-----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, EFRIWUVj1VDPQXPVrcqOs3sTUBWtT3uuuxD8bm4O1yP8xhhTR9bK64Mb0aRvnhUr Db+GbFSLuoVpnDuz22kvdw== /in/edgar/work/20000815/0000780118-00-000010/0000780118-00-000010.txt : 20000922 0000780118-00-000010.hdr.sgml : 20000921 ACCESSION NUMBER: 0000780118-00-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMWEST INSURANCE GROUP INC CENTRAL INDEX KEY: 0000780118 STANDARD INDUSTRIAL CLASSIFICATION: [6351 ] IRS NUMBER: 952672141 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09580 FILM NUMBER: 701272 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 10-Q 1 0001.txt FORM 10-Q QUARTERLY FILING FOR AIG SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____ to ____ Commission file number: 1-9580 AMWEST INSURANCE GROUP, INC. (Exact name of registrant as specified in its charter) Delaware 95-2672141 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5230 Las Virgenes Rd. Calabasas, California 91302 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (818) 871-2000 --------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . As of August 10, 2000, 4,322,555 shares of common stock, $.01 par value, were outstanding. AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES INDEX Part I. FINANCIAL INFORMATION: Item 1 Consolidated Statements of Operations for the three months and six months ended June 30, 2000 and 1999 (unaudited) 3 Consolidated Balance Sheets as of June 30, 2000 (unaudited) and December 31, 1999 4 Consolidated Statements of Cash Flows for the three months and six months ended June 30, 2000 and 1999 (unaudited) 6 Notes to Interim Consolidated Financial Statements 8 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3 Quantitative and Qualitative Disclosures about Market Risk No significant changes from the Company's Annual Report on Form 10-K for the year ended December 31, 1999 Part II. OTHER INFORMATION: Item 1 Legal Proceedings 14 Item 2 Changes in Securities 14 Item 3 Defaults Upon Senior Securities 14 Item 4 Submission of Matters to a Vote of Security Holders 14 Item 5 Other Information 15 Item 6 Exhibits and Reports on Form 8-K 15 PART I - FINANCIAL INFORMATION
Item 1 AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (In thousands, except per share data) Three months ended Six months ended June 30, June 30, -------- -------- 2000 1999 2000 1999 ---- ---- ---- ---- OPERATIONS Gross premiums written $ 43,275 $ 36,042 $ 79,947 $ 68,177 ---------------- ---------------- ----------------- ---------------- Net premiums earned $ 27,170 $ 26,986 $ 57,907 $ 53,979 Net investment income 1,575 1,705 3,452 3,474 Net realized investment gain (loss) (244) 1,297 911 2,037 Commissions and fees 481 522 1,324 1,129 ---------------- ---------------- ----------------- ---------------- Total revenues 28,982 30,510 63,594 60,619 ---------------- ---------------- ----------------- ---------------- Net losses and loss adjustment expenses 28,243 10,003 41,791 19,089 Policy acquisition costs 13,807 12,736 29,061 25,923 General operating costs 3,761 4,558 7,814 8,497 Interest expense 630 493 1,250 1,047 ---------------- ---------------- ----------------- ---------------- Total expenses 46,441 27,790 79,916 54,556 ---------------- ---------------- ----------------- ---------------- Income (loss) before income taxes (17,459) 2,720 (16,322) 6,063 Provision (benefit) for income taxes (5,467) 980 (5,133) 1,958 ---------------- ---------------- ----------------- ---------------- Net income (loss) $ (11,992) $ 1,740 $ (11,189) $ 4,105 ================ ================ ================= ================ Earnings (loss) per common share: Basic $ (2.77) $ 0.40 $ (2.58) $ 0.95 ================ ================ ================= ================ Diluted $ (2.77) $ 0.40 $ (2.58) $ 0.95 ================ ================ ================= ================ COMPREHENSIVE INCOME (LOSS) Net income (loss) $ (11,992) $ 1,740 $ (11,189) $ 4,105 Other comprehensive income (loss): Unrealized gains(losses) on securities, net of income taxes of $(440) and $397 for the three months ended June 30, 2000 and 1999, and $(246) and $804 for the six months ended June 30, 2000 and 1999, respectively 856 (771) 478 (1,560) Reclassification adjustment for gains included in net income, net of income taxes of $(28) and $280 for the three months ended June 30, 2000 and 1999, and $269 and $467 for the six months ended June 30, 2000 and 1999, respectively 55 (542) (523) (907) ---------------- ---------------- ----------------- ---------------- Comprehensive income (loss) $ (11,081) $ 427 $ (11,234) $ 1,638 ================ ================ ================= ================ See accompanying notes to interim consolidated financial statements.
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands) ASSETS June 30, December 31, 2000 1999 -------------------- --------------------- (unaudited) Investments: Fixedmaturities, available-for-sale (amortized cost of $89,578 and $104,193 at June 30, 2000 and December 31, 1999 respectively) $86,751 $100,892 Common equity securities, available-for-sale (cost of $3,855 and $2,886 at June 30, 2000 and December 31, 1999, respectively) 5,134 4,199 Preferred equity securities, available-for-sale (cost of $3,826 and $4,905 at June 30, 2000 and December 31, 1999, respectively) 3,390 5,073 Other invested assets (cost of $7,858 and $7,725 at June 30, 2000 and December 31, 1999, respectively) 7,977 7,749 Short-term investments 3,226 2,691 -------------------- --------------------- Total investments 106,478 120,604 Cash and cash equivalents 5,070 15,821 Accrued investment income 1,585 1,654 Agents balances and premiums receivable (less allowance for doubtful accounts of $1,260 at June 30, 2000 and December 31, 1999, respectively) 21,711 15,365 Contract settlement funds and collateral receivable 22,234 16,270 Reinsurance recoverable: Paid loss and loss adjustment expenses 6,089 5,401 Unpaid loss and loss adjustment expenses 28,021 21,903 Ceded unearned premiums 16,633 6,747 Deferred policy acquisition costs 19,411 22,147 Furniture, equipment and improvements, net 5,144 5,635 Income taxes recoverable 4,684 1,472 Other assets 11,164 8,676 -------------------- --------------------- Total assets $248,224 $241,695 ==================== =====================
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued) (Dollars in thousands, except share data) LIABILITIES AND STOCKHOLDERS' EQUITY June 30, December 31, 2000 1999 -------------------- --------------------- (unaudited) Liabilities: Unpaid losses and loss adjustment expenses $ 68,767 $ 56,466 Unearned premiums 61,511 51,736 Funds held 43,986 50,271 Bank indebtedness 14,500 14,500 Amounts due to reinsurers 4,305 2,181 Deferred Federal income taxes (535) 494 Other liabilities 10,166 9,245 -------------------- --------------------- Total liabilities 202,700 184,893 Stockholders' equity: Preferred stock, $.01 par value, 1,000,000 shares authorized; issued and outstanding: none - - Common stock, $.01 par value, 10,000,000 shares authorized, issued and outstanding: 4,319,498 at June 30, 2000 and 4,328,592 at December 31, 1999 43 43 Additional paid-in capital 19,680 19,724 Accumulated other comprehensive income (1,231) (1,186) Retained earnings 27,032 38,221 -------------------- --------------------- Total stockholders' equity 45,524 56,802 -------------------- --------------------- Total liabilities and stockholders' equity $248,224 $241,695 ==================== ===================== See accompanying notes to interim consolidated financial statements.
