-----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, BG8vg8dO38466Y6t6UNS4FurOB9mwnibZ21UF8MrO90GhBhKuflYiXR81BduTSTc CMJyx6JrJcV92d7QTSWvjA== /in/edgar/work/0000780118-00-000012/0000780118-00-000012.txt : 20001115 0000780118-00-000012.hdr.sgml : 20001115 ACCESSION NUMBER: 0000780118-00-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 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: 768059 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 September 30, 2000 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____ to ____ Commission file number: 1-9580 AMWEST INSURANCE GROUP, INC. ------------- ----------------------------- (Exact name of registrant as specified in its charter) Delaware 95-2672141 - -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5230 Las Virgenes Road Calabasas, California 91302 - --------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (818) 871-2000 --------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . As of November 10, 2000, 4,326,067 shares of common stock, $.01 par value, were outstanding. AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES INDEX Part I. FINANCIAL INFORMATION: ------------------------------- Item 1 Consolidated Statements of Operations for the three months and nine months ended September 30, 2000 and 1999 (unaudited) 3 Consolidated Balance Sheets as of September 30, 2000 (unaudited) and December 31, 1999 4 Consolidated Statements of Cash Flows for the three months and nine months ended September 30, 2000 and 1999 (unaudited) 6 Notes to Interim Consolidated Financial Statements 8 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3 Quantitative and Qualitative Disclosures about Market Risk No significant changes from the Company's Annual Report on Form 10-K for the year ended December 31, 1999 Part II. OTHER INFORMATION: ---------------------------- Item 1 Legal Proceedings 15 Item 2 Changes in Securities 15 Item 3 Defaults Upon Senior Securities 15 Item 4 Submission of Matters to a Vote of Security Holders 15 Item 5 Other Information 15 Item 6 Exhibits and Reports on Form 8-K 15 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 Nine months ended September 30, September 30, ------------- ------------- 2000 1999 2000 1999 ---- ---- ---- ---- OPERATIONS Gross premiums written $ 39,158 $ 35,969 $ 119,105 $ 104,146 ---------------- ---------------- -------------- ---------------- Net premiums earned $ 25,146 $ 27,732 $ 83,053 $ 81,711 Net investment income 1,540 1,595 4,992 5,069 Net realized investment gains 1,198 10 2,109 2,047 Commissions and fees 443 323 1,767 1,452 ---------------- ---------------- -------------- ---------------- Total revenues 28,327 29,660 91,921 90,279 ---------------- ---------------- -------------- ---------------- Net losses and loss adjustment expenses 16,701 14,330 58,492 33,419 Policy acquisition costs 11,991 15,543 41,052 41,466 General operating costs 3,269 3,285 11,083 11,782 Interest expense 602 593 1,852 1,640 ---------------- ---------------- ------------ ---------------- Total expenses 32,563 33,751 112,479 88,307 ---------------- ---------------- ------------- ---------------- Income (loss) before income taxes (4,236) (4,091) (20,558) 1,972 Provision (benefit) for income taxes (1,109) (1,345) (6,242) 613 ---------------- ---------------- --------------- ---------------- Net income (loss) $ (3,127) $ (2,746) $ (14,316) $ 1,359 ================ ================ ============== ================ Earnings (loss) per common share: Basic $ (0.73) $ (0.64) $ (3.31) $ 0.31 ================ ================ ============== ================ Diluted $ (0.73) $ (0.64) $ (3.31) $ 0.31 ================ ================ ============== ================ COMPREHENSIVE INCOME (LOSS) Net income (loss) $ (3,127) $ (2,746) $ (14,316) $ 1,359 Other comprehensive income (loss): Unrealized gains(losses) on securities, net of Income taxes of $(18) and $466 for the three Months ended September 30, 2000 and 1999, and $(264) and $1,270 for the nine months ended September 30, 2000 and 1999 respectively 34 (905) 512 (2,465) Reclassification adjustment for gains included in net income, net of income taxes of $(83) and $58 for the three months ended September 30, 2000 and 1999, and $186 and $526 for the nine months ended September 30, 2000 and 1999, respectively 162 (113) (361) (1,020) ---------------- ---------------- ----------------- ----------- Comprehensive income (loss) $ (2,931) $ (3,764) $ (14,165) $ (2,126) ================ ================ ================= =========== See accompanying notes to interim consolidated financial statements.
