Nevada and Oregon. Amwest Surety and Far West hold certificates of authority from the United States Department of the Treasury, which qualifies them as acceptable sureties on Federal bonds. Amwest Surety and Far West are rated (a group rating) "A-" (Excellent) by Best and Condor is rated "B" (Adequate). The term "the Company" unless the context otherwise requires, refers to Amwest Insurance Group, Inc. and its insurance subsidiaries. The principal executive offices of the Company are located at 5230 Las Virgenes Road, Calabasas, California 91302. The Company's telephone number is (818) 871-2000 and its facsimile number is (818) 871-2019. PRODUCTS The Company's major products are: Contract performance bonds, which guarantee the performance of specific contractual obligations between the principal and the obligee and/or payments to labor and material suppliers. Included within this product are contract performance bonds which are partially guaranteed by the Small Business Administration ("SBA"). Commercial Surety bonds, which includes all non-contract surety bonds including numerous types of license and permit, miscellaneous and judicial bonds for which the Company is primarily liable. Court bonds, which guarantee that the principal will adequately discharge the obligations set by a court. These bonds principally consist of bail and immigration bonds for which the agent is generally primarily liable. Specialty Property and Casualty, which includes commercial auto liability and physical damage, general liability and other related property and casualty coverages. The following tables show, for the periods indicated, the premiums written, net premiums earned, losses and loss adjustment expenses and loss ratios for the Company's four major product lines:
PREMIUMS WRITTEN Years ended December 31, 1999 1998 1997 (Dollars in thousands) ----------------------------------------------------------------------------------- Type of Insurance Contract performance bonds $ 61,913 45.4% $ 62,293 46.9% $ 54,808 50.7% Commercial Surety bonds 32,216 23.6 27,662 20.8 16,694 15.4 Court bonds 14,055 10.3 12,315 9.3 11,109 10.3 ------------- ------------- ------------- ------------- ------------- ------------- Total Surety 108,184 79.3 102,270 77.0 82,611 76.4 Specialty Property & Casualty insurance 28,304 20.7 30,549 23.0 25,480 23.6 ------------- ------------- ------------- ------------- ------------- ------------- Total $ 136,488 100.0% $132,819 100.0% $ 108,091 100.0% ============= ============= ============= ============= ============= =============
NET PREMIUMS EARNED Years ended December 31, 1999 1998 1997 (Dollars in thousands) ----------------------------------------------------------------------------------- Type of Insurance Contract performance bonds $ 50,785 45.9% $ 52,491 49.5% $ 46,741 50.7% Commercial Surety bonds 22,855 20.7 20,233 19.1 12,786 13.9 Court bonds 11,860 10.7 11,442 10.8 11,038 12.0 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Total Surety 85,500 77.3 84,166 79.4 70,565 76.6 Specialty Property & Casualty insurance 25,044 22.7 21,805 20.6 21,585 23.4 ------------- ------------- ------------- ------------- ------------- ------------- Total $110,544 100.0% $105,971 100.0% $ 92,150 100.0% ============= ============= ============= ============= ============= =============
LOSSES & LOSS ADJUSTMENT EXPENSES AND LOSS RATIOS Years ended December 31, 1999 1998 1997 (Dollars in thousands) ----------------------------------------------------------------------------------- Type of Insurance Contract performance bonds $ 23,392 46.1% $ 17,447 33.2% $ 15,738 33.7% Commercial Surety bonds 6,139 26.9 5,485 27.1 2,873 22.5 Court bonds 1,644 13.9 330 2.9 1,402 12.7 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Total Surety 31,175 36.5 23,262 27.6 20,013 28.4 Specialty Property & Casualty insurance 17,135 68.4 17,569 80.6 14,644 67.8 ------------- ------------- ------------- ------------- ------------- ------------- Total $ 48,310 43.7% $ 40,831 38.5% $ 34,657 37.6% ============= ============= ============= ============= ============= =============
UNDERWRITING For the contract and commercial surety lines of business, the Company individually analyzes the risk associated with each application it receives, except for selected categories of miscellaneous bonds. This underwriting evaluation includes verifying the credit history and financial resources of the applicant. The Company maintains control of the contract and commercial surety underwriting process through the use of authority limits for each underwriter, through committee underwriting of larger risks and through a system of limited delegation. Substantially all risks are underwritten utilizing indemnity agreements which may be personal, corporate or both. Such agreements indemnify the Company from losses on surety bonds and are an integral part of the underwriting process. Additionally, the Company may require collateral based upon an assessment of the risk characteristics. The risk assessment includes evaluation of the financial strength of the account, credit history and, for contract bonds, work in progress and successful work experience. Collateral can consist of irrevocable letters of credit, certificates of deposit, cash, savings accounts, publicly traded securities and trust deeds or mortgages on real property. The principal form of collateral accepted by the Company currently consists of irrevocable letters of credit and certificates of deposit. Total collateral held as of December 31, 1999 had a value of approximately $278,822,000. Trust deeds and mortgages on real property held as collateral are not reflected in this figure due to the inexact nature of their disposition values. The Company reflects in its consolidated financial statements only funds received as collateral on which net earnings inure to the benefit of the Company. This amounted to $37,173,000 at December 31, 1999. The underwriting process for the court line of business consists of two separate approaches, one for the wholesale agent written business and another for the retail direct business. The underwriting procedures are as follows: Wholesale Underwriting Procedures - The Company contracts with retail agents and, through this contract, the agents are provided with underwriting authority levels ranging from a low of about $20,000 to a maximum of $125,000 together with powers of attorney. Underwriting authority levels are agreed to by the agents in writing. Court division regional managers and home office management set the underwriting levels based upon a number of factors. These factors include the agent's experience, track record, and most importantly, the amount of agent collateral that the Company holds pursuant to the indemnification provisions of the agent contract. Should an agent wish to write a bond that is in excess of his underwriting authority level, he is required to contact the Company for approval. The Company then reviews the collateral with the agent to determine whether or not the collateral is sufficient. Each of the court division's underwriting staff have been assigned underwriting authority levels. Management must approve bonds in excess of staff underwriting authority levels. Generally, the Company requires the agent to obtain full collateral, except in those cases where the agent has a very large amount of contract collateral on deposit with the Company and/or the agent has been in the business for a long period of time. The Company maintains an underwriting approval record in the bond files for each approval. The Company periodically reviews an agent's adherence to these policies through on-site agent reviews or audits as well as by review of a monthly management report prepared using computer data. Once an agent executes a bond, he reports the execution to the Company along with payment. Powers are replaced in an amount equal to those which have been reported in order to assure a complete reporting of all bonds executed. Retail Underwriting Procedures - The Company's retail offices are staffed with court bond underwriters. The retail branch manager has set underwriting authority levels for each of the underwriters. Court division home office management establishes the retail branch managers' underwriting authority level. The branch manager must approve any bond over the underwriter's underwriting authority level. Any bond over the branch manager's underwriting authority level must have written approval by court division home office management. Full collateral is generally required. However, on smaller bonds ($2,500 or less), underwriters may approve a bond with little collateral if the indemnitors appear to be strong. This evaluation is based upon a TRW credit report and/or employment stability. The retail offices are supplied with powers of attorney from the home office. These powers are in turn supplied to non-liable agents who post the bonds. Agents are re-supplied with powers on an as-needed basis. Powers for the retail offices are replaced on an as needed basis with periodic audit conducted by the Company's internal audit department as well as by the court division's home office retail operations unit. For the specialty property and casualty lines of business, the Company sets insurance premium rates for various risk classifications based upon its historical loss experience and industry averages. The Company's rates and classifications are established using actuarial computations prepared by its actuarial consultant and are reviewed on a semi-annual basis and adjusted periodically. The information used by the Company in its actuarial evaluations includes complete historical claim information related to its experience as an insurance company and industry data. The Company's insurance premium rates are subject to rate regulation, which varies by state. Insurance applications are evaluated and a decision to write a particular risk at a specific premium is made by the Company's underwriting department. The Company's policy is to have its underwriting personnel or third party administrator for the assigned risk business individually review each risk. The underwriting department or third party administrator determines whether to write a particular risk after evaluating a number of factors based upon detailed objective underwriting standards contained in the underwriting standards manual. These factors include the type and value of the property to be insured, the location and management of operations conducted by the insured, the experience and claim history of the insured and, with respect to vehicle coverage, the driving records of the vehicle operators. When a determination has been made that an applicant represents an appropriate risk, the Company offers coverage on a monthly or annual basis. Many of the Company's specialty property and casualty coverages are offered in Commercial Business Package policies. Package policies may include fire and allied lines, commercial inland marine, general liability, commercial automobile liability, and physical damage coverages. The commercial automobile liability portion of the package policy provides bodily injury and property damage liability. Also, uninsured/underinsured motorist coverage, medical payments coverage, and comprehensive and collision coverages are offered. The general liability portion of the Group Business Package covers bodily injury and property damage liability written on an occurrence basis. The policy contains customary extensions of coverage. All Group Business Package policies contain absolute pollution liability exclusion. Limited pollution coverage is provided only to the extent required by the U.S. Department of Transportation ("DOT") regulatory requirements, which generally require minimum liability policy limits of $750,000 to cover environmental restoration on claims for insureds that travel interstate or on federal property. STATUTORY NET PREMIUMS WRITTEN TO STATUTORY POLICYHOLDERS' SURPLUS RATIO This ratio reflects the leverage of the Company's current volume of net business in relation to its policyholders' surplus. There are no legal requirements governing this ratio, but guidelines established by the National Association of Insurance Commissioners ("NAIC") have historically provided that the ratio should not exceed 3.0 to 1. In addition, the guidelines can vary according to the lines of business written. The following table shows, for the years indicated, the insurance subsidiaries' consolidated ratios:
Years ended December 31, 1999 1998 1997 1996 1995 (Dollars in thousands) ---------------------------------------------------------------------- Statutory net premiums written $112,490 $107,961 $100,034 $89,325 $82,814 Statutory policyholders' surplus 40,574 48,600 44,312 40,298 45,361 Ratio 2.77 2.22 2.26 2.22 1.83
In December 1993, the NAIC adopted a Risk-Based Capital ("RBC") Model Law for property and casualty companies. The RBC Model Law is intended to provide standards for calculating a variable regulatory capital requirement related to a company's current operations and its risk exposures (asset risk, underwriting risk, credit risk and off-balance sheet risk). These standards are intended to serve as a diagnostic solvency tool for regulators that establishes uniform capital levels and specific authority levels for regulatory intervention when an insurer falls below minimum capital levels. The Model Law specifies four distinct action levels at which a regulator can intervene with increasing degrees of authority over a domestic insurer if its RBC is equal to or less than 200% of its computed authorized control level RBC. A company's RBC is required to be disclosed in its statutory annual statement. The RBC is not intended to be used as a rating or ranking tool nor is it to be used in premium rate making or approval. The Company has calculated it's RBC requirements as of December 31, 1999 and found that it exceeded any regulatory action level. However, Condor's surplus level is very near the company action level of the Nebraska Risk Based Capital Statute. As a result, the Nebraska Department of Insurance has requested that the Company file a business plan for Condor which contains all of the attributes required of a risk based capital plan. It is anticipated that the business plan will be filed during April 2000. The Company's insurance subsidiaries currently prepare their statutory financial statements in accordance with accounting practices prescribed or permitted by the various state insurance departments. Prescribed statutory accounting practices include a variety of publications of the NAIC, as well as state laws, regulations and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. The NAIC recently issued a series of Statements of Statutory Accounting Principles as part of the project to establish a uniform set of statutory basis accounting and reporting rules. The Statements of Statutory Accounting Principles ("SAP"s) are generally effective commencing January 1, 2001 and may, in certain circumstances, result in a significant change in statutory basis accounting and reporting. Management is currently reviewing the SAPs, however at this time the Company has not determined how implementation will affect its statutory financial statements and is unable to predict how insurance rating agencies will interpret or react to such changes. No assurance can be given that future legislative or regulatory changes from such activities will not adversely affect the Company. COMBINED RATIOS The generally accepted accounting principles ("GAAP") combined ratio is the sum of (1) the ratio of losses and loss adjustment expenses incurred (including a provision for incurred but not reported losses) to net premiums earned (the "loss ratio") and (2) the ratio of policy acquisition and general operating costs to net premiums earned (the "expense ratio"). The following table shows the loss ratios, expense ratios and combined ratios of the Company as derived from data prepared in accordance with GAAP. Generally, if the combined ratio is below 100% an insurance company has an underwriting profit; if it is above 100% the company has an underwriting loss.
Years ended December 31, 1999 1998 1997 1996 1995 ------------- ------------- -------------- ------------- ------------- Loss Ratio 43.7% 38.5% 37.6% 53.1% 41.4% Expense Ratio 66.2 64.3 63.6 58.4 62.9 ------------- ------------- -------------- ------------- ------------- Combined Ratio 109.9% 102.8% 101.2% 111.5% 104.3% ============= ============= ============== ============= =============
See Management's Discussion and Analysis (MD&A) for further discussion of the Company's loss ratios. REINSURANCE A reinsurance transaction occurs when an insurance company remits or "cedes" a portion of the premium to a reinsurer as payment for the reinsurer's assumption of a portion of the risk. Reinsurance does not legally discharge the insurer from its primary liability for the full amount of the policies, and the ceding company must pay the loss if the assuming company fails to meet its obligations under the reinsurance agreement. The Company evaluates and monitors the financial condition of its reinsurers in order to minimize its exposure to significant losses from reinsurer insolvencies. The Company purchases reinsurance for protection against liabilities in excess of certain limits. The Company imposes stricter underwriting standards with respect to bonds with penal amounts in excess of reinsured limits. On the surety lines of business, the Company's subsidiaries maintain an excess of loss reinsurance treaty with a group of reinsurers (the "Excess Treaty"). The Excess Treaty may be canceled at the election of either party by providing notice of cancellation 90 days prior to any anniversary (currently October 1), however, the reinsurers would remain liable for covered losses incurred up to the cancellation date. The Excess Treaty limits the Company's exposure on any one principal (the person or entity for whose account the surety contract is made, and whose debt or obligation is the subject of the surety contract) to the first $2,000,000 of loss and to losses in excess of $20,000,000 for losses incurred prior to October 1, 1998 and $25,000,000 for losses incurred thereafter. Coverage is provided for most types of bonds which the Company writes except SBA guaranteed bonds, which are not covered by the treaty. The reinsurers' maximum exposure under the Excess Treaty is $26,000,000 of losses discovered during any one contract period (October 1 to October 1) for the 1997-1998 contract year, $35,000,000 for the 1998-1999 contract year and $34,500,000 for the 1999-2000 contract year. The Excess Treaty also contains profit sharing provisions for the $4,000,000 excess of $2,000,000 layer of the treaty, of which no amounts are currently accrued based on experience of the treaty through December 31, 1999. The Company, effective January 1, 1997, entered into an annual aggregate stop loss treaty with Underwriters Reinsurance Company (Barbados), Inc. which treaty was renewed for the 1998 and 1999 accident years. For the 1997 accident year, the treaty covers surety losses and allocated loss adjustment expenses in excess of 25.86% of surety earned premium. For the 1998 accident year, the treaty has separate attachment points for surety and non-surety lines of business. On the surety lines of business when losses and loss adjustment expenses exceed 32.8% of net earned premiums and for all other lines when losses and loss adjustment expenses exceed 67% of net earned premiums, the reinsurer becomes liable for losses up to 7% of surety earned premiums. For the 1999 accident year, the treaty covers losses, excluding allocated loss adjustment expenses, for all lines of business in excess of 26.5% through 28.0% of net earned premium and for losses in excess of 31.0% up to 39.718%. During 1999 and 1998, the Company ceded $6,981,000 and $2,533,000, respectively, in losses to the aggregate stop loss treaty. The Company's insurance subsidiaries also issue contract bonds under the SBA Surety Guarantee Program. Industry practice is to account for SBA guarantees as reinsurance transactions. The purpose of the SBA Surety Guarantee Program is to assist small contractors, who have not established credit or who fail to meet a surety's normal underwriting standards, in obtaining bonds. An SBA guarantee covers between 80% and 90% of the surety's liability up to $1,250,000 per bond. The Company also purchased a quota share reinsurance treaty with Underwriters Reinsurance Company, a New Hampshire domiciled reinsurer, which was effective July 1, 1998. This treaty cedes 15% of net surety written premium for all surety written through Amwest Surety on a pro rata basis. This treaty provides statutory surplus enhancement for the Company due to the ceding commission received by the Company. For its liability lines of business, the Company has reduced its exposure on any one risk with the purchase of excess of loss reinsurance. The net retained amount has varied by year, primarily based on the Company's surplus position. Through July 1, 1999, the Company retained the first $400,000 on any one risk with the next $600,000 ceded to a consortium of reinsurers led by Gerling Global Reinsurance Corporation. From July 1, 1997 to June 30, 1998 the Company participated in this treaty with a 10% share through July 1, 1999. The Company further reinsured $1,000,000 in excess of $1,000,000 for its liability coverages including extra contractual obligations and excess of policy limits exposures. Effective July 1, 1999, the Company replaced its existing property and casualty reinsurance coverages with a per event reinsurance cover (PERC) which reinsures the Company on both property and liability coverage for losses in excess of $1,000,000 per event up to $3,000,000. An additional property cover has been purchased for $2,000,000 in excess of $3,000,000 relating to the Company's property coverages. Also, the Company's aggregate stop loss treaty was amended effective July 1, 1999 to include the premium previously ceded to the non-renewed $600,000 excess $400,000 reinsurance led by Gerling Global Reinsurance Corporation. Commencing July 1, 1999, liability losses in excess of $400,000 up to $1,000,000 will be included in the loss ratio applied to the aggregate stop loss treaty. Limits relating to its Hawaii homeowners and Florida homeowners programs differ from the above. For Hawaii homeowners, the Company participates in the Hawaii Hurricane Relief Fund, and accordingly, its Hawaii policies exclude wind coverage over 75 miles per hour. Additionally, for Florida homeowners the Company participates in the Florida Hurricane Catastrophe Fund at the highest level of participation permitted. Recoveries from this Fund are limited to hurricanes and are based on a formula which utilizes, among other factors, premiums written, industry premiums written, industry losses and amounts available in the fund. RESERVES The Company maintains reserves for losses and loss adjustment expenses with respect to both reported and unreported claims. The amount of loss reserves for reported claims, including related loss adjustment expense reserves, is generally based upon a case-by-case evaluation of the type of loss. In evaluating reserves for surety losses and loss adjustment expenses, the Company considers a number of factors including an estimate of the costs to complete the project, outstanding obligations to subcontractors, suppliers and the like and prevailing case law and regulations pertaining to the underlying exposures. The Company also considers the financial strength of the principal, estimated offsets to the claimed amount, such as collateral, contract funds and indemnity agreements, and defenses available to the principal and the Company. The Company may use outside attorneys, construction consultants and other professionals throughout the reserving process. The Company establishes expense reserves to cover the anticipated expenses incurred by these outside vendors. All reserves for reported claims are net of anticipated contract funds, collateral and other non-reinsurance recoveries. Reserves for incurred but not reported claims are based on Company experience. An amount is included in the reserves for unallocated loss adjustment expenses consisting of the costs for the Company's claims, legal and subrogation departments to settle claims incurred prior to year end. The loss settlement period on most of the Company's insurance claims is relatively short. Nevertheless, it is often necessary to adjust estimates of liability on a claim either upward or downward between the time a claim is reported and the time of payment. There are inherent uncertainties in estimating reserves, therefore, actual losses and loss adjusting expenses may deviate, perhaps substantially, from reserves on the accompanying consolidated financial statements, which could have a material adverse effect on the Company's financial condition and results of operations. The Company does not discount its claim reserves for financial reporting purposes. While the Company may make implicit provisions for inflation or increasing costs in establishing reserves for known claims, the relatively short claim to payment period and the nature of the insured losses makes provisions for inflation or increasing costs generally unnecessary. The following table sets forth a reconciliation of the statutory liability for losses and loss adjustment expenses (1) for the periods shown:
December 31, 1999 1998 1997 (Dollars in thousands) ------------------------------------------ Statutory liability for losses and loss adjustment expenses at beginning of year $32,407 $33,338 $35,876 Provision for losses and loss adjustment expenses occurring in current year 47,412 43,420 35,212 Increase (decrease) in estimated losses and loss adjustment expenses for claims occurring in prior years 898 (2,589) (555) ------------- -------------- ------------- 48,310 40,831 34,657 ------------- -------------- ------------- Losses and loss adjustment expense payments for claims occurring during: Current year (20,029) (24,992) (15,095) Prior years (26,125) (16,770) (22,100) ------------- -------------- ------------- (46,154) (41,762) (37,195) ------------- -------------- ------------- Statutory liability for losses and loss adjustment expenses at end of year $34,563 $32,407 $33,338 ============= ============== ============= (1) Amounts reflect the liability for losses and loss adjustment expenses net of reinsurance recoverable on unpaid loss and loss adjustment expenses.
The increase or decrease in estimated losses and loss adjustment expenses for losses occurring in prior years reflects the net effect of the resolution of losses for other than full reserve value and subsequent readjustment of loss values as of December 31st of the applicable years. The increase during 1999 in estimated losses and loss adjustment expenses for claims occurring in prior years is primarily due to adverse development for the property and casualty lines of business. The decreases during 1998 and 1997 related primarily to the surety lines of business. The net losses for 1999 and 1998 reflect the benefit of the aggregate stop loss reinsurance treaty. Losses and loss adjustment expense ceded to this treaty were $2,533,000 in 1998 and $6,981,000 in 1999 on ceded premium of $2,316,000 in 1998 and $4,822,000 in 1999. Competitive market conditions and the Company's ability to write surety bonds for larger contractors has resulted, on many bonds, in the substitution of indemnity agreements for liquid and non-liquid collateral. The Company, through its ongoing reserve analysis, has estimated the benefit to be derived from such agreements and reduced estimates of ultimate losses incurred accordingly. In the fourth quarter of 1998, the Company increased its estimate of such "salvage and subrogation" recoveries by approximately $5.4 million which is partially attributable to salvage and subrogation on losses incurred during the fourth quarter. The increase relates primarily to the 1998 and 1997 years and reflects the Company's belief that the underlying data is maturing. Further, subsequent collection efforts have proven prior estimates to be conservative. Since the Company had also pierced it's aggregate stop loss treaty in the fourth quarter, the net benefit attributable to the increased "salvage and subrogation" estimate was approximately $1,025,000. The difference between the reserves reported in the Company's consolidated financial statements prepared in accordance with GAAP and those reported in the annual statements filed with the State Departments of Insurance in accordance with statutory accounting principles ("SAP") is as follows:
December 31, 1999 1998 1997 (Dollars in thousands) ----------------------------------------- Reserves reported on a SAP basis $34,563 $32,407 $33,338 Reinsurance recoverable on unpaid loss and loss adjustment expenses 21,903 9,837 6,185 ------------- ------------- ------------- Reserves reported on a GAAP basis $56,466 $42,244 $39,523 ============= ============= =============
In accordance with Financial Accounting Standards Board Statement No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts, reinsurance recoverable on unpaid losses and loss adjustment expenses are reported for under GAAP as assets rather than netted against the corresponding liability for such items on the balance sheet. Since these recoverable balances are netted against the losses and loss adjustment expense liability for statutory purposes, a SAP/GAAP difference results. The table on page 12 discloses the cumulative development of unpaid losses and loss adjustment expenses of the Company from 1989 through 1999. The top line of this table depicts the estimated net liability for unpaid losses and loss adjustment expenses recorded at the balance sheet date for each of the indicated years. This liability represents the estimated net amount of losses and loss adjustment expenses for claims arising in all prior years that are unpaid at the balance sheet date, including losses that had been incurred but not reported to the Company. The lower portion of the table shows the re-estimated amount of the previously recorded net liability based on experience as of the end of each succeeding year. Estimated gross liability and the re-estimated amount of previously recorded gross liability for the five years ended December 31, 1999 are shown below the table. The Company attempts to estimate reserves that are adequate and neither deficient nor redundant. Therefore, no meaningful evaluation of estimated future redundancies or deficiencies can be developed from the Company's prior experience. The cumulative "redundancy/(deficiency)" shown in the table on page 12 represents the aggregate change in the estimates over prior years. For example, the 1993 liability has developed a $1,146,000 redundancy over six years. That amount has been reflected in income over the five years. The effect on income for the past three years of changes in estimates of the liabilities for losses and loss adjustment expenses is shown in the reconciliation table on page 9. The cumulative redundancy (deficiency) as of the end of any year is due to a re-evaluation of reserves established in prior years at less than or more than the reserved values as of that date.
CUMULATIVE LOSS DEVELOPMENT December 31, (Dollars in thousands) 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 ----------------------------------------------------------------------------------------------------------- Net liability for losses & loss adjustment $13,169 $23,199 $23,269 $24,860 $28,641 $26,584 $24,246 $35,876 $33,338 $32,407 $34,563 expenses Net paid (cumulative) as of: One year later 5,426 9,892 9,826 11,224 15,862 18,318 13,379 22,100 16,770 26,125 - Two years later 8,146 14,386 14,473 16,896 23,547 24,579 22,934 28,301 28,005 Three years later 9,301 17,057 16,464 18,576 26,659 28,010 24,256 33,142 Four years later 10,996 18,261 16,654 18,902 27,303 27,446 25,480 Five years later 11,642 17,976 16,795 18,962 27,089 28,219 Six years later 11,646 18,074 16,838 18,618 27,606 Seven years later 11,583 18,227 16,463 19,248 Eight years later 11,434 17,965 17,079 Nine years later 11,455 18,602 Ten years later 12,095 Net liability re-estimated as of: One year later 12,247 20,580 20,560 21,937 26,860 26,343 25,040 35,322 30,749 33,305 - Two years later 10,463 18,890 18,401 19,565 25,943 28,540 26,237 33,998 30,600 Three years later 11,071 18,871 17,810 18,695 27,699 28,415 26,141 33,418 Four years later 11,622 18,654 16,664 19,048 26,914 28,675 25,887 Five years later 11,706 17,982 16,784 18,720 27,273 28,680 Six years later 11,628 17,943 16,589 18,774 27,495 Seven years later 11,542 17,994 16,565 19,231 Eight years later 11,204 18,005 17,138 Nine years later 11,483 18,648 Ten years later 12,130 Net Reserve Redundancy (Deficiency): $1,039 $4,551 $6,131 $5,629 $1,146 ($2,096) ($1,641) $2,458 $2,738 ($898) - ========================================================================================================== Net redundancy (deficiency) as a percent of original 8% 20% 26% 23% 4% (8%) (7%) 7% 8% (3%) - net liability: ========================================================================================================== Gross liability for losses & loss adjustment $34,653 $31,915 $42,009 $39,523 $43,004 $56,466 expenses Ceded liability for losses & loss adjustment (8,069) (7,669) (6,133) (6,185) (10,597) (21,903) expenses ---------------------------------------------------------- Net liability for losses & loss adjustment $26,584 $24,246 $35,876 $33,338 $32,407 $34,563 expenses ========================================================== Gross liability re-estimated $38,007 $31,294 $40,327 $38,261 $48,970 Ceded liability re-estimated (9,327) (5,407) (6,909) (7,661) (15,665) ----------------------------------------------- Net liability re-estimated $28,680 $25,887 $33,418 $30,600 $33,305 =============================================== Gross Reserve Redundancy (Deficiency) ($3,354) $621 $1,682 $1,262 ($5,966) =============================================== Note 1: The Company allocates salvage and subrogation recoverable balances by calendar year based on its best estimate of the years for which the accrued salvage and subrogation relates.
INVESTMENTS The Company's primary investment objectives are the protection and long-term enhancement of surplus, flexibility to respond to changing business conditions and the maximization of after-tax total return consistent with the Company's business objectives. The Company has investment management agreements with two firms to manage a significant part of the Company's investment portfolio. The Company pays each investment manager a quarterly fee based on the market value of the portfolio managed. The Company's arrangement with each investment manager is terminable by either party on 60 days prior notice. With respect to each of the investment mangers, investment guidelines have been established. These guidelines establish limits for maturity risk, quality risk and diversification risk. Guidelines are also established for investment grades, issue size and effective portfolio duration. Certain states or territories require the Company to deposit securities issued by such states or territories as a condition of licensure. These securities are managed in-house in accordance with guidelines established by the various states and territories. At December 31, 1999, the market value of all state deposits was approximately $14,276,000. The following table sets forth the composition of the Company's investment portfolio at the dates indicated:
December 31, 1999 1998 1997 1996 1995 (Dollars in thousands) --------------------------------------------------------------------- Fixed maturities, available-for-sale, at market (1): Bonds: U.S. Government $ 10,851 $12,411 $11,289 $13,739 $32,101 Asset backed securities 1,837 2,349 3,342 4,004 5,636 Mortgage backed securities 24,827 23,070 17,754 24,245 17,723 States, municipalities and political subdivisions 32,057 37,329 27,845 26,608 34,952 Other 29,604 29,413 34,612 27,848 20,284 Redeemable preferred stock, at market (1) 1,716 2,655 3,904 6,050 6,495 ------------- ------------- ------------- ------------- ------------- Total fixed maturities 100,892 107,227 98,746 102,494 117,191 Common equity securities, at market (1) 4,199 10,572 10,297 9,779 8,689 Preferred equity securities, at market (1) 5,073 4,265 2,894 4,253 3,592 Other invested assets 7,749 4,939 6,945 3,030 938 Short-term investments, at cost 2,691 2,201 2,281 890 745 ------------- ------------- ------------- ------------- ------------- Total investments 120,604 129,204 121,163 120,446 131,155 Interest bearing cash equivalents (2) 15,821 2,431 3,807 6,434 5,232 ------------- ------------- ------------- ------------- ------------- Total investments and cash equivalents $136,425 $131,635 $124,970 $126,880 $136,387 ============= ============= ============= ============= ============= (1) Market value is principally determined by quotations on national securities exchanges. When national securities exchange quotes are not available, the Company's investment advisors estimate the market value. (2) These amounts represent gross invested bank balances.
The Company's investment results, pre-tax investment yields and effective yields for the periods indicated were as follows:
Years ended December 31, 1999 1998 1997 1996 1995 Investment Results: (Dollars in thousands) ------------------------------------------------------------------ Average invested assets (includes short-term investments) $134,030 $127,776 $125,590 $131,473 $137,162 Net investment income 7,055 6,651 6,396 6,807 7,863 Average annual yield on investments: Fixed maturities 5.73% 5.86% 5.88% 5.83% 6.15% Equity securities 5.60 4.90 3.95 3.11 4.53 Short-term investments 5.18 4.31 3.49 4.93 8.21 ------------ ------------- ------------ ------------ ------------- Effective yield total investments 5.57 5.51 5.40 5.44 6.10 Less investment expense (0.31) (0.31) (0.31) (0.26) (0.37) ============ ============= ============ ============ ============= Total investment yield 5.26% 5.20% 5.09% 5.18% 5.73% ============ ============= ============ ============ ============= Average annual return on investments (1) 3.06% 7.5% 10.10% 6.14% 14.01% ============ ============= ============ ============ ============= (1) Average annual return is net investment income, realized gains (losses) and the change in unrealized gains (losses) divided by average invested assets.