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (Dollars in thousands) Three months ended Six months ended June 30, June 30, -------- -------- 2000 1999 2000 1999 ---- ---- ---- ---- Cash flows from operating activities: Net income (loss) $(11,992) $ 1,740 $ (11,189) $ 4,105 Adjustments to reconcile net income to cash provided by operating activities: Change in agents' balances and premiums receivable and unearned premiums 3,911 (699) 3,429 (3,776) Change in accrued investment income 65 58 69 (87) Change in unpaid losses and loss adjustment expenses 13,941 (110) 12,301 (3,312) Change in reinsurance recoverable on paid and unpaid losses and loss adjustment expenses and ceded unearned premiums (16,448) 2,854 (16,692) (234) Change in amounts due to/from reinsurers 7,541 (6,250) 2,124 (4,062) Change in other assets and other liabilities (6,844) (1,988) (7,531) (3,011) Change in income taxes, net (5,617) 326 (4,218) 1,327 Change in deferred policy acquisition costs 5,739 (1,565) 2,736 (2,065) Net realized gain (loss) on sale of investments 244 (1,297) (911) (2,037) Net realized (gain)loss on sale of fixed assets 3 (1) 8 (5) Provision for depreciation and amortization 443 454 904 947 ---------------- ------------- ---------------- -------------- Net cash used by operating activities (9,014) (6,478) (18,970) (12,210) Cash flows from investing activities: Cash received from investments sold prior to maturity 13,727 12,489 25,003 27,418 Cash received from investments matured or called 1,852 3,613 3,371 6,374 Cash paid for investments acquired (5,531) (13,907) (13,400) (30,928) Amortization of discount on bonds (5) 47 (5) 93 Capital expenditures, net (191) (495) (421) (1,150) Acquisition of agencies, net - - - 256 ---------------- ------------- ---------------- -------------- Net cash provided by investing activities 9,852 1,747 14,548 2,063
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (continued) (Dollars in thousands) Three months ended Six months ended June 30, June 30, -------- -------- 2000 1999 2000 1999 ---- ---- ---- ---- Cash flows from financing activities: Proceeds from issuance of common stock 22 51 52 409 Repurchase of common stock (96) - (96) - Change in funds held (2,736) 2,566 (6,285) 9,863 Dividends paid - (389) - (777) ------------- ---------------- ---------------- -------------- Net cash provided (used) by financing activities (2,810) 2,228 (6,329) 9,495 ---------------- ------------- ---------------- -------------- Net decrease in cash and cash equivalents (1,972) (2,503) (10,751) (652) Cash and cash equivalents at beginning of period 7,042 4,282 15,821 2,431 ---------------- ------------- ---------------- -------------- Cash and cash equivalents at end of period $ 5,070 $ 1,779 $5,070 $1,779 ================ ============= ================ ============== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 630 $493 $1,250 $1,047 Income taxes 150 654 152 655 See accompanying notes to interim consolidated financial statements.
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES Notes to Interim Consolidated Financial Statements (unaudited) (1) Basis of Presentation The interim consolidated financial statements presented herein are unaudited and, in the opinion of management, reflect all adjustments necessary for a fair presentation of results for such periods. All such adjustments are of a normal, recurring nature. The results of operations for any interim period are not necessarily indicative of results for the full year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. (2) Bank Covenant The Company has entered into a revolving credit agreement, as amended, with Union Bank for $15,000,000. At June 30, 2000, $14,500,000 of the $15,000,000 line 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 first installment is due September 30, 2001. The interest rate at June 30, 2000 was 8.4%. The credit agreement contains certain financial covenants with respect to capital expenditures, business acquisitions, liquidity ratio, leverage ratio, tangible net worth, net profit and dividend payments. The Company is currently in violation of Section 5.13 of the revolving credit agreement pertaining to a minimum of $32,500,000 in policyholders' surplus as well as Section 5.14 pertaining to a maximum operating leverage ratio of 3:1 for Amwest Surety Insurance Company and its subsidiaries. The Company has provided Union Bank with pertinent information regarding an action plan and is currently seeking a waiver and amendment regarding this covenant. Should the Company be unsuccessful in obtaining a waiver and amendment regarding this covenant, the Company would be deemed to be in default and all sums then owing would be due and immediately payable. In such case, The Company would attempt to refinance the amounts owed to Union Bank, however, no assurances can be given that the Company would be successful in doing so. (3) Earnings Per Share Basic EPS is calculated based on the weighted average number of common shares outstanding and diluted EPS includes the effects of dilutive potential common shares. The calculation of basic and diluted EPS for the three months ended June 30, 2000 and 1999 is as follows:
Three months ended June 30, Income (Loss) Shares Per-Share (Numerator) (Denominator) Amount ($ in thousands) (Dollars) ------------------- -------------------- ------------------- Basic EPS: 2000 $ (11,992) 4,332,889 $ (2.77) 1999 $ 1,740 4,318,254 $ .40 Effect of Dilutive Securities: 2000 0 1999 6,910 Diluted EPS: 2000 $ (11,992) 4,332,889 $ (2.77) 1999 $ 1,740 4,325,164 $ .40
Diluted EPS for 2000 is the same as basic EPS because the result of the calculation is antidilutive due to the net loss reported for the three months ended June 30, 2000. Dilutive securities represent the Company's stock options. Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Gross premiums written increased 20% and 17% from $36,042,000 and $68,177,000 for the three months and six months ended June 30, 1999, respectively, to $43,275,000 and $79,947,000 for the three months and six months ended June 30, 2000, respectively. Gross premiums for the surety business increased 11% and 12% from $28,916,000 and $53,949,000 for the three months and six months ended June 30, 1999, respectively, to $31,960,000 and $60,662,000 for the three months and six months ended June 30, 2000, respectively. The increase is attributable to increased writings in the commercial surety and court operations. Gross premiums for the property and casualty business increased 59% and 36% from $7,126,000 and $14,228,000 for the three months and six months ended June 30, 1999, respectively, to $11,315,000 and $19,285,000 for the three months and six months ended June 30, 2000, respectively. The increase is primarily due to increased writings in the commercial trucking product, the California specialty motorcycle program and the Florida homeowners program. As of April 1, 2000, the Company entered into a 35% quota share reinsurance agreement on it's surety business with Swiss Reinsurance America Corporation. Premiums ceded under this contract amounted to $18,890,000 during the three months ended June 30, 2000. With this quota share agreement in place, net written premium decreased by 26% for the quarter ended June 30, 2000. Net premiums earned increased 1% and 7% from $26,986,000 and $53,979,000 for the three months and six months ended June 30, 1999, respectively, to $27,170,000 and $57,907,000 for the three months and six months ended June 30, 2000, respectively. The growth in net premiums earned for the three months and six months ended June 30, 2000 was lower than growth in premiums written due to higher premium cessions in 2000 versus 1999 on the surety quota share reinsurance. The Company generally earns premiums ratably over the assigned bond terms for the surety business and the policy term for the specialty property and casualty business. Net investment income decreased 8% and 1% from $1,705,000 and $3,474,000 for the three months and six months ended June 30, 1999, respectively, to $1,575,000 and $3,452,000 for the three months and six months ended June 30, 2000, respectively. The decrease is due to a decrease in the amount of average invested assets from $126,311,000 at June 30, 1999 to $113,541,000 at June 30, 2000. Realized investment gains decreased from $1,297,000 and $2,037,000 for the three months and six months ended June 30, 1999, respectively, to a loss of $244,000 and a gain of $911,000 for the three months and six months ended June 30, 2000, respectively. The investments sold during the three months and six months ended June 30, 2000 were primarily equity securities and convertible bonds. Commissions and fees decreased 8% and increased 17% from $522,000 and $1,129,000 for the three months and six months ended June 30, 1999, respectively, to $481,000 and $1,324,000 for the three months and six months ended June 30, 2000, respectively. The increase for the six months ended June 30, 2000 is primarily due to an increase in fee income on the funds control business offset by a decrease in fee income from the Liberty Retail Bail division for the three months ended June 30, 2000. Net losses and loss adjustment expenses increased 182% and 119% from $10,003,000 and $19,089,000 for the three months and six months ended June 30, 1999, respectively, to $28,243,000 and $41,791,000 for the three months and six months ended June 30, 2000, respectively. The loss and loss adjustment expense ratio for the surety operations increased from 18% and 22% for the three months and six months ended June 30, 1999, respectively, to 103% and 66% for the three months and six months ended June 30, 2000, respectively, primarily due to net adverse development of $4,676,000 for the 1999 loss year, increases in net reserves for the 2000 loss year to bring it in line with the development trends of the 1999 loss year, and changes in the Company's reinsurance program which resulted in an increase in retained losses. The 1999 and 2000 loss year development is the result of claims on contract bonds with larger penal amounts, generally in excess of $1,000,000. An analysis of the development on these bonds indicate that these larger obligations tend to develop at a slower pace and are generally more susceptible to issues of severity than smaller, less complex obligations. The loss and loss adjustment expense ratio for the property and casualty operations decreased from 112% to 106% for the three months ended June 30, 1999 and 2000, respectively, and increased slightly from 88% to 90% for the six months ended June 30, 1999 and 2000, respectively. The commercial trucking insurance market has continued to firm and the Company has been able to affect rate increases without sacrificing policy retention. Policy acquisition costs increased as a percentage of net premiums earned from 47%, or $12,736,000, and 48%, or $25,923,000, for the three months and six months ended June 30, 1999, respectively, to 51%, or $13,807,000, and 50%, or $29,061,000, for the three months and six months ended June 30, 2000, respectively. The increase in the ratio is due to increased commission expense on the surety business offset slightly by higher ceding commissions from the surety quota share reinsurance. General operating costs decreased as a percentage of net premiums earned from 17%, or $4,558,000, and 16%, or $8,497,000, for the three months and six months ended June 30, 1999, respectively, to 14%, or $3,761,000, and 13%, or $7,814,000, for the three months and six months ended June 30, 2000, respectively. The improvement in the general operating cost ratio is a continuation of the Company's ability to service increased writings without corresponding increases in home office expenses. Interest expense increased 28% and 19% from $493,000 and $1,047,000 for the three months and six months ended June 30, 1999, respectively, to $630,000 and $1,250,000 for the three months and six months ended June 30, 2000, respectively. The increase is attributable to an increase in average funds held on which the Company pays interest from $35,474,000 for the six months ended June 30, 1999 to $47,129,000 for the six months ended June 30, 2000. Income before income taxes decreased from $2,720,000 and $6,063,000 for the three months and six months ended June 30, 1999, respectively, to a loss of $17,459,000 and $16,322,000 for the three months and six months ended June 30, 2000, respectively, due to the factors outlined above. The effective tax rate was 36% and 32% for the three months and six months ended June 30, 1999 as compared to a benefit of 31% for the three months and six months ended June 30, 2000. The primary reason for the variance from the corporate income tax rate of 34% is tax-advantaged income received on a portion of the Company's investment portfolio offset by certain non-deductible expenses. The Company has recorded for the six months ended June 30, 2000 its estimated effective tax rate for the year based on current underwriting and investment income recorded. Changes to the Company's estimated effective tax rate are recorded quarterly. Net income decreased from $1,740,000 and $4,105,000 for the three months and six months ended June 30, 1999, respectively, to a net loss of $11,992,000 and $11,189,000 for the three months and six months ended June 30, 2000, respectively, due to the factors outlined above. Liquidity and Capital Resources As of June 30, 2000, the Company held total cash and cash equivalents and invested assets of $111,548,000. This amount includes an aggregate of $43,986,000 in funds held which is shown as a liability on the Company's consolidated balance sheets. As of June 30, 2000, the Company's invested assets consisted of $86,751,000 in fixed maturities, $5,134,000 in common equity securities, $3,390,000 in preferred equity securities, $7,977,000 in other invested assets and $3,226,000 in short-term investments, including certificates of deposit with original maturities less than one year. Because the Company depends primarily on dividends from its insurance subsidiaries for its net cash flow requirements, absent other sources of cash flow, the Company cannot pay dividends materially in excess of the amount of dividends that could be paid by the insurance subsidiaries to the Company. The State of Nebraska regulates, through the Office of the Insurance Commissioner, the amount of dividends which can be paid by a domestic insurance company utilizing various formula methodology. The Company has entered into a revolving credit agreement, as amended, with Union Bank for $15,000,000. At June 30, 2000, $14,500,000 of the $15,000,000 line 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 first installment is due September 30, 2001. The interest rate at June 30, 2000 was 8.4%. The credit agreement contains certain financial covenants with respect to capital expenditures, business acquisitions, liquidity ratio, leverage ratio, tangible net worth, net profit and dividend payments. The Company is currently in violation of Section 5.13 of the revolving credit agreement pertaining to a minimum of $32,500,000 in policyholders' surplus as well as Section 5.14 pertaining to a maximum operating leverage ratio of 3:1 for Amwest Surety Insurance Company and its subsidiaries. The Company has provided Union Bank with pertinent information regarding an action plan and is currently seeking a waiver and amendment regarding this covenant. Should the Company be unsuccessful in obtaining a waiver and amendment regarding this covenant, the Company would be deemed to be in default and all sums then owing would be due and immediately payable. In such case, the Company would attempt to refinance the amounts owed to Union Bank, however, no assurances can be given that the Company would be successful in doing so. The Company is a party to a lease with ACD2 for its corporate headquarters. This lease has a term of 15 years and contains provisions for scheduled lease charges. The Company's minimum commitment with respect to this lease in 2000 is approximately $447,000. The Company also has the option to purchase this office building and land commencing on April 27, 2000 and extending for a six month period at a predetermined rate for the building, with the value of land based on then existing market rates. The Company has exercised such option in the second quarter of 2000 and expects to finalize the transaction by the end of the third quarter of 2000. Other than the Company's obligations with respect to funds held as collateral, the Company's obligation to pay claims as they arise, the Company's commitments to pay principal and interest on the bank debt and lease expenses as noted above, the Company has no significant cash commitments. The Company used $6,478,000 and $12,210,000 in cash from operating activities for the three months and six months ended June 30, 1999, respectively, as compared to using $9,014,000 and $18,970,000 for the three months and six months ended June 30, 2000, respectively. The Company generated $1,747,000 and $2,063,000 in cash from investing activities for the three months and six months ended June 30, 1999, respectively, as compared to generating $9,852,000 and $14,548,000 for the three months and six months ended June 30, 2000, respectively. The Company generated $2,228,000 and $9,495,000 in cash from financing activities for the three months and six months ended June 30, 1999, respectively, as compared to using $2,810,000 and $6,329,000 for the three months and six months ended June 30, 2000, respectively. The cash used for operating activities increased primarily due to operating losses for the six months ended June 30, 2000, changes in the Company's reinsurance program, and a reduction in funds held as collateral. The cash used for operating activities during the period was primarily funded by investing activities. As a result of significant operating losses experienced during the first six months of 2000, the Company's capital levels have materially decreased. Such decreases could result in regulatory action and a possible rating reduction from A.M. Best and other industry rating agents. The Company is currently undergoing an intensive analysis of operations designed to improve operating results, however, the Company believes it must quickly raise additional capital or enter into one or more strategic alliances which would provide same. The Company has engaged Cochran, Caronia & Co. LLC, an investment banking firm, to immediately seek strategic alliances or other capital-raising alternatives on behalf of the Company. No assurances can be given such efforts will succeed. 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. Other issues: Certain statements contained in this Form 10-Q regard matters which are not historical facts and are forward looking statements. Because such forward looking statements include risks and uncertainties, actual results may differ materially from those expressed in or implied by such forward looking statements. Factors that could cause actual results to differ materially include, but are not limited to: the ineffectiveness of changes made by management, a deterioration in premiums written or losses incurred in the Company's surety and other specialty businesses, the ability to achieve increased percentage writings of commercial surety and court products, the lack of adherence by branch personnel to Company underwriting guidelines, failure of the Company to improve its leverage which could result in a reduction in the ratings from A.M. Best and other industry rating agencies, the ability of the Company to obtain a waiver or amendment regarding a covenant included in the Company's revolving bank credit agreement, failure of the Company to raise additional capital or to sucessfully consumate a strategic alliance, a reduction in the investment yield earned on the Company's investment portfolio, or general economic decline. The Company undertakes no obligation to release publicly the results of any revisions to these forward looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. The table on the next page shows, for the periods indicated, the gross premiums written, net premiums earned, net losses and loss adjustment expenses and loss ratios for the Company's specialty property and casualty operations and surety operations.