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands) ASSETS September 30, December 31, 2000 1999 ---------------- ---------------- (unaudited) Investments: Fixedmaturities, available-for-sale (amortized cost of $77,527and $104,193 at September 30, 2000 and December 31, 1999, respectively) $75,187 $ 100,892 Common equity securities, available-for-sale (cost of $3,560 and $2,886 at September 30, 2000 and December 31, 2000, respectively) 4,617 4,199 Preferred equity securities, available-for-sale (cost of $3,506 and $4,905 September 30, 2000 and December 31, 1999, respectively) 3,100 5,073 Other invested assets (cost of $4,533 and $7,725 at September 30, 2000 and December 31, 1999, respectively) 4,654 7,749 Short-term investments 3,366 2,691 -------------------- --------------------- Total investments 90,924 120,604 Cash and cash equivalents 10,732 15,821 Accrued investment income 1,130 1,654 Agents balances and premiums receivable (less allowance for doubtful accounts of $1,573 at September 30, 2000 and $1,260 at December 31, 1999, respectively) 19,826 15,365 Contract settlement funds and collateral receivable 22,578 16,270 Reinsurance recoverable: Paid loss and loss adjustment expenses 6,409 5,401 Unpaid loss and loss adjustment expenses 36,435 21,903 Ceded unearned premiums 18,062 6,747 Deferred policy acquisition costs 19,734 22,147 Furniture, equipment and improvements, net 5,262 5,635 Income taxes recoverable 4,753 1,472 Goodwill 4,363 4,129 Other assets 11,599 4,547 -------------------- --------------------- Total assets $251,807 $241,695 ==================== =====================
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued) (Dollars in thousands) LIABILITIES AND STOCKHOLDERS' EQUITY September 30, December 31, 2000 1999 --------------- ---------------- (unaudited) Liabilities: Unpaid losses and loss adjustment expenses $ 76,030 $ 56,466 Unearned premiums 62,640 51,736 Funds held 43,328 50,271 Bank indebtedness 14,500 14,500 Amounts due to reinsurers 3,151 2,181 Deferred Federal income taxes (445) 494 Other liabilities 9,991 9,245 -------------------- --------------------- Total liabilities 209,195 184,893 Stockholders' equity: Preferred stock, $.01 par value, 1,000,000 Shares authorized; issued and outstanding: none - - Common stock, $.01 par value, 10,000,000 Shares authorized, issued and outstanding: 4,324,248 at September 30, 2000 and 4,328,592 at December 31, 1999 43 43 Additional paid-in capital 19,699 19,724 Net unrealized appreciation (depreciation) of investments carried at market, net of income taxes (1,035) (1,186) Retained earnings 23,905 38,221 -------------------- --------------------- Total stockholders' equity 42,612 56,802 -------------------- --------------------- Total liabilities and stockholders' equity $251,807 $241,695 ==================== ===================== See accompanying notes to interim consolidated financial statements.
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (Dollars in thousands) Three months ended Nine months ended September 30, September 30, ------------- ------------- 2000 1999 2000 1999 ---- ---- ---- ---- Cash flows from operating activities: Net income (loss) $ (3,127) $ (2,746) $ (14,316) $ 1,359 Adjustments to reconcile net income to cash provided by operating activities: Change in agents' balances and premiums receivable and unearned premiums 3,013 5,141 6,443 1,365 Change in accrued investment income 455 27 524 (60) Change in unpaid losses and loss adjustment expenses 7,264 2,458 19,564 (854) Change in reinsurance recoverable on paid and unpaid losses and loss adjustment expenses and ceded unearned premiums (10,162) 1,130 (26,854) 896 Change in amounts due to/from reinsurers (1,154) 2,080 970 (1,982) Change in other assets and other liabilities (5,316) 951 (12,847) (2,060) Change in income taxes, net (80) (1,598) (4,298) (270) Change in deferred policy acquisition costs (323) (446) 2,413 (2,511) Net realized gain on sale of investments (491) (9) (1,402) (2,046) Net realized loss on sale of fixed assets 41 5 49 - Provision for depreciation and amortization 437 468 1,341 1,415 ---------------- ----------------- ----------------- --------- Net cash provided (used) by operating activities (9,443) 7,461 (28,413) (4,748) Cash flows from investing activities: Cash received from investments sold prior to maturity 25,733 6,915 50,736 34,333 Cash received from investments matured or called 1,073 3,910 4,444 10,284 Cash paid for investments acquired (10,420) (9,770) (23,820) (40,698) Amortization of discount on bonds (46) 41 (51) 134 Capital expenditures, net (596) (441) (1,017) (1,591) Acquisition of agencies, net - 2 - 258 ---------------- ----------------- ----------------- ---------- Net cash provided by investing activities 15,744 657 30,292 2,720 Cash flows from financing activities: Proceeds from issuance of common stock 19 97 71 505 Repurchase of common stock - (170) (96) (170) Change in funds held (658) 6,074 (6,943) 15,937 Dividends paid - (389) - (1,166) ---------------- ----------------- ---------------- ---------- Net cash provided (used) by financing activities (639) 5,612 (6,968) 15,106 ---------------- ----------------- ---------------- ---------- Net increase (decrease) in cash and cash equivalents 5,662 13,730 (5,089) 13,078 Cash and cash equivalents at beginning of period 5,070 1,779 15,821 2,431 ---------------- ----------------- ----------------- ---------- Cash and cash equivalents at end of period $ 10,732 $ 15,509 $ 10,732 $ 15,509 ================ ================= ================= ========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 602 $ 593 $ 1,852 $ 1,640 Income taxes - 253 152 908 See accompanying notes to interim consolidated financial statements.