The amortized cost and estimated market value of fixed maturities at December 31, 1999, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Prepayment assumptions for asset backed and mortgage backed securities are obtained from broker dealer survey values or internal estimates. These assumptions are consistent with the current interest rate and economic environment.
Amortized Cost Estimated Market Value Fixed maturities due: (Dollars in thousands) ---------------------------------- Within 1 year $ 3,813 $ 3,817 Beyond 1 year but within 5 years 43,573 42,363 Beyond 5 years but within 10 years 37,594 35,549 Beyond 10 years but within 20 years 11,114 11,025 Beyond 20 years 8,099 8,138 ---------------- ----------------- $104,193 $100,892 ================ =================
MARKETING AND GROWTH The Company markets its surety bond products in 50 states, the District of Columbia, Guam, Puerto Rico, the U.S. Virgin Islands, Argentina and the Marshall Islands through approximately 9,000 independent agents and brokers. California constituted 24.2% and 23.3% of surety premiums written for the years ended December 31, 1999 and 1998, respectively. Business produced outside of the United States constitutes less than 1% of surety premium. The Company's contract performance and commercial surety bonds are distributed through a network of 30 branch and field offices located in major metropolitan areas throughout the United States. Each branch office has a defined territory which it serves, primarily working with those independent agents specializing in writing surety bonds. While the branch offices occasionally write business directly with the customer, the Company does not actively seek such business. The Company's distribution methodology results in a relatively high distribution cost system inasmuch as the Company must maintain a cadre of professionals in each branch location as well as pay competitive commissions to the agents it serves. The Company believes, however, that the higher costs of maintaining a local presence in each market it serves are essential to produce acceptable loss characteristics for the surety bonds it underwrites. The Company's experience has shown that it is important to have experienced underwriting professionals in the markets it serves. This results in more construction site, contractor and agent direct contact than would be possible if the business were underwritten from a remote location. The Company believes that this direct interface is essential to consistently produce profitable underwriting results. Wholesale court bonds are produced by contracting directly with retail agents. The court division also contracts with general agents who in turn contract with retail agents. In both scenarios, the agents are fully liable for all losses generated on bonds they underwrite. Amwest Surety markets for contracted agents by advertising in trade publications and by personally marketing to agents in their offices. Personal marketing efforts are primarily handled by the regional managers. The Company markets its retail court bonds in the states of Washington, Idaho, New Mexico, Utah, Hawaii, Oklahoma, Kansas and Missouri. The business is developed primarily through yellow page advertising. The Company utilizes a large number of independent contractor non-liable agents to post the bonds it writes. The Company directs its specialty property and casualty marketing efforts primarily at independent insurance producers. At December 31, 1999, the total number of direct producers placing specialty property and casualty coverage was approximately 125. Such producers are made aware of the coverages offered by the Company primarily through direct solicitation and advertisements in trade publications and trade shows. COMPETITION The insurance industry is a highly competitive industry. There are numerous firms, particularly in the specialty markets, which compete for a limited volume of business. Competition is based upon price, service, products offered and financial strength of the insurance company. These factors as measured in part by the Company's Best rating are particularly important with respect to the surety market. A reduction in the Best rating of Amwest Surety or Far West would impair the Company's ability to operate at the levels it has historically. There are a number of companies in the industry which offer packages and policies similar to the Company's. The Company competes for surety business in the middle market. The Company's capacity enables the Company to underwrite specialty surety credit which is dominated by small, regional companies as well as business marketed by professional surety agents who are generally sought after by standard market companies. Local service, pricing and, to some extent, agent commissions are the primary competitive tools. The Company, while competitive in pricing and commissions, believes that service is the difference. To this end, the Company believes its branch network and its decentralized approach to doing business will enable it to continue to compete effectively, even when challenged by the larger standard market companies. The Company's strategy for its specialty property and casualty business generally is to position itself within a limited regional geographic location as a consistent and reliable provider of commercial insurance packages for insureds involved in specialized industries. The Company believes that its monthly direct-bill commercial policies create a competitive advantage because the insured is not required to finance an annual premium. Additionally, the Company believes that its ability to provide a consistent insurance package for specialized industries and to continue to provide quality service in the handling of claims through staff who are particularly experienced in the areas of the Company's specialization permit it to compete successfully in its targeted customer base. The Company's direct billing also enable insurance producers to enjoy the benefits of a monthly commission without incurring the cost of billing and the attendant problems relating to premium collection. EMPLOYEES At December 31, 1999, the Company employed 520 people. GOVERNMENT REGULATION The Company's insurance subsidiaries are domesticated in the state of Nebraska. Accordingly, the Company is regulated by the Nebraska Department of Insurance as an insurance holding company. Any person who acquires or agrees to acquire an amount of the Company's Common Stock which would cause him to own beneficially more than 10% of such stock must obtain the prior approval of the Nebraska Insurance Commissioner. The Company's insurance subsidiaries are required to file with the Department of Insurance in their state of domicile information concerning ownership, financial condition, capital structure and general business operations. The Company's insurance subsidiaries can only conduct business in states in which they are licensed. Each of the insurance subsidiaries are subject to varying degrees of regulation and supervision in the states in which they conduct business. This regulation relates to such matters as the adequacy of reserves, the type and quality of investments, minimum capital and surplus requirements, risk-based capital requirements, deposit of securities with state insurance authorities for the benefit of policyholders, restrictions on dividends and other transfers, periodic examination of the insurers' affairs, claims handling procedures, and annual and other reports required to be filed with the state insurance commissioners on the financial and other condition of these companies. The subsidiaries must also file rates with most of the states in which they are licensed to underwrite insurance. The Company's insurance subsidiaries are also subject to triennial examinations of their financial condition by their state of domicile. Condor was last examined by the State of California as of December 31, 1995. Amwest Surety and Far West were examined by the State of Nebraska as of December 31, 1996. Amwest Surety and Far West are also regulated by the United States Department of the Treasury as acceptable sureties for Federal bonds. The Company participates in the Hawaii Hurricane Relief Fund, and accordingly, its Hawaii policies exclude wind coverage over 75 miles per hour. Additionally, the Company participates in the Florida Hurricane Catastrophe Fund at the highest level of participation permitted. Recoveries from this Fund are limited to hurricanes and are based on a formula which utilizes, among other factors, premiums written, industry premiums written, industry losses and amounts available in the fund. As a participant, the Company could be assessed in the event the above Funds sustain hurricane losses. The Company is a participant in California's "assigned risk" program as it relates to commercial automobile liability insurance. Automobile liability insurers in California are required to sell bodily injury liability to a proportionate number (based on the insurer's share of the California automobile casualty insurance market) of those drivers applying to the California Department of Insurance for placement as assigned risks. Drivers seek placement as assigned risks because their driving records or other relevant characteristics make them difficult to insure in the open market. ITEM 2. PROPERTIES The Company leases all of its office space which, as of December 31, 1999, totaled approximately 156,000 square feet. The home office aggregates approximately 63,000 square feet. Branch locations range from 150 to 4,600 square feet. See Note 12 of Notes to Consolidated Financial Statements. On January 26, 1996, the Company entered into a lease agreement for home office space in the City of Calabasas. The Company moved to this location in June 1997. The lease term is for a period of 15 years and covers approximately 63,000 square feet. The Company also has the option to purchase this home 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. ITEM 3. LEGAL PROCEEDINGS The Company is from time to time named as a defendant in various lawsuits incidental to its business. While the outcome of lawsuits and other proceedings cannot be predicted with certainty, management expects these matters will not have a materially adverse effect on the consolidated financial position or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION The Company's Common Stock has been traded on the American Stock Exchange under the symbol AMW since June 25, 1987 and on the Pacific Stock Exchange under the symbol AMW since April 21, 1988. The following table sets forth, for the periods indicated, the high and low sale prices per share as reported on the American Stock Exchange. This table also sets forth the amount per share of cash dividends paid by the Company with respect to its Common Stock for each of the indicated periods.
Period High Low Dividends 1998 (1) First Quarter 13 5/8 12 .09 Second Quarter 15 1/3 13 2/7 .09 Third Quarter 13 3/16 12 .09 Fourth Quarter 13 3/16 11 4/5 .09 1999 (1) First Quarter 13 3/16 8 3/8 .09 Second Quarter 10 5/8 8 1/4 .09 Third Quarter 11 3/8 9 1/4 .09 Fourth Quarter 9 7/8 6 3/8 .09 (1) Amounts reflect a 10% stock dividend effective March 31, 1999.
On March 29, 2000, the closing price of the Company's Common Stock on the American Stock Exchange was $8.75 per share. HOLDERS As of March 29, 2000, there were 320 holders of record of the Company's Common Stock. However, based on available information, the Company believes that the total number of stockholders, including beneficial stockholders, exceeds 1,000. DIVIDENDS The Company began paying cash dividends in 1986. The Company's ability to pay cash dividends is subject to certain regulatory and contractual restrictions. See Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" and Notes 8 and 10 of Notes to Consolidated Financial Statements. In a decision to deploy more capital toward executing the Company's strategic plan, the Board of Directors voted to eliminate the payment of the regular quarterly cash dividend effective February 9, 2000. ITEM 6. SELECTED FINANCIAL DATA The selected data presented below under the captions "Summary of Earnings," "Year End Financial Position" and "Operating Ratios" for, and as of the end of, each of the years in the five year period ended December 31, 1999, are derived from the consolidated financial statements of Amwest Insurance Group, Inc. and subsidiaries, which financial statements have been audited by KPMG LLP, independent certified public accountants. The consolidated financial statements as of December 31, 1999 and 1998 and for each of the years in the three year period ended December 31, 1999 and the report thereon, are included elsewhere in this Annual Report on Form 10-K.
SELECTED FINANCIAL DATA (In thousands, except per share amounts) Year ended December 31, 1999 1998 1997 1996 1995 ------------------------------------------------------------------------------- Summary of Earnings: Net premiums earned $ 110,544 $ 105,971 $ 92,150 $ 87,883 $ 85,170 Net investment income 7,055 6,651 6,396 6,807 7,863 Realized gains 3,913 4,400 3,473 2,201 2,176 Underwriting expenses 121,465 108,947 93,233 97,961 88,847 Income (loss) before income taxes 516 9,012 7,435 (5,046) 4,498 Provision (benefit) for income taxes 76 2,743 1,937 (2,360) 829 Net income (loss) $ 440 $ 6,269 $ 5,498 $ (2,686) $ 3,669 =============================================================================== Per share (1): Basic $ .10 $ 1.47 $ 1.34 $ (.67) $ .92 =============================================================================== Diluted $ .10 $ 1.45 $ 1.33 $ (.67) $ .90 =============================================================================== Cash dividends $ 0.36 $ 0.36 $ 0.40 $ 0.40 $ 0.36 =============================================================================== Year End Financial Position: Total investments $ 120,604 $129,204 121,163 120,446 131,155 Total assets 241,695 216,291 190,519 181,418 183,833 Bank indebtedness 14,500 14,500 14,500 12,500 12,500 Total stockholders' equity 56,802 61,902 57,179 49,932 55,075 Average stockholders' equity 59,352 59,541 53,558 52,504 50,616 Return on stockholders' equity .74% 10.53% 10.27% (5.12%) 7.25% Operating Ratios: Loss & loss adjustment expenses 43.7% 38.5% 37.6% 53.1% 41.4% Other underwriting expenses 66.2% 64.3% 63.6% 58.4% 62.9% Combined ratios 109.9% 102.8% 101.2% 111.5% 104.3% (1) Amounts reflect a 10% stock dividend effective March 31, 1999.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Year ended December 31, 1999 compared to year ended December 31, 1998 Premiums written increased 3% from $132,819,000 in 1998 to $136,488,000 in 1999. The premium growth was due to premium increases in the surety product lines. Premiums for the surety business increased 6% from $102,270,000 in 1998 to $108,184,000 in 1999. The increase is attributable to increased writings in the court and commercial surety operations. The Company is focused on increasing non-contract surety production and has increased the percentage of this business from 39% of total surety writings in 1998 to 43% of total surety writings in 1999. Premiums for the property and casualty business decreased 7% from $30,549,000 in 1998 to $28,304,000 in 1999. 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 4% from $105,971,000 in 1998 to $110,544,000 in 1999. 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 6% from $6,651,000 in 1998 to $7,055,000 in 1999. The increase for the year is primarily due to an increase in the amount of average invested assets from $127,776,000 in 1998 to $134,030,000 in 1999. Investment yields in 1999 were comparable to those in 1998. Net realized investment gains decreased from $4,400,000 in 1998 to $3,913,000 in 1999. The investments sold during 1999 were primarily equity securities and certain fixed income investments including mortgage-backed and municipal bond securities. Commissions and fees decreased 4% from $2,854,000 in 1998 to $2,736,000 in 1999. The decrease 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 programs in 1999 partially offset by an increase in fee income on property bonds and funds control business. Net losses and loss adjustment expenses increased 18% from $40,831,000 in 1998 to $48,310,000 in 1999. The increase is primarily due to a number of significant losses in the contract surety product line, continued losses on the property and casualty discontinued lines, and adverse development on property and casualty. The net losses for both years reflect the benefit of the aggregate stop loss reinsurance treaty. Losses and loss adjustment expense ceded to this treaty were $2,533,000 in 1998 and $6,981,000 in 1999 on ceded premium of $2,316,000 in 1998 and $4,822,000 in 1999. Policy acquisition costs increased as a percentage of net premiums earned from 51%, or $53,806,000 in 1998 to 52%, or $57,723,000 in 1999. The increase in the expense ratio 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 remained constant as a percentage of net premiums earned at 14%, or $14,310,000 in 1998 and $15,432,000 in 1999. Interest expense increased 18% from $1,917,000 in 1998 to $2,267,000 in 1999. The increase is attributable to an increase in average funds held on which the Company pays interest from $27,488,000 for 1998 to $40,407,000 for 1999. Income before income taxes decreased from $9,012,000 in 1998 to $516,000 in 1999 due to the factors outlined above. The effective tax rate was 30% in 1998 as compared to 15% in 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. Net income decreased from $6,269,000 in 1998 to $440,000 in 1999 due to the factors outlined above. Year ended December 31, 1998 compared to year ended December 31, 1997 Gross premiums written increased 23% from $108,091,000 in 1997 to $132,819,000 in 1998. Premium growth for the surety division was 24%, with the commercial surety product showing the largest growth, up 66% from $16,694,000 in 1997 to $27,662,000 in 1998. Management believes that this growth is attributable to continued emphasis on this product and a strengthening of our servicing and underwriting capabilities for commercial surety during 1998. In addition, the Company's bail product grew 11% from $11,109,000 in 1997 to $12,315,000 in 1998 due primarily to increased penetration of this product in Missouri, Oklahoma and Texas. Contract surety premiums grew 14% from $54,808,000 in 1997 to $62,293,000 in 1998. Of this amount, 8% was the product of acquisitions completed during late 1997 and 6% was internally generated. Property and Casualty Division premiums grew 20% primarily due to the implementation of the Division's California non-standard automobile program and specialty motorcycle program in New York State. Net premiums earned increased 15% from $92,150,000 in 1997 to $105,971,000 in 1998. The increase in net premiums earned reflects the increased premium writings partially offset by increased premiums ceded as a result of changes in the Company's reinsurance program during 1998. Net investment income and realized investment gains increased 12% from $9,869,000 in 1997 to $11,051,000 in 1998. This increase is primarily due to an increase in realized investment gains from $3,473,000 during 1997 to $4,400,000 during 1998. In addition, net investment income before realized investment gains increased 4% from $6,396,000 to $6,651,000 due to higher average invested balances during 1998. Commissions and Fees increased 365% from $615,000 in 1997 to $2,854,000 in 1998. The increase is primarily due to the addition of funds control business in 1998 and the purchase of Liberty Bonding Company in 1998 which writes property bonds. Net losses and loss adjustment expenses increased 18% from $34,657,000 in 1997 to $40,831,000 in 1998. This resulted in a slight increase in the loss and loss adjustment expense ratio from 37.6% in 1997 to 38.5% in 1998. The increased loss ratio is primarily attributable to an increase in the loss and loss adjustment expense ratio for the property and casualty division whose loss and loss adjustment expense ratio was 80.6% for the year ended December 31, 1998, compared to 67.8% for the year ended December 31, 1997. Substantially all of this increase is attributable to adverse development of prior year commercial auto and general liability reserves as a result of ongoing reserve analysis performed by the Company. During 1998, the Company completed several organizational changes within the P&C claims and legal departments, partially in response to the noted adverse development of prior year reserved amounts and also to both strengthen the Company's in-house capabilities and streamline the expense structure of settling P&C claims. Management believes that these changes will strengthen the Company's reserving and claims settlement practices. The surety loss and loss adjustment expense ratios remained constant at 28% for 1997 and 1998. The 1998 ratio includes the impact of the excess of loss and the aggregate stop loss reinsurance treaties. During 1998 $4,168,000 was ceded in premiums on these treaties with $4,100,000 ceded in losses. In 1997 $2,987,000 was ceded in premiums with no losses ceded to the reinsurers. Competitive market conditions and the Company's ability to write surety bonds for larger contractors has resulted, on many bonds, in the substitution of indemnity agreements for liquid and non-liquid collateral. The Company, through its ongoing reserve analysis, has estimated the benefit to be derived from such agreements and reduced estimates of ultimate losses incurred accordingly. In the fourth quarter of 1998, the Company increased its estimate of such "salvage and subrogation" recoveries by approximately $5.4 million which is partially attributable to salvage and subrogation on losses incurred during the fourth quarter. The increase relates primarily to the 1998 and 1997 years and reflects the Company's belief that the underlying data is maturing. Further, subsequent collection efforts have proven prior estimates to be conservative. Since the Company had also pierced it's aggregate excess contract in the fourth quarter, the net benefit attributable to the increased "salvage and subrogation" estimate was approximately $1,025,000. Policy acquisition costs as a percentage of net premiums earned remained relatively constant at a ratio of 50% or $45,952,000 in 1997 and 51% or $53,806,000 in 1998. General operating costs decreased as a percentage of net premiums earned from 14% or $12,624,000 in 1997 to 13% or $14,310,000 in 1998. The decrease in the ratio is due to increased efficiency in servicing an increased premium base. The 1998 amounts include a non-recurring $319,000 charge in connection with the disposition and write-off of the Company's New York probate operation. Interest expense remained relatively flat at $1,966,000 in 1997 compared with $1,917,000 in 1998. At December 31, 1997 and 1998, the collateral balances accrued interest daily at an average rate of 3.7% per annum for both years. Additionally, the average interest rate on the bank indebtedness increased from an average rate of 7.3% during 1997 to an average rate of 7.4% during 1998 due to fluctuations during 1998 in the London Interbank Offered (LIBOR) which is used as the benchmark for the Company's rate on bank indebtedness. The interest rate on the Company's bank indebtedness at December 31, 1998 was 7.1%. Income before income taxes increased from $7,435,000 in 1997 to $9,012,000 in 1998 due to the factors outlined above. The effective tax rate was 26% for 1997 and 30% for 1998. 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. Additionally, due to various factors arising during 1997, the Company eliminated its valuation allowance on its deferred tax assets, which further lowered the 1997 effective tax rate. Net income was $5,498,000 in 1997 and $6,269,000 in 1998 due to the factors outlined above. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 1999, the Company had total cash and cash equivalents and investments of $136,425,000. Included in these amounts is an aggregate of $50,271,000 in funds held which are shown as a liability on the Company's consolidated balance sheet. As of December 31, 1999, the Company's investment balances were comprised of $100,892,000 in fixed maturities held at market, $4,199,000 in common equity securities, $5,073,000 in preferred equity securities, $7,749,000 in other invested assets and $2,691,000 in short-term investments. The Company's off balance sheet collateral which primarily consists of irrevocable letters of credit and certificates of deposit increased from $218,360,000 at December 31, 1998 to $241,649,000 at December 31, 1999. This increase is primarily attributable to increased commercial surety writings. In addition, funds held increased from $30,542,000 at December 31, 1998 to $50,271,000 at December 31, 1999. The Company reflects in its consolidated financial statements funds received as collateral on which net earnings inure to the benefit of the Company. This amounted to $22,092,000 at December 31, 1998 and $37,173,000 at December 31, 1999. The increase in this amount is primarily attributed to increased commercial surety writings and timing and payment of claims activity related to draws on irrevocable letters of credit and certificates of deposit. The Company also holds funds as deposits on certain property and casualty business, certain immigration business and on funds control business. These funds amounted to $8,450,000 at December 31, 1998 and $13,098,000 at December 31, 1999. This increase is due to an increase in funds held for the Company's funds control business. Because the Company depends primarily on dividends from its insurance subsidiaries for its net cash flow requirements, absent other sources of cash flow, the Company cannot pay dividends materially in excess of the amount of dividends that could be paid by the insurance subsidiaries to the Company. See Note 8 of Notes to Consolidated Financial Statements. On August 6, 1994, the Company entered into a revolving credit agreement with Union Bank for $12,500,000 which refinanced a previous loan. The debt agreement was amended on April 24, 1996, July 10, 1996 and waived and amended as of September 30, 1997, February 9, 1999 and August 30, 1999 to increase the amount available under the revolving line of credit from $12,500,000 to $15,000,000 and to change certain covenants and payment requirements. At December 31, 1999, $15,000,000 is available under the revolving line of credit, $14,500,000 of which is currently utilized. 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 interest rate at December 31, 1999 was 8.2%. 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. See Note 10 of Notes to Consolidated Financial Statements. The Company is a party to a lease with ACD2 regarding its corporate headquarters. The lease term is for a period of 15 years and contains provisions for scheduled lease charges. The Company's minimum commitment with respect to this lease in 2000 is approximately $893,000. The Company has the option to purchase this home 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. See Note 12 of Notes to Consolidated Financial Statements. Other than the Company's obligations with respect to funds held, the Company's obligations 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 the remainder of 2000. The Company used $1,538,000, $697,000 and $9,716,000 in cash from operating activities in the fiscal years ended December 31, 1997, 1998 and 1999, respectively. The Company generated $3,835,000, used $7,526,000 and generated $4,382,000 in cash for investing activities for the fiscal years ended December 31, 1997, 1998 and 1999, respectively. The Company used $4,924,000, generated $6,847,000 and generated $18,724,000 in cash from financing activities for the fiscal years ended December 31, 1997, 1998 and 1999, respectively. The cash used for operating activities in 1999 increased approximately $9,000,000 due primarily to an increase in contract settlement funds receivable. Such increase is attributable to increased funding of principals to complete various contracts currently in claim. The effect of inflation on the revenues and net income of the Company during all three periods discussed above was not significant. OTHER MATTERS Year 2000 Issues: The Company did not experience material Year 2000 problems and does not expect to incur any significant additional costs related to Year 2000 matters. New Accounting Standards: In 1998, the American Institute of Certified Accountants issued Statement of Position No. 98-1, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 addresses the accounting for various costs associated with the development of software for internal use. SOP 98-1 requires that costs incurred in the Preliminary Project and Post-Implementation/Operation Stages be expensed as incurred while certain costs incurred in the Application Development Stage are to be capitalized. The Company adopted the provisions of SOP 98-1 effective January 1, 1999. Other Issues: Certain statements contained in this Form 10-K 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 business, the inability to achieve increased percentage writings of commercial surety and court products, a decline in the Company's credit or other third party ratings, the lack of adherence by branch personnel to Company underwriting guidelines, 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The main objective in managing the investment portfolios of the Company is to maximize total investment returns while minimizing credit risks, in order to provide maximum support to the insurance underwriting operations. Investment strategies are developed based on many factors including expected underwriting results, tax position, regulatory requirements, fluctuations in interest rates and consideration of other market risks. Investment decisions are primarily managed by the Company's investment advisors based on guidelines established by management and approved by the board of directors. Market risk represents the potential for loss due to adverse changes in the fair value of financial instruments. The market risks related to financial instruments of the Company primarily relate to the investment portfolio, which exposes the Company to risks related to interest rates and, to a lesser extent, credit quality, prepayment and equity prices. Interest rate risk is the price sensitivity of a fixed income security to changes in interest rates. Since most of the Company's property and casualty business is short-tailed in nature, the Company has established duration guidelines to be commensurate with our liabilities. Our guidelines have established duration of the portfolio to be between 2-5 years. The following table provides information about all our fixed maturity investments which are sensitive to changes in interest rates. The table presents cash flows of principal amounts and related weighted average interest rates by expected maturity dates at December 31, 1999. The cash flows are based on the earlier of the call date or the maturity date or, for mortgage-backed securities, expected payment patterns. Actual cash flows could differ from the expected amounts.