TABLE 1 AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES SUMMARY OF PREMIUMS AND LOSSES BY PRODUCT LINE (Dollars in thousands) Three months ended Six months ended Year ended June 30, June 30, December 31, Type of Bond 2000 1999 2000 1999 1999 1998 ------------ ---- ---- ---- ---- ---- ---- Surety Gross premiums written $31,960 $28,916 $60,662 $53,949 $108,184 $102,270 Net premiums earned 19,327 21,395 42,935 42,895 85,500 84,166 Net losses and loss adjustment expenses 19,948 3,747 28,328 9,388 27,373 23,262 Loss and loss adjustment expense ratio 103% 18% 66% 22% 32% 28% Property & Casualty Gross premiums written $ 11,315 $ 7,126 $19,285 $14,228 $28,304 $30,549 Net premiums earned 7,843 5,591 14,972 11,084 25,044 21,805 Net losses and loss adjustment expenses 8,295 6,256 13,463 9,701 20,937 17,569 Loss and loss adjustment expense ratio 106% 112% 90% 88% 84% 81% Total Company Gross premiums written $43,275 $36,042 $79,947 $68,177 $136,488 $132,819 Net premiums earned 27,170 26,986 57,907 53,979 110,544 105,971 Net losses and loss adjustment expenses 28,243 10,003 41,791 19,089 48,310 40,831 Loss and loss adjustment expense ratio 104% 37% 72% 35% 44% 39%
PART II - OTHER INFORMATION AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES Items 1-3: LEGAL PROCEEDINGS, CHANGE IN SECURITIES, DEFAULTS UPON SENIOR SECURITIES None Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The annual meeting of stockholders was held on May 19, 2000. (b) (i) The following directors were elected to serve until the 2003 Annual Meeting of Stockholders or until their successors have been duly elected and qualified: Richard H. Savage Neil F. Pont Charles L. Schultz (ii) The other directors whose terms of office continued after the meeting are: John E. Savage Thomas R. Bennett Bruce A. Bunner Robert W. Kleinschmidt Guy A. Main Arthur F. Melton Roland D. Miller (c) (i) Of the 3,506,756 shares represented at the meeting, the directors named in (b) (i) above were elected by the following votes: No. of Votes Received Withhold Name For Authority Richard H. Savage 3,467,884 38,872 Neil F. Pont 3,112,604 394,152 Charles L. Schultz 3,467,584 39,172 Item 5: OTHER INFORMATION None Item 6: EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits See the Exhibit Index on page 17. (b) Reports on Form 8-K There were no reports filed on Form 8-K during the three months ended June 30, 2000. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMWEST INSURANCE GROUP, INC. Date: August 14, 2000 by: /s/ JOHN E. SAVAGE ------------------------------------- John E. Savage President, Co-Chief Executive Officer and Chief Operating Officer (Principal Executive Officer) by: /s/ PHILLIP E. HUFF ------------------------------------- Phillip E. Huff Senior Vice-President, Treasurer (Principal Financial and Principal Accounting Officer) AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES EXHIBIT INDEX Exhibit Number Description Location 2 Plan of acquisition, reorganization, arrangement, liquidation or succession None 4 Instruments defining the rights of securityholders, including indentures Not required 10.1 Consulting Agreement with Richard H. Savage dated May 21, 1999 Exhibits 10.2 Aggregate Stop Loss Reinsurance Contract effective April 1, 2000 issued to Amwest Surety Insurance Company, Far West Insurance Company and Condor Insurance Company by Underwriters Reinsurance Company (Barbados) Inc. Exhibits 10.3 Quota Share Reinsurance Agreement effective April 1, 2000 issued to Amwest Surety Insurance Company and Far West Insurance Company by Swiss Reinsurance America Corporation. Exhibits 11 Statement re computation of per share earnings Page 8, Note 3 15 Letter re unaudited interim financial information None 18 Letter re change in accounting principles None 19 Previously unfiled documents None 20 Report furnished to security holders None 23 Published report regarding matters submitted to vote of security holders None 24 Consents of experts and counsel None 25 Power of attorney None 28 Additional exhibits None EX-27 2 0002.txt FDS --
7 0000780118 Siobhan K. Horton 1,000 U.S. Dollars 3-mos Dec-31-1999 Apr-01-2000 Jun-30-2000 1 0 0 86,751 8,524 0 0 106,478 5,070 34,110 19,411 248,224 68,767 61,511 0 0 14,500 0 0 43 45,481 248,224 27,170 1,575 (244) 481 28,243 13,807 3,761 (17,459) (5,407) (11,992) 0 0 0 (11,992) (2.77) (2.77) 56,466 44,625 6,057 15,927 22,454 68,767 0
EX-10 3 0003.txt 10.1 CONSULTING AGREEMENT CONSULTING AGREEMENT This Agreement, effective May 21, 1999, between Amwest Insurance Group, a Delaware corporation, its subsidiaries and affiliates ("Amwest") with its principal place of business at 5230 Las Virgenes Road, Calabasas, California 91302 and Richard H. Savage ("Savage") with his principal place of business at 4421 San Juan Road, P.O. Box 2717, Friday Harbor, Washington 98250. RECITALS WHEREAS Richard H. Savage, Chairman of the Board and Co-Chief Executive Officer of Amwest announced his plans to retire, effective May 21, 1999, as Co-Chief Executive Officer of Amwest, and therefore step down as a member of the executive management team of the company; and WHEREAS Amwest desires to engage Savage's service as a consultant to Amwest, and WHEREAS Savage is willing to act as a consultant for Amwest upon the terms stated below. NOW THEREFORE, the parties agree as follows: AGREEMENT Article 1.0 Term of Contract, Renewal 1.01 Effective Date. This Agreement will become effective May 21, 1999 and will continue in effect through December 31, 2004, unless terminated earlier. 1.02 Renewal. At the sole option of Savage, this Agreement may be renewed for an additional five-year period through December 31, 2009, by written notice given on or before December 3 1, 2004. Such renewal must be communicated in writing in the manner provided for by this Agreement. Article 2.0 Consulting Services Terms and Conditions. 2.01 Services Provided. At the request of Amwest, Savage will be available to provide advisory and consulting, services to Amwest. 2.02 Method of Performing Services. Amwest and Savage will jointly determine the method, details, and means for performing the above-described services. 2.03 Status of Savage. As of January 1, 2000, Savage will no longer be an employee of Amwest and specifically waives any rights such as he might have enjoyed as an employee. During the period commencing January 1, 2000 through the term of this Agreement, (as it may be renewed), Savage shall serve as an independent Contractor. Savage agrees that effective January 1, 2000 he shall not be or serve as an employee, partner, agent, or principal of Amwest while this Agreement is in effect. Savage further agrees that he shall not be entitled to the rights or benefits afforded to Amwest's employees, except as specifically provided for in this Agreement. 2.04 Payment of Income Taxes. Savage is responsible for paying, when due, all income taxes, including estimated taxes incurred as a result of the compensation paid by Amwest to Savage for services under this Agreement. On request, Savage will provide Amwest with proof of timely payments. Savage agrees to indemnify Amwest for any claims, costs, losses, fees, penalties, interest, or damages suffered by Amwest resulting from Savage's failure to comply with this provision. Article 3.0 Compensation. 3.01 Flat Rate. In consideration for the services to be performed by Savage, commencing January 1, 2000, Amwest agrees to pay Savage one hundred thousand dollars ($100,000) per year. 3.02 Date for Payment of Compensation. For services rendered under this Agreement, Amwest agrees to pay Savage the sum set forth in Article 3.01 of this Agreement in twelve equal monthly payments, payable on the first day of each month. 