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES Notes to Interim Consolidated Financial Statements (unaudited) (1) Basis of Presentation The interim consolidated financial statements presented herein are unaudited and, in the opinion of management, reflect all adjustments necessary for a fair presentation of results for such periods. All such adjustments are of a normal, recurring nature. The results of operations for any interim period are not necessarily indicative of results for the full year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. (2) Bank Covenant The Company has entered into a revolving credit agreement, as amended, with Union Bank for $15,000,000. At September 30, 2000, $14,500,000 of the $15,000,000 line is currently utilized and the remaining $500,000 is no longer available pursuant to the discussion below. The bank loan has a variable rate of interest and has amortizing principal payments. The first installment is due September 30, 2001. The interest rate at September 30, 2000 was 9.75%. The credit agreement contains certain financial covenants with respect to capital expenditures, business acquisitions, liquidity ratio, leverage ratio, tangible net worth, net profit and dividend payments. The Company is currently in violation of Section 5.13 of the revolving credit agreement pertaining to a minimum of $32,500,000 in policyholder surplus, Section 5.14 pertaining to a maximum operating leverage ratio of 3:1, and Section 5.15 pertaining to maintaining an A.M. Best rating of A- or better for Amwest Surety Insurance Company and its subsidiaries. On August 30, 2000, the Company received notification from Union Bank acknowledging violation of these financial covenants and stating that no further borrowings are possible under the Credit Agreement and all outstanding Eurodollar Rate Borrowings will, at the expiration of the applicable interest period, be converted into Base Rate Borrowings. In addition, the debt was reassigned to the Special Asset Group ("SAG") for purposes of future negotiations. The Company is currently working to provide the SAG with pertinent information regarding an action plan and will attempt to negotiate new terms and covenants, however, no assurance can be given that the Company would be successful in doing so. Should the Company be unsuccessful in negotiating new terms and covenants, the Company could be deemed to be in default and all sums then owing shall be due and immediately payable. (3) Reinsurance The Company has made numerous changes to its reinsurance programs including entering into a 35% quota share agreement with Swiss Reinsurance America Corporation effective April 1, 2000. The term of the agreement is 21 months ending on December 31, 2001. In-force premiums on bonds written from January 1, 2000 to March 31, 2000 were also ceded into this contract. The Company also renewed the Aggregate Stop Loss Reinsurance Contract with Underwriters Reinsurance Company (Barbados), Inc. effective April 1, 2000. The term of the agreement is three years ending on April 1, 2002. The treaty covers losses, excluding allocated loss adjustment expenses, for all lines of business in excess of 40% through 46% of net earned premiums. With respect to the Company's property and casualty business, a Multiple Line Excess of Loss Reinsurance Agreement with Swiss Reinsurance America Corporation was entered effective July 1, 2000 which reinsures the Company on both property and liability coverage for losses in excess of $300,000 per event up to $1,000,000. In addition, on the same effective date, the Company entered into a Multiple Line Excess of Loss Reinsurance Agreement with Swiss Reinsurance America Corporation, which reinsures the Company's monthly commercial transportation policies for losses in excess of $75,000 per event up to $300,000. The term of each of these contracts expire on July 1, 2001. Similar catastrophe coverages to those in the prior year are still in effect for the property and casualty business. (4) Earnings Per Share Basic EPS is calculated based on the weighted average number of common shares outstanding and diluted EPS includes the effects of dilutive potential common shares. The calculation of basic and diluted EPS for the three months ended September 30, 2000 and 1999 is as follows:
Three months ended September 30, Income Shares Per-Share (Numerator) (Denominator) Amount ($ in thousands) (Dollars) ------------------- -------------------- ---------------- Basic EPS: 2000 $ (3,127) 4,322,295 $ (.73) 1999 $ (2,746) 4,315,942 $ (.64) Effect of Dilutive Securities: 2000 0 1999 0 Diluted EPS: 2000 $ (3,127) 4,322,295 $ (.73) 1999 $ (2,746) 4,315,942 $ (.64)