December 31, December 31, 1999 Estimated There-After Amortized Market 2000 2001 2002 2003 2004 Cost Value ----------- ------------ ----------- ----------- ----------- ------------- --------------- ------------- (Dollars in thousands) Tax-exempt $1,250 $3,995 $1,000 $700 $1,835 $20,115 $29,803 $29,331 Average interest rate 4.06% 4.15% 5.05% 6.89% 4.925 5.24% - - Taxable - other than mortgage-backed securities $1,276 $4,150 $5,890 $5,597 $6,200 $29,513 $48,764 $46,734 Average interest rate 6.10% 6.43% 5.07% 5.76% 6.80% 6.22% - - Mortgage-backed securities $1,280 $1,425 $3,949 $6,398 $2,680 $9,852 $25,626 $24,827 Average interest rate 7.00% 8.13% 7.10% 7.72% 8.09% 9.94% - - =========== ============ =========== =========== =========== ============= ============== ============== Total $3,806 $9,570 $10,839 $12,695 $10,715 $59,480 $104,193 $100,892 =========== ============ =========== =========== =========== ============= ============== ==============
Prepayment risk refers to the changes in prepayment patterns related to decreases and increases in interest rates than can either shorten or lengthen the expected timing of the principal repayments and thus the average life and the effective yield of a security. Such risk exists primarily within the portfolio of mortgage-backed securities. Equity market risk is defined as the chance that market influences will affect the expected returns of all equities. Returns are influenced not only by the fundamental attributes of investment securities, but by the price movements of the general marketplace. Much of this depends on the sensitivity to the overall market of the individual issue. The Company attempts to reduce this risk through diversification and a focus on high quality, blue chip investments. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements required in response to this section are submitted as part of Item 14(a) of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT For information regarding Directors and Executive Officers of the Registrant, reference is made to the Registrant's definitive proxy statement for its Annual Meeting of Stockholders to be held on May 19, 2000, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1999, and which is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION For information regarding executive compensation, reference is made to the Registrant's definitive proxy statement for its Annual Meeting of Stockholders to be held on May 19, 2000, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1999, and which is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT For information regarding security ownership of certain beneficial owners and management, reference is made to the Registrant's definitive proxy statement for its Annual Meeting of Stockholders to be held on May 19, 2000, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1999, and which is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS For information regarding certain relationships and related transactions, reference is made to the Registrant's definitive proxy statement for its Annual Meeting of Stockholders to be held May 19, 2000, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1999, and which is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements The index to the consolidated financial statements appears on page 38. (b) Reports on Form 8-K None. (c) Exhibits 3.1 Restated Certificate of Incorporation of the Company as amended to date. (Incorporated by reference to Exhibit 3(3)(a) to the Company's Form 8-B Registration Statement No. 1-9580.) 3.2 Bylaws of the Company. (Incorporated by reference to Exhibit 3.2 of the Company's 1990 Form 10-K.) 4.1 Specimen Common Stock Certificate. (Incorporated by reference to Exhibit 3(4) to the Company's Form 8-B Registration Statement No. 1-9580.) 10.1 Third-party administrative support service agreement for California Non-CAIP Assigned Risk Automobile (Incorporated by reference to Exhibit 10.28 to Condor Services, Inc.'s 1991 Form 10-K). 10.2 Investment Management Agreement between the Company and AAM Advisors, Inc., dated August 11, 1992. (Incorporated by reference to Exhibit 10.21 to the Company's 1992 Form 10-K.) 10.3 Contract between the Company and Scudder, Stevens & Clark, Inc., dated August 13, 1992. (Incorporated by reference to Exhibit 10.22 to the Company's 1992 Form 10-K.) 10.4 Lease Agreement dated January 24, 1996 by and between Amwest Insurance Group, Inc. and ACD2, a California corporation (Incorporated by reference to 10.24 to the Company's Form S-4 Registration Statement No. 333-00119) 10.5 Option Agreement dated January 24, 1996 by and between Amwest Insurance Group, Inc. and ACD2, a California corporation (Incorporated by reference to 10.25 to the Company's Form S-4 Registration Statement No. 333-00119) 10.6 Restated Revolving Credit Agreement dated July 10, 1996 between Amwest Insurance Group, Inc. and Union Bank of California, N.A. (Incorporated by reference to Exhibit 10.55 to the Company's 1996 Form 10-K.) 10.7 Waiver and Amendment No. 1 dated as of September 30, 1997 to the Restated Revolving Credit Agreement dated July 10, 1996. (Incorporated by reference to Exhibit 19.1 to the Company's September 30, 1997 Form 10-Q.) 10.8 Waiver and Amendment No. 2 dated as of February 9, 1999 to the Restated Revolving Credit Agreement dated July 10, 1996. (Incorporated by reference to Exhibit 10.8 to the Company's 1998 Form 10-K.) 10.9 Waiver and Amendment No. 3 dated as of August 30, 1999 to the Restated Revolving Credit Agreement dated July 10, 1996. (Incorporated by reference to Exhibit 10 to the Company's September 30, 1999 Form 10-Q.) 10.10 Casualty Excess of Loss Reinsurance Contract effective July 1, 1996 issued to Condor Insurance Company, Amwest Surety Insurance Company and Far West Insurance Company by a group of reinsurers led by Gerling Global Reinsurance Corporation. (Incorporated by reference to Exhibit 10.53 to the Company's 1996 Form 10-K.) 10.11 Contingent Excess of Loss Reinsurance Contract effective July 1, 1998 issued to Condor Insurance Company, Amwest Surety Insurance Company and Far West Insurance Company by a group of reinsurers led by Kemper Reinsurance Company. (Incorporated by reference to Exhibit 10.10 to the Company's 1998 Form 10-K.) 10.12 Excess of Loss Reinsurance Contract effective October 1, 1997 issued to Amwest Surety Insurance Company by a group of reinsurers lead by Kemper Reinsurance Company. (Incorporated by reference to Exhibit 10.10 to the Company's 1997 Form 10-K.) 10.13 Aggregate Stop Loss Reinsurance Contract effective January 1, 1999 issued to Amwest Surety Insurance Company, Far West Insurance Company and Condor Insurance Company by Underwriters Reinsurance Company (Barbados) Inc. 10.14 50% Private Passenger Automobile Quota Share Reinsurance Contract effective July 1, 1997 issued to Condor Insurance Company, Amwest Surety Insurance Company and Far West Insurance Company by Gerling Global Reinsurance Corporation and USF RE Insurance Company. (Incorporated by reference to Exhibit 10.12 to the Company's 1997 Form 10-K.) 10.15 75% California Homeowners Multiple Line Quota Share Reinsurance Contract effective July 1, 1997 issued to Condor Insurance Company, Amwest Surety Insurance Company and Far West Insurance Company by Constitution Reinsurance Corporation and Vesta Fire Insurance Company. (Incorporated by reference to Exhibit 10.13 to the Company's 1997 Form 10-K.) 10.16 75% Florida Multiple Line Quota Share Reinsurance Contract effective July 1, 1998 issued to Condor Insurance Company, Amwest Surety Insurance Company and Far West Insurance Company by a group of reinsurers led by Vesta Fire Insurance Corporation. (Incorporated by reference to Exhibit 10.15 to the Company's 1998 Form 10-K.) 10.17 Quota Share Reinsurance Agreement effective July 1, 1998 issued to Amwest Surety Insurance Company by Underwriters Reinsurance Company. (Incorporated by reference to Exhibit 10.16 to the Company's 1998 Form 10-K.) 10.18 Excess Per Event Reinsurance Contract effective July 1, 1999 issued to Condor Insurance Company, Amwest Surety Insurance Company and Far West Insurance Company by a group of reinsurers led by Gerling Global Reinsurance Corporation of America. 10.19 Excess Catastrophe Reinsurance Contract effective July 1, 1999 issued to Condor Insurance Company, Amwest Surety Insurance Company and Far West Insurance Company by a group of reinsurers led by Gerling Global Reinsurance Corporation of America. 10.20 Stock Option Plan of the Company, as amended. (Incorporated by reference to Exhibit 4.1 to the Company's Form S-8 Registration Statement No. 33-82178.) 10.18 Form of Indemnity Agreement between the Company and Individual Directors and Certain Officers Designated by the Company's Board of Directors. (Incorporated by reference to Exhibit 3(10) to the Company's Form 8-B Registration Statement No. 1-9580.) 10.19 Form of Senior Executive Severance Agreement entered into by the Company and certain officers. (Incorporated by reference to 10.20 to the Company's 1989 Form 10-K.) 10.21 Rights Agreement dated as of May 10, 1999 executed by the Company and American Stock Transfer and Trust Company, as rights agent. (Incorporated by reference to Exhibit 99.1 to the Company's Registration Statement on Form 8-K dated May 11, 1999.) 10.22 Amended Certificate to the Certificate of Designation, Preferences and Rights of Series A Junior Participating Cumulative Preferred Stock of Amwest Insurance Group, Inc. effective on May 10, 1999. (Incorporated by reference to Exhibit 99.2 to the Company's Registration Statement on Form 8-K dated May 11, 1999.) 10.21 Non-Employee Director Stock Option Plan of the Company. (Incorporated by reference to Exhibit 4.2 to the Company's Form S-8 Registration Statement No. 33-82178.) 10.22 Amwest Insurance Group, Inc. 1998 Stock Incentive Plan (Incorporated by reference to Exhibit 4.1 to the Company's Form S-8 Registration Statement No. 333-61819.) 10.23 Amwest Insurance Group, Inc. Employee Stock Purchase Plan (Incorporated by reference to Exhibit 99.1 to the Company's Form S-8 Registration Statement No. 333-17109.) 11.1 Statement regarding computation of per share earnings. (See Note 1 of Notes to Consolidated Financial Statements.) 21.1 List of Subsidiaries of Registrant. (Incorporated by reference to Exhibit 3(22) to the Company's Form 8-B Registration Statement No. 1-9580.) 23.1 Consent of KPMG LLP for incorporation by reference of their opinion to the Registration Statements Nos. 33-11020, 33-24243, 33-38128 and 33-82178 on Form S-8 and in Registration Statements Nos. 33-28645 and 33-37984 on Form S-3 of Amwest Insurance Group, Inc. (See page 70 of the Consolidated Financial Statements.) (d) Schedules Independent Auditors' Report. Index to financial statement schedules. Schedule Caption I Summary of Investments-Other Than Investments in Related Parties at December 31, 1999. II Condensed Financial Information of the Registrant. III Supplementary Insurance Information Items omitted are not applicable or not required for Form 10-K. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMWEST INSURANCE GROUP, INC. Date: March 29, 2000 By: /s/ JOHN E. SAVAGE ----------------------------- John E. Savage President, Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. Signature Title Date /s/RICHARD H. SAVAGE Chairman of the Board March 29, 2000 - --------------------------- Richard H. Savage President, Chief Executive Officer and Director /s/ JOHN E. SAVAGE (Principal Executive Officer) March 29, 2000 - --------------------------- John E. Savage Senior Vice President, Chief Financial Officer, Treasurer and Director (Principal Financial and Principal /s/ STEVEN R. KAY Accounting Officer) March 29, 2000 - --------------------------- Steven R. Kay /s/ NEIL F. PONT Senior Vice President and Director March 29, 2000 - --------------------------- Neil F. Pont /s/ THOMAS R. BENNETT Director March 29, 2000 - --------------------------- Thomas R. Bennett /s/ BRUCE A. BUNNER Director March 29, 2000 - --------------------------- Bruce A. Bunner /s/ ROBERT W. KLEINSCHMIDT Director March 29, 2000 - --------------------------- Robert W. Kleinschmidt /s/ GUY A. MAIN Director March 29, 2000 - --------------------------- Guy A. Main /s/ ARTHUR F. MELTON Director March 29, 2000 - --------------------------- Arthur F. Melton /s/ ROLAND D. MILLER Director March 29, 2000 - --------------------------- Roland D. Miller /s/ CHARLES L. SCHULTZ Director March 29, 2000 - --------------------------- Charles L. Schultz INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Independent Auditors' Report 35 Consolidated Financial Statements: Consolidated Statements of Operations and Comprehensive Income for the Years Ended December 31, 1999, 1998 and 1997 36 Consolidated Balance Sheets as of December 31, 1999 and 1998 37 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997 39 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1999, 1998 and 1997 40 Notes to Consolidated Financial Statements 41 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders Amwest Insurance Group, Inc.: We have audited the accompanying consolidated balance sheets of Amwest Insurance Group, Inc. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations and comprehensive income, cash flows and changes in stockholders' equity for each of the years in the three year period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Amwest Insurance Group, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 1999, in conformity with generally accepted accounting principles. Los Angeles, California February 3, 2000 KPMG LLP AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Dollars in thousands, except share and per share data)
Years ended December 31, 1999 1998 1997 ----------------- ---------------- ----------------- OPERATIONS Gross written premiums $136,488 $132,819 $108,091 ----------------- ---------------- ----------------- Net premiums earned 110,544 105,971 92,150 Net investment income 7,055 6,651 6,396 Net realized investment gains 3,913 4,400 3,473 Commissions and fees 2,736 2,854 615 ----------------- ---------------- ----------------- Total revenues 124,248 119,876 102,634 Net losses and loss adjustment expenses 48,310 40,831 34,657 Policy acquisition costs 57,723 53,806 45,952 General operating costs 15,432 14,310 12,624 Interest expense 2,267 1,917 1,966 ----------------- ---------------- ----------------- Total expenses 123,732 110,864 95,199 Income before income taxes 516 9,012 7,435 Provision for income taxes 76 2,743 1,937 ----------------- ---------------- ----------------- Net income $ 440 $ 6,269 $ 5,498 ----------------- ---------------- ----------------- Earnings per common share: Basic $ .10 $ 1.47 $ 1.34 ================= ================ ================= Diluted $ .10 $ 1.45 $ 1.33 ================= ================ ================= COMPREHENSIVE INCOME (LOSS) Net income $ 440 $ 6,269 $ 5,498 Other comprehensive income (loss): Unrealized gains(losses) on securities, net of income taxes of $1,257, $(259) and $(1,553) for the years ended December 31, 1999, 1998 and 1997, (2,441) 502 3,014 respectively Reclassification adjustment for gains included in net income, net of income taxes of $1,079, $756 and $594 for the years ended December 31, 1999, 1998 and 1997, respectively (2,094) (1,469) (1,154) ----------------- ---------------- ----------------- Comprehensive income (loss) $ (4,095) $ 5,302 $ 7,358 ================= ================ ================= See accompanying notes to consolidated financial statements.
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
December 31, 1999 1998 ---------------- ----------------- ASSETS Investments: Fixed maturities, available-for-sale (amortized cost of $104,193 and $105,355 at December 31, 1999 and 1998, respectively) $ 100,892 $ 107,227 Common equity securities, available-for-sale (cost of $2,886 and $7,692 at December 31, 1999 and 1998, respectively) 4,199 10,572 Preferred equity securities, available-for-sale (cost of $4,905 and $4,258 at December 31, 1999 and 1998, respectively) 5,073 4,265 Other invested assets (cost of $7,725 and $4,622 at December 31, 1999 and 1998, respectively) 7,749 4,939 Short-term investments 2,691 2,201 ---------------- ----------------- Total investments 120,604 129,204 Cash and cash equivalents 15,821 2,431 Accrued investment income 1,654 1,470 Agents' balances and premiums receivable (less allowance for doubtful accounts of $1,260 and $1,015 at December 31, 1999 and 1998, respectively) 15,365 17,309 Contract settlement funds and collateral receivable 16,270 6,493 Reinsurance recoverable: Paid loss and loss adjustment expenses 5,401 6,236 Unpaid loss and loss adjustment expenses 21,903 9,837 Ceded unearned premiums 6,747 8,584 Deferred policy acquisition costs 22,147 20,209 Furniture, equipment and improvements, net 5,635 6,267 Income taxes recoverable 1,472 951 Other assets 8,676 7,300 ---------------- ----------------- Total assets $ 241,695 $ 216,291 ================ =================
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued) (Dollars in thousands, except share and per share data)
December 31, 1999 1998 ---------------- ----------------- LIABILITIES Unpaid losses and loss adjustment expenses $ 56,466 $ 42,244 Unearned premiums 51,736 51,627 Funds held 50,271 30,542 Deferred Federal income taxes 494 3,185 Bank indebtedness 14,500 14,500 Amounts due to reinsurers 2,181 4,393 Other liabilities 9,245 7,898 ---------------- ----------------- Total liabilities 184,893 154,389 ---------------- ----------------- 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; 4,328,592 at December 31, 1999 and 4,311,580 at December 31, 1998 43 43 Additional paid-in capital 19,724 19,175 Accumulated other comprehensive income (1,186) 3,349 Retained earnings 38,221 39,335 ---------------- ----------------- Total stockholders' equity 56,802 61,902 ---------------- ----------------- Total liabilities and stockholders' equity $ 241,695 $ 216,291 ================ ================= See accompanying notes to consolidated financial statements.
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Increase (Decrease) in Cash and Cash Equivalents (Dollars in thousands)
Years ended December 31, 1999 1998 1997 ----------------- ---------------- ----------------- Cash flows from operating activities: Net income $ 440 $ 6,269 $5,498 Adjustments to reconcile net income to cash provided by operating activities: Change in agents' balances, premiums receivable and unearned premiums 2,053 4,816 6,445 Change in accrued investment income (184) (104) 33 Change in unpaid losses and loss adjustment expenses 14,222 2,721 (2,486) Change in contract settlement funds and collateral receivable (9,777) (2,119) (249) Change in reinsurance recoverables and ceded unearned premiums (9,394) (13,909) 293 Change in amounts due to/from reinsurers (2,212) 3,938 110 Change in other assets and other liabilities (29) (969) (6,298) Change in income taxes, net (875) 388 2,346 Change in deferred policy acquisition costs (1,938) 1,090 (5,198) Net realized gain on sale of investments (3,913) (4,400) (3,478) Net realized loss on sale of fixed assets - 6 48 Provision for depreciation and amortization 1,891 1,576 1,398 ----------------- ---------------- ----------------- Net cash (used) by operating activities (9,716) (697) (1,538) ----------------- ---------------- ----------------- Cash flows from investing activities: Cash received from investments sold 44,189 74,642 52,441 Cash received from investments matured or called 10,208 18,475 8,545 Cash paid for investments acquired (48,895) (98,331) (55,214) Amortization/accretion of bonds 139 181 116 Capital expenditures, net (1,259) (2,493) (2,053) ----------------- ---------------- ----------------- Net cash provided (used) by investing activities 4,382 (7,526) 3,835 ----------------- ---------------- ----------------- Cash flows from financing activities: Proceeds from issuance of long term debt - - 2,000 Proceeds from issuance of common stock 720 975 1,382 Repurchase of common stock (171) Change in funds held 19,729 7,426 (6,812) Dividends paid (1,554) (1,554) (1,494) ----------------- ---------------- ----------------- Net cash provided (used) by financing activities 18,724 6,847 (4,924) ----------------- ---------------- ----------------- Net increase (decrease) in cash and cash equivalents 13,390 (1,376) (2,627) Cash and cash equivalents at beginning of year 2,431 3,807 6,434 ----------------- ---------------- ----------------- Cash and cash equivalents at end of year $ 15,821 $ 2,431 $ 3,807 ================= ================ ================= Supplemental disclosure of cash flow information: Cash paid during the year for interest $ 2,267 $ 1,917 $ 1,966 Cash paid during the year for income taxes 908 4,023 460 See accompanying notes to consolidated financial statements.
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Dollars in thousands, except share data) Years ended December 31, 1999, 1998, and 1997
Common stock ---------------------- Accumulated $.01 Additional other Total Shares par paid-in comprehensive Retained stockholders' issued value capital income earnings equity ------------ --------- ------------- --------------- ----------- -------------- Balance at December 31, 1996 4,024,462 $41 $16,819 $ 2,456 $30,616 $49,932 Issuance of common stock pursuant to the exercise of options 86,031 1 681 - - 682 Issuance of common stock pursuant to the employee stock purchase plan 10,252 - 132 - - 132 Issuance of common stock for agency purchases 57,210 - 569 - - 569 Change in other comprehensive income - - - 1,860 - 1,860 Cash dividends - - - - (1,494) (1,494) Net income - - - - 5,498 5,498 ------------ --------- ------------- --------------- ----------- -------------- Balance at December 31, 1997 4,177,955 42 18,201 4,316 34,620 57,179 Issuance of common stock pursuant to the exercise of options 81,167 1 439 - - 440 Issuance of common stock pursuant to the employee stock purchase plan 17,947 - 215 - - 215 Issuance of common stock for agency purchases 34,511 - 320 - - 320 Change in other comprehensive income - - - (967) - (967) Cash dividends - - - - (1,554) (1,554) Net income - - - - 6,269 6,269 ------------ --------- ------------- --------------- ----------- -------------- Balance at December 31, 1998 4,311,580 43 19,175 3,349 39,335 61,902 Issuance of common stock pursuant to the exercise of options 9,169 - 64 - - 64 Issuance of common stock pursuant to the employee stock purchase plan 17,505 - 157 - - 157 Issuance of common stock for agency purchases 6,938 - 499 - - 499 Repurchase of common stock (16,600) (171) (171) Change in other comprehensive income - - - (4,535) - (4,535) Cash dividends - - - - (1,554) (1,554) Net income - - - - 440 440 ------------ --------- ------------- --------------- ----------- -------------- Balance at December 31, 1999 4,328,592 $43 $19,724 $ (1,186) $38,221 $56,802 ============ ========= ============= =============== =========== ============== See accompanying notes to consolidated financial statements.
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998, and 1997 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Amwest Insurance Group, Inc., (the "Company") through its wholly owned insurance subsidiaries, is primarily engaged in underwriting surety bonds nationwide, commercial automobile insurance in the state of California and, to a lesser extent, other property and casualty coverages in various parts of the United States. The surety bonds are predominantly written through the Company's 30 branch and field offices located throughout the United States. In 1999 and 1998, respectively, the Company's direct premiums written in California was 35.4% and 36.9%. Principles of Consolidation The accompanying consolidated financial statements include the accounts of Amwest Insurance Group, Inc. and its wholly-owned subsidiaries, Amwest Surety Insurance Company ("Amwest Surety"), Condor Insurance Company ("Condor") and Far West Insurance Company ("Far West"). The consolidated financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP") which differ in some respects from those followed in reports to insurance regulatory authorities. Intercompany transactions and balances have been eliminated. Management Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Earnings Per Share Basic earnings per share ("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 effect on reported EPS data is as follows:
Income Shares Per-Share Years ended December 31, (Numerator) (Denominator) (1) Amount (1) ($ in thousands) (Dollars) -------------------- ------------------- ------------- Basic EPS: 1999 $ 440 4,318,537 $ .10 1998 $ 6,269 4,258,684 $ 1.47 1997 $ 5,498 4,095,576 $ 1.34 Effect of Dilutive Securities: 1999 12,783 1998 76,274 1997 51,917 Diluted EPS: 1999 $ 440 4,331,320 $ .10 1998 $ 6,269 4,334,958 $ 1.45 1997 $ 5,498 4,147,493 $ 1.33 (1) Amounts reflect a 10% stock dividend effective March 31, 1999.
Deferred Policy Acquisition Costs Acquisition costs related to unearned premiums, consisting of commissions, premium taxes, salaries and other acquisition costs, are deferred and amortized to income ratably over the estimated term of the bond or the effective period of the policy. These costs vary with and are related to the production of business. Deferred acquisition costs are limited to the estimated future profit, based on the anticipated losses and loss adjustment expenses, maintenance costs and investment income. Policy acquisition costs incurred and amortized to income are as follows:
Years ended December 31, 1999 1998 1997 (Dollars in thousands) ---------------------------------------------------- Balance at beginning of year $ 20,209 $ 21,299 $ 16,101 Costs deferred during the year 59,661 52,716 51,150 Amortization charged to expense (57,723) (53,806) (45,952) ----------------- ---------------- ----------------- Balance at end of year $ 22,147 $ 20,209 $ 21,299 ================= ================ =================
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Federal Income Taxes Deferred income taxes are recognized for the tax consequences of "temporary differences" by applying the applicable tax rate to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Cash and Cash Equivalents The cash and cash equivalents shown on the statements of cash flows include cash and short-term, highly liquid investments (those with original maturities when purchased of ninety days or less). Funds Held The Company accepts various forms of collateral for issuance of its surety bonds, including cash, trust deeds or mortgages on real property, irrevocable letters of credit, certificates of deposit, savings accounts and publicly traded securities. The Company's policy is to record in the accompanying consolidated financial statements only funds received as collateral on which earnings inure to the benefit of the Company. These funds are not restricted as to withdrawal or usage, are not segregated by the Company and are invested on an ongoing basis. At December 31, 1999, the related collateral balances accrue interest daily at an average rate of 3.6% per annum and are due and payable (together with accrued interest) to the collateral owner upon exoneration of the underlying liability. The Company also holds deposits for contractors for whom the Company is controlling disbursements from obligees ("funds control") and deposits for commercial transportation insureds on which the earnings inure to the benefit of the Company. Investments Fixed maturities include bonds, notes and redeemable preferred stock. In connection with establishing its investment objectives, the Company determined that it needed to maintain flexibility to respond to changes in interest rates, tax planning considerations or other aspects of asset/liability management. Since the Company does not purchase fixed maturity investments with a view towards resale, the fixed maturities have been classified as "available-for-sale" and are carried at market value. Market values for fixed maturities are obtained from a national quotation service. Temporary unrealized investment gains and losses on fixed maturities, available-for-sale are credited or charged directly to stockholders' equity, net of applicable tax effect. When a decline in market value of fixed maturities is considered to be other than temporary, a loss is recognized in the consolidated statement of operations. Mortgage backed securities are valued at amortized cost using the pro-rata method of amortization including anticipated prepayments calculated at the date of purchase using the average life method. Adjustments are made as necessary to the value of the bonds for changes in the average life calculation. These changes are based upon current and past experience for the underlying collateral. (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Equity securities are carried at market value. Net unrealized appreciation (depreciation) on equity securities "available for sale", to the extent that there is no other than temporary impairment of value, is credited or charged directly to stockholders' equity, net of applicable income tax effect. Market values for equity securities are principally determined by quotations on national securities exchanges. When a decline in market value is considered to be other than temporary, a loss is recognized in the consolidated statement of operations. Realized gains and losses are determined using the specific identification method. Short-term investments consist primarily of certificates of deposit with original maturities of less than one year and greater than 90 days and are stated at cost which approximates market value. Losses and Loss Adjustment Expenses The liability for unpaid losses and loss adjustment expenses is based upon the accumulation of individual case estimates for losses reported prior to the close of the accounting period plus estimates of unreported claims. The liability is stated net of anticipated salvage and subrogation recoverable and other non-reinsurance recoveries. In evaluating reserves for surety losses and loss adjustment expenses, the Company considers a number of factors including an estimate of the costs to complete the project, outstanding obligations to subcontractors, suppliers and the like and prevailing case law and regulations pertaining to the underlying exposures. The Company also considers the financial strength of the principal, estimated offsets to the claimed amount, such as collateral, contract funds and indemnity agreements, and defenses available to the principal and the Company. The Company may use outside attorneys and construction consultants throughout the reserving process. All reserves for reported claims are net of anticipated collateral and other non-reinsurance recoveries. Reserves for incurred but not reported claims are based on Company experience. An amount is included in the reserves for unallocated loss adjustment expenses consisting of the costs for the Company's claims, legal and subrogation departments to settle claims incurred prior to year end. The loss settlement period on most of the Company's insurance claims is relatively short. Nevertheless, it is often necessary to adjust estimates of liability on a claim either upward or downward between the time a claim is reported and the time of payment. There are inherent uncertainties in estimating reserves, therefore, actual losses and loss adjustment expenses may deviate, perhaps substantially, from reserves on the accompanying consolidated financial statements, which could have a material adverse effect on the Company's financial condition and results of operations. The Company does not discount its claim reserves for financial reporting purposes. While the Company may make implicit provisions for inflation or increasing costs in establishing reserves for known claims, the relatively short claim to payment period and the nature of the insured losses makes provisions for inflation or increasing costs generally unnecessary. Any differences between estimates and ultimate payments are reflected in the consolidated statements of operations in the period in which such estimates are changed and could have a material adverse effect on the Company's financial condition and results of operations at that time. (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Contract Settlement and Collateral Receivable The Company has recorded on the balance sheet an accrual for contract settlement funds and collateral receivable. Contract settlement funds are those funds due from obligees on contract performance and payment bonds where the Company has chosen to take over and complete the projects in order to mitigate losses. Collateral receivable is recorded for letters of credit which have been requested for draw to the bank, but the funds have not yet been received. Accrued amounts are determined on a case by case basis and are included as a reduction of losses incurred. Premium Income Recognition Premium income on surety bonds are recognized as follows: bonds with a known term (such as contractor's license, sales tax and most miscellaneous bonds), are recognized as income ratably over the term of the bond. Bonds on which the Company has significant experience in and information available for estimating the term (such as most court bonds and customs bonds) are recognized as income over the estimated term of the bond. For other bonds with indefinite terms (generally contract performance bonds), the Company estimates a term of twelve months, and premiums are recognized ratably over such period, unless information comes to the Company's attention that the obligation guaranteed has already been discharged, in which case all remaining unearned premiums are immediately recognized as earned. Premium income on non-surety property and casualty policies are recognized ratably over the effective period of the policy. Reinsurance In the normal course of business, the Company seeks to reduce the loss that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. Amounts recoverable from reinsurers are estimated in a manner consistent with the premium and claim liability associated with the reinsured bond or policy. Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments", and Statement of Financial Accounting Standards No. 119, "Disclosures about Derivative Financial Instruments and Fair Value of Financial Instruments", require disclosure of estimated fair value information about financial instruments, for which it is practicable to estimate that value. Under Statement of Financial Accounting Standards No. 115, the Company categorizes all of its investments in debt and equity securities as available for sale. Accordingly, all investments, including cash and short term investments, are carried on the balance sheet at their fair value. The carrying amounts and fair values for investment securities are disclosed in Note 3 and were drawn from standard trade data sources such as market and broker quotes. The estimated fair value of bank indebtedness equals its carrying value, which was based on the bank loan's variable interest rate which approximates the rates currently available today. The carrying amounts and fair values for the bank indebtedness are disclosed in Note 10. (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Risk-Based Capital The NAIC has adopted a risk-based capital formula for property and casualty insurance companies which establishes recommended minimum capital requirements. The formula has been designed to capture the widely varying elements of risks undertaken by writers of different lines of insurance having differing risk characteristics, as well as writers of similar lines where differences in risk may be related to corporate structure, investment policies, reinsurance arrangements and a number of other factors. The Company has calculated its risk-based capital requirement as of December 31, 1999 and found that its subsidiaries exceeded the highest capital requirement level. However, Condor's surplus level is very near the company action level of the Nebraska Risk Based Capital Statute. As a result, the Nebraska Department of Insurance has requested that the Company file a business plan for Condor which contains all of the attributes required of a risk based capital plan. It is anticipated that the business plan will be filed during April 2000. Reclassifications Certain amounts in the accompanying consolidated financial statements for 1997 and 1998 have been reclassified to conform to the 1999 financial statement presentation. (2) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK The vast majority of the collateral held by the Company does not qualify for inclusion in the accompanying consolidated financial statements. The Company's policy is to record in the accompanying consolidated financial statements only those funds received as collateral on which earnings inure to the benefit of the Company. Most of the off-balance sheet collateral is in the form of irrevocable letters of credit and certificates of deposit. On a case-by-case basis, loss reserves are reduced for that portion that can be recovered through liquidation of collateral. To the extent that these collateral items prove to be worth less than the face or notional value, the Company may incur additional losses. However, the Company believes that since the quality of collateral funds are evaluated prior to the setting of loss reserves on a case-by-case basis, any differences between face or notional value and ultimate disposition value will generally be minor. A summary of off-balance sheet collateral held by the Company as of December 31 is as follows:
December 31, 1999 1998 (Dollars in thousands) ---------------------------------- Off-Balance Sheet Collateral: Irrevocable letters of credit $ 158,723 $ 152,814 Certificates of Deposit 26,000 22,352 Other Collateral 56,926 43,194 ----------------- ---------------- Total Off-Balance Sheet Collateral $ 241,649 $ 218,360 ================= ================
(2) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK (CONTINUED) Trust deeds and mortgages on real property held as collateral are not reflected in the above figures due to the inexact nature of their disposition values. During 1999 and 1998, the Company received approximately 6.1% and 5.8% of its total collateral recoveries from trust deeds and mortgages on real property. The Company's off-balance-sheet collateral, most notably irrevocable letters of credit, is taken on behalf of principals located in every geographical region of the country. The Company does not believe there to be noteworthy concentration of credit risk in any single area. (3) INVESTMENTS
A summary of net investment income is as follows: Years ended December 31, 1999 1998 1997 (Dollars in thousands) ---------------------------------------------------- Gross investment income: Fixed maturities $5,961 $ 6,038 $ 5,918 Equity securities 675 686 538 Other assets 833 319 330 Investment expense (414) (392) (390) ----------------- ---------------- ----------------- Net investment income $7,055 $ 6,651 $ 6,396 ================= ================ ================= Gross realized gains: Fixed maturities $1,263 $ 2,172 $ 1,542 Equity securities 4,562 2,391 2,686 Other assets 610 980 - Gross realized losses: Fixed maturities (1,360) (588) (403) Equity securities (1,162) (555) (347) Other assets - - (5) ----------------- ---------------- ----------------- Net realized gains $3,913 $ 4,400 $ 3,473 ================= ================ =================
A summary of the accumulated net unrealized gains (losses) on investments carried at market and the applicable deferred Federal income taxes is shown below:
December 31, 1999 1998 (Dollars in thousands) --------------------------------- Gross unrealized gains: Fixed maturities $ 774 $ 3,019 Equity securities 1,940 3,844 Other invested assets 24 389 Gross unrealized losses: Fixed maturities (4,075) (1,147) Equity securities (460) (958) Other invested assets - (72) ----------------- --------------- Unrealized gains (losses) on investments carried at market, gross of tax (1,797) 5,075 Deferred Federal income taxes 611 (1,726) ----------------- --------------- Unrealized gains, net of deferred Federal income taxes $(1,186) $ 3,349 ================= ===============
(3) INVESTMENTS (CONTINUED) A summary of the net increase (decrease) in unrealized investment gains (losses) less applicable deferred Federal income taxes is as follows:
Years ended December 31, 1999 1998 1997 (Dollars in thousands) ---------------------------------------------------- Fixed maturities, available-for-sale $(5,173) $ (358) $ 1,535 Common equity securities, available-for-sale (1,567) (561) 879 Preferred equity securities, available-for-sale 161 (223) (52) Other invested assets (293) (323) 457 ----------------- ---------------- ----------------- Total (6,872) (1,465) 2,819 Deferred Federal income taxes 2,337 498 (959) ----------------- ---------------- ----------------- Net increase (decrease) in unrealized investment gains (losses), net of deferred Federal income taxes $(4,535) $ (967) $ 1,860 ================= ================ =================
The Company's insurance subsidiaries are required to deposit securities in several of the states in which it conducts business as a condition of licensure. These investments are included in the "Fixed maturities" and "Short-term investments" captions within the accompanying consolidated balance sheets. As of December 31, 1999 and 1998, the market value of these deposits was approximately $14,276,000 and $14,170,000, respectively. The amortized cost and estimated market values of investments in fixed maturities are as follows:
December 31, 1999 (Dollars in thousands) ---------------------------------------------------------------------- ----------------- ----------------- ---------------- ----------------- Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Market Value ----------------- ----------------- ---------------- ----------------- Fixed maturities, available-for-sale Bonds: U.S. Government $ 10,990 $ 105 $ (244) $ 10,851 Asset backed securities 1,906 - (69) 1,837 Mortgage backed securities 25,626 43 (842) 24,827 States, municipalities and political subdivisions 32,532 114 (589) 32,057 Industrial and miscellaneous 31,143 496 (2,300) 29,339 ----------------- ----------------- ---------------- ----------------- Total 102,197 758 (4,044) 98,911 Redeemable preferred stock 1,731 16 (31) 1,716 Certificates of deposit 265 - - 265 ----------------- ----------------- ---------------- ----------------- Total fixed maturities 104,193 774 (4,075) 100,892 Common equity securities 2,886 1,497 (184) 4,199 Preferred equity securities 4,905 443 (275) 5,073 Other invested assets 7,725 24 - 7,749 Short term investments 2,691 - - 2,691 ----------------- ----------------- ---------------- ----------------- Total investments $122,400 $ 2,738 $(4,534) $120,604 ================= ================= ================ =================
(3) INVESTMENTS (CONTINUED)
December 31, 1998 (Dollars in thousands) ---------------------------------------------------------------------- ----------------- ----------------- ---------------- ----------------- Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Market Value ----------------- ----------------- ---------------- ----------------- Bonds: U.S. Government $ 11,837 $ 574 $ - $ 12,411 Asset backed securities 2,289 65 (5) 2,349 Mortgage backed securities 23,158 170 (258) 23,070 States, municipalities and political subdivisions 36,376 975 (22) 37,329 Industrial and miscellaneous 28,877 1,148 (817) 29,208 ----------------- ----------------- ---------------- ----------------- Total 102,537 2,932 (1,102) 104,367 Redeemable preferred stock 2,613 87 (45) 2,655 Certificates of Deposit 205 - - 205 ----------------- ----------------- ---------------- ----------------- Total 105,355 3,019 (1,147) 107,227 Common equity securities 7,692 3,612 (732) 10,572 Preferred equity securities 4,258 232 (225) 4,265 Other invested assets 4,622 389 (72) 4,939 Short term investments 2,201 - - 2,201 ----------------- ----------------- ---------------- ----------------- Total investments $124,128 $ 7,252 $(2,176) $129,204 ================= ================= ================ =================
The amortized cost and estimated market value of fixed maturities at December 31, 1999, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Prepayment assumptions for asset backed and mortgage backed securities are obtained from broker dealer survey values or internal estimates. These assumptions are consistent with the current interest rate and economic environment.