3.03 Payment of Expenses. Amwest will reimburse Savage for all reasonable expenses incurred in performing services under this Agreement. The term "expenses" includes: costs of travel, telephone bills, supplies, entertainment expenses, and other approved expenses. Savage will provide Amwest with receipts for all expenses pursuant to Amwest's usual policy for reimbursement of expenses. Consulting Agreement - Richard H. Savage - Page 2 3.04 Medical Insurance Coverage Effective January 1, 2000, Amwest agrees to purchase and continue to keep in force for the duration of this Agreement "supplemental medical insurance" or "Medi-Gap" coverage on behalf of Savage and his wife Myma Savage. Article 4.0 Obligations of Savage. 4.01 Minimum Amount of Service. Savage agrees to work sufficient hours each month, as may be agreed by Savage and Amwest, in order to perform the above-described services. 4.02 Time and Place of Performing Work. Savage may perform the services under this Agreement at any suitable time and location of his choice. 4.03 Tools, Materials, and Equipment. Savage and Amwest will agree as to who will supply tools, materials, and equipment required to perform the services required under this Agreement. 4.04 Assignment. Neither this Agreement nor any duties or obligations under this Agreement may be assigned by Savage without the prior written consent of Amwest. Article 5.0 Obligations of Amwest. 5.01 Cooperation of Amwest. Amwest agrees to comply with all reasonable requests of Savage necessary to the performance of Savage's duties under this Agreement. 5.02 Place of Work. Amwest agrees to famish space at Amwest's premises for use by Savage while performing the above-described services. Consulting Agreement - Richard H. Savage - Page 3 5.03 Assignment. This Agreement and all of Amwest's duties and obligations under this Agreement may be assigned, without prior written consent of Savage, by Amwest to any person or entity so long as: (a) such person or entity agrees in writing to assume in full all obligations of Amwest under this Agreement, and (b) such person or entity has, in the reasonable judgment of Savage, the financial ability to discharge the financial obligations of Amwest hereunder. Article 6.0 Termination of Agreement. 6.01 Expiration of Agreement. Unless otherwise terminated as provided in this Agreement, this Agreement will continue in effect until December 31, 2004, and shall then terminate unless renewed pursuant to Article 1.02 or by mutual agreement between the parties. 6.02 Termination on Occurrence of Stated Events. This Agreement will terminate automatically upon Savage's death or total Disability and Amwest shall be under no obligation to pay any amounts to Savage thereafter. 6.03 Termination at the Election of a Party This Agreement may be terminated at the election of either party without cause upon giving the other party 5 days written notice. In the event Amwest elects to terminate this Agreement under this Article, the unpaid balance of the flat rate specified in Article 3.01 for the entire term of this Agreement (such term to be defined as those periods of time as provided for by both Section 1.01 and 1.02) shall be immediately due and payable to Savage. In the event Savage elects to terminate this Agreement under this Article, the unpaid balance of the flat rate specified in Article 3.01 shall be retained by Amwest and Amwest shall be under no obligation to pay such amounts to Savage thereafter. 6.03 Termination for Default. If either party defaults in the performance of this Agreement or materially breaches any of its provisions, the non-breaching party may terminate this Agreement by giving written notification to the breaching party. Termination will take effect immediately on receipt of notice by the breaching party or five (5) days after mailing of notice, whichever occurs first. For the purposes of this Article, material breach of this Agreement includes, but is not limited to, the following: (a) Amwest's failure to pay Savage any compensation due within thirty (30) days after written demand for payment. (b) Savage's failure to complete the services specified in Article 2.01. Consulting Agreement - Richard H. Savage - Page 4 (c) Savage's material breach of any representation or agreement contained in this Agreement. (d) Amwest's material breach of any representation or agreement contained in this Agreement. 6.04 Remedies for Default. (a) If Amwest defaults in the performance of this Agreement or materially breaches any of its provisions, the unpaid balance of the flat rate specified in Article 3.01 for the entire term of this Agreement (such term to be defined as those periods of time as provided for by both Section 1.01 and 1.02) shall be immediately due and payable to Savage. (b) If Savage defaults in the performance of this Agreement or materially breaches any of its provisions, the unpaid balance of the flat rate specified in Article 3.01 shall be retained by Amwest and Amwest shall be under no obligation to pay such amounts to Savage thereafter. Article 7.0 General Provisions. 7.01 Notices. Any notices required to be given under this Agreement by either party to the other may be effected by personal delivery in writing or by mail, registered or certified, postage prepaid with return receipt requested or through overnight delivery via a package delivery service. Such notices must be addressed to the parties at the addresses appearing in the introductory Article of this Agreement, but each party may change the address by giving written notice in accordance with this Article. Notices delivered personally will be deemed communicated as of the day of receipt or the fifth day after mailing, whichever occurs first. 7.02 Entire Agreement of the Parties. This Agreement supersedes any and all agreements, either oral or written, between the parties with respect to the rendering of services by Savage for Amwest and contains all of the representations, covenants, and agreements between the parties with respect to the rendering of those services. Each party to this Agreement acknowledges that no representations, inducements, promises, or agreements, orally or otherwise, have been made by any party, or. anyone acting on behalf of any party, which are not contained in this Agreement, and that no other agreement, statement, or promise not contained in this Agreement will be valid or binding. Any modification of this Agreement will be effective only if it is in writing signed by the party to be charged. Consulting Agreement - Richard H. Savage - Page 5 7.03 Partial Invalidity. If any provision of this Agreement is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remaining provisions will continue in full force and effect without being impaired or invalidated in any way. 7.04 Payment of Moneys Due Deceased Savage. If Savage dies before completing the services under this Agreement, any moneys due Savage from Amwest under this Agreement as of the date of death will be paid to Savage's executors, administrators, heirs, personal representatives, successors, and assigns. 7.05 Arbitration. Any controversy or claim arising out of or relating to this Agreement or the breach of the Agreement will be settled by arbitration in accordance with the rules of the American Arbitration Association. Judgment on the award rendered by the arbitrators may be entered in any court having jurisdiction over the award. 7.06 Attorney's Fees If any legal action, including an action for declaratory relief, is brought to enforce or interpret the provisions of this Agreement, the prevailing, party will be entitled to reasonable attorneys' fees, which may be set by the court in the same action or in a separate action brought for that purpose, in addition to any other relief to which that party may be entitled. 