Maturity distribution of fixed maturities, Amortized Estimated available-for-sale: Cost Market Value (dollars in thousands) ---------------------------------- Due in 1 year or less $ 3,813 $ 3,817 Due after 1 year through 5 years 43,573 42,363 Due after 5 years through 10 years 37,594 35,549 Due after 10 years through 20 years 11,114 11,025 Due after 20 years 8,099 8,138 ---------------- ----------------- Total bonds and sinking fund preferred stock $104,193 $100,892 ================ =================
Proceeds from the sale of available-for-sale securities during 1999 and 1998 were $44,189,000 and $74,642,000, respectively. Gross gains of $5,825,000 and $4,563,000 and gross losses of $2,522,000 and $1,143,000 were realized on those sales in 1999 and 1998, respectively. (4) FURNITURE, EQUIPMENT AND IMPROVEMENTS Furniture, equipment and improvements are recorded at historical cost. Depreciation and amortization of automobiles, furniture and equipment is calculated using the straight-line method over estimated useful lives from 3 to 5 years. Amortization of leasehold improvements is calculated using the straight-line method over the estimated useful lives of the assets or the term of the lease, whichever is shorter.
December 31, 1999 1998 Summary of Furniture, Equipment and Improvements: (Dollars in thousands) ---------------------------------- Automobiles $ 275 $ 149 Furniture 3,339 3,215 Equipment 8,996 11,522 Improvements 1,821 1,723 ---------------- ----------------- Total fixed assets 14,431 16,609 Less accumulated depreciation (8,796) (10,342) ---------------- ----------------- Furniture, equipment and improvements, net $ 5,635 $ 6,267 ================ =================
(5) INCOME TAXES Amwest Insurance Group, Inc. and subsidiaries file a consolidated Federal income tax return. A reconciliation of the corporate Federal tax with the financial statement effective tax for the years ended December 31, 1999, 1998 and 1997 are as follows:
Years ended December 31, 1999 1998 1997 (Dollars in thousands) ---------------------------------------------------- Computed tax expense at statutory rate $ 175 $ 3,064 $ 2,528 Tax-advantaged interest income (526) (595) (506) Change in valuation allowance - - (652) State taxes 18 65 15 Bad debt expense - - 291 Other, net 409 209 261 ----------------- ---------------- ----------------- Total provision for income taxes $ 76 $ 2,743 $ 1,937 ================= ================ =================
The tax effects of temporary differences that give rise to significant portions of the deferred tax liability and the deferred tax asset at December 31, 1999 and 1998 are presented below. (5) INCOME TAXES (CONTINUED)
Years ended December 31, 1999 1998 (Dollars in thousands) ---------------------------------- Deferred tax assets: Unearned premiums $ 3,060 $ 2,927 Discount on loss reserves 1,301 1,068 Accrued vacation 348 309 Deferred compensation/ Accrued severance 42 224 Alternative minimum tax credit 629 667 Bad debt reserve 428 232 Unrealized investment losses 684 - Fixed assets 266 - Other 725 191 ---------------- ----------------- Total gross deferred tax assets 7,483 5,618 ---------------- ----------------- Deferred tax liabilities: Deferred policy acquisition costs (7,530) (6,871) Unrealized investment gains - (1,722) Fixed assets - (75) Discount on salvage & subrogation reserves (400) (74) Deductible receivables - (44) Other (47) (17) ---------------- ----------------- Total gross deferred tax liabilities (7,977) (8,803) ---------------- ----------------- Total net deferred tax liability $ (494) $ (3,185) ================ =================
The ultimate realization of deferred tax assets is dependent upon the reversal of deferred credits and the generation of future taxable income during the periods in which those temporary differences become deductible. In the opinion of management, it is more likely than not that the Company will realize the benefit of the deferred tax assets. At December 31, 1999, the Company has no net operating loss carryforwards available. (6) RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES The following table sets forth a reconciliation of the liability for losses and loss adjustment expenses for the periods shown:
December 31, 1999 1998 1997 (Dollars in thousands) ----------------------------------------- Balance at beginning of year $42,244 $ 39,523 $ 42,009 Less: net reinsurance recoverable on unpaid loss and loss adjustment expenses (9,837) (6,185) (6,133) ------------- ------------- ------------- Net balance at beginning of year 32,407 33,338 35,876 Provision for losses and loss adjustment expenses occurring in current year 47,412 43,420 35,212 Increase (decrease) in estimated losses and loss adjustment expenses for claims occurring in prior years 898 (2,589) (555) ------------- ------------- ------------- 48,310 40,831 34,657 ------------- ------------- ------------- Losses and loss adjustment expense payments for claims occurring during: Current year (20,029) (24,992) (15,095) Prior years (26,125) (16,770) (22,100) ------------- ------------- ------------- (46,154) (41,762) (37,195) ------------- ------------- ------------- Net balance at end of year 34,563 32,407 33,338 Plus: net reinsurance recoverable on unpaid loss and loss adjustment expenses 21,903 9,837 6,185 ------------- ------------- ------------- Balance at end of year $56,466 $42,244 $ 39,523 ============= ============= =============
The increase or decrease in estimated losses and loss adjustment expenses for losses occurring in prior years reflects the net effect of the resolution of losses for other than full reserve value and subsequent readjustment of loss values as of December 31st of the applicable years. The increase during 1999 in estimated losses and loss adjustment expenses for claims occurring in prior years is primarily due to adverse development for the property and casualty lines of business. The decreases during 1998 and 1997 related primarily to the surety lines of business. The net losses for 1999 and 1998 reflect the benefit of the aggregate stop loss reinsurance treaty. Losses and loss adjustment expense ceded to this treaty were $2,533,000 in 1998 and $6,981,000 in 1999 on ceded premium of $2,316,000 in 1998 and $4,822,000 in 1999. Competitive market conditions and the Company's ability to write surety bonds for larger contractors has resulted, on many bonds, in the substitution of indemnity agreements for liquid and non-liquid collateral. The Company, through its ongoing reserve analysis, has estimated the benefit to be derived from such agreements and reduced estimates of ultimate losses incurred accordingly. In the fourth quarter of 1998, the Company increased its estimate of such "salvage and subrogation" recoveries by approximately $5.4 million which is partially attributable to salvage and subrogation on losses incurred during the fourth quarter. The increase relates primarily to the 1998 and 1997 years and reflects the Company's belief that the underlying data is maturing. Further, subsequent collection efforts have proven prior estimates to be conservative. Since the Company had also pierced it's aggregate stop loss treaty in the fourth quarter, the net benefit attributable to the increased "salvage and subrogation" estimate was approximately $1,025,000. (7) REINSURANCE The Company cedes insurance to reinsurers and the Small Business Administration ("SBA") under reinsurance treaties that cover individual risks or entire classes of business. Although the ceding of insurance does not discharge the Company from its primary liability to its bondholder, the insurance company that assumes the coverage assumes the related liability, and it is the practice of insurers for accounting purposes to treat reinsured risks, to the extent of the reinsurance ceded, as though they were risks for which the original insurer is not liable. The Company evaluates and monitors the financial condition of its reinsurers in order to minimize its exposure to significant losses from reinsurer insolvencies. The reinsurance recoverables and ceded unearned premium reported on the accompanying balance sheet would represent a liability of the Company if all reinsurers were unable to meet existing obligations under reinsurance agreements. The following amounts represent premiums assumed and the deductions for reinsurance ceded for the years ended December 31, 1999, 1998 and 1997.
Years ended December 31, 1999 1998 1997 (Dollars in thousands) ---------------------------------------------------- Net premiums written: Direct $ 134,404 $ 129,614 $ 107,015 Assumed 2,084 3,205 1,076 Ceded (23,998) (24,858) (8,057) ----------------- ---------------- ----------------- Net premiums written $ 112,490 $ 107,961 $ 100,034 ================= ================ ================= Net change in unearned premiums: Direct $ (223) $ (8,961) $ (8,706) Assumed 114 484 632 Ceded (1,837) 6,487 190 ----------------- ---------------- ----------------- Net change in unearned premiums $ (1,946) $ (1,990) $ (7,884) ================= ================ ================= Net loss and loss adjustment expenses: Direct $ 72,145 $ 50,364 $ 36,038 Assumed 1,322 2,058 995 Ceded (25,157) (11,591) (2,376) ----------------- ---------------- ----------------- Net losses and loss adjustment expenses $ 48,310 $ 40,831 $ 34,657 ================= ================ =================
(7) REINSURANCE (CONTINUED) On the surety lines of business, the Company's subsidiaries maintain an excess of loss reinsurance treaty with a group of reinsurers (the "Excess Treaty"). The Excess Treaty may be canceled at the election of either party by providing notice of cancellation 90 days prior to any anniversary (currently October 1), however, the reinsurers would remain liable for covered losses incurred up to the cancellation date. The Excess Treaty limits the Company's exposure on any one principal (the person or entity for whose account the surety contract is made, and whose debt or obligation is the subject of the surety contract) to the first $2,000,000 of loss and to losses in excess of $20,000,000 for losses incurred prior to October 1, 1998 and $25,000,000 for losses incurred thereafter. Coverage is provided for most types of bonds which the Company writes except SBA guaranteed bonds, which are not covered by the treaty. The reinsurers' maximum exposure under the Excess Treaty is $26,000,000 of losses discovered during any one contract period (October 1 to October 1) for the 1997-1998 contract year, $35,000,000 for the 1998-1999 contract year and $34,500,000 for the 1999-2000 contract year. The Excess Treaty also contains profit sharing provisions for the $4,000,000 excess of $2,000,000 layer of the treaty, of which no amounts are currently accrued based on experience of the treaty through December 31, 1999. The Company, effective January 1, 1997, entered into an annual aggregate stop loss treaty with Underwriters Reinsurance Company (Barbados), Inc. which treaty was renewed for the 1998 and 1999 accident years. For the 1997 accident year, the treaty covers surety losses and allocated loss adjustment expenses in excess of 25.86% of surety earned premium. For the 1998 accident year, the treaty has separate attachment points for surety and non-surety lines of business. On the surety lines of business when losses and loss adjustment expenses exceed 32.8% of net earned premiums and for all other lines when losses and loss adjustment expenses exceed 67% of net earned premiums, the reinsurer becomes liable for losses up to 7% of surety earned premiums. For the 1999 accident year, the treaty covers losses, excluding allocated loss adjustment expenses, for all lines of business in excess of 26.5% through 28.0% of net earned premium and for losses in excess of 31.0% up to 39.718%. During 1999 and 1998, the Company ceded $6,981,000 and $2,533,000, respectively, in losses to the aggregate stop loss treaty. The Company's insurance subsidiaries also issue contract bonds under the SBA Surety Guarantee Program. Industry practice is to account for SBA guarantees as reinsurance transactions. The purpose of the SBA Surety Guarantee Program is to assist small contractors, who have not established credit or who fail to meet a surety's normal underwriting standards, in obtaining bonds. An SBA guarantee covers between 80% and 90% of the surety's liability up to $1,250,000 per bond. The Company also purchased a quota share reinsurance treaty with Underwriters Reinsurance Company, a New Hampshire domiciled reinsurer, which was effective July 1, 1998. This treaty cedes 15% of net surety written premium for all surety written through Amwest Surety on a pro rata basis. This treaty provides statutory surplus enhancement for the Company due to the ceding commission received by the Company. For its liability lines of business, the Company has reduced its exposure on any one risk with the purchase of excess of loss reinsurance. The net retained amount has varied by year, primarily based on the Company's surplus position. Through July 1, 1999, the Company retained the first $400,000 on any one risk with the next $600,000 ceded to a consortium of reinsurers led by Gerling Global Reinsurance Corporation. From July 1, 1997 to June 30, 1998 the Company participated in this treaty with a 10% share through July 1, 1999. The Company further reinsured $1,000,000 in excess of $1,000,000 for its liability coverages including extra contractual obligations and excess of policy limits exposures. (7) REINSURANCE (CONTINUED) Effective July 1, 1999, the Company replaced its existing property and casualty reinsurance coverages with a per event reinsurance cover (PERC) which reinsures the Company on both property and liability coverage for losses in excess of $1,000,000 per event up to $3,000,000. An additional property cover has been purchased for $2,000,000 in excess of $3,000,000 relating to the Company's property coverages. Also, the Company's aggregate stop loss treaty was amended effective July 1, 1999 to include non-surety losses in excess of $400,000 up to $1,000,000. Limits relating to its Hawaii homeowners and Florida homeowners programs differ from the above. For Hawaii homeowners, the Company participates in the Hawaii Hurricane Relief Fund, and accordingly, its Hawaii policies exclude wind coverage over 75 miles per hour. Additionally, for Florida homeowners the Company participates in the Florida Hurricane Catastrophe Fund at the highest level of participation permitted. Recoveries from this Fund are limited to hurricanes and are based on a formula which utilizes, among other factors, premiums written, industry premiums written, industry losses and amounts available in the fund. (8) RESTRICTIONS ON DIVIDENDS As a holding company, the Company depends primarily on dividends from its insurance subsidiaries for its cash flow requirements. The Company's insurance subsidiaries are subject to state regulations which restrict their ability to pay dividends. These regulations restrict the amount of stockholder dividends which may be paid within any one year without the approval of the Department of Insurance in their state of domicile. The Company's insurance subsidiaries are domiciled in the state of Nebraska. The Nebraska Insurance Code provides that amounts may be paid as dividends on an annual basis without prior approval up to a maximum of the greater of (1) statutory net income, excluding realized capital gains, for the preceding year plus any carryforward net income from the previous two calendar years that have not already been paid out as dividends or (2) 10% of statutory policyholders' surplus as of the preceding December 31. The amount is further restricted to the amount of earned surplus as of December 31, 1999. Amwest Surety and Condor can pay $6,782,000 and $0, respectively, in dividends to the Company during 1999 without prior approval. For the years ended December 31, 1999, 1998 and 1997, Amwest Surety has not paid any dividends to Amwest Insurance Group, Inc. The Company's credit agreements also contain restrictions on the payment of dividends (see Note 10). (9) STATUTORY ACCOUNTING PRINCIPLES FINANCIAL INFORMATION The Company's insurance subsidiaries are required to file annual statements with insurance regulatory authorities prepared on an accounting basis prescribed or permitted by such authorities (statutory). Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners ("NAIC"), as well as state laws, regulations and general administrative rules. Generally accepted accounting principles differ in certain respects from these prescribed statutory accounting practices. The more significant of these differences are (a) premium income is taken into earnings over the periods covered by the policies, whereas the related acquisition and commission costs, including ceding commissions in excess of acquisition costs on selected pro rata reinsurance contracts, are recognized when incurred; (b) all bonds and sinking fund preferred stock are recorded at amortized cost, regardless of trading activity; (c) non-admitted assets are charged directly against surplus; (d) loss reserves and unearned premium reserves are stated net of reinsurance; (e) Federal income taxes are recorded when payable; and (f) the outstanding contribution certificate is included as a component of surplus, and the interest on the outstanding contribution certificate is a direct charge to surplus. Additionally, the cash flow presentation is not consistent with generally accepted accounting principles and a reconciliation from net income to funds provided by operations is not presented. Permitted statutory accounting practices encompass all accounting practices not so prescribed. As of December 31, 1999, there were no material permitted statutory accounting practices utilized by the insurance companies. The NAIC recently issued a series of Statements of Statutory Accounting Principles as part of the project to establish a uniform set of statutory basis accounting and reporting rules. The Statements of Statutory Accounting Principles ("SAPs") are generally effective commencing January 1, 2001 and may, in certain circumstances, result in a significant change in statutory basis accounting and reporting. Management is currently reviewing the SAPs, however at this time the Company has not determined how implementation will affect its statutory financial statements and is unable to predict how insurance rating agencies will interpret or react to such changes. No assurance can be given that future legislative or regulatory changes from such activities will not adversely affect the Company. Policyholders surplus and net income on a statutory basis is as follows:
December 31, 1999 1998 1997 Statutory Statutory Statutory Statutory Statutory Statutory Policyholders Net Income Policyholders Net Income Policyholders Net Income Surplus (Loss) Surplus (Loss) Surplus (Loss) (Dollars in thousands) ------------------------------------------------------------------------------------------------------ Amwest Surety $32,643 $1,117 $ 39,526 $ 7,624 $ 33,823 $ 3,528 Far West 7,171 (500) 7,562 835 6,501 (461) Condor 7,931 (529) 9,074 (767) 10,489 1,362
(10) BANK INDEBTEDNESS On August 6, 1994, the Company entered into a revolving credit agreement with Union Bank for $12,500,000. The debt agreement was amended on April 24, 1996, July 10, 1996 and waived and amended as of September 30, 1997, February 9, 1999 and August 30, 1999 to increase the amount available under the revolving line of credit from $12,500,000 to $15,000,000 and to change certain covenants and payment requirements. At December 31, 1999, $15,000,000 is available under the revolving line of credit, $14,500,000 of which is currently utilized. The bank loan has a variable rate based upon fluctuations in the London Interbank Offered Rate (LIBOR) and amortizing principal payments. The interest rate at December 31, 1999 was 8.2%. 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. As of December 31, 1999, the Company was in compliance with its debt covenants.
Balance (Dollars in thousands) ------------------------- The revolving credit agreement expires as follows: September 30, 2001 $ 5,000 September 30, 2002 5,000 September 30, 2003 5,000
The bank loan has a variable interest rate which approximates the rates currently available today. Accordingly, estimated fair value of the debt is equal to the statement value of $14,500,000. (11) OTHER LIABILITIES The following table is a summary of other liabilities at December 31, 1999 and 1998:
December 31, 1999 1998 (Dollars in thousands) ---------------------------------- Accrued salaries, fringe benefits and other compensation $2,609 $ 3,098 Premium taxes payable 775 898 General accounts payable 135 320 Notes payable 1,053 600 Dividends payable 389 391 Deferred compensation payable 1,539 660 Proposition 103 reserve 228 228 Commission payable 967 430 Other 1,550 1,273 ---------------- ----------------- Total other liabilities $9,245 $ 7,898 ================ =================
(12) COMMITMENTS AND CONTINGENCIES The Company is subject to certain claims arising in the ordinary course of its operations. The Company believes that the ultimate resolution of such matters will not materially affect its consolidated financial condition. At December 31, 1999, the Company occupied office space under various operating leases in addition to a leased mini-computer that have remaining noncancellable lease terms in excess of one year. Rental expenses of approximately $3,460,565, $3,369,000 and $3,648,000 for the years ended December 31, 1999, 1998 and 1997, respectively, have been charged to operations in the accompanying consolidated statements of operations.
Balance (Dollars in thousands) ------------------------- Summary of minimum future annual rental commitments: 2000 $2,478 2001 2,089 2002 1,915 2003 1,525 2004 and thereafter 11,061 ------------------------- Total $19,068 =========================
(13) STOCK DIVIDEND 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. (14) RIGHTS AGREEMENT On May 10, 1999, the Board of Directors approved a Rights Agreement and declared a dividend of one Preferred Stock Purchase Right (a "Right") for each share of common stock outstanding on May 10, 1999. The Stock Purchase Rights previously issued under the Company's 1989 Stockholders Rights Plan expired on May 10, 1999. Each Right becomes exercisable on the tenth business day after a person or group (other than the Company and certain related parties) has acquired or commenced a tender or exchange offer to acquire 15% or more of the Company's common stock, or upon consummation of certain mergers, business combinations or sales of the Company's assets. If the Rights become exercisable, a holder will be entitled to purchase in certain cases (i) one one-thousandth of a share of Series A Junior Participating Cumulative Preferred Stock, $.01 par value, at the then current exercise price (initially $100), (ii) shares of common stock, $.01 par value, having a market price equal to two times the then current exercise price, or (iii) in case of a merger, common stock of the acquiring corporation having a market value equal to two times the then current exercise price. The Company is entitled to redeem the Rights at $.001 per Right under certain circumstances. The rights do not have voting or dividend rights, and cannot be traded independently from the Company's common stock until such time as they become exercisable. (15) EMPLOYEE STOCK PURCHASE PLAN The Company provides an employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986, as amended, to any employee who has a customary working schedule of more than 20 hours per week and whose customary employment is for more than five months in any calendar year. It excludes any employee who owns stock possessing 5% or more of the total combined voting power or value of all classes of stock of the Company. Eligible employees are entitled to purchase shares of the Company's common stock on a calendar month basis at 92% of the fair market value of the Company's common stock on the last business day of a calendar month. (16) RETIREMENT PLAN The Company has a 401(k) savings plan entitled the Amwest Surety Insurance Company 401(k) Plan (the "Plan"). Employees eligible for participation in the Plan must have attained one year of service and be at least 21 years of age. The Plan provides for employer matching contributions at 50%, up to a maximum of the first 6% of the employee contribution and become fully vested at the end of 5 years of employment. Total expense to the Company during 1999, 1998 and 1997 amounted to $511,000, $423,000 and $365,000, respectively. (17) STOCK OPTIONS In May 1998, the stockholders approved the 1998 Stock Incentive Plan ("the Plan") which replaced the existing Stock Option Plan and a Non-Employee Director Stock Option Plan. The new Stock Incentive Plan reserved 250,000 shares of its Common Stock, subject to adjustment for reorganizations, recapitalizations, stock splits or similar events. As of December 31, 1999, 91,300 options had been granted under this plan. Shares of Common Stock subject to the unexercised portions of any options granted under the Plan which expire, terminate or are canceled may again be subject to options under the Plan. The per share exercise price of options under the Plan may not be less than 100% of the fair market value of the underlying Common Stock on the date of the grant of the option (110% of such fair market value with respect to Incentive Options granted to an individual who owns more than 10% of the total combined voting power of all classes of stock of the Company or any subsidiary or parent corporation). The 507,959 outstanding options from the Stock Option Plan and the Non-Employee Director Stock Option Plan will remain in effect until exercised, canceled or expired. The Company accounts for its options under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"). As permitted by FAS 123, the Company continued to use accounting methods presented by Accounting Principles Board Opinion No. 25 and has expanded its disclosure of stock-based compensation in the tables below. The additional compensation costs that would have been recorded if the Company had adopted FAS 123 are not material to the consolidated financial statements of the Company. (17) STOCK OPTIONS (CONTINUED) Transactions involving stock options during the years ended December 31, 1999, 1998 and 1997 are presented below:
1999 1998 1997 ---------------------------------- --------------------------------- --------------------------------- Weighted Average Weighted Average Weighted Average Shares Exercise Price Shares Exercise Price Shares Exercise Price --------------- ------------------ --------------- ----------------- --------------- ------------------ Outstanding at beginning of year 533,891 $14.07 542,304 $10.76 534,826 $10.41 Granted 85,250 9.31 91,025 14.84 112,530 10.33 Exercised (9,169) 7.39 (81,167) 9.64 (86,031) 7.93 Canceled / Expired (10,713) 10.88 (18,271) 10.85 (19,021) 10.95 --------------- ------------------ --------------- ----------------- --------------- ------------------ Outstanding at end of year 599,259 $11.38 533,891 $11.63 542,304 $10.76 =============== ================== =============== ================= =============== ================== Options exercisable at end of year 415,284 $11.43 322,539 $11.30 287,697 $10.69 =============== ================== =============== ================= =============== ==================
The following table summarizes information about options outstanding under the Plans at December 31, 1999:
Options Outstanding Options Exercisable Weighted Average Range of Number Remaining Weighted Average Number Weighted Average Exercise Prices Outstanding Contractual Life Exercise Price Outstanding Exercise Price - ---------------------------- ---------------- ----------------- ----------------- ---------------- ----------------- $5.074 - $8.161 2,663 4.7 $6.85 2,663 6.85 $8.574 - $11.587 353,248 6.8 10.36 222,692 10.67 $11.674 - $14.886 243,348 5.8 12.91 189,929 12.37 ================ ================= ================= ================ ================= $5.074 - $14.886 599,259 6.4 $11.38 415,284 11.43 ================ ================= ================= ================ =================
Pro forma net income and earnings per share information, as required by FAS No. 123, has been calculated as if the Company had accounted for options granted under the Plans under the fair value method. The fair value of options granted was estimated as of the date of grant based on the Black-Scholes option pricing model given the following weighted average assumptions: risk-free interest rates of 5.03% for 1999, 5.64% for 1998 and 6.34% and 6.67% for 1997, a dividend yield of 4.12% for 1999, 2.76% for 1998 and 3.12% for 1997, volatility of the Company's Common Stock of 7.64% for 1999, 6.91% for 1998 and 7.15% for 1997, and an expected life of the stock options of 10 years. The weighted average grant date fair values of stock options granted during 1999, 1998 and 1997 were $2.77, $5.88 and $4.92, respectively. (17) STOCK OPTIONS (CONTINUED) For purposes of pro forma disclosures, the estimated fair value is amortized on a straight-line basis over the vested period.
Year ended December 31, 1999 1998 1997 Net income As reported $ 440 $6,269 $ 5,498 Pro forma 410 6,210 5,449 Diluted Earnings per share (1) As reported $ .10 $ 1.59 $ 1.46 Pro forma .09 1.58 1.45 (1) Amounts reflect 10% stock dividend effective March 31, 1999.
(18) SEGMENT INFORMATION Segment Information In accordance with Financial Accounting Standards No. 131 ("FAS 131"), "Disclosures about Segments of an Enterprise and Related Information," the Company reports certain financial information according to the "management approach." This approach requires reporting information regarding operating segments on the basis used internally by management to evaluate segment performance. FAS 131 also requires disclosures about products and services, geographic areas and major customers. Accordingly, the Company's segments are determined based on product categories. The Company evaluates performance based on underwriting income or loss. Reportable segments include Surety and Specialty Property & Casualty. The Company's surety division underwrites a wide variety of surety bonds for small to mid-sized surety accounts through independent agents and brokers. Currently, the Company has the capacity to write bonds up to $25 million. In order to protect the Company from major losses on the larger accounts, the Company purchases reinsurance from a consortium of Treasury listed reinsurers. Bonds are underwritten using a variety of factors to help mitigate risk, including the acceptance of full or partial collateral and the usage of funds control where appropriate. The Company's property and casualty division primarily writes insurance packages which consist principally of commercial automobile liability and physical damage and, to a lesser extent, general liability and other related coverages for insureds involved in general trucking including sand and gravel, transit mix, logging, farm to market, intermodal trucking, less than total load (LTL), newspaper distribution, tow truck and limousine services industries. The Company also offers homeowners insurance in Florida and Hawaii and motorcycle insurance in New York and California. In addition, the Company has offered personal lines coverage for private passenger automobile in Arizona and California and homeowners insurance in California. These personal lines products have been discontinued and are in run-off. During 1999, earned premium for the discontinued lines was 11% of total property and casualty earned premium. (18) SEGMENT INFORMATION (CONTINUED) Reportable segment data is as follows:
Net Earned Premium Income Before Income Taxes Segment Assets (2) (Dollars in thousands) 1999 1998 1997 1999 1998 1997 1999 1998 1997 Surety $85,500 $84,166 $70,565 $(4,224) $ 3,689 $ 1,395 $ 73,612 $54,127 $40,140 Specialty Property & Casualty 25,044 21,805 21,585 (3,961) (3,811) (1,863) 14,221 14,541 8,792 ------------ ----------- ------------ ----------- ------------ ------------ ----------- ------------ ----------- Total Segments 110,544 105,971 92,150 (8,185) (122) (468) 87,833 68,668 48,932 Corporate (1) - - - 8,701 9,134 7,903 153,862 147,623 141,587 ------------ ----------- ------------ ----------- ------------ ------------ ----------- ------------ ----------- Consolidated Total $110,544 $105,971 $92,150 $516 $ 9,012 $ 7,435 $241,695 $216,291 $190,519 ============ =========== ============ =========== ============ ============ =========== ============ =========== (1) Corporate includes net investment income, net realized investment gains, interest expense, investments, cash and cash equivalents, accrued investment income, furniture, equipment and improvements, income taxes recoverable and other assets. (2) Segment assets include agents' balances and premiums receivable, reinsurance recoverable, ceded unearned premiums, deferred policy acquisition expenses and contract settlement funds and collateral receivable.
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES SUPPLEMENTARY INFORMATION (UNAUDITED) QUARTERLY FINANCIAL INFORMATION The quarterly results for the years ended December 31, 1999, 1998 and 1997 are set forth in the following table:
(Dollars in thousands, except per share data) ----------------- ---------------- ----------------- ---------------- First Second Quarter Third Fourth Quarter Quarter Quarter ----------------- ---------------- ----------------- ---------------- 1999 Premiums written $32,135 $36,042 $35,969 $32,342 Net premiums earned 26,993 26,986 27,732 28,833 Net investment income 1,769 1,705 1,595 1,986 Net realized gains 740 1,297 10 1,866 Commissions and fees 742 721 532 741 Total revenues 30,244 30,709 29,869 33,426 Net income (loss) 2,366 1,740 (2,746) (920) Earnings (loss) per share - basic (1) .55 .40 (.64) (.21) Earnings (loss) per share - diluted (1) .55 .40 (.64) (.21) ----------------- ---------------- ----------------- ---------------- First Second Quarter Third Fourth Quarter Quarter Quarter ----------------- ---------------- ----------------- ---------------- 1998 Premiums written $29,342 $35,044 $34,687 $33,746 Net premiums earned 27,124 27,248 25,633 25,966 Net investment income 1,577 1,560 1,733 1,781 Net realized gains 820 1,065 1,901 614 Commissions and fees 257 701 798 1098 Total revenues 29,778 30,574 30,065 29,459 Net income 2,056 975 2,098 1,140 Earnings per share - basic (1) .49 .23 .49 .26 Earnings per share - diluted (1) .48 .23 .48 .26 ----------------- ---------------- ----------------- ---------------- First Second Quarter Third Fourth Quarter Quarter Quarter ----------------- ---------------- ----------------- ---------------- 1997 Premiums written $21,609 $28,175 $30,083 $28,224 Net premiums earned 21,446 21,781 23,736 25,187 Net investment income 1,681 1,605 1,594 1,516 Net realized gains 637 348 1,044 1,444 Commissions and fees 149 131 157 178 Total revenues 23,913 23,865 26,531 28,325 Net income 1,785 1,314 685 1,714 Earnings per share - basic (1) .44 .33 .16 .41 Earnings per share - diluted (1) .44 .32 .16 .41 (1) Amounts reflect a 10% stock dividend effective March 31, 1999.
SCHEDULE I AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES SUMMARY OF INVESTMENTS- OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 1999 (Dollars in thousands)
Column A Column B Column C Column D Amount as shown on Type of investment Cost Value balance sheet Fixed Maturities: Bonds: United States Government and government agencies and authorities $ 22,792 22,132 22,132 States, municipalities and political subdivisions 33,385 32,904 32,904 Foreign governments - - - Public utilities 561 544 544 Convertibles and bonds with warrants attached - - - All other corporate bonds 45,459 43,331 43,331 --------------- --------------- --------------- Total bonds 102,197 98,911 98,911 Certificates of deposit 265 265 265 Redeemable preferred stock 1,731 1,716 1,716 --------------- --------------- --------------- Total fixed maturities 104,193 100,892 100,892 Equity securities: Common stocks: Public utilities - - - Banks, trust and insurance companies 132 169 169 Industrial, miscellaneous and all other 2,754 4030 4030 Non-redeemable preferred stocks 4,905 5,073 5,073 --------------- --------------- --------------- Total equity securities 7,791 9,272 9,272 Mortgage loans on real estate - XXXXXXX - Real estate - XXXXXXX - Policy loans - XXXXXXX - Other long-term investments 7,725 XXXXXXX 7,749 Short-term money-market investments 2,691 XXXXXXX 2,691 --------------- --------------- --------------- Total investments $ 122,400 XXXXXXX $ 120,604 =============== =============== ===============
SCHEDULE II AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION (Parent Company Only) STATEMENT OF OPERATIONS (Dollars in thousands)
Year ended December 31, 1999 1998 1997 REVENUES: Equity in income (loss) of subsidiaries $ 542 $ 6,083 $ 5,208 Commissions & fees 21 697 572 Net investment income 23 - 32 Net realized gains (losses) 180 1,001 8 ------------- ------------- ------------- Total revenues 766 7,781 5,820 EXPENSES: Interest expense 543 533 306 ------------- ------------- ------------- Total expenses 543 533 306 Income before income taxes 223 7,248 5,514 Provision for income taxes (benefit) 217 979 16 ------------- ------------- ------------- Net income (loss) $ 440 $ 6,269 $ 5,498 ============= ============= ============= See accompanying notes to financial statements.
SCHEDULE II (continued) AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION (Parent Company Only) BALANCE SHEETS (Dollars in thousands)
December 31, 1999 1998 ASSETS: Total investments $ 66,254 $ 71,229 Cash and cash equivalents 564 184 Income taxes receivable 136 - Deferred Federal income tax asset 226 84 Due from affiliates - 642 Furniture, equipment and improvements 3,950 4,701 Other assets 3,053 976 ------------- -------------- Total assets $ 74,183 $ 77,816 ============= ============== LIABILITIES AND STOCKHOLDERS' EQUITY: Liabilities: Bank indebtedness $ 14,500 $ 14,500 Income tax payable - 301 Due to affiliates 30 - Other liabilities 2,851 1,113 ------------- -------------- Total liabilities 17,381 15,914 ------------- -------------- Stockholders' Equity: Common stock and additional paid in capital 19,767 19,218 Net unrealized appreciation (depreciation) of investments, net of taxes (1,186) 3,349 Retained earnings 38,221 39,335 ------------- -------------- Total stockholders' equity 56,802 61,902 ------------- -------------- Total liabilities and stockholders' equity $ 74,183 $ 77,816 ============= ============== See accompanying notes to financial statements.
SCHEDULE II (continued) AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION (Parent Company Only) STATEMENT OF CASH FLOWS (Dollars in thousands)
Year ended December 31, 1999 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 440 $ 6,269 $ 5,498 Less equity in income of subsidiary (542) (6,083) (5,208) ------------ -------------- ------------- Net income from operations (102) 186 290 Adjustments: Change in income taxes, net (685) 879 (92) Change in due (to) from affiliates 672 (566) (1,242) Change in other assets / liabilities (339) 281 (320) Provision for depreciation and amortization 938 557 372 Realized (gains) losses on sale of investments (180) (1,002) (8) Realized loss on sale of fixed assets - 5 46 ------------ -------------- ------------- Net cash provided (used) 304 340 (954) ------------ -------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Cash received from investments sold, matured, called or repaid 372 2,025 187 Cash paid for investments acquired (104) (162) (17) Capital expenditures, net (187) (1,616) (2,988) ------------ -------------- ------------- Net cash provided (used) 81 247 (2,818) ------------ -------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of surplus note from subsidiary 1,000 - 1,000 Proceeds from issuance of long term debt - - 2,000 Proceeds from common stock issuance 720 975 1,382 Repurchase of common stock (171) - - Dividends paid (1,554) (1,554) (1,493) ------------ -------------- ------------- Net cash from financing activities (5) (579) 2,889 ------------ -------------- ------------- Net increase (decrease) 380 8 (883) Cash and cash equivalents, beginning 184 176 1,059 ------------ -------------- ------------- Cash and cash equivalents, ending $ 564 $ 184 $ 176 ============ ============== ============= See accompanying notes to financial statements.
SCHEDULE II (continued) AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION (Parent Company Only) NOTES TO FINANCIAL STATEMENTS 1. Basis of Presentation The accompanying condensed financial statements include the accounts of Amwest Insurance Group, Inc. (the "Parent Company"). The Parent Company's wholly-owned subsidiaries, Amwest Surety Insurance Company, Far West Insurance Company, Far West Bond Services, Condor Insurance Company and Raven Claims Services, Inc. are not presented as consolidated entities on these condensed financial statements. 2. Material Contingencies The Parent Company is the subject of certain claims arising in the ordinary course of its operations. The Parent Company believes that the ultimate resolution of such matters will not materially affect its financial condition. 3. Long-Term Obligations and Guarantees On August 6, 1994, the Parent Company entered into a revolving credit agreement with Union Bank for $12,500,000. The debt agreement was amended on April 24, 1996, July 10, 1996, September 30, 1997 and again on February 9, 1999 to increase the amount available under the revolving line of credit from $12,500,000 to $15,000,000 and to change certain covenants and payment requirements. At December 31, 1999, $15,000,000 is available under the revolving line of credit, $14,500,000 of which is currently utilized. The bank loan has a variable rate based upon fluctuations in the London Interbank Offered Rate (LIBOR) and amortizing principal payments. 4. Stock Dividend 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. SCHEDULE III AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES SUPPLEMENTARY INSURANCE INFORMATION December 31, (Dollars in thousands)
Column A Column B Column C Column D Column E Column F Column G Column H Column I Column J Column K Future policy benefits, Benefits, Amortization Deferred losses, Other policy claims, of deferred policy claims and claims and Net losses and policy Other acquisition loss Unearned benefits Premium investment settlement acquisition operating Premiums Segment costs expenses premiums payable revenue income (1) expenses costs expenses written As of and for the year ended December 31, 1999 Surety $22,015 $31,366 $49,238 - $85,500 $5,592 $31,175 $48,906 $11,838 $108,184 Specialty Property & Casualty 132 25,100 2,498 - 25,044 1,463 17,135 8,817 3,594 28,304 ------------------------------------------------------------------------------------------------------------------ Total $22,147 $56,466 $51,736 - $110,544 $7,055 $48,310 $57,723 $15,432 $136,488 ------------------------------------------------------------------------------------------------------------------ As of and for the year ended December 31, 1998 Surety $ 19,636 $20,295 $ 47,650 - $ 84,166 $ 5,121 $ 23,262 $47,090 $ 11,632 $ 102,270 Specialty Property & Casualty 573 21,949 3,977 - 21,805 1,530 17,569 6,716 2,678 30,549 ------------------------------------------------------------------------------------------------------------------ Total $ 20,209 $ 42,244 $ 51,627 - $ 105,971 $ 6,651 $ 40,831 $53,806 $ 14,310 $ 132,819 ------------------------------------------------------------------------------------------------------------------ As of and for the year ended December 31, 1997 Surety $ 21,042 $ 18,862 $ 40,249 - $ 70,565 $ 4,861 $ 20,013 $39,755 $ 9,436 $ 82,611 Specialty Property & Casualty 257 20,661 1,764 - 21,585 1,535 14,644 6,197 3,188 25,480 ------------------------------------------------------------------------------------------------------------------ Total $ 21,299 $ 39,523 $ 42,013 - $ 92,150 $ 6,396 $ 34,657 $ 45,952 $ 12,624 $ 108,091 ------------------------------------------------------------------------------------------------------------------ (1) Allocation based upon net premiums written
The Board of Directors Amwest Insurance Group, Inc.: We consent to incorporation by reference in registration statements Nos. 33-11020, 33-24243 and 33-38128 on Form S-8 and in registration statements Nos. 33-28645, 33-37984, 333-61819 and 333-17109 on Form S-3 of Amwest Insurance Group, Inc. of our reports dated February 3, 1999, relating to the consolidated balance sheets of Amwest Insurance Group, Inc. and subsidiaries as of December 31, 1999 and 1998 and the related consolidated statements of operations and comprehensive income, cash flows and changes in stockholders' equity and related schedules for each of the years in the three-year period ended December 31, 1999, which reports appear in the December 31, 1999 annual report on Form 10-K of Amwest Insurance Group, Inc. KPMG LLP Los Angeles, California March 29, 2000 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Amwest Insurance Group, Inc.: Under date of February 3, 1999, we reported on the consolidated balance sheets of Amwest Insurance Group, Inc. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations and comprehensive income, cash flows and changes in stockholders' equity for each of the years in the three-year period ended December 31, 1999, as contained in the annual report on Form 10-K for the year 1999. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related consolidated financial statement schedules as listed in the accompanying index. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG LLP Los Angeles, California February 3, 2000 EX-10.13 3 AGGREGATE STOP LOSS REINSURANCE CONTRACT Aggregate Stop Loss Reinsurance Contract Effective: January 1, 1999 issued to Amwest Surety Insurance Company Far West Insurance Company and Condor Insurance Company all of Omaha, Nebraska E. W. Blanch Co. Reinsurance Services 3500 West 80th Street Minneapolis, Minnesota 55431 ============================================================================= ============================================================================= Table of Contents Article Page I Business Reinsured 3 II Term 3 III Territory 3 IV Retention and Limit 4 V Definitions 5 VI Other Reinsurance 6 VII Loss Notices and Settlements 6 VIII Salvage and Subrogation 6 IX Reinsurance Premium 6 X Late Payments 7 XI Reports and Remittances 9 XII Commutation 9 XIII Offset (BRMA 36C) 9 XIV Access to Records (BRMA 1D) 9 XV Net Retained Lines 9 XVI Errors and Omissions (BRMA 14F) 10 XVII Currency (BRMA 12A) 10 XVIII Taxes (BRMA 50B) 10 XIX Federal Excise Tax (BRMA 17A) 10 XX Unauthorized Reinsurers 11 XXI Insolvency 12 XXII Arbitration 13 XXIII Service of Suit (BRMA 49C) 14 XXIV Agency Agreement 14 XXV Intermediary (BRMA 23A) 15 Schedule A Aggregate Stop Loss Reinsurance Contract Effective: January 1, 1999 issued to Amwest Surety Insurance Company Far West Insurance Company and Condor Insurance Company all of Omaha, Nebraska (hereinafter referred to collectively as the "Company") by Underwriters Reinsurance Company (Barbados), Inc. Barbados, West Indies (hereinafter referred to as the "Reinsurer") Article I - Business Reinsured By this Contract the Reinsurer agrees to reinsure and/or indemnify the Company for the net excess liability which may accrue to the Company during the term of this Contract under its bonds, policies, contracts and binders of insurance or reinsurance (hereinafter called "bonds," as respects surety business, and "policies," as respects property and casualty business) whether in force or expired on the effective date hereof, issued or renewed on or after that date (including bonds or policies with premium anniversary dates on or after that date), for all surety business and property and casualty business written by the Company (direct and assumed), subject to the terms, conditions and limitations hereinafter set forth. Article II - Term This Contract shall become effective on January 1, 1999, with respect to losses occurring on or after that date and shall remain in force until December 31, 1999, both days inclusive. Article III - Territory The territorial limits of this Contract shall be identical with those of the Company's bonds or policies. Article IV - Retention and Limit A. Subject to the provisions of paragraphs B and C below, the Company shall retain and be liable for an amount of ultimate net loss equal to a 26.50% loss ratio (as hereinafter defined in Article V) for the term of this Contract. The Reinsurer shall then be liable for any ultimate net loss which exceeds the Company's retention, but does not exceed a 28.00% loss ratio for the term of this Contract. B. In addition to the above and subject to the provisions of paragraph C below, the Reinsurer shall also be liable for any ultimate net loss which exceeds a 31.00% loss ratio for the term of this Contract, but does not exceed a 39.718% loss ratio for the term of this Contract. Any ultimate net loss in excess of a loss ratio for the term of this Contract which is greater than 28.00%, but less than 31.00%, shall be retained by the Company and shall be hereinafter referred to as the "loss retention corridor." The total liability of the Reinsurer during the term of this Contract shall not exceed an amount equal to 10.218% of the Company's net earned premium for the term of this Contract. C. Notwithstanding the foregoing, in the event that the net earned premium as respects property and casualty business exceeds 26.22% of the total net earned premium hereunder, no claim shall be made under this Contract unless and until the Company shall have first incurred an amount of ultimate net loss in excess of 26.50% of its net earned premium during the term of this Contract, plus 35.00% of the difference by which the net earned premium as respects property and casualty business exceeds 26.22% of the total net earned premium hereunder. The limit of liability of the Reinsurer and the Company's loss retention corridor shall be arrived at in the same manner. In the event that the net earned premium as respects property and casualty business is less than 20.22% of the total net earned premium hereunder, no claim shall be made under this Contract unless and until the Company shall have first incurred an amount of ultimate net loss in excess of 26.50% of its net earned premium during the term of this Contract, less 35.00% of the difference by which the net earned premium as respects property and casualty business is less than 20.22% of the total net earned premium hereunder. The limit of liability of the Reinsurer and the Company's loss retention corridor shall be arrived at in the same manner. D. The Company shall have the option to purchase an additional reinsurance limit equal to 10.218% of the Company's net earned premium for the term of this Contract. This option expires on December 31, 1999 and can only be exercised if the ultimate net loss ceded under this Contract is less than 5.109% of the net earned premium for the term of this Contract. Article V - Definitions A. "Net excess liability" as used herein shall mean those amounts payable by the Company as defined in the ultimate net loss definition set forth in paragraph B below. B. "Ultimate net loss" as used herein is defined as the sum or sums (including extra contractual obligations and loss in excess of bond or policy limits, both as hereafter defined) paid or payable by the Company in settlement of claims and in satisfaction of judgments rendered on account of such claims, after deduction of all salvage, all recoveries and all claims on inuring insurance or reinsurance, whether collectible or not. Nothing herein shall be construed to mean that losses under this Contract are not recoverable until the Company's ultimate net loss has been ascertained. C. "Loss in excess of bond or policy limits" and "extra contractual obligations" as used herein shall be defined as follows: 1. "Loss in excess of bond or policy limits" shall mean any amount paid or payable by the Company in excess of its bond or policy limits, but otherwise within the terms of its policy, as a result of an action against it by its insured or its insured's assignee to recover damages the insured is legally obligated to pay to a third party claimant because of the Company's alleged or actual negligence or bad faith in rejecting a settlement within policy limits, or in discharging its duty to defend or prepare the defense in the trial of an action against its insured, or in discharging its duty to prepare or prosecute an appeal consequent upon such an action. 2. "Extra contractual obligations" shall mean any punitive, exemplary, compensatory or consequential damages, other than loss in excess of bond or policy limits, paid or payable by the Company as a result of an action against it by its insured, its insured's assignee or a third party claimant, which action alleges negligence or bad faith on the part of the Company in handling a claim under a policy subject to this Contract. Any loss in excess of bond or policy limits or extra contractual obligation shall be deemed to have occurred on the same date as the loss covered or alleged to be covered under the bond or policy. Notwithstanding anything stated herein, this Contract shall not apply to any loss in excess of bond or policy limits or any extra contractual obligation incurred by the Company as a result of any fraudulent and/or criminal act by any officer or director of the Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder. D. "Net earned premium" as used herein is defined as gross earned premium of the Company for the classes of business reinsured hereunder, less the earned portion of premiums ceded by the Company for reinsurance which inures to the benefit of this Contract. E. "Loss ratio" as used herein shall mean the ratio of the Company's aggregate ultimate net loss paid during the term of this Contract to the Company's net earned premium for the term of this Contract. Article VI - Other Reinsurance A. Notwithstanding the provisions of Article IV, the Company is permitted, but not required, to purchase other facultative and/or other treaty reinsurance on business subject to this Contract. Premiums ceded by the Company for reinsurance which inures to the benefit of this Contract shall be deducted in determining subject premium hereunder as provided in Article IX. B. The Company's inuring reinsurance agreements, as identified in Schedule A attached hereto, shall remain in force during the term hereof, or so deemed. Article VII - Loss Notices and Settlements All loss settlements made by the Company, provided they are within the terms of this Contract, shall be binding upon the Reinsurer, and the Reinsurer agrees to pay all amounts for which it may be liable upon receipt of reasonable evidence of the amount paid (or scheduled to be paid) by the Company. Article VIII - Salvage and Subrogation The Reinsurer shall be credited with salvage (i.e., reimbursement obtained or recovery made by the Company, less the actual cost, excluding salaries of officials and employees of the Company and sums paid to attorneys as retainer, of obtaining such reimbursement or making such recovery) on account of claims and settlements involving reinsurance hereunder. Salvage thereon shall always be used to reimburse the excess carriers in the reverse order of their priority according to their participation before being used in any way to reimburse the Company for its primary loss. The Company hereby agrees to enforce its rights to salvage or subrogation relating to any loss, a part of which loss was sustained by the Reinsurer, and to prosecute all claims arising out of such rights. Article IX - Reinsurance Premium A. As premium for the reinsurance provided hereunder, the Company shall pay the Reinsurer 3.5% of its net earned premium as respects surety business and 1.0% of its net earned premium as respects property and casualty business for the term of this Contract. B. The Company shall pay the Reinsurer an annual deposit premium of $3,609,256 in four installments of $902,314 on January 1, April 1, July 1 and October 1, 1999. C. If the Company elects to purchase an additional reinsurance limit in accordance with the provisions of paragraph D of Article IV, the Company shall pay an additional reinsurance premium to the Reinsurer for such additional limit equal to 2.35% of its net earned premium as respects surety business and 0.65% of its net earned premium as respects property and casualty business for the term of this Contract. The Company shall pay the Reinsurer a deposit premium of $2,400,000 in equal pro rata amounts on the first day of each calendar quarter remaining during the term of this Contract. D. Within 60 days after the expiration of this Contract, the Company shall provide a report to the Reinsurer setting forth the premium due hereunder, computed in accordance with paragraphs A and C and any additional premium due the Reinsurer or return premium due the Company shall be remitted promptly. Article X - Late Payments A. It is understood and agreed that the provisions of this Article shall not be implemented unless specifically invoked, in writing, by one of the parties to this Contract. B. In the event any premium, loss or other payment due either party is not received by the intermediary named in Article XXV (hereinafter referred to as the "Intermediary") by the payment due date, the party to whom payment is due may, by notifying the Intermediary in writing, require the debtor party to pay, and the debtor party agrees to pay, an interest penalty on the amount past due calculated for each such payment on the last business day of each month as follows: 1. The number of full days which have expired since the due date or the last monthly calculation, whichever the lesser; times 2. 1/365th of the six month (or nearest thereto) U.S. Treasury Bill rate, as quoted in the Wall Street Journal on the first business day of the month for which the calculation is being made; times 3. The amount past due, including accrued interest. It is agreed that interest shall accumulate until payment of the original amount due plus interest penalties have been received by the Intermediary. C. The establishment of the due date shall, for purposes of this Article, be determined as follows: 1. As respects the payment of routine deposits and premiums due the Reinsurer, the due date shall be as provided for in the applicable section of this Contract. In the event a due date is not specifically stated for a given payment, it shall be deemed due 45 days after the date of transmittal by the Intermediary of the initial billing for each such payment. 2. As respects any payment, adjustment or return due either party not otherwise provided for in subparagraph 1 above, the due date shall be deemed as five business days following receipt of written notification that the provisions of this Article have been invoked. For purposes of interest calculations only, amounts due hereunder shall be deemed paid upon receipt by the Intermediary. D. Nothing herein shall be construed as limiting or prohibiting 1) the Reinsurer from contesting the validity of any claim, or from participating in the defense or control of any claim or suit; or 2) either party from contesting the validity of any payment, or from initiating any arbitration or other proceeding in accordance with the provisions of this Contract. If the debtor party prevails in an arbitration or other proceeding, then any interest penalties due hereunder on the amount in dispute shall be null and void. If the debtor party loses in such proceeding, then the interest penalty on the amount determined to be due hereunder shall be calculated in accordance with the provisions set forth above unless otherwise determined by such proceedings. If a debtor party advances payment of any amount it is contesting, and proves to be correct in its contestation, either in whole or in part, the other party shall reimburse the debtor party for any such excess payment made plus interest on the excess amount calculated in accordance with this Article. E. As provided under Article VII it is understood and agreed that the Company shall furnish the Reinsurer with usual and customary claim information and nothing herein shall be construed as limiting or prohibiting the Reinsurer from requesting additional information that it may deem necessary. F. Interest penalties arising out of the application of this Article that are $100 or less from any party shall be waived unless there is a pattern of late payments consisting of three or more items over the course of any 12-month period. Article XI - Reports and Remittances Within 60 days after the end of each calendar quarter following the expiration of this Contract, the Company shall report to the Reinsurer its aggregate ultimate net loss paid for the contract term as of the end of the quarter. If the aggregate ultimate net loss paid exceeds an amount equal to the Company's retention hereunder for the contract term based on an estimate of the Company's net earned premium for the contract term, the Reinsurer shall pay its portion of such estimated excess (net of any prior payments for the contract term). However, any such payment by the Reinsurer shall be provisional, subject to adjustment when the Company's actual ultimate net loss and net earned premium for the contract term have been determined. Article XII - Commutation The Company may commute this Contract with agreement by the Reinsurer. Article XIII - Offset (BRMA 36C) The Company and the Reinsurer shall have the right to offset any balance or amounts due from one party to the other under the terms of this Contract. The party asserting the right of offset may exercise such right any time whether the balances due are on account of premiums or losses or otherwise. Article XIV - Access to Records (BRMA 1D) The Reinsurer or its designated representatives shall have access at any reasonable time to all records of the Company which pertain in any way to this reinsurance. Article XV - Net Retained Lines A. This Contract applies only to that portion of any bond or policy which the Company retains net for its own account, and in calculating the amount of any loss hereunder and also in computing the amount or amounts in excess of which this Contract attaches, only loss or losses in respect of that portion of any bond or policy which the Company retains net for its own account shall be included. B. The amount of the Reinsurer's liability hereunder in respect of any loss or losses shall not be increased by reason of the inability of the Company to collect from any other reinsurer(s), whether specific or general, any amounts which may have become due from such reinsurer(s), whether such inability arises from the insolvency of such other reinsurer(s) or otherwise. Article XVI - Errors and Omissions (BRMA 14F) Inadvertent delays, errors or omissions made in connection with this Contract or any transaction hereunder shall not relieve either party from any liability which would have attached had such delay, error or omission not occurred, provided always that such error or omission is rectified as soon as possible after discovery. Article XVII - Currency (BRMA 12A) A. Whenever the word "Dollars" or the "$" sign appears in this Contract, they shall be construed to mean United States Dollars and all transactions under this Contract shall be in United States Dollars. B. Amounts paid or received by the Company in any other currency shall be converted to United States Dollars at the rate of exchange at the date such transaction is entered into the books of the Company. Article XVIII - Taxes (BRMA 50B) In consideration of the terms under which this Contract is issued, the Company will not claim a deduction in respect of the premium hereon when making tax returns, other than income or profits tax returns, to any state or territory of the United States of America or the District of Columbia. Article XIX - Federal Excise Tax (BRMA 17A) (Applicable to those reinsurers, excepting Underwriters at Lloyd's London and other reinsurers exempt from Federal Excise Tax, who are domiciled outside the United States of America.) A. The Reinsurer has agreed to allow for the purpose of paying the Federal Excise Tax the applicable percentage of the premium payable hereon (as imposed under Section 4371 of the Internal Revenue Code) to the extent such premium is subject to the Federal Excise Tax. B. In the event of any return premium becoming due hereunder the Reinsurer will deduct the applicable percentage from the return premium payable hereon and the Company or its agent should take steps to recover the tax from the United States Government. Article XX - Unauthorized Reinsurers A. If the Reinsurer is unauthorized in any state of the United States of America or the District of Columbia, the Reinsurer agrees to fund its share of the Company's ceded unearned premium and outstanding loss and loss adjustment expense reserves (including incurred but not reported loss reserves) by: 1. Clean, irrevocable and unconditional letters of credit issued and confirmed, if confirmation is required by the insurance regulatory authorities involved, by a bank or banks meeting the NAIC Securities Valuation Office credit standards for issuers of letters of credit and acceptable to said insurance regulatory authorities; and/or 2. Escrow accounts for the benefit of the Company; and/or 3. Cash advances; if, without such funding, a penalty would accrue to the Company on any financial statement it is required to file with the insurance regulatory authorities involved. The Reinsurer, at its sole option, may fund in other than cash if its method and form of funding are acceptable to the insurance regulatory authorities involved. B. With regard to funding in whole or in part by letters of credit, it is agreed that each letter of credit will be in a form acceptable to insurance regulatory authorities involved, will be issued for a term of at least one year and will include an "evergreen clause," which automatically extends the term for at least one additional year at each expiration date unless written notice of non-renewal is given to the Company not less than 30 days prior to said expiration date. The Company and the Reinsurer further agree, notwithstanding anything to the contrary in this Contract, that said letters of credit may be drawn upon by the Company or its successors in interest at any time, without diminution because of the insolvency of the Company or the Reinsurer, but only for one or more of the following purposes: 1. To reimburse itself for the Reinsurer's share of unearned premiums returned to insureds on account of bond or policy cancellations, unless paid in cash by the Reinsurer; 2. To reimburse itself for the Reinsurer's share of losses and/or loss adjustment expense paid under the terms of bonds or policies reinsured hereunder, unless paid in cash by the Reinsurer; 3. To reimburse itself for the Reinsurer's share of any other amounts claimed to be due hereunder, unless paid in cash by the Reinsurer; 4. To fund a cash account in an amount equal to the Reinsurer's share of any ceded unearned premium and/or outstanding loss and loss adjustment expense reserves (including incurred but not reported loss reserves) funded by means of a letter of credit which is under non-renewal notice, if said letter of credit has not been renewed or replaced by the Reinsurer 10 days prior to its expiration date; 5. To refund to the Reinsurer any sum in excess of the actual amount required to fund the Reinsurer's share of the Company's ceded unearned premium and/or outstanding loss and loss adjustment expense reserves (including incurred but not reported loss reserves), if so requested by the Reinsurer. In the event the amount drawn by the Company on any letter of credit is in excess of the actual amount required for B(1), B(2) or B(4), or in the case of B(3), the actual amount determined to be due, the Company shall promptly return to the Reinsurer the excess amount so drawn. Article XXI - Insolvency A. In the event of the insolvency of one or more of the reinsured companies, this reinsurance shall be payable directly to the company or to its liquidator, receiver, conservator or statutory successor immediately upon demand, with reasonable provision for verification, on the basis of the liability of the company without diminution because of the insolvency of the company or because the liquidator, receiver, conservator or statutory successor of the company has failed to pay all or a portion of any claim. It is agreed, however, that the liquidator, receiver, conservator or statutory successor of the company shall give written notice to the Reinsurer of the pendency of a claim against the company indicating the policy or bond reinsured which claim would involve a possible liability on the part of the Reinsurer within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership, and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses that it may deem available to the company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the Court, against the company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the company solely as a result of the defense undertaken by the Reinsurer. B. Where two or more reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Contract as though such expense had been incurred by the company. C. It is further understood and agreed that, in the event of the insolvency of one or more of the reinsured companies, the reinsurance under this Contract shall be payable directly by the Reinsurer to the company or to its liquidator, receiver or statutory successor, except as provided by Section 4118(a) of the New York Insurance Law or except (1) where this Contract specifically provides another payee of such reinsurance in the event of the insolvency of the company or (2) where the Reinsurer with the consent of the direct insured or insureds has assumed such bond or policy obligations of the company as direct obligations of the Reinsurer to the payees under such bonds or policies and in substitution for the obligations of the company to such payees. Article XXII - Arbitration A. As a condition precedent to any right of action hereunder, any dispute arising out of the interpretation, performance or breach of this Contract, including the formation or validity thereof, shall be submitted for decision to a panel of three arbitrators. Notice requesting arbitration will be in writing and sent certified or registered mail, return receipt requested. B. One arbitrator shall be chosen by each party and the two arbitrators shall, before instituting the hearing, choose an impartial third arbitrator who shall preside at the hearing. If either party fails to appoint its arbitrator within 30 days after being requested to do so by the other party, the latter, after 10 days notice by certified or registered mail of its intention to do so, may appoint the second arbitrator. C. If the two arbitrators are unable to agree upon the third arbitrator within 30 days of their appointment, the two arbitrators will jointly petition the American Arbitration Association to appoint the third arbitrator from the AAA's Panel of Reinsurance Arbitrators. D. All arbitrators shall be disinterested active or former executive officers of insurance or reinsurance companies, underwriters at Lloyd's of London, reinsurance intermediaries and attorneys actively or formerly engaged in practicing law in the areas of insurance or reinsurance. E. Within 30 days after notice of appointment of all arbitrators, the panel shall meet and determine timely periods for briefs, discovery procedures and schedules for hearings. F. The panel shall be relieved of all judicial formality and shall not be bound by the strict rules of procedure and evidence. The arbitration shall take place in Woodland Hills, California or, if unanimously agreed by the panel, any other mutually acceptable location. G. If more than one reinsurer is involved in the same dispute, all such reinsurers shall constitute and act as one party for purposes of this article. However, nothing shall impair the rights of such reinsurers to assert several rather than joint defenses or claims, nor shall this provision be construed as changing the liability of the reinsurers under the terms of this Contract from several to joint. H. The panel shall make its decision considering custom and practice as promptly as possible following the termination of hearings. The decision of any two arbitrators, when rendered in writing shall be final and binding, and judgment upon the award may be entered in any court having jurisdiction. The panel is empowered to grant such interim relief as it may deem appropriate. I. Each party shall bear the expense of its own arbitrator and shall jointly and equally with the other party bear the cost of the third arbitrator. The remaining costs of the arbitration shall be allocated by the panel. The panel may, at its discretion, award such further costs and expenses as it considers appropriate, including but not limited to attorney's fees and interest to the extent permitted by law. Insofar as the arbitration panel chooses to look to substantive law, it shall consider the law of the State of California. Article XXIII - Service of Suit (BRMA 49C) (Applicable if the Reinsurer is not domiciled in the United States of America, and/or is not authorized in any State, Territory or District of the United States where authorization is required by insurance regulatory authorities) A. It is agreed that in the event the Reinsurer fails to pay any amount claimed to be due hereunder, the Reinsurer, at the request of the Company, will submit to the jurisdiction of a court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of the Reinsurer's rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States. B. Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefor, the Reinsurer hereby designates the party named in its Interests and Liabilities Agreement, or if no party is named therein, the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Contract. Article XXIV - Agency Agreement Amwest Surety Insurance Company shall be deemed the agent of the other reinsured companies for purposes of sending or receiving notices required by the terms and conditions of this Contract, and for purposes of remitting or receiving any monies due any party. Article XXV - Intermediary (BRMA 23A) E. W. Blanch Co. is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. All communications (including but not limited to notices, statements, premium, return premium, commissions, taxes, losses, loss adjustment expense, salvages and loss settlements) relating thereto shall be transmitted to the Company or the Reinsurer through E. W. Blanch Co., Reinsurance Services, 3500 West 80th Street, Minneapolis, Minnesota 55431. Payments by the Company to the Intermediary shall be deemed to constitute payment to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed to constitute payment to the Company only to the extent that such payments are actually received by the Company. In Witness Whereof, the parties hereto by their duly authorized representatives have executed this Contract as of the dates undermentioned at: Calabasas, California, this _______ day of ______________________ 199___. --------------------------------------------------- Amwest Surety Insurance Company Far West Insurance Company Condor Insurance Company Barbados, West Indies, this _______ day of _______________________ 199___. --------------------------------------------------- Underwriters Reinsurance Company (Barbados), Inc. Schedule A Aggregate Stop Loss Reinsurance Contract Effective: January 1, 1999 issued to Amwest Surety Insurance Company Far West Insurance Company and Condor Insurance Company all of Omaha, Nebraska Inuring Reinsurance Contracts: 1. Agreement of Reinsurance No. B415, Effective: May 1, 1992 2. Agreement of Reinsurance No. FFAL09994, Effective: May 1, 1994 3. Casualty Excess of Loss Reinsurance Contract, Effective: July 1, 1996 4. 