7.07 Governing Law. This Agreement will be governed by and construed in accordance with the laws of the State of California. Executed at Calabasas, California on January 10, 2000. Amwest: Amwest Insurance Group Savage: Richard H. Savage A Delaware corporation By: Steven R. Kay Richard H. Savage Chief Financial Officer Senior Vice President Consulting Agreement - Richard H. Savage - Page 6 EX-10 4 0004.txt 10.2 STOP LOSS REINSURANCE AGREEMENT Aggregate Stop Loss Reinsurance Contract Effective: April 1, 2000 issued to Amwest Surety Insurance Company Far West Insurance Company and Condor Insurance Company all of Omaha, Nebraska Table of Contents Article Page I Business Reinsured 1 II Term 1 III Territory 2 IV Retention and Limit 2 V Definitions 3 VI Other Reinsurance 4 VII Loss Notices and Settlements 4 VIII Salvage and Subrogation 5 IX Reinsurance Premium 5 X Late Payments 5 XI Reports and Remittances 7 XII Commutation 7 XIII Offset (BRMA 36C) 7 XIV Access to Records (BRMA 1D) 7 XV Net Retained Lines 8 XVI Errors and Omissions (BRMA 14F) 8 XVII Currency (BRMA 12A) 8 XVIII Taxes (BRMA 50B) 8 XIX Federal Excise Tax (BRMA 17A) 9 XX Unauthorized Reinsurers 9 XXI Insolvency 10 XXII Arbitration 11 XXIII Service of Suit (BRMA 49D) 12 XXIV Agency Agreement 12 XXV Intermediary (BRMA 23A) 12 Schedule A Aggregate Stop Loss Reinsurance Contract Effective: April 1, 2000 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 A. This Contract shall become effective on April 1, 2000, with respect to losses occurring on or after that date, and shall remain in force until March 31, 2003, both days inclusive. B. Notwithstanding the foregoing, in the event of a change in control of the Company, the Reinsurer shall have the option to terminate this Contract and commute all ceded outstanding loss under this Contract as of the date of the change in control. For the purposes of this paragraph, either of the following events shall be deemed to be a "change in control:" 1. There is any material change in the senior management of the Company. A material change in management shall be deemed to have occurred if the current Chief Executive Officer (John Savage) leaves his current position. 2. There is any material change in the ownership of the Company. A material change in ownership shall be deemed to have occurred if there is a change of 30.0% or more in the ownership of the voting stock of the Company. In the event of commutation in accordance with the provisions of this paragraph, the Reinsurer shall pay the Company a mutually agreed upon amount representing the ceded outstanding loss hereunder. If agreement cannot be reached, the Company and the Reinsurer may mutually appoint an actuary or appraiser to investigate, determine and capitalize such claim or claims and the Reinsurer shall pay the amount so determined to be the capitalized value of such loss. The expense of the actuary or appraiser shall be equally divided between the Company and the Reinsurer. 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 paragraph C below, as respects the first contract year hereunder, the Company shall retain and be liable for an amount of ultimate net loss equal to a 40.0% loss ratio (as defined in Article V) for the first contract year. The Reinsurer shall then be liable for any ultimate net loss which exceeds the Company's retention, but the liability of the Reinsurer shall not exceed the lesser of $8,750,000, or 6.0% of the Company's net earned premium (as defined in Article V) for the first contract year. B. Subject to the provisions of paragraph C below, as respects the second and third contract years hereunder, the Company shall retain and be liable for an amount of ultimate net loss equal to a 40.0% loss ratio (as defined in Article V) for each such contract year. The Reinsurer shall then be liable for 75.0% of any ultimate net loss which exceeds the Company's retention, but the liability of the Reinsurer shall not exceed the lesser of $6,562,500, or 75.0% of 6.0% of the Company's net earned premium (as defined in Article V) for each such contract year. C. Notwithstanding the foregoing, in the event that the Company's net earned premium as respects property and casualty business for any contract year exceeds 25.0% of the Company's total net earned premium for that contract year, no claim shall be made under this Contract for that contract year unless and until the Company shall have first incurred an amount of ultimate net loss in excess of 40.0% of its net earned premium for that contract year, plus 34.0% of the amount by which the Company's net earned premium as respects property and casualty business for that contract year exceeds 25.0% of the Company's total net earned premium for that contract year. The limit of liability of the Reinsurer for each contract year shall be arrived at in the same manner. In the event that the Company's net earned premium as respects property and casualty business for any contract year is less than 15.0% of the Company's total net earned premium for that contract year, no claim shall be made under this Contract for that contract year unless and until the Company shall have first incurred an amount of ultimate net loss in excess of 40.0% of its net earned premium for that contract year, less 34.0% of the amount by which the Company's net earned premium as respects property and casualty business for that contract year is less than 15.0% of the Company's total net earned premium for that contract year. The limit of liability of the Reinsurer for each contract year shall be arrived at in the same manner. 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, but not including litigation expenses or any other loss adjustment expense) 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 for each contract year to the Company's net earned premium for that contract year. F. "Contract year" as used in this Contract shall mean the period from April 1, 2000 to March 31, 2001, both days inclusive, and each respective 12-month period (or portion thereof) thereafter that this Contract continues in force. 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 paragraph D of Article V. B. The Company's inuring reinsurance contracts, 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 reinsurance provided hereunder, the Company shall pay the Reinsurer the following: 1. As respects the first contract year,$4,000,000 in four equal installments of $1,000,000 on April 1, July 1 and October 1 of 2000 and January 1 of 2001. 2. As respects the second contract year, the Company shall pay an annual deposit premium of $3,000,000 in four equal installments of $750,000 on April 1, July 1 and October 1 of 2001 and January 1 of 2002. 3. As respects the third contract year, the Company shall pay an annual deposit premium of $3,000,000 in four equal installments of $750,000 on April 1, July 1 and October 1 of 2002 and January 1 of 2003. B. Notwithstanding the provisions of paragraph A above and of Article XIII, the Company shall have the right to offset premium amounts due the Reinsurer under this Contract against excess premium of $3,639,023.94 paid by the Company to the Reinsurer and interest income earned on such excess premium under the Company's Aggregate Stop Loss Reinsurance Contract, effective January 1, 1999. The interest income earned on such excess premium paid by the Company shall be calculated beginning January 19, 2000 using the 90-day U.S. Treasury Bill rate times the amount of premium held by the Reinsurer in excess of the premium amount due and payable to the Reinsurer under this Contract. 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 termination or expiration of this Contract, the Company shall report to the Reinsurer its aggregate ultimate net loss paid for the term of this Contract 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 term of this Contract based on an estimate of the Company's net earned premium for the term of this Contract, the Reinsurer shall pay its portion of such estimated excess (net of any prior payments). 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 term of this Contract have been determined. Article XII - Commutation A. The Company may commute this Contract with agreement by the Reinsurer. B. The Reinsurer may commute this Contract in the event of a change in control of the Company as defined in paragraph B of Article II. 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 outstanding loss 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 paid under the terms of bonds or 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 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 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 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, 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. 