50% Private Passenger Automobile Quota Share Reinsurance Contract, Effective: July 1, 1997 5. 75% California Homeowners Multiple Line Quota Share Reinsurance Contract, Effective: July 1, 1997 6. 75% Florida Multiple Line Quota Share Reinsurance Contract, Effective: July 1, 1998 7. Contingent Excess of Loss Reinsurance Contract, Effective: July 1, 1998 Addendum No. 1 to the Aggregate Stop Loss Reinsurance Contract Effective: January 1, 1999 issued to Amwest Surety Insurance Company Far West Insurance Company and Condor Insurance Company all of Omaha, Nebraska by Underwriters Reinsurance Company (Barbados), Inc. Barbados, West Indies It Is Hereby Agreed, effective July 1, 1999, that paragraphs A, B and C of Article IX - Reinsurance Premium shall be deleted and the following substituted therefor: "A. As premium for the reinsurance provided hereunder, the Company shall pay the Reinsurer 3.5% of its net earned premium as respects surety business for the term of this Contract, 1.0% of its net earned premium as respects property and casualty business for the period from January 1, 1999 through June 30, 1999 and 7.5% of its net earned premium as respects property and casualty business for the period from July 1, 1999 through December 31, 1999. B. The Company shall pay the Reinsurer an annual deposit premium of $4,580,746 in two installments of $902,314 on January 1 and April 1 of 1999 and two installments of $1,388,059 on July 1 and October 1 of 1999. C. If the Company elects to purchase an additional reinsurance limit in accordance with the provisions of paragraph D of Article IV, the Company shall pay an additional reinsurance premium to the Reinsurer for such additional limit equal to 2.35% of its net earned premium as respects surety business and 5.00% of its net earned premium as respects property and casualty business for the term of this Contract. The Company shall pay the Reinsurer a deposit premium of $3,000,000 at the time such option is exercised." It Is Further Agreed, effective July 1, 1999, that this Contract shall be amended as follows: 1. Article XXV - Intermediary (BRMA 23A) - shall be deleted and the following substituted therefor: "Article XXV - Intermediary (BRMA 23A) E. W. Blanch Co., Inc. is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. All communications (including but not limited to notices, statements, premium, return premium, commissions, taxes, losses, loss adjustment expense, salvages and loss settlements) relating thereto shall be transmitted to the Company or the Reinsurer through E. W. Blanch Co., Inc., 3600 West 80th Street, Minneapolis, Minnesota 55431. Payments by the Company to the Intermediary shall be deemed to constitute payment to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed to constitute payment to the Company only to the extent that such payments are actually received by the Company." 2. Schedule A attached to and forming part of the Contract shall be deleted and Schedule A attached to and forming part of this Addendum shall be substituted therefor. The provisions of this Contract shall remain otherwise unchanged. In Witness Whereof, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at: Calabasas, California, this _______ day of ______________ in the year ___. --------------------------------------------------- Amwest Surety Insurance Company Far West Insurance Company Condor Insurance Company Barbados, West Indies, this _______ day of ______________ in the year ___. --------------------------------------------------- Underwriters Reinsurance Company (Barbados), Inc. (Revised: July 1, 1999) Schedule A Aggregate Stop Loss Reinsurance Contract Effective: January 1, 1999 issued to Amwest Surety Insurance Company Far West Insurance Company and Condor Insurance Company all of Omaha, Nebraska Inuring Reinsurance Contracts applicable to the period from January 1, 1999 to June 30, 1999: 1. Agreement of Reinsurance No. B415, Effective: May 1, 1992 2. Agreement of Reinsurance No. FFAL09994, Effective: May 1, 1994 3. Casualty Excess of Loss Reinsurance Contract, Effective: July 1, 1996 4. 50% Private Passenger Automobile Quota Share Reinsurance Contract, Effective: July 1, 1997 5. 75% California Homeowners Multiple Line Quota Share Reinsurance Contract, Effective: July 1, 1997 6. 75% Florida Multiple Line Quota Share Reinsurance Contract, Effective: July 1, 1998 7. Contingent Excess of Loss Reinsurance Contract, Effective: July 1, 1998 Inuring Reinsurance Contracts aplicable to the period from July 1, 1999 to December 31, 1999: 1. Agreement of Reinsurance No. B415, Effective: May 1, 1992 2. Agreement of Reinsurance No. FFAL09994, Effective: May 1, 1994 3. Excess Catastrophe Reinsurance Contract, Effective: July 1, 1999 4. Excess Per Event Reinsurance Contract, Effective: July 1, 1999 EX-10.18 4 EXCESS PER EVENT REINSURANCE CONTRACT Excess Per Event Reinsurance Contract Effective: July 1, 1999 issued to Condor Insurance Company Calabasas, California Amwest Surety Insurance Company Omaha, Nebraska and Far West Insurance Company Omaha, Nebraska Table of Contents Article Page I Classes of Business Reinsured 3 II Commencement and Termination 4 III Territory (BRMA 51A) 4 IV Exclusions 4 V Retention and Limit 6 VI Reinstatement 6 VII Definitions 8 VIII Other Reinsurance 11 IX Florida Hurricane Catastrophe Fund 11 X Claims 11 XI Salvage and Subrogation 12 XII Reinsurance Premium 12 XIII Contingent Commission 13 XIV Offset (BRMA 36C) 14 XV Access to Records (BRMA 1D) 14 XVI Liability of the Reinsurer 14 XVII Net Retained Lines (BRMA 32E) 14 XVIII Errors and Omissions (BRMA 14F) 15 XIX Currency (BRMA 12A) 15 XX Taxes (BRMA 50B) 15 XXI Federal Excise Tax (BRMA 17A) 15 XXII Loss Reserves 16 XXIII Insolvency 17 XXIV Arbitration 18 XXV Service of Suit (BRMA 49C) 19 XXVI Agency Agreement 20 XXVII Intermediary (BRMA 23A) 20 Excess Per Event Reinsurance Contract Effective: July 1, 1999 issued to Condor Insurance Company Calabasas, California Amwest Surety Insurance Company Omaha, Nebraska and Far West Insurance Company Omaha, Nebraska (hereinafter referred to collectively as the "Company") by The Subscribing Reinsurer(s) Executing the Interests and Liabilities Agreement(s) Attached Hereto (hereinafter referred to as the "Reinsurer") Article I - Classes of Business Reinsured A. By this Contract the Reinsurer agrees to reinsure the excess liability which may accrue to the Company under its policies, contracts and binders of insurance or reinsurance (hereinafter called "policies") in force on the effective date hereof or issued or renewed on or after that date, and classified by the Company as Fire, Allied Lines, Homeowners Multiple Peril (Sections I and II), Mobile Homeowners Multiple Peril (Sections I and II), Inland Marine, Earthquake, Private Passenger Automobile Liability and Physical Damage, Motorcycle Liability and Commercial Automobile Liability and Physical Damage and General Liability business, subject to the terms, conditions and limitations set forth herein and in Schedule A attached to and forming part of this Contract. B. It is understood that the classes of business reinsured under this Contract are deemed to include: 1.Coverages required for non-resident drivers under the motor vehicle financial responsibility law or the motor vehicle compulsory insurance law or any similar law of any state or province, following the provisions of the Company's policies when they include or are deemed to include so-called "Out of State Insurance" provisions; 2.Coverages required under Section 30 of the Motor Carrier Act of 1980 and/or any amendments thereto. Article II - Commencement and Termination A. This Contract shall become effective on July 1, 1999, with respect to losses arising out of loss events commencing on or after that date, and shall continue in force thereafter until terminated. B. Either party may terminate this Contract at any June 30 by giving the other party not less than 90 days prior notice by certified mail. C. If any contract year expires or if this Contract is terminated while a loss event covered hereunder is in progress, the Reinsurer's liability hereunder shall, subject to the other terms and conditions of this Contract, be determined as if the entire loss event had occurred prior to the expiration of such contract year or the termination of this Contract, provided that no part of such loss event is claimed against any subsequent contract year hereunder or any renewal or replacement of this Contract. D. In the event negotiations for a renewal of this Contract are not completed by June 30 of any contract year, such contract year shall, at the Company's option, be extended by addendum to 15 months, and either party may then terminate this Contract on any September 30 by giving the other party not less than 60 days prior notice by certified mail. E. "Contract year" as used in this Contract shall mean the period from July 1, 1999, to June 30, 2000, both days inclusive, and each respective 12-month period thereafter that this Contract continues in force. However, if a contract year is extended to 15 months as provided in paragraph D above, the contract year following such extended contract year shall be a nine-month period and each subsequent 12-month period shall be a separate contract year. Article III - Territory (BRMA 51A) The territorial limits of this Contract shall be identical with those of the Company's policies. Article IV - Exclusions A. This Contract does not apply to and specifically excludes the following: 1. Reinsurance assumed by the Company, except inter-company reinsurance between any of the reinsured companies hereunder. 2. Financial guarantee and insolvency. 3. Business written by the Company on a co-indemnity basis where the Company is not the controlling carrier. 4. Nuclear risks as defined in the "Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance (U.S.A.)," the "Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance (Canada)," the "Nuclear Incident Exclusion Clause - Liability - Reinsurance (U.S.A.)" and the "Nuclear Incident Exclusion Clause - Liability - Reinsurance (Canada)" attached to and forming part of this Contract. 5. Liability as a member, subscriber or reinsurer of any Pool, Syndicate or Association; and any combination of insurers or reinsurers formed for the purpose of covering specific perils, specific classes of business or for the purpose of insuring risks located in specific geographical areas. However, this exclusion shall not apply to residual market mechanisms, including but not limited to FAIR Plans, Joint Underwriting Associations, Assigned Risk Plans, or to Coastal Pools, Beach Plans or similar plans, however styled. It is understood and agreed, however, that this reinsurance does not include any increase in liability to the Company resulting from (a) the inability of any other participant in a residual market mechanism, including but not limited to a FAIR Plan, Joint Underwriting Association, Assigned Risk Plan, Coastal Pool, Beach Plan or similar plan, to meet its liability, or (b) any claim against such a residual market mechanism, including but not limited to a FAIR Plan, Joint Underwriting Association, Assigned Risk Plan, Coastal Pool, Beach Plan or similar plan, or any participant therein, including the Company, whether by way of subrogation or otherwise, brought by or on behalf of any insolvency fund. Notwithstanding the foregoing, this exclusion shall not apply to loss assessments made against the Company by the Hawaii Hurricane Relief Fund or loss adjustment expenses incurred by the Company on Hawaii Hurricane Relief Fund policies issued by the Company. 6. All liability of the Company arising by contract, operation of law, or otherwise, from its participation or membership, whether voluntary or involuntary, in any insolvency fund. "Insolvency fund" includes any guaranty fund, insolvency fund, plan, pool, association, fund or other arrangement, however denominated, established or governed, which provides for any assessment of or payment or assumption by the Company of part or all of any claim, debt, charge, fee or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent, or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part. 7. Seepage and pollution in accordance with the full ISO Seepage and Pollution Exclusion, except when such loss is due to explosion, hostile fire or as respects automobile liability due to collision or upset, unless otherwise restricted by state law. However, where a court renders an adverse judgment interpreting the ISO Exclusion wording, the Reinsurer will cover that portion of the judgment regarding losses due to pollution. 8. Business produced under the New York Motorcycle Program. B. The Company shall have the option to exclude a class of business subject to this Contract by providing the Reinsurer with prior written notice. Article V - Retention and Limit A. As respects each excess layer of reinsurance coverage provided by this Contract, the Company shall retain and be liable for the first amount of ultimate net loss, shown as "Company's Retention" for that excess layer in Schedule A attached hereto, arising out of each loss event. The Reinsurer shall then be liable, as respects each excess layer, for the amount by which such ultimate net loss exceeds the Company's applicable retention, but the liability of the Reinsurer under each excess layer shall not exceed the amount, shown as "Reinsurer's Per Event Limit" for that excess layer in Schedule A attached hereto, as respects any one loss event. B. The Company shall purchase or be deemed to have purchased excess facultative reinsurance for Commercial Automobile Liability policies with limits exceeding $2,000,000. C. If the Company's losses arising from the same cause are allocated to more than one loss event under the provisions of subparagraph C of Article VII, the Company's retention applicable to each such loss event shall be reduced by dividing the Company's retention by the number of such loss events (whether or not commencing during the term of this Contract) with pro rata consideration given depending on the primary policy limits or reinsurance retention of the individual policy periods affected. The Reinsurer's limit of liability applicable to such loss event for each such policy period shall be arrived at in the same manner. Article VI - Reinstatement A. In the event all or any portion of the reinsurance under the First Excess Per Event layer is exhausted by loss during any one contract year, the amount so exhausted shall be reinstated immediately from the time the loss event commences hereon. As respects loss events involving only property losses and at least two risks, for the first $1,000,000 so reinstated during any one contract year the Company shall pay reinstatement premium equal to $75,000 times the percentage of the loss event limit reinstated (based on the loss paid by the Reinsurer); for the second $1,000,000 so reinstated during the same contract year the Company shall pay reinstatement premium equal to $150,000 times the percentage of the loss event limit reinstated (based on the loss paid by the Reinsurer). As respects all other losses under the First Excess Per Event layer, the Company shall pay no additional premium. B. In the event all or any portion of the reinsurance under the Second Excess Per Event layer is exhausted by loss during any one contract year, the amount so exhausted shall be reinstated immediately from the time the loss event commences hereon. For the first $1,000,000 so reinstated during any one contract year the Company shall pay reinstatement premium equal to 50% of the earned reinsurance premium for the Second Excess Per Event layer for that contract year (exclusive of reinstatement premium) times the percentage of the loss event limit reinstated (based on the loss paid by the Reinsurer); for the second $1,000,000 so reinstated during the same contract year the Company shall pay reinstatement premium equal to 100% of the earned reinsurance premium for the Second Excess Per Event layer for that contract year (exclusive of reinstatement premium) times the percentage of the loss event limit reinstated (based on the loss paid by the Reinsurer). C. Whenever the Company requests payment by the Reinsurer of any loss hereunder for which reinstatement premium is due the Reinsurer, the Company shall submit a statement to the Reinsurer of such premium. If reinstatement premium is based on the earned reinsurance premium for the Second Excess Per Event layer for the contract year, and that premium has not been finally determined as of the date of any such statement, the calculation of reinstatement premium due shall be based on the annual deposit premium and shall be readjusted when the earned reinsurance premium for the contract year has been finally determined. Any reinstatement premium shown to be due the Reinsurer for any excess layer as reflected by any such statement (less prior payments, if any, for that excess layer) shall be payable by the Company concurrently with payment by the Reinsurer of the requested loss for that excess layer. Any return reinstatement premium shown to be due the Company shall be remitted by the Reinsurer as promptly as possible after receipt and verification of the Company's statement. D. Notwithstanding anything stated herein, the liability of the Reinsurer shall not exceed: 1. As respects the First Excess Per Event layer, $3,000,000 as respects loss or losses arising out of loss events commencing during any one contract year and involving only property losses and at least two risks; and 2. As respects the Second Excess Per Event layer, $3,000,000 as respects loss or losses arising out of loss events commencing during any one contract year. Article VII - Definitions A. "Ultimate net loss" as used herein is defined as the sum or sums (including loss in excess of policy limits, extra contractual obligations and loss adjustment expense, as hereinafter defined) paid or payable by the Company in settlement of claims and in satisfaction of judgments rendered on account of such claims, after deduction of all salvage, all recoveries and all claims on inuring insurance or reinsurance, whether collectible or not. Nothing herein shall be construed to mean that losses under this Contract are not recoverable until the Company's ultimate net loss has been ascertained. B. "Loss in excess of policy limits" and "extra contractual obligations" as used herein shall be defined as follows: 1. "Loss in excess of policy limits" shall mean 90% of any amount paid or payable by the Company in excess of its policy limits, but otherwise within the terms of its policy, as a result of an action against it by its insured or its insured's assignee to recover damages the insured is legally obligated to pay to a third party claimant because of the Company's alleged or actual negligence or bad faith in rejecting a settlement within policy limits, or in discharging its duty to defend or prepare the defense in the trial of an action against its insured, or in discharging its duty to prepare or prosecute an appeal consequent upon such an action. 2. "Extra contractual obligations" shall mean 90% of any punitive, exemplary, compensatory or consequential damages, other than loss in excess of policy limits, paid or payable by the Company as a result of an action against it by its insured, its insured's assignee or a third party claimant, which action alleges negligence or bad faith on the part of the Company in handling a claim under a policy subject to this Contract. An extra contractual obligation shall be deemed to have occurred on the same date as the loss covered or alleged to be covered under the policy. Notwithstanding anything stated herein, this Contract shall not apply to any loss in excess of policy limits or any extra contractual obligation incurred by the Company as a result of any fraudulent and/or criminal act by any officer or director of the Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder. C. "Loss event" as used herein is defined as an accident, occurrence, a series of accidents or occurrences, claim made, loss discovered or any other circumstance that triggers coverage under the Company's original policies arising out of or caused by one event, except that: 1. As respects property losses subject hereto, all individual losses directly occasioned by any one disaster, occurrence or loss or series of disasters, occurrences or losses arising out of one occurrence which occurs anywhere in the world, but limited in the United States of America and Canada to any one state of the United States or province of Canada and states or provinces contiguous thereto and to one another. However, the duration and extent of any one "loss event" shall be limited to all individual losses sustained by the Company occurring during any period of 168 consecutive hours arising out of and directly occasioned by the same event, except that the term "loss event" shall be further defined as follows: a. As regards windstorm, hail, tornado, hurricane, cyclone, including ensuing collapse and water damage, all individual losses sustained by the Company occurring during any period of 72 consecutive hours arising out of and directly occasioned by the same loss event. However, the loss event need not be limited to one state or province or states or provinces contiguous thereto. b. As regards riot, riot attending a strike, civil commotion, vandalism and malicious mischief, all individual losses sustained by the Company occurring during any period of 72 consecutive hours within the area of one municipality or county and the municipalities or counties contiguous thereto arising out of and directly occasioned by the same loss event. The maximum duration of 72 consecutive hours may be extended in respect of individual losses which occur beyond such 72 consecutive hours during the continued occupation of an assured's premises by strikers, provided such occupation commenced during the aforesaid period. c. As regards earthquake (the epicenter of which need not necessarily be within the territorial confines referred to above) and fire following directly occasioned by the earthquake, only those individual fire losses which commence during the period of 168 consecutive hours may be included in the Company's "loss event." d. As regards "freeze," only individual losses directly occasioned by collapse, breakage of glass and water damage (caused by bursting frozen pipes and tanks and melting snow) may be included in the Company's "loss event." Except for those "loss events" referred to in subparagraphs (a) and (b) above, the Company may choose the date and time when any such period of consecutive hours commences, provided that it is not earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, occurrence or loss, and provided that only one such period of 168 consecutive hours shall apply with respect to one loss event. However, as respects those "loss events" referred to in subparagraphs (a) and (b) above, if the disaster, occurrence or loss occasioned by the occurrence is of greater duration than 72 consecutive hours, then the Company may divide that disaster, occurrence or loss into two or more "loss events," provided that no two periods overlap and no individual loss is included in more than one such period, and provided that no period commences earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, occurrence or loss. It is understood that losses arising from a combination of two or more perils as a result of the same occurrence shall be considered as having arisen from one "loss event." Notwithstanding the foregoing, the hourly limitations as stated above shall not be exceeded as respects the applicable perils and no single "loss event" shall encompass a time period greater than 168 consecutive hours. 2. Losses arising from the date change to the year 2000, or any other date change, including leap year calculations, shall not in and of themselves be regarded as a "loss event" for purposes of this Contract. Such losses shall include any loss, damage, cost, claim or expense, whether preventative, remedial or otherwise, directly or indirectly arising out of or relating to: a. The calculation, comparison, differentiation, sequencing or processing of data involving the date change to the year 2000, or any other date change, including leap year calculations, by any computer system, hardware, program or software and/or any microchip, integrated circuit or similar device in computer equipment or non-computer equipment, whether the property of the insured or not; or b. Any change, alteration or modification involving the date change to the year 2000 or any other date change, including leap year calculations, to any such computer system, hardware, program or software or any microchip, integrated circuit or similar device in computer equipment or non-computer equipment, whether the property of the insured or not. This subparagraph 2 applies regardless of any other cause or event that contributes concurrently or in any sequence to the loss, damage, cost claim or expense. However, this subparagraph 2 shall not apply in respect of physical damage occurring at the insured's premises arising out of the perils covered by this Contract. None of the circumstances described in subparagraphs 2(a) and 2(b) above shall, in and of itself, constitute a loss event for purposes of this Contract. D. "Policy period" as used herein shall mean the period from the inception or renewal date of the primary policy through the expiration, termination or first premium anniversary date of the policy, whichever first occurs. As respects continuous or greater than one year term policies, each premium anniversary date shall be considered the beginning of a new policy period. E. "Loss adjustment expense" as used herein shall mean expenses allocable to the investigation, defense and/or settlement of specific claims, including litigation expenses, interest on judgments, and declaratory judgment expenses incurred in connection with claims under policies reinsured hereunder, but not including office expenses or salaries of the Company's regular employees. F. "Net earned premium" as used herein is defined as gross earned premium of the Company for the classes of business reinsured hereunder, less the earned portion of premiums ceded by the Company for reinsurance which inures to the benefit of this Contract. Article VIII - Other Reinsurance The Company shall be permitted to carry other reinsurance, recoveries under which shall inure to the benefit of the Company and be entirely disregarded in applying all of the provisions of this Contract. Article IX - Florida Hurricane Catastrophe Fund A. Any loss reimbursement the Company receives under the Florida Hurricane Catastrophe Fund (FHCF) as a result of loss events commencing during the term of this Contract shall be deemed to be salvage received by the Company in determining ultimate net loss under this Contract. If the salvage amount is based on the Company's losses in more than one loss event and the FHCF does not designate the amount allocable to each loss event, the salvage amount shall be prorated in the proportion that the Company's losses in each loss event bear to the Company's total losses arising out of all loss events to which the salvage applies. If, as a result of such salvage, the loss to the Reinsurer under any excess layer of this Contract in any one loss occurrence is less than the amount previously paid by the Reinsurer under that excess layer, the Company shall promptly remit the difference to the Reinsurer. B. Any reimbursement premiums or emergency assessment paid by the Company under the FHCF shall be deemed to be premiums paid for inuring reinsurance. Article X - Claims A. Whenever a claim is reserved by the Company for an amount greater than its retention hereunder and/or whenever a claim appears likely to result in a claim under this Contract, the Company shall notify the Reinsurer. Further, the Company shall notify the Reinsurer whenever a claim involves a fatality, amputations or permanent loss of use of upper or lower extremities, spinal injuries resulting in partial or total paralysis of upper or lower extremities, brain injuries resulting in impairment of physical functions, severe burn cases, or any other injuries likely to result in a permanent disability rating of 50.0% or more, regardless of liability, if the policy limits or statutory benefits applicable to the claim are greater than the Company's retention hereunder. The Reinsurer shall have the right to participate, at its own expense, in the defense or control of any claim or suit or proceeding involving this reinsurance. B. All claim settlements made by the Company, provided they are within the terms of this Contract, shall be binding upon the Reinsurer, and the Reinsurer agrees to pay all amounts for which it may be liable upon receipt of reasonable evidence of the amount paid by the Company. Article XI - Salvage and Subrogation The Reinsurer shall be credited with salvage (i.e., reimbursement obtained or recovery made by the Company, less the actual cost, excluding salaries of officials and employees of the Company and sums paid to attorneys as retainer, of obtaining such reimbursement or making such recovery) on account of claims and settlements involving reinsurance hereunder. Salvage thereon shall always be used to reimburse the excess carriers in the reverse order of their priority according to their participation before being used in any way to reimburse the Company for its primary loss. The Company hereby agrees to enforce its rights to salvage or subrogation relating to any loss, a part of which loss was sustained by the Reinsurer, and to prosecute all claims arising out of such rights. Article XII - Reinsurance Premium A. As premium for each excess layer of reinsurance coverage provided by this Contract during each contract year, the Company shall pay the Reinsurer the greater of the following: 1. The amount shown as "Annual Minimum Premium" for that excess layer in Schedule A attached hereto as respects each contract year; or 2. The percentage, shown as "Premium Rate" for that excess layer in Schedule A attached hereto, of the Company's net earned premium for each contract year. B. The Company shall pay the Reinsurer an annual deposit premium for each excess layer of the amount, shown as "Annual Deposit Premium" for that excess layer in Schedule A attached hereto as respects each contract year, in four equal installments of the amount, shown as "Quarterly Deposit Premium" for that excess layer in Schedule A attached hereto, on July 1, October 1, January 1, and April 1 of each contract year. C. In the event that a contract year is extended in accordance with the provisions of paragraph D of Article II, the amounts shown as "Annual Minimum Premium" and "Annual Deposit Premium" for each excess layer in Schedule A for such extended contract year shall be increased by 25.0%. The amounts shown as "Annual Minimum Premium" and "Annual Deposit Premium" for each excess layer in Schedule A for the nine-month contract year following an extended contract year shall be 75.0% of the amount shown as "Annual Minimum Premium" for that excess layer in Schedule A attached hereto. D. Within 60 days after the end of each contract year, the Company shall provide a report to the Reinsurer setting forth the premium due hereunder for the contract year, computed in accordance with paragraph A, and any additional premium due the Reinsurer or return premium due the Company shall be remitted promptly. Article XIII - Contingent Commission A. As respects the First Excess Per Event Layer only, the Reinsurer shall pay the Company a contingent commission equal to 25.0% of the net profit, if any, accruing to the Reinsurer during each accounting period defined herein. The first accounting period shall be from the effective date of this Contract through the end of the third contract year (as defined in paragraph E of Article II) hereunder, and each subsequent period of three consecutive contract years shall be a separate accounting period. However, if this Contract is terminated, the final accounting period shall be from the beginning of the then current accounting period through the date of termination. B. The Reinsurer's net profit for each accounting period shall be calculated in accordance with the following formula, it being understood that a positive balance equals net profit and a negative balance equals net loss: 1. Reinsurance premiums paid or payable for the First Excess Per Event layer for the accounting period; less 2. Expenses incurred by the Reinsurer at 20.0% of reinsurance premiums paid or payable for the First Excess Per Event layer for the accounting period; less 3. Losses incurred for the First Excess Per Event layer for the accounting period; less 4. The Reinsurer's net loss, if any, from the immediately preceding accounting period. C. The Company shall calculate and report the Reinsurer's net profit within 60 days after 24 months following the end of each contract year within each accounting period, within 60 days after the end of each accounting period, and within 60 days after the end of each 12-month period thereafter until all losses subject hereto have been finally settled. Each such calculation shall be based on cumulative transactions hereunder from the beginning of the accounting period through the date of calculation, including the Reinsurer's net loss, if any, from the immediately preceding accounting period. As respects the initial calculation referred to above, any contingent commission shown to be due the Company shall be paid by the Reinsurer as promptly as possible after receipt and verification of the Company's report. As respects each subsequent calculation, any additional contingent commission shown to be due the Company shall be paid by the Reinsurer as promptly as possible after receipt and verification of the Company's report. Any return contingent commission shown to be due the Reinsurer shall be paid by the Company with its report. D. "Losses incurred" as used herein shall mean ceded losses and loss adjustment expense paid as of the effective date of calculation, plus the ceded reserves for losses and loss adjustment expense outstanding as of the same date, all as respects losses arising out of loss events commencing during the accounting period under consideration. Article XIV - Offset (BRMA 36C) The Company and the Reinsurer shall have the right to offset any balance or amounts due from one party to the other under the terms of this Contract. The party asserting the right of offset may exercise such right any time whether the balances due are on account of premiums or losses or otherwise. Article XV - Access to Records (BRMA 1D) The Reinsurer or its designated representatives shall have access at any reasonable time to all records of the Company which pertain in any way to this reinsurance. Article XVI - Liability of the Reinsurer A. The liability of the Reinsurer shall follow that of the Company in every case and be subject in all respects to all the general and specific stipulations, clauses, waivers and modifications of the Company's policies and any endorsements thereon. However, in no event shall this be construed in any way to provide coverage outside the terms and conditions set forth in this Contract. B. Nothing herein shall in any manner create any obligations or establish any rights against the Reinsurer in favor of any third party or any persons not parties to this Contract. Article XVII - Net Retained Lines (BRMA 32E) A. This Contract applies only to that portion of any policy which the Company retains net for its own account (prior to deduction of any underlying reinsurance specifically permitted in this Contract), and in calculating the amount of any loss hereunder and also in computing the amount or amounts in excess of which this Contract attaches, only loss or losses in respect of that portion of any policy which the Company retains net for its own account shall be included. B. The amount of the Reinsurer's liability hereunder in respect of any loss or losses shall not be increased by reason of the inability of the Company to collect from any other reinsurer(s), whether specific or general, any amounts which may have become due from such reinsurer(s), whether such inability arises from the insolvency of such other reinsurer(s) or otherwise. Article XVIII - Errors and Omissions (BRMA 14F) Inadvertent delays, errors or omissions made in connection with this Contract or any transaction hereunder shall not relieve either party from any liability which would have attached had such delay, error or omission not occurred, provided always that such error or omission is rectified as soon as possible after discovery. Article XIX - Currency (BRMA 12A) A. Whenever the word "Dollars" or the "$" sign appears in this Contract, they shall be construed to mean United States Dollars and all transactions under this Contract shall be in United States Dollars. B. Amounts paid or received by the Company in any other currency shall be converted to United States Dollars at the rate of exchange at the date such transaction is entered on the books of the Company. Article XX - Taxes (BRMA 50B) In consideration of the terms under which this Contract is issued, the Company will not claim a deduction in respect of the premium hereon when making tax returns, other than income or profits tax returns, to any state or territory of the United States of America or the District of Columbia. Article XXI - Federal Excise Tax (BRMA 17A) (Applicable to those reinsurers, excepting Underwriters at Lloyd's London and other reinsurers exempt from Federal Excise Tax, who are domiciled outside the United States of America.) A. The Reinsurer has agreed to allow for the purpose of paying the Federal Excise Tax the applicable percentage of the premium payable hereon (as imposed under Section 4371 of the Internal Revenue Code) to the extent such premium is subject to the Federal Excise Tax. B. In the event of any return of premium becoming due hereunder the Reinsurer will deduct the applicable percentage from the return premium payable hereon and the Company or its agent should take steps to recover the tax from the United States Government. Article XXII - Loss Reserves A. If the Reinsurer is unauthorized in any state of the United States of America or the District of Columbia or the Reinsurer has an A. M. Best rating equal to or below B++, the Reinsurer agrees to fund its share of the Company's ceded outstanding loss and loss adjustment expense reserves (including incurred but not reported loss reserves) by: 1. Clean, irrevocable and unconditional letters of credit issued and confirmed, if confirmation is required by the insurance regulatory authorities involved, by a bank or banks meeting the NAIC Securities Valuation Office credit standards for issuers of letters of credit and acceptable to said insurance regulatory authorities; and/or 2. Escrow accounts for the benefit of the Company; and/or 3. Cash advances; if, without such funding, a penalty would accrue to the Company on any financial statement it is required to file with the insurance regulatory authorities involved. The Reinsurer, at its sole option, may fund in other than cash if its method and form of funding are acceptable to the insurance regulatory authorities involved. B. With regard to funding in whole or in part by letters of credit, it is agreed that each letter of credit will be in a form acceptable to insurance regulatory authorities involved, will be issued for a term of at least one year and will include an "evergreen clause," which automatically extends the term for at least one additional year at each expiration date unless written notice of non-renewal is given to the Company not less than 30 days prior to said expiration date. The Company and the Reinsurer further agree, notwithstanding anything to the contrary in this Contract, that said letters of credit may be drawn upon by the Company or its successors in interest at any time, without diminution because of the insolvency of the Company or the Reinsurer, but only for one or more of the following purposes: 1. To reimburse itself for the Reinsurer's share of losses and/or loss adjustment expense paid under the terms of policies reinsured hereunder, unless paid in cash by the Reinsurer; 2. To reimburse itself for the Reinsurer's share of any other amounts claimed to be due hereunder, unless paid in cash by the Reinsurer; 3. To fund a cash account in an amount equal to the Reinsurer's share of any ceded outstanding loss and loss adjustment expense reserves (including incurred but not reported loss reserves) funded by means of a letter of credit which is under non-renewal notice, if said letter of credit has not been renewed or replaced by the Reinsurer 10 days prior to its expiration date; 4. To refund to the Reinsurer any sum in excess of the actual amount required to fund the Reinsurer's share of the Company's ceded outstanding loss and loss adjustment expense reserves (including incurred but not reported loss reserves), if so requested by the Reinsurer. In the event the amount drawn by the Company on any letter of credit is in excess of the actual amount required for B(1), or B(3), or in the case of B(2), the actual amount determined to be due, the Company shall promptly return to the Reinsurer the excess amount so drawn. Article XXIII - Insolvency A. In the event of the insolvency of one or more of the reinsured companies, this reinsurance shall be payable directly to the company or to its liquidator, receiver, conservator or statutory successor immediately upon demand, with reasonable provision for verification, on the basis of the liability of the company without diminution because of the insolvency of the company or because the liquidator, receiver, conservator or statutory successor of the company has failed to pay all or a portion of any claim. It is agreed, however, that the liquidator, receiver, conservator or statutory successor of the company shall give written notice to the Reinsurer of the pendency of a claim against the company indicating the policy or bond reinsured which claim would involve a possible liability on the part of the Reinsurer within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership, and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses that it may deem available to the company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the Court, against the company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the company solely as a result of the defense undertaken by the Reinsurer. B. Where two or more reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Contract as though such expense had been incurred by the company. C. It is further understood and agreed that, in the event of the insolvency of one or more of the reinsured companies, the reinsurance under this Contract shall be payable directly by the Reinsurer to the company or to its liquidator, receiver or statutory successor, except as provided by Section 4118(a) of the New York Insurance Law or except (1) where this Contract specifically provides another payee of such reinsurance in the event of the insolvency of the company or (2) where the Reinsurer with the consent of the direct insured or insureds has assumed such policy obligations of the company as direct obligations of the Reinsurer to the payees under such policies and in substitution for the obligations of the company to such payees. Article XXIV - Arbitration A. As a condition precedent to any right of action hereunder, in the event of any dispute or difference of opinion hereafter arising with respect to this Contract, it is hereby mutually agreed that such dispute or difference of opinion shall be submitted to arbitration. One Arbiter shall be chosen by the Company, the other by the Reinsurer, and an Umpire shall be chosen by the two Arbiters before they enter upon arbitration, all of whom shall be active or retired disinterested executive officers of insurance or reinsurance companies or Lloyd's London Underwriters. In the event that either party should fail to choose an Arbiter within 30 days following a written request by the other party to do so, the requesting party may choose two Arbiters who shall in turn choose an Umpire before entering upon arbitration. If the two Arbiters fail to agree upon the selection of an Umpire within 30 days following their appointment, each Arbiter shall nominate three candidates within 10 days thereafter, two of whom the other shall decline, and the decision shall be made by drawing lots. B. Each party shall present its case to the Arbiters within 30 days following the date of appointment of the Umpire. The Arbiters shall consider this Contract as an honorable engagement rather than merely as a legal obligation and they are relieved of all judicial formalities and may abstain from following the strict rules of law. The decision of the Arbiters shall be final and binding on both parties; but failing to agree, they shall call in the Umpire and the decision of the majority shall be final and binding upon both parties. Judgment upon the final decision of the Arbiters may be entered in any court of competent jurisdiction. C. If more than one reinsurer is involved in the same dispute, all such reinsurers shall constitute and act as one party for purposes of this Article and communications shall be made by the Company to each of the reinsurers constituting one party, provided, however, that nothing herein shall impair the rights of such reinsurers to assert several, rather than joint, defenses or claims, nor be construed as changing the liability of the reinsurers participating under the terms of this Contract from several to joint. D. Each party shall bear the expense of its own Arbiter, and shall jointly and equally bear with the other the expense of the Umpire and of the arbitration. In the event that the two Arbiters are chosen by one party, as above provided, the expense of the Arbiters, the Umpire and the arbitration shall be equally divided between the two parties. E. Any arbitration proceedings shall take place at El Segundo, California unless otherwise mutually agreed upon by the parties to this Contract, but notwithstanding the location of the arbitration, all proceedings pursuant hereto shall be governed by the law of the state in which the Company has its principal office. Article XXV - Service of Suit (BRMA 49C) (Applicable if the Reinsurer is not domiciled in the United States of America, and/or is not authorized in any State, Territory or District of the United States where authorization is required by insurance regulatory authorities) A. It is agreed that in the event the Reinsurer fails to pay any amount claimed to be due hereunder, the Reinsurer, at the request of the Company, will submit to the jurisdiction of a court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of the Reinsurer's rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States. B. Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefor, the Reinsurer hereby designates the party named in its Interests and Liabilities Agreement, or if no party is named therein, the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Contract. Article XXVI - Agency Agreement If more than one reinsured company is named as a party to this Contract, the first named company shall be deemed the agent of the other reinsured companies for purposes of sending or receiving notices required by the terms and conditions of this Contract, and for purposes of remitting or receiving any monies due any party. Article XXVII - Intermediary (BRMA 23A) E. W. Blanch Co., Inc. is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. All communications (including but not limited to notices, statements, premium, return premium, commissions, taxes, losses, loss adjustment expense, salvages and loss settlements) relating thereto shall be transmitted to the Company or the Reinsurer through E. W. Blanch Co., Inc., 3600 West 80th Street, Minneapolis, Minnesota 55431. Payments by the Company to the Intermediary shall be deemed to constitute payment to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed to constitute payment to the Company only to the extent that such payments are actually received by the Company. In Witness Whereof, the Company by its duly authorized representative has executed this Contract as of the date undermentioned at: Calabasas, California, this ________ day of ____________ in the year ____. --------------------------------------------------- Condor Insurance Company Amwest Surety Insurance Company Far West Insurance Company Excess Per Event Reinsurance Contract Effective: July 1, 1999 issued to Condor Insurance Company Calabasas, California Amwest Surety Insurance Company Omaha, Nebraska and Far West Insurance Company Omaha, Nebraska First Second Excess Excess Company's Retention $1,000,000 $2,000,000 Reinsurer's Per Event Limit $1,000,000 $1,000,000 Annual Minimum Premium $700,000 $161,000 Premium Rate 2.75% 0.60% Annual Deposit Premium $1,000,000 $230,000 Quarterly Deposit Premium $250,000 $57,500 The figures listed above for each excess layer shall apply to each Subscribing Reinsurer in the percentage share for that excess layer as expressed in its Interests and Liabilities Agreement attached hereto. U.S.A. NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE 1. This Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks. 2. Without in any way restricting the operation of paragraph (1) of this Clause, this Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to: I. Nuclear reactor power plants including all auxiliary property on the site, or II. Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and "critical facilities" as such, or III. Installations for fabricating complete fuel elements or for processing substantial quantities of "special nuclear material," and for reprocessing, salvaging, chemically separating, storing or disposing of "spent" nuclear fuel or waste materials, or IV. Installations other than those listed in paragraph (2) III above using substantial quantities of radioactive isotopes or other products of nuclear fission. 3. Without in any way restricting the operations of paragraphs (1) and (2) hereof, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith except that this paragraph (3) shall not operate (a) where Reassured does not have knowledge of such nuclear reactor power plant or nuclear installation, or (b) where said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. However on and after 1st January 1960 this sub-paragraph (b) shall only apply provided the said radioactive contamination exclusion provision has been approved by the Governmental Authority having jurisdiction thereof. 4. Without in any way restricting the operations of paragraphs (1), (2) and (3) hereof, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against. 5. It is understood and agreed that this Clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Reassured to be the primary hazard. 6. The term "special nuclear material" shall have the meaning given it in the Atomic Energy Act of 1954 or by any law amendatory thereof. 7. Reassured to be sole judge of what constitutes: (a) substantial quantities, and (b) the extent of installation, plant or site. Note.-Without in any way restricting the operation of paragraph (1) hereof, it is understood and agreed that (a) all policies issued by the Reassured on or before 31st December 1957 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply. (b) with respect to any risk located in Canada policies issued by the Reassured on or before 31st December 1958 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply. 12/12/57 N.M.A. 1119 BRMA 35B NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE CANADA 1. This Agreement does not cover any loss or liability accruing to the Reinsured, directly or indirectly, and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks. 2. Without in any way restricting the operation of paragraph 1 of this clause, this Agreement does not cover any loss or liability accruing to the Reinsured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to: (a) nuclear reactor power plants including all auxiliary property on the site, or (b) any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and critical facilities as such, or (c) installations for fabricating complete fuel elements or for processing substantial quantities of prescribed substances, and for reprocessing, salvaging, chemically separating, storing or disposing of spent nuclear fuel or waste materials, or (d) installations other than those listed in (c) above using substantial quantities of radioactive isotopes or other products of nuclear fission. 3. Without in any way restricting the operation of paragraphs 1 and 2 of this clause, this Agreement does not cover any loss or liability by radioactive contamination accruing to the Reinsured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith, except that this paragraph 3 shall not operate: (a) where the Reinsured does not have knowledge of such nuclear reactor power plant or nuclear installation, or (b) where the said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. 4. Without in any way restricting the operation of paragraphs 1, 2 and 3 of this clause, this Agreement does not cover any loss or liability by radioactive contamination accruing to the Reinsured, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against. 5. This clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Reinsured to be the primary hazard. 6. The term "prescribed substances" shall have the meaning given to it by the Atomic Energy Control Act R.S.C. 1985(c), A-16 or by any law amendatory thereof. 7. Reinsured to be sole judge of what constitutes: (a) substantial quantities, and (b) the extent of installation, plant or site. 8. Without in any way restricting the operation of paragraphs 1, 2, 3 and 4 of this clause, this Agreement does not cover any loss or liability accruing to the Reinsured, directly or indirectly, and whether as Insurer or Reinsurer, caused: (1) by any nuclear incident, as defined in the Nuclear Liability Act or any other nuclear liability act, law or statute, or any law amendatory thereof or nuclear explosion, except for ensuing loss or damage which results directly from fire, lightning or explosion of natural, coal or manufactured gas; (2) by contamination by radioactive material. NOTE: Without in any way restricting the operation of paragraphs 1, 2, 3 and 4 of this clause, paragraph 8 of this clause shall only apply to all original contracts of the Reinsured, whether new, renewal or replacement, which become effective on or after December 31, 1992. U.S.A. NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE (Approved by Lloyd's Underwriters' Fire and Non-Marine Association) (1) This reinsurance does not cover any loss or liability accruing to the Reassured as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association. (2) Without in any way restricting the operation of paragraph (1) of this Clause it is understood and agreed that for all purposes of this reinsurance all the original policies of the Reassured (new, renewal and replacement) of the classes specified in Clause II of this paragraph (2) from the time specified in Clause III in this paragraph (2) shall be deemed to include the following provision (specified as the Limited Exclusion Provision): Limited Exclusion Provision.* I. It is agreed that the policy does not apply under any liability coverage, to (injury, sickness, disease, death or destruction with respect to which an insured under the (bodily injury or property damage policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability. II. Family Automobile Policies (liability only), Special Automobile Policies (private passenger automobiles, liability only), Farmers Comprehensive Personal Liability Policies (liability only), Comprehensive Personal Liability Policies (liability only) or policies of a similar nature; and the liability portion of combination forms related to the four classes of policies stated above, such as the Comprehensive Dwelling Policy and the applicable types of Homeowners Policies. III. The inception dates and thereafter of all original policies as described in II above, whether new, renewal or replacement, being policies which either (a) become effective on or after 1st May, 1960, or (b) become effective before that date and contain the Limited Exclusion Provision set out above; provided this paragraph (2) shall not be applicable to Family Automobile Policies, Special Automobile Policies, or policies or combination policies of a similar nature, issued by the Reassured on New York risks, until 90 days following approval of the Limited Exclusion Provision by the Governmental Authority having jurisdiction thereof. (3) Except for those classes of policies specified in Clause II of paragraph (2) and without in any way restricting the operation of paragraph (1) of this Clause, it is understood and agreed that for all purposes of this reinsurance the original liability policies of the Reassured (new, renewal and replacement) affording the following coverages: Owners, Landlords and Tenants Liability, Contractual Liability, Elevator Liability, Owners or Contractors (including railroad) Protective Liability, Manufacturers and Contractors Liability, Product Liability, Professional and Malpractice Liability, Storekeepers Liability, Garage Liability, Automobile Liability (including Massachusetts Motor Vehicle or Garage Liability) shall be deemed to include, with respect to such coverages, from the time specified in Clause V of this paragraph (3), the following provision (specified as the Broad Exclusion Provision): Broad Exclusion Provision.* It is agreed that the policy does not apply: I. Under any Liability Coverage to (injury, sickness, disease, death or destruction (bodily injury or property damage (a) with respect to which an insured under the policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability; or (b) resulting from the hazardous properties of nuclear material and with respect to which (1) any person or organization is required to maintain financial protection pursuant to the Atomic Energy Act of 1954, or any law amendatory thereof, or (2) the insured is, or had this policy not been issued would be, entitled to indemnity from the United States of America, or any agency thereof, under any agreement entered into by the United States of America, or any agency thereof, with any person or organization. II. Under any Medical Payments Coverage, or under any Supplementary Payments Provision relating to (immediate medical or surgical relief to expenses incurred with respect (first aid, to (bodily injury, sickness, disease or death resulting from the hazardous properties of (bodily injury nuclear material and arising out of the operation of a nuclear facility by any person or organization. III. Under any Liability Coverage to (injury, sickness, disease, death or destruction (bodily injury or property damage resulting from the hazardous properties of nuclear material, if (a) the nuclear material (1) is at any nuclear facility owned by, or operated by or on behalf of, an insured or (2) has been discharged or dispersed therefrom; (b) the nuclear material is contained in spent fuel or waste at any time possessed, handled, used, processed, stored, transported or disposed of by or on behalf of an insured; or (c) the(injury, sickness, disease, death or destruction arises out of the furnishing by an insured (bodily injury or property damage of services, materials, parts or equipment in connection with the planning, construction, maintenance, operation or use of any nuclear facility, but if such facility is located within the United States of America, its territories, or possessions or Canada, this exclusion (c) applies only to (injury to or destruction of property at such nuclear facility (property damage to such nuclear facility and any property thereat. IV. As used in this endorsement: "hazardous properties" include radioactive, toxic or explosive properties; "nuclear material" means source material, special nuclear material or byproduct material; "source material", "special nuclear material", and "byproduct material" have the meanings given them in the Atomic Energy Act of 1954 or in any law amendatory thereof; "spent fuel" means any fuel element or fuel component, solid or liquid, which has been used or exposed to radiation in a nuclear reactor; "waste" means any waste material (1) containing byproduct material and (2) resulting from the operation by any person or organization of any nuclear facility included within the definition of nuclear facility under paragraph (a) or (b) thereof; "nuclear facility" means (a) any nuclear reactor, (b) any equipment or device designed or used for (1) separating the isotopes of uranium or lutonium, (2) processing or utilizing spent fuel, or (3) handling processing or packaging waste, (c) any equipment or device used for the processing, fabricating or alloying of special nuclear material if at any time the total amount of such material in the custody of the insured at the premises where such equipment or device is located consists of or contains more than 25 grams of plutonium or uranium 233 or any combination thereof, or more than 250 grams of uranium 235, (d) any structure, basin, excavation, premises or place prepared or used for the storage or disposal of waste, and includes the site on which any of the foregoing is located, all operations conducted on such site and all premises used for such operations; "nuclear reactor" means any apparatus designed or used to sustain nuclear fission in a self-supporting chain reaction or to contain a critical mass of fissionable material; ( With respect to injury to or destruction of property, the word "injury" or "destruction" ( "property damage" includes all forms of radioactive contamination of property. ( includes all forms of radioactive contamination of property. V. The inception dates and thereafter of all original policies affording coverages specified in this paragraph (3), whether new, renewal or replacement, being policies which become effective on or after 1st May, 1960, provided this paragraph (3) shall not be applicable to (i) Garage and Automobile Policies issued by the Reassured on New York risks, or (ii) statutory liability insurance required under Chapter 90, General Laws of Massachusetts, until 90 days following approval of the Broad Exclusion Provision by the Governmental Authority having jurisdiction thereof. (4) Without in any way restricting the operation of paragraph (1) of this Clause, it is understood and agreed that paragraphs (2) and (3) above are not applicable to original liability policies of the Reassured in Canada and that with respect to such policies this Clause shall be deemed to include the Nuclear Energy Liability Exclusion Provisions adopted by the Canadian Underwriters' Association of the Independent Insurance Conference of Canada. *NOTE. The words printed in italics in the Limited Exclusion Provision and in the Broad Exclusion Provision shall apply only in relation to original liability policies which include a Limited Exclusion Provision or a Broad Exclusion Provision containing those words. 21/9/67 N.M.A. 1590 NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE CANADA 1. This Agreement does not cover any loss or liability accruing to the Reinsured as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber, or association. 2. Without in any way restricting the operation of paragraph 1 of this clause it is agreed that for all purposes of this Agreement all the original liability contracts of the Reinsured, whether new, renewal or replacement, of the following classes, namely, Personal Liability, Farmers Liability, Storekeepers Liability, which become effective on or after 31st December 1984, shall be deemed to include, from their inception dates and thereafter, the following provision: -- Limited Exclusion Provision This Policy does not apply to bodily injury or property damage with respect to which the Insured is also insured under a contract of nuclear energy liability insurance (whether the Insured is named in such contract or not and whether or not it is legally enforceable by the Insured) issued by the Nuclear Insurance Association of Canada or any other group or pool of insurers or would be an Insured under any such policy but for its termination upon exhaustion of its limit of liability. With respect to property, loss of use of such property shall be deemed to be property damage. 3. Without in any way restricting the operation of paragraph 1 of this clause it is agreed that for all purposes of this Agreement all the original liability contracts of the Reinsured, whether new, renewal or replacement, of any class whatsoever (other than Personal Liability, Farmers Liability, Storekeepers Liability or Automobile Liability contracts), which become effective on or after 31st December 1984, shall be deemed to include, from their inception dates and thereafter, the following provision: -- Broad Exclusion Provision It is agreed that this Policy does not apply: (a) to liability imposed by or arising under the Nuclear Liability Act; or (b) to bodily injury or property damage with respect to which an Insured under this Policy is also insured under a contract of nuclear energy liability insurance (whether the Insured is named in such contract or not and whether or not it is legally enforceable by the Insured) issued by the Nuclear Insurance Association of Canada or any other insurer or group or pool of insurers or would be an Insured under any such policy but for its termination upon exhaustion of its limit of liability; or (c) to bodily injury or property damage resulting directly or indirectly from the nuclear energy hazard arising from: (1) the ownership, maintenance, operation or use of a nuclear facility by or on behalf of an Insured; (2) the furnishing by an Insured of services, materials, parts or equipment in connection with the planning, construction, maintenance, operation or use of any nuclear facility; and (3) The possession, consumption, use, handling, disposal or transportation of fissionable substances or of other radioactive material (except radioactive isotopes, away from a nuclear facility, which have reached the final stage of fabrication so as to be useable for any scientific, medical, agricultural, commercial or industrial purpose) used, distributed, handled or sold by an Insured. As used in this Policy: (I) The term "nuclear energy hazard" means the radioactive, toxic, explosive or other hazardous properties of radioactive material; (II) The term "radioactive material" means uranium, thorium, plutonium, neptunium, their respective derivatives and compounds, radioactive isotopes of other elements and any other substances that the Atomic Energy Control Board may, by regulation, designate as being prescribed substances capable of releasing atomic energy, or as being requisite for the production, use or application of atomic energy; (III) The term "nuclear facility" means: (a) any apparatus designed or used to sustain nuclear fission in a self-supporting chain reaction or to contain a critical mass of plutonium, thorium and uranium or any one or more of them; (b) any equipment or device designed or used for (i) separating the isotopes of plutonium, thorium and uranium or any one or more of them, (ii) processing or utilizing spent fuel, or (iii) handling, processing or packaging waste; (c) any equipment or device used for the processing, fabricating or alloying of plutonium, thorium or uranium enriched in the isotope uranium 233 or in the isotope uranium 235, or any one or more of them if at any time the total amount of such material in the custody of the Insured at the premises where such equipment or device is located consists of or contains more than 25 grams of plutonium or uranium 233 or any combination thereof, or more than 250 grams of uranium 235; (d) any structure, basin, excavation, premises or place prepared or used for the storage or disposal of waste radioactive material; and includes the site on which any of the foregoing is located, together with all operations conducted thereon and all premises used for such operations. (IV) The term "fissionable substance" means any prescribed substance that is, or from which can be obtained, a substance capable of releasing atomic energy by nuclear fission. (V) With respect to property, loss of use of such property shall be deemed to be property damage. N.M.A. 1979 Addendum No. 1 to the Excess Per Event Reinsurance Contract Effective: July 1, 1999 issued to Condor Insurance Company Calabasas, California Amwest Surety Insurance Company Omaha, Nebraska and Far West Insurance Company Omaha, Nebraska (hereinafter referred to collectively as the "Company") It is Hereby Agreed, effective October 1, 1999, that subparagraph 8 of paragraph A of Article IV - Exclusions - shall be deleted and the following substituted therefor: "8. Business produced under the California and New York Motorcycle Program." The provisions of this Contract shall remain otherwise unchanged. In Witness Whereof, the Company by its duly authorized representative has executed this Addendum as of the date undermentioned at: Calabasas, California, this _____ day of _______________ in the year ____. --------------------------------------------------- Condor Insurance Company Amwest Surety Insurance Company Far West Insurance Company Addendum No. 1 to the Interests and Liabilities Agreement of Gerling Global Reinsurance Corporation of America New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Per Event Reinsurance Contract Effective: July 1, 1999 issued to Condor Insurance Company Calabasas, California Amwest Surety Insurance Company Omaha, Nebraska and Far West Insurance Company Omaha, Nebraska (hereinafter referred to collectively as the "Company") The Subscribing Reinsurer hereby accepts Addendum No. 1, as duly executed by the Company, as part of the Contract, effective October 1, 1999. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Addendum as of the date undermentioned at: New York, New York, this ____ day of _______________ in the year _____. --------------------------------------------------- Gerling Global Reinsurance Corporation of America Addendum No. 1 to the Interests and Liabilities Agreement of Hannover Ruckversicherungs-Aktiengesellschaft Hannover, Germany (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Per Event Reinsurance Contract Effective: July 1, 1999 issued to Condor Insurance Company Calabasas, California Amwest Surety Insurance Company Omaha, Nebraska and Far West Insurance Company Omaha, Nebraska (hereinafter referred to collectively as the "Company") The Subscribing Reinsurer hereby accepts Addendum No. 1, as duly executed by the Company, as part of the Contract, effective October 1, 1999. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Addendum as of the date undermentioned at: Hannover, Germany, this ____ day of _______________ in the year _____. --------------------------------------------------- Hannover Ruckversicherungs-Aktiengesellschaft Addendum No. 1 to the Interests and Liabilities Agreement of Hartford Fire Insurance Company Hartford, Connecticut by HartRe Company, L.L.C. Hartford, Connecticut (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Per Event Reinsurance Contract Effective: July 1, 1999 issued to Condor Insurance Company Calabasas, California Amwest Surety Insurance Company Omaha, Nebraska and Far West Insurance Company Omaha, Nebraska (hereinafter referred to collectively as the "Company") The Subscribing Reinsurer hereby accepts Addendum No. 1, as duly executed by the Company, as part of the Contract, effective October 1, 1999. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Addendum as of the date undermentioned at: San Francisco, California, this ____ day of _______________ in the year _____. --------------------------------------------------- HartRe Company, L.L.C. (for and on behalf of Hartford Fire Insurance Company) Addendum No. 1 to the Interests and Liabilities Agreement of PMA Reinsurance Corporation Philadelphia, Pennsylvania (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Per Event Reinsurance Contract Effective: July 1, 1999 issued to Condor Insurance Company Calabasas, California Amwest Surety Insurance Company Omaha, Nebraska and Far West Insurance Company Omaha, Nebraska (hereinafter referred to collectively as the "Company") The Subscribing Reinsurer hereby accepts Addendum No. 1, as duly executed by the Company, as part of the Contract, effective October 1, 1999. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Addendum as of the date undermentioned at: Philadelphia, Pennsylvania, this ____ day of _______________ in the year _____. --------------------------------------------------- PMA Reinsurance Corporation Addendum No. 1 to the Interests and Liabilities Agreement of SOREMA North America Reinsurance Company New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Per Event Reinsurance Contract Effective: July 1, 1999 issued to Condor Insurance Company Calabasas, California Amwest Surety Insurance Company Omaha, Nebraska and Far West Insurance Company Omaha, Nebraska (hereinafter referred to collectively as the "Company") The Subscribing Reinsurer hereby accepts Addendum No. 1, as duly executed by the Company, as part of the Contract, effective October 1, 1999. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Addendum as of the date undermentioned at: New York, New York, this ____ day of _______________ in the year _____. --------------------------------------------------- SOREMA North America Reinsurance Company Addendum No. 1 to the Interests and Liabilities Agreement of Underwriters Reinsurance Company Concord, New Hampshire (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Per Event Reinsurance Contract Effective: July 1, 1999 issued to Condor Insurance Company Calabasas, California Amwest Surety Insurance Company Omaha, Nebraska and Far West Insurance Company Omaha, Nebraska (hereinafter referred to collectively as the "Company") The Subscribing Reinsurer hereby accepts Addendum No. 1, as duly executed by the Company, as part of the Contract, effective October 1, 1999. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Addendum as of the date undermentioned at: Calabasas, California, this ____ day of _______________ in the year _____. --------------------------------------------------- Underwriters Reinsurance Company EX-10.19 5 EXCESS CATASTROPHE REINSURANCE CONTRACT Excess Catastrophe Reinsurance Contract Effective: July 1, 1999 issued to Condor Insurance Company Calabasas, California Amwest Surety Insurance Company Omaha, Nebraska and Far West Insurance Company Omaha, Nebraska Excess Catastrophe Reinsurance Contract Effective: July 1, 1999 issued to Condor Insurance Company Calabasas, California Amwest Surety Insurance Company Omaha, Nebraska and Far West Insurance Company Omaha, Nebraska (hereinafter referred to collectively as the "Company") by The Subscribing Reinsurer(s) Executing the Interests and Liabilities Agreement(s) Attached Hereto (hereinafter referred to as the "Reinsurer") Table of Contents Article Page I Classes of Business Reinsured 3 II Commencement and Termination 3 III Territory (BRMA 51A) 3 IV Exclusions 4 V Retention and Limit 6 VI Reinstatement 6 VII Definitions 7 VIII Other Reinsurance 10 IX Florida Hurricane Catastrophe Fund 10 X Loss Notices and Settlements 10 XI Salvage and Subrogation 11 XII Reinsurance Premium 11 XIII Offset (BRMA 36C) 11 XIV Access to Records (BRMA 1D) 11 XV Liability of the Reinsurer 12 XVI Net Retained Lines (BRMA 32E) 12 XVII Errors and Omissions (BRMA 14F) 12 XVIII Currency (BRMA 12A) 12 XIX Taxes (BRMA 50B) 13 XX Federal Excise Tax (BRMA 17A) 13 XXI Loss Reserves 13 XXII Insolvency 15 XXIII Arbitration 15 XXIV Service of Suit (BRMA 49C) 16 XXV Agency Agreement 17 XXVI Intermediary (BRMA 23A) 17 Article I - Classes of Business Reinsured A. By this Contract the Reinsurer agrees to reinsure the excess liability which may accrue to the Company under its policies, contracts and binders of insurance or reinsurance (hereinafter called "policies") in force on the effective date hereof or issued or renewed on or after that date, and classified by the Company as Fire, Allied Lines, Homeowners (property sections only), Mobile Homeowners (property sections only), Inland Marine, Earthquake, Private Passenger Automobile Physical Damage and Commercial Automobile Physical Damage business, subject to the terms, conditions and limitations hereinafter set forth. B. It is understood that the classes of business reinsured under this Contract are deemed to include: 1. Coverages required for non-resident drivers under the motor vehicle financial responsibility law or the motor vehicle compulsory insurance law or any similar law of any state or province, following the provisions of the Company's policies when they include or are deemed to include so-called "Out of State Insurance" provisions; 2. Coverages required under Section 30 of the Motor Carrier Act of 1980 and/or any amendments thereto. Article II - Commencement and Termination A. This Contract shall become effective on July 1, 1999, with respect to losses arising out of loss occurrences commencing on or after that date, and shall remain in force until June 30, 2000, both days inclusive. B. If this Contract expires while a loss occurrence covered hereunder is in progress, the Reinsurer's liability hereunder shall, subject to the other terms and conditions of this Contract, be determined as if the entire loss occurrence had occurred prior to the expiration of this Contract, provided that no part of such loss occurrence is claimed against any renewal or replacement of this Contract. C. In the event negotiations for the renewal of this Contract are not completed by June 30, 2000, this Contract shall, at the Company's option, be extended to 15 months. Article III - Territory (BRMA 51A) The territorial limits of this Contract shall be identical with those of the Company's policies. Article IV - Exclusions A. This Contract does not apply to and specifically excludes the following: 1. Reinsurance assumed by the Company, except inter-company reinsurance between any of the reinsured companies hereunder. 2. Financial guarantee and insolvency. 3. Business written by the Company on a co-indemnity basis where the Company is not the controlling carrier. 4. Nuclear risks as defined in the "Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance (U.S.A.)"and the "Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance (Canada)" attached to and forming part of this Contract. 5. Liability as a member, subscriber or reinsurer of any Pool, Syndicate or Association; and any combination of insurers or reinsurers formed for the purpose of covering specific perils, specific classes of business or for the purpose of insuring risks located in specific geographical areas. However, this exclusion shall not apply to residual market mechanisms, including but not limited to FAIR Plans, Joint Underwriting Associations, Assigned Risk Plans, or to Coastal Pools, Beach Plans or similar plans, however styled. It is understood and agreed, however, that this reinsurance does not include any increase in liability to the Company resulting from (a) the inability of any other participant in a residual market mechanism, including but not limited to a FAIR Plan, Joint Underwriting Association, Assigned Risk Plan, Coastal Pool, Beach Plan or similar plan, to meet its liability, or (b) any claim against such a residual market mechanism, including but not limited to a FAIR Plan, Joint Underwriting Association, Assigned Risk Plan, Coastal Pool, Beach Plan or similar plan, or any participant therein, including the Company, whether by way of subrogation or otherwise, brought by or on behalf of any insolvency fund. Notwithstanding the foregoing, this exclusion shall not apply to loss assessments made against the Company by the Hawaii Hurricane Relief Fund or loss adjustment expenses incurred by the Company on Hawaii Hurricane Relief Fund policies issued by the Company. 