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 American Arbitration Association'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. 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. H. 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 49D) (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 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., 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 parties hereto by their duly authorized representatives have executed this Contract 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. Schedule A Aggregate Stop Loss Reinsurance Contract Effective: April 1, 2000 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. Excess Catastrophe Reinsurance Contract, Effective: July 1, 1999 4. Excess Per Event Reinsurance Contract, Effective: July 1, 1999 EX-10 5 0005.txt 10.3 QUOTA SHARE REINSURANCE AGREEMENT Net Line Quota Share Reinsurance Contract Reinsured: Amwest Surety Insurance Company & Far West Insurance Company Both of Calabasas, California Subject Business: Business classified as all surety classifications written by the Reinsured. Subject Loss: "Subject Loss" shall include all Loss, ALAE and ECO, if any, net of excess of loss reinsurance purchased by the company but not stop loss reinsurance for losses with a discovery date during the term of this agreement and complying with the losses discovered definition that follows. "Losses Discovered" shall be deemed to mean new losses first reported to the Company on or after the effective date of the treaty on bonds written or renewed on or after January 1, 2000. Losses discovered prior to April 1, 2000 and development on losses discovered prior to April 1, 2000 are specifically excluded. Subject Premium: Unearned premium portfolio as of April 1, 2000 (from bonds written after December 31, 1999) plus written premium during the term. Term: Term contract: April 1, 2000 - December 31, 2001. Cession: 35.0% Quota Share for the period 4/1/2000 - 9/30/2000. Amount may decrease at the company's sole discretion at any calendar quarter thereafter as long as the decreased cession is retained by company for its net account but in no event will the cession rate be less than 15%. The company must decide a change in the cession within 15 days prior to the commencement of the calendar quarter under consideration. Ceding Commission: Actual company expenses attributable to the surety division of the reinsured, not to exceed the following maximum amounts: 1) 62.5% for the period April 1, 2000 - December 31, 2000 (including the UEP transfer at April 1, 2000); and 2) 57.5% for the period January 1, 2001 - December 31, 2001 The total ceding commission paid by the reinsurer during the term of the contract shall not exceed 60% of the ceded premium during the term of the contract, prior to the application of the Expense Saving provision of the contract. Expense Savings: It is understood and agreed that in the event the actual company expenses during the period 1/1/2001 - 12/31/2001 are less than 60% then that percentage amount shall be a reduction to the provisional 57.5% ceding commission payable during the period 1/1/2001 - 12/31/2001 as follows: Actual Expense Reduction applied to Provisional Comm 60% - 57.5% 100% (up to 2.5%) 57.5% - 56% 50% (up to .75%) Accounts & Remittances: Monthly within 30 days, the Reinsured shall report the following to the reinsurer. 1. GNWPI* on Subject Business Ceded. 2. Net Earned Premiums on Subject Business Ceded. 3. Ceding Commission on (1) above. 4. Ceded Subject Loss and LAE Outstanding. 5. Ceded Subject Loss and LAE Paid. The balance of (1) less (3) less (5) will be payable monthly within 60 days. * GNWPI to mean gross net written premium income after deductions for inuring excess of loss reinsurance but not stop loss reinsurance. Claims Reporting: Reinsurers shall be provided promptly a detailed written narrative report with full particulars for all losses with potential exposure in excess of $500,000 to the Company. Exclusions: The same list of exclusions that appears in the Company's excess of loss bond reinsurance contract (effective October 1, 1999) plus Insurance Company Qualifying Bonds. Special Termination: It is understood and agreed that should at any time the Reinsured lose 25.0% or more of its surplus; be acquired, merged with or controlled by any other company; undergo a significant change in management to be defined as a change in the Chief Executive Officer; or lose its accreditation by the United States Treasury Department, the Reinsurer shall have the right to immediately terminate this Agreement by giving the Company 15 days prior notice by certified mail. In the event of a special termination, the provisional ceding commission paid through the date of termination shall be subject to the ceding commission article. Insolvency: A. In the event of insolvency of the Company, the reinsurance provided by this Agreement shall be payable by the Reinsurer on the basis of the liability of the Company as respects Policies covered hereunder, without diminution because of such insolvency, directly to the Company or its liquidator, receiver, conservator or statutory successor except as provided in Sections 4118(a) (1) (A) and 1114(c) of the New York Insurance Law. B. The Reinsurer shall be given written notice of the pendency of each claim or loss which may involve the reinsurance provided by this Agreement within a reasonable time after such claim or loss is filed in the insolvency proceedings. The Reinsurer shall have the right to investigate each such claim or loss and interpose, at its own expense, in the proceedings where the claim or loss is to be adjudicated, any defense which it may deem available to the Company, its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to court approval, against the insolvent Company as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. C. In addition to the offset provisions set forth in the contract, any debts or credits, liquidated or unliquidated, in favor of or against either party on the date of the receivership or liquidation order (except where the obligation was purchased by or transferred to be used as an offset) are deemed mutual debts or credits and shall be set off with the balance only to be allowed or paid. Although such claim on the part of either party against the other may be unliquidated or undetermined in amount on the date of the entry of the receivership or liquidation order, such claim will be regarded as being in existence as of such date and any claims then in existence and held by the other party may be offset against it. D. Nothing contained in this contract is intended to change the relationship or status of the parties to this Agreement or to enlarge upon the rights or obligations of either party hereunder except as provided herein. Special Acceptances: All contractor risk must be specially accepted if they meet any of the following criteria: (a) single jobs of $20,000,000 or more are to be considered; and/or (b) Amwest uncompleted bonded work exceeds 35,000,000; and/or (c) the total uncompleted work on hand, both bonded and unbonded exceeds $50,000,000. Commercial surety risk where Swiss Re paper is utilized with penal sums more than $15,000,000 and/or aggregate exposures exceeding $25,000,000 must be specially accepted. Warranty: The Company warrants that the inuring excess of loss treaty and limits will be maintained over the life of this treaty, or so deemed. Common Account reinsurers are to be mutually agreed or the Company bears the risk of uncollectable reinsurance. Reinsurer: Swiss Reinsurance America Corporation - 100% Agreed: _______________________________ Date:__________________ Amwest Surety Insurance Company / Far West Insurance Company Agreed: _______________________________ Date:__________________ Swiss Reinsurance America Corporation -----END PRIVACY-ENHANCED MESSAGE-----