6. All liability of the Company arising by contract, operation of law, or otherwise, from its participation or membership, whether voluntary or involuntary, in any insolvency fund. "Insolvency fund" includes any guaranty fund, insolvency fund, plan, pool, association, fund or other arrangement, however denominated, established or governed, which provides for any assessment of or payment or assumption by the Company of part or all of any claim, debt, charge, fee or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent, or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part. 7. Seepage and pollution in accordance with the full ISO Seepage and Pollution Exclusion, except when such loss is due to explosion or hostile fire, unless otherwise restricted by state law. However, where a court renders an adverse judgment interpreting the ISO Exclusion wording, the Reinsurer will cover that portion of the judgment regarding losses due to pollution. 8. Business produced under the New York Motorcycle Program. B. The Company shall have the option to exclude a class of business subject to this Contract by providing the Reinsurer with prior written notice. Article V - Retention and Limit A. The Company shall retain and be liable for $3,000,000 of ultimate net loss arising out of each loss occurrence. The Reinsurer shall then be liable for the amount by which such ultimate net loss exceeds the Company's retention, but the liability of the Reinsurer under each excess layer shall not exceed $2,000,000 as respects any one loss occurrence. B. No claim shall be made hereunder unless two or more risks are involved in the same loss occurrence. C. The Company shall be the sole judge of what constitutes one risk. Article VI - Reinstatement A. In the event all or any portion of the reinsurance hereunder is exhausted by loss, the amount so exhausted shall be reinstated immediately from the time the loss occurrence commences hereon. For each amount so reinstated the Company agrees to pay additional premium equal to the product of the following: 1. The percentage of the occurrence limit reinstated (based on the loss paid by the Reinsurer); times 2. The earned reinsurance premium for the term of this Contract (exclusive of reinstatement premium). B. Whenever the Company requests payment by the Reinsurer of any loss hereunder, the Company shall submit a statement to the Reinsurer of reinstatement premium due the Reinsurer. If the earned reinsurance premium for the term of this Contract has not been finally determined as of the date of any such statement, the calculation of reinstatement premium due shall be based on the annual deposit premium and shall be readjusted when the earned reinsurance premium for the term of this Contract has been finally determined. Any reinstatement premium shown to be due the Reinsurer as reflected by any such statement (less prior payments, if any) shall be payable by the Company concurrently with payment by the Reinsurer of the requested loss. Any return reinstatement premium shown to be due the Company shall be remitted by the Reinsurer as promptly as possible after receipt and verification of the Company's statement. C. Notwithstanding anything stated herein, the liability of the Reinsurer shall not exceed $2,000,000 as respects loss or losses arising out of any one loss occurrence, or $4,000,000 in all during the term of this Contract. Article VII - Definitions A. "Ultimate net loss" as used herein is defined as the sum or sums (including loss in excess of policy limits, extra contractual obligations and any loss adjustment expense, as hereinafter defined) paid or payable by the Company in settlement of claims and in satisfaction of judgments rendered on account of such claims, after deduction of all salvage, all recoveries and all claims on inuring insurance or reinsurance, whether collectible or not. Nothing herein shall be construed to mean that losses under this Contract are not recoverable until the Company's ultimate net loss has been ascertained. B. "Loss in excess of policy limits" and "extra contractual obligations" as used herein shall be defined as follows: 1. "Loss in excess of policy limits" shall mean 90% of any amount paid or payable by the Company in excess of its policy limits, but otherwise within the terms of its policy, as a result of an action against it by its insured or its insured's assignee to recover damages the insured is legally obligated to pay because of the Company's alleged or actual negligence or bad faith in rejecting a settlement within policy limits, or in discharging its duty to defend or prepare the defense in the trial of an action against its insured, or in discharging its duty to prepare or prosecute an appeal consequent upon such an action. 2. "Extra contractual obligations" shall mean 90% of any punitive, exemplary, compensatory or consequential damages, other than loss in excess of policy limits, paid or payable by the Company as a result of an action against it by its insured or its insured's assignee, which action alleges negligence or bad faith on the part of the Company in handling a claim under a policy subject to this Contract. An extra contractual obligation shall be deemed to have occurred on the same date as the loss covered or alleged to be covered under the policy. However, loss in excess of policy limits and extra contractual obligations arising out of any one loss occurrence shall not exceed an amount equal to 25.0% of the contractual loss under all policies involved in that loss occurrence. Notwithstanding anything stated herein, this Contract shall not apply to any loss in excess of policy limits or any extra contractual obligation incurred by the Company as a result of any fraudulent and/or criminal act by any officer or director of the Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder. C. "Loss occurrence" as used herein is defined as all individual losses directly occasioned by any one disaster, occurrence or loss or series of disasters, occurrences or losses arising out of one occurrence which occurs anywhere in the world, but limited in the United States of America and Canada to any one state of the United States or province of Canada and states or provinces contiguous thereto and to one another. However, the duration and extent of any one "loss occurrence" shall be limited to all individual losses sustained by the Company occurring during any period of 168 consecutive hours arising out of and directly occasioned by the same event, except that the term "loss occurrence" shall be further defined as follows: 1. As regards windstorm, hail, tornado, hurricane, cyclone, including ensuing collapse and water damage, all individual losses sustained by the Company occurring during any period of 72 consecutive hours arising out of and directly occasioned by the same loss occurrence. However, the loss occurrence need not be limited to one state or province or states or provinces contiguous thereto. 2. As regards riot, riot attending a strike, civil commotion, vandalism and malicious mischief, all individual losses sustained by the Company occurring during any period of 72 consecutive hours within the area of one municipality or county and the municipalities or counties contiguous thereto arising out of and directly occasioned by the same loss occurrence. The maximum duration of 72 consecutive hours may be extended in respect of individual losses which occur beyond such 72 consecutive hours during the continued occupation of an assured's premises by strikers, provided such occupation commenced during the aforesaid period. 3. As regards earthquake (the epicenter of which need not necessarily be within the territorial confines referred to above) and fire following directly occasioned by the earthquake, only those individual fire losses which commence during the period of 168 consecutive hours may be included in the Company's "loss occurrence." 4. As regards "freeze," only individual losses directly occasioned by collapse, breakage of glass and water damage (caused by bursting frozen pipes and tanks and melting snow) may be included in the Company's "loss occurrence." Except for those "loss occurrences" referred to in subparagraphs (1) and (2) above, the Company may choose the date and time when any such period of consecutive hours commences, provided that it is not earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, occurrence or loss, and provided that only one such period of 168 consecutive hours shall apply with respect to one loss occurrence. However, as respects those "loss occurrences" referred to in subparagraphs (1) and (2) above, if the disaster, occurrence or loss occasioned by the occurrence is of greater duration than 72 consecutive hours, then the Company may divide that disaster, occurrence or loss into two or more "loss occurrences," provided that no two periods overlap and no individual loss is included in more than one such period, and provided that no period commences earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, occurrence or loss. No individual losses occasioned by an event that would be covered by 72 hours clauses may be included in any "loss occurrence" claimed under the 168 hours provision. Losses arising from the date change to the year 2000, or any other date change, including leap year calculations, shall not in and of themselves be regarded as a "loss occurrence" for purposes of this Contract. Such losses shall include any loss, damage, cost, claim or expense, whether preventative, remedial or otherwise, directly or indirectly arising out of or relating to: a. The calculation, comparison, differentiation, sequencing or processing of data involving the date change to the year 2000, or any other date change, including leap year calculations, by any computer system, hardware, program or software and/or any microchip, integrated circuit or similar device in computer equipment or non-computer equipment, whether the property of the insured or not; or b. Any change, alteration or modification involving the date change to the year 2000 or any other date change, including leap year calculations, to any such computer system, hardware, program or software or any microchip, integrated circuit or similar device in computer equipment or non-computer equipment, whether the property of the insured or not. This subparagraph applies regardless of any other cause or event that contributes concurrently or in any sequence to the loss, damage, cost claim or expense. However, this subparagraph shall not apply in respect of physical damage occurring at the insured's premises arising out of the perils covered by this Contract. None of the circumstances described in subparagraphs (a) and (b) above shall, in and of itself, constitute an event for purposes of this Contract. D. "Loss adjustment expense" as used herein shall mean expenses allocable to the investigation, defense and/or settlement of specific claims, including litigation expenses, interest on judgments, and declaratory judgments expenses incurred in connection with claims under policies reinsured hereunder, but not including office expenses or salaries of the Company's regular employees. E. "Net earned premium" as used herein is defined as gross earned premium of the Company for the classes of business reinsured hereunder, less the earned portion of premiums ceded by the Company for reinsurance which inures to the benefit of this Contract. Article VIII - Other Reinsurance The Company shall be permitted to carry other reinsurance, recoveries under which shall inure to the benefit of the Company and be entirely disregarded in applying all of the provisions of this Contract. Article IX - Florida Hurricane Catastrophe Fund A. Any loss reimbursement the Company receives under the Florida Hurricane Catastrophe Fund (FHCF) as a result of loss occurrences commencing during the term of this Contract shall be deemed to be salvage received by the Company in determining ultimate net loss under this Contract. If the salvage amount is based on the Company's losses in more than one loss occurrence and the FHCF does not designate the amount allocable to each loss occurrence, the salvage amount shall be prorated in the proportion that the Company's losses in each loss occurrence bear to the Company's total losses arising out of all loss occurrences to which the salvage applies. If, as a result of such salvage, the loss to the Reinsurer under any excess layer of this Contract in any one loss occurrences is less than the amount previously paid by the Reinsurer under that excess layer, the Company shall promptly remit the difference to the Reinsurer. B. Any return reinstatement premium due the Company under any excess layer of this Contract as a result of a salvage payment made to the Reinsurer under that excess layer in accordance with paragraph A shall be payable by the Reinsurer concurrently with payment by the Company of the salvage amount. C. Any reimbursement premiums or emergency assessment paid by the Company under the FHCF shall be deemed to be premiums paid for inuring reinsurance. Article X - Loss Notices and Settlements A. Whenever losses sustained by the Company appear likely to result in a claim hereunder, the Company shall notify the Reinsurer, and the Reinsurer shall have the right to participate in the adjustment of such losses at its own expense. B. All loss settlements made by the Company, provided they are within the terms of this Contract, shall be binding upon the Reinsurer, and the Reinsurer agrees to pay all amounts for which it may be liable upon receipt of reasonable evidence of the amount paid (or scheduled to be paid) by the Company. Article XI - Salvage and Subrogation The Reinsurer shall be credited with salvage (i.e., reimbursement obtained or recovery made by the Company, less the actual cost, excluding salaries of officials and employees of the Company and sums paid to attorneys as retainer, of obtaining such reimbursement or making such recovery) on account of claims and settlements involving reinsurance hereunder. Salvage thereon shall always be used to reimburse the excess carriers in the reverse order of their priority according to their participation before being used in any way to reimburse the Company for its primary loss. The Company hereby agrees to enforce its rights to salvage or subrogation relating to any loss, a part of which loss was sustained by the Reinsurer, and to prosecute all claims arising out of such rights. Article XII - Reinsurance Premium A. As premium for the reinsurance provided hereunder, the Company shall pay the Reinsurer 1.26% of its net earned premium for the term of this Contract, subject to a minimum premium of $126,000. B. The Company shall pay the Reinsurer a deposit premium of $180,000 in four equal installments of $45,000 on July 1 and October 1, 1999 and January 1 and April 1, 2000. C. Within 60 days after the expiration of this Contract, the Company shall provide a report to the Reinsurer setting forth the premium due hereunder, computed in accordance with paragraph A, and any additional premium due the Reinsurer or return premium due the Company shall be remitted promptly. Article XIII - Offset (BRMA 36C) The Company and the Reinsurer shall have the right to offset any balance or amounts due from one party to the other under the terms of this Contract. The party asserting the right of offset may exercise such right any time whether the balances due are on account of premiums or losses or otherwise. Article XIV - Access to Records (BRMA 1D) The Reinsurer or its designated representatives shall have access at any reasonable time to all records of the Company which pertain in any way to this reinsurance. Article XV - Liability of the Reinsurer A. The liability of the Reinsurer shall follow that of the Company in every case and be subject in all respects to all the general and specific stipulations, clauses, waivers and modifications of the Company's policies and any endorsements thereon. However, in no event shall this be construed in any way to provide coverage outside the terms and conditions set forth in this Contract. B. Nothing herein shall in any manner create any obligations or establish any rights against the Reinsurer in favor of any third party or any persons not parties to this Contract. Article XVI - Net Retained Lines (BRMA 32E) A. This Contract applies only to that portion of any policy which the Company retains net for its own account (prior to deduction of any underlying reinsurance specifically permitted in this Contract), and in calculating the amount of any loss hereunder and also in computing the amount or amounts in excess of which this Contract attaches, only loss or losses in respect of that portion of any policy which the Company retains net for its own account shall be included. B. The amount of the Reinsurer's liability hereunder in respect of any loss or losses shall not be increased by reason of the inability of the Company to collect from any other reinsurer(s), whether specific or general, any amounts which may have become due from such reinsurer(s), whether such inability arises from the insolvency of such other reinsurer(s) or otherwise. Article XVII - Errors and Omissions (BRMA 14F) Inadvertent delays, errors or omissions made in connection with this Contract or any transaction hereunder shall not relieve either party from any liability which would have attached had such delay, error or omission not occurred, provided always that such error or omission is rectified as soon as possible after discovery. Article XVIII - Currency (BRMA 12A) A. Whenever the word "Dollars" or the "$" sign appears in this Contract, they shall be construed to mean United States Dollars and all transactions under this Contract shall be in United States Dollars. B. Amounts paid or received by the Company in any other currency shall be converted to United States Dollars at the rate of exchange at the date such transaction is entered on the books of the Company. Article XIX - Taxes (BRMA 50B) In consideration of the terms under which this Contract is issued, the Company will not claim a deduction in respect of the premium hereon when making tax returns, other than income or profits tax returns, to any state or territory of the United States of America or the District of Columbia. Article XX - Federal Excise Tax (BRMA 17A) (Applicable to those reinsurers, excepting Underwriters at Lloyd's London and other reinsurers exempt from Federal Excise Tax, who are domiciled outside the United States of America.) A. The Reinsurer has agreed to allow for the purpose of paying the Federal Excise Tax the applicable percentage of the premium payable hereon (as imposed under Section 4371 of the Internal Revenue Code) to the extent such premium is subject to the Federal Excise Tax. B. In the event of any return of premium becoming due hereunder the Reinsurer will deduct the applicable percentage from the return premium payable hereon and the Company or its agent should take steps to recover the tax from the United States Government. Article XXI - Loss Reserves A. If the Reinsurer is unauthorized in any state of the United States of America or the District of Columbia or the Reinsurer has an A. M. Best rating equal to or below B++, the Reinsurer agrees to fund its share of the Company's ceded outstanding loss and loss adjustment expense reserves (including all case reserves plus any reasonable amount estimated to be unreported from known loss occurrences) by: 1. Clean, irrevocable and unconditional letters of credit issued and confirmed, if confirmation is required by the insurance regulatory authorities involved, by a bank or banks meeting the NAIC Securities Valuation Office credit standards for issuers of letters of credit and acceptable to said insurance regulatory authorities; and/or 2. Escrow accounts for the benefit of the Company; and/or 3. Cash advances; if, without such funding, a penalty would accrue to the Company on any financial statement it is required to file with the insurance regulatory authorities involved. The Reinsurer, at its sole option, may fund in other than cash if its method and form of funding are acceptable to the insurance regulatory authorities involved. B. With regard to funding in whole or in part by letters of credit, it is agreed that each letter of credit will be in a form acceptable to insurance regulatory authorities involved, will be issued for a term of at least one year and will include an "evergreen clause," which automatically extends the term for at least one additional year at each expiration date unless written notice of non-renewal is given to the Company not less than 30 days prior to said expiration date. The Company and the Reinsurer further agree, notwithstanding anything to the contrary in this Contract, that said letters of credit may be drawn upon by the Company or its successors in interest at any time, without diminution because of the insolvency of the Company or the Reinsurer, but only for one or more of the following purposes: 1. To reimburse itself for the Reinsurer's share of losses and/or loss adjustment expense paid under the terms of policies reinsured hereunder, unless paid in cash by the Reinsurer; 2. To reimburse itself for the Reinsurer's share of any other amounts claimed to be due hereunder, unless paid in cash by the Reinsurer; 3. To fund a cash account in an amount equal to the Reinsurer's share of any ceded outstanding loss and loss adjustment expense reserves reserves (including all case reserves plus any reasonable amount estimated to be unreported from known loss occurrences) funded by means of a letter of credit which is under non-renewal notice, if said letter of credit has not been renewed or replaced by the Reinsurer 10 days prior to its expiration date; 4. To refund to the Reinsurer any sum in excess of the actual amount required to fund the Reinsurer's share of the Company's ceded outstanding loss and loss adjustment expense reserves reserves (including all case reserves plus any reasonable amount estimated to be unreported from known loss occurrences), if so requested by the Reinsurer. In the event the amount drawn by the Company on any letter of credit is in excess of the actual amount required for B(1) or B(3), or in the case of B(2), the actual amount determined to be due, the Company shall promptly return to the Reinsurer the excess amount so drawn. Article XXII - Insolvency A. In the event of the insolvency of one or more of the reinsured companies, this reinsurance shall be payable directly to the company or to its liquidator, receiver, conservator or statutory successor immediately upon demand, with reasonable provision for verification, on the basis of the liability of the company without diminution because of the insolvency of the company or because the liquidator, receiver, conservator or statutory successor of the company has failed to pay all or a portion of any claim. It is agreed, however, that the liquidator, receiver, conservator or statutory successor of the company shall give written notice to the Reinsurer of the pendency of a claim against the company indicating the policy or bond reinsured which claim would involve a possible liability on the part of the Reinsurer within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership, and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses that it may deem available to the company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the Court, against the company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the company solely as a result of the defense undertaken by the Reinsurer. B. Where two or more reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Contract as though such expense had been incurred by the company. C. It is further understood and agreed that, in the event of the insolvency of one or more of the reinsured companies, the reinsurance under this Contract shall be payable directly by the Reinsurer to the company or to its liquidator, receiver or statutory successor, except as provided by Section 4118(a) of the New York Insurance Law or except (1) where this Contract specifically provides another payee of such reinsurance in the event of the insolvency of the company or (2) where the Reinsurer with the consent of the direct insured or insureds has assumed such policy obligations of the company as direct obligations of the Reinsurer to the payees under such policies and in substitution for the obligations of the company to such payees. Article XXIII - Arbitration A. As a condition precedent to any right of action hereunder, in the event of any dispute or difference of opinion hereafter arising with respect to this Contract, it is hereby mutually agreed that such dispute or difference of opinion shall be submitted to arbitration. One Arbiter shall be chosen by the Company, the other by the Reinsurer, and an Umpire shall be chosen by the two Arbiters before they enter upon arbitration, all of whom shall be active or retired disinterested executive officers of insurance or reinsurance companies or Lloyd's London Underwriters. In the event that either party should fail to choose an Arbiter within 30 days following a written request by the other party to do so, the requesting party may choose two Arbiters who shall in turn choose an Umpire before entering upon arbitration. If the two Arbiters fail to agree upon the selection of an Umpire within 30 days following their appointment, each Arbiter shall nominate three candidates within 10 days thereafter, two of whom the other shall decline, and the decision shall be made by drawing lots. B. Each party shall present its case to the Arbiters within 30 days following the date of appointment of the Umpire. The Arbiters shall consider this Contract as an honorable engagement rather than merely as a legal obligation and they are relieved of all judicial formalities and may abstain from following the strict rules of law. The decision of the Arbiters shall be final and binding on both parties; but failing to agree, they shall call in the Umpire and the decision of the majority shall be final and binding upon both parties. Judgment upon the final decision of the Arbiters may be entered in any court of competent jurisdiction. C. If more than one reinsurer is involved in the same dispute, all such reinsurers shall constitute and act as one party for purposes of this Article and communications shall be made by the Company to each of the reinsurers constituting one party, provided, however, that nothing herein shall impair the rights of such reinsurers to assert several, rather than joint, defenses or claims, nor be construed as changing the liability of the reinsurers participating under the terms of this Contract from several to joint. D. Each party shall bear the expense of its own Arbiter, and shall jointly and equally bear with the other the expense of the Umpire and of the arbitration. In the event that the two Arbiters are chosen by one party, as above provided, the expense of the Arbiters, the Umpire and the arbitration shall be equally divided between the two parties. E. Any arbitration proceedings shall take place at El Segundo, California unless otherwise mutually agreed upon by the parties to this Contract, but notwithstanding the location of the arbitration, all proceedings pursuant hereto shall be governed by the law of the state in which the Company has its principal office. Article XXIV - Service of Suit (BRMA 49C) (Applicable if the Reinsurer is not domiciled in the United States of America, and/or is not authorized in any State, Territory or District of the United States where authorization is required by insurance regulatory authorities) A. It is agreed that in the event the Reinsurer fails to pay any amount claimed to be due hereunder, the Reinsurer, at the request of the Company, will submit to the jurisdiction of a court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of the Reinsurer's rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States. B. Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefor, the Reinsurer hereby designates the party named in its Interests and Liabilities Agreement, or if no party is named therein, the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Contract. Article XXV - Agency Agreement If more than one reinsured company is named as a party to this Contract, the first named company shall be deemed the agent of the other reinsured companies for purposes of sending or receiving notices required by the terms and conditions of this Contract, and for purposes of remitting or receiving any monies due any party. Article XXVI - Intermediary (BRMA 23A) E. W. Blanch Co., Inc. is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. All communications (including but not limited to notices, statements, premium, return premium, commissions, taxes, losses, loss adjustment expense, salvages and loss settlements) relating thereto shall be transmitted to the Company or the Reinsurer through E. W. Blanch Co., Inc., 3600 West 80th Street, Minneapolis, Minnesota 55431. Payments by the Company to the Intermediary shall be deemed to constitute payment to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed to constitute payment to the Company only to the extent that such payments are actually received by the Company. In Witness Whereof, the Company by its duly authorized representative has executed this Contract as of the date undermentioned at: Calabasas, California, this ____ day of _______________ in the year _____. --------------------------------------------------- Condor Insurance Company Amwest Surety Insurance Company Far West Insurance Company U.S.A. NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE 1. This Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks. 2. Without in any way restricting the operation of paragraph (1) of this Clause, this Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to: I. Nuclear reactor power plants including all auxiliary property on the site, or II. Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and "critical facilities" as such, or III. Installations for fabricating complete fuel elements or for processing substantial quantities of "special nuclear material," and for reprocessing, salvaging, chemically separating, storing or disposing of "spent" nuclear fuel or waste materials, or IV. Installations other than those listed in paragraph (2) III above using substantial quantities of radioactive isotopes or other products of nuclear fission. 3. Without in any way restricting the operations of paragraphs (1) and (2) hereof, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith except that this paragraph (3) shall not operate (a) where Reassured does not have knowledge of such nuclear reactor power plant or nuclear installation, or (b) where said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. However on and after 1st January 1960 this sub-paragraph (b) shall only apply provided the said radioactive contamination exclusion provision has been approved by the Governmental Authority having jurisdiction thereof. 4. Without in any way restricting the operations of paragraphs (1), (2) and (3) hereof, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against. 5. It is understood and agreed that this Clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Reassured to be the primary hazard. 6. The term "special nuclear material" shall have the meaning given it in the Atomic Energy Act of 1954 or by any law amendatory thereof. 7. Reassured to be sole judge of what constitutes: (a) substantial quantities, and (b) the extent of installation, plant or site. Note.-Without in any way restricting the operation of paragraph (1) hereof, it is understood and agreed that (a) all policies issued by the Reassured on or before 31st December 1957 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply. (b) with respect to any risk located in Canada policies issued by the Reassured on or before 31st December 1958 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply. 12/12/57 N.M.A. 1119 BRMA 35B NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE CANADA 1. This Agreement does not cover any loss or liability accruing to the Reinsured, directly or indirectly, and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks. 2. Without in any way restricting the operation of paragraph 1 of this clause, this Agreement does not cover any loss or liability accruing to the Reinsured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to: (a) nuclear reactor power plants including all auxiliary property on the site, or (b) any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and critical facilities as such, or (c) installations for fabricating complete fuel elements or for processing substantial quantities of prescribed substances, and for reprocessing, salvaging, chemically separating, storing or disposing of spent nuclear fuel or waste materials, or (d) installations other than those listed in (c) above using substantial quantities of radioactive isotopes or other products of nuclear fission. 3. Without in any way restricting the operation of paragraphs 1 and 2 of this clause, this Agreement does not cover any loss or liability by radioactive contamination accruing to the Reinsured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith, except that this paragraph 3 shall not operate: (a) where the Reinsured does not have knowledge of such nuclear reactor power plant or nuclear installation, or (b) where the said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. 4. Without in any way restricting the operation of paragraphs 1, 2 and 3 of this clause, this Agreement does not cover any loss or liability by radioactive contamination accruing to the Reinsured, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against. 5. This clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Reinsured to be the primary hazard. 6. The term "prescribed substances" shall have the meaning given to it by the Atomic Energy Control Act R.S.C. 1985(c), A-16 or by any law amendatory thereof. 7. Reinsured to be sole judge of what constitutes: (a) substantial quantities, and (b) the extent of installation, plant or site. 8. Without in any way restricting the operation of paragraphs 1, 2, 3 and 4 of this clause, this Agreement does not cover any loss or liability accruing to the Reinsured, directly or indirectly, and whether as Insurer or Reinsurer, caused: (1) by any nuclear incident, as defined in the Nuclear Liability Act or any other nuclear liability act, law or statute, or any law amendatory thereof or nuclear explosion, except for ensuing loss or damage which results directly from fire, lightning or explosion of natural, coal or manufactured gas; (2) by contamination by radioactive material. NOTE: Without in any way restricting the operation of paragraphs 1, 2, 3 and 4 of this clause, paragraph 8 of this clause shall only apply to all original contracts of the Reinsured, whether new, renewal or replacement, which become effective on or after December 31, 1992. Addendum No. 1 to the Excess Catastrophe Reinsurance Contract Effective: July 1, 1999 issued to Condor Insurance Company Calabasas, California Amwest Surety Insurance Company Omaha, Nebraska and Far West Insurance Company Omaha, Nebraska (hereinafter referred to collectively as the "Company") It is Hereby Agreed, effective October 1, 1999, that subparagraph 8 of paragraph A of Article IV - Exclusions - shall be deleted and the following substituted therefor: "8. Business produced under the California and New York Motorcycle Program." The provisions of this Contract shall remain otherwise unchanged. In Witness Whereof, the Company by its duly authorized representative has executed this Addendum as of the date undermentioned at: Calabasas, California, this _____ day of ______________ in the year _____. --------------------------------------------------- Condor Insurance Company Amwest Surety Insurance Company Far West Insurance Company Addendum No. 1 to the Interests and Liabilities Agreement of Gerling Global Reinsurance Corporation of America New York, New York (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: July 1, 1999 issued to Condor Insurance Company Calabasas, California Amwest Surety Insurance Company Omaha, Nebraska and Far West Insurance Company Omaha, Nebraska (hereinafter referred to collectively as the "Company") The Subscribing Reinsurer hereby accepts Addendum No. 1, as duly executed by the Company, as part of the Contract, effective October 1, 1999. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Addendum as of the date undermentioned at: New York, New York, this ____ day of ________________ in the year ____. --------------------------------------------------- Gerling Global Reinsurance Corporation of America Addendum No. 1 to the Interests and Liabilities Agreement of Hannover Ruckversicherungs-Aktiengesellschaft Hannover, Germany (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: July 1, 1999 issued to Condor Insurance Company Calabasas, California Amwest Surety Insurance Company Omaha, Nebraska and Far West Insurance Company Omaha, Nebraska (hereinafter referred to collectively as the "Company") The Subscribing Reinsurer hereby accepts Addendum No. 1, as duly executed by the Company, as part of the Contract, effective October 1, 1999. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Addendum as of the date undermentioned at: Hannover, Germany, this ____ day of ________________ in the year ____. --------------------------------------------------- Hannover Ruckversicherungs-Aktiengesellschaft Addendum No. 1 to the Interests and Liabilities Agreement of Underwriters Reinsurance Company Concord, New Hampshire (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: July 1, 1999 issued to Condor Insurance Company Calabasas, California Amwest Surety Insurance Company Omaha, Nebraska and Far West Insurance Company Omaha, Nebraska (hereinafter referred to collectively as the "Company") The Subscribing Reinsurer hereby accepts Addendum No. 1, as duly executed by the Company, as part of the Contract, effective October 1, 1999. In Witness Whereof, the Subscribing Reinsurer by its duly authorized representative has executed this Addendum as of the date undermentioned at: Calabasas, California, this ____ day of ________________ in the year ____. --------------------------------------------------- Underwriters Reinsurance Company Addendum No. 1 to the Interests and Liabilities Agreement of Certain Underwriting Members of Lloyd's shown in the Signing Schedule attached hereto (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: July 1, 1999 issued to Condor Insurance Company Calabasas, California Amwest Surety Insurance Company Omaha, Nebraska and Far West Insurance Company Omaha, Nebraska (hereinafter referred to collectively as the "Company") The Subscribing Reinsurer hereby accepts Addendum No. 1, as duly executed by the Company, as part of the Contract, effective October 1, 1999. Signed for and on behalf of the Subscribing Reinsurer in the Signing Schedule attached hereto. Addendum No. 1 to the Interests and Liabilities Agreement of Certain Insurance Companies shown in the Signing Schedule(s) attached hereto (hereinafter referred to as the "Subscribing Reinsurer") with respect to the Excess Catastrophe Reinsurance Contract Effective: July 1, 1999 issued to Condor Insurance Company Calabasas, California Amwest Surety Insurance Company Omaha, Nebraska and Far West Insurance Company Omaha, Nebraska (hereinafter referred to collectively as the "Company") The Subscribing Reinsurer hereby accepts Addendum No. 1, as duly executed by the Company, as part of the Contract, effective October 1, 1999. Signed for and on behalf of the Subscribing Reinsurer in the Signing Schedule(s) attached hereto. -----END PRIVACY-ENHANCED MESSAGE-----