Diluted EPS for 1999 and 2000 is the same as basic EPS because the result of the calculation is antidilutive due to the net loss reported for the three months ended September 30, 1999 and 2000. Dilutive securities represent the Company's stock options. Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF ------ FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Gross premiums written increased 9% and 14% from $35,969,000 and $104,146,000 for the three months and nine months ended September 30, 1999, respectively, to $39,158,000 and $119,105,000 for the three months and nine months ended September 30, 2000, respectively. Gross premiums written for the surety business decreased 2% from $28,773,000 for the three months ended September 30, 1999 to $28,200,000 for the three months ended September 30, 2000 and increased 7% from $82,722,000 for the nine months ended September 30, 1999 to $88,861,000 for the nine months ended September 30, 2000. The increase is attributable to increased writings primarily in the court and commercial surety operations partially offset by decreased writings in the contract surety product line. For the quarterly comparison, a higher percentage decrease in writings within the contract surety product accounted for the reduction. Gross premiums written for the property and casualty business increased 52% and 41% from $7,196,000 and $21,424,000 for the three months and nine months ended September 30, 1999, respectively, to $10,958,000 and $30,244,000 for the three months and nine months ended September 30, 2000, respectively. The increase is primarily due to increased writings in the commercial trucking product, the California specialty motorcycle program and the Florida homeowners program. The Company anticipates decreased gross premiums as a result of the recent A.M. Best rating reduction, a refined market focus, the requirement to reduce operating leverage for rating purposes and the need to safeguard policyholders' surplus. Although the magnitude of these reductions are not yet determinable, the Company expects the fourth quarter premium writings to be negatively impacted. Net premiums earned decreased 9% from $27,732,000 for the three months ended September 30, 1999 to $25,146, 000 for the three months ended September 30, 2000, and increased 2% from $81,711,000 for the nine months ended September 30, 1999 to $83,053,000 for the nine months ended September 30, 2000. The growth in net premiums earned for the nine months ended September 30, 2000 was lower than the growth in premiums written due to higher reinsurance premium cessions in 2000 versus 1999 on the Company's surety quota share reinsurance contract. The Company generally earns premiums ratably over the assigned bond terms for the surety business and the policy term for the specialty property and casualty business. Net investment income decreased 3% and 2% from $1,595,000 and $5,069,000 for the three months and nine months ended September 30, 1999, respectively, to $1,540,000 and $4,992,000 for the three months and nine months ended September 30, 2000, respectively. The decrease for the three months ended September 30, 2000 is primarily due to a decrease in the amount of average invested assets from $127,320,000 at September 30, 1998 to $122,668,000 at September 30, 1999. Net realized investment gains increased from $10,000 and $2,047,000 for the three months and nine months ended September 30, 1999, respectively, to $1,198,000 and $2,109,000 for the three months and nine months ended September 30, 2000, respectively. The investments sold during the three months and nine months ended September 30, 2000 were primarily equity securities and certain fixed income investments including mortgage-backed and municipal bond securities. Commissions and fees increased 37% and 22% from $323,000 and $1,452,000 for the three months and nine months ended September 30, 1999 to $443,000 and $1,767,000 for the three months and nine months ended September 30, 2000, respectively. The increase is primarily attributable to an increase in fees charged to the policyholders related to increased premium writings in the California specialty motorcycle program as well as an increase in fee income on the funds control business. Net losses and loss adjustment expenses increased 17% and 75% from $14,330,000 and $33,419,000 for the three months and nine months ended September 30, 1999, respectively, to $16,701,000 and $58,492,000 for the three months and nine months ended September 30, 2000, respectively, due to significant adverse development for the 1999 loss year, increases in net reserves for the 2000 loss year to bring it in line with the development trends of the 1999 loss year, and changes in the Company's reinsurance program which resulted in an increase in retained losses. The majority of the adverse development results from claims on contract bonds with larger penal amounts (generally in excess of $1,000,000) which have developed more slowly than smaller, less complex obligations. The loss and loss adjustment expense ratio for the surety business increased from 53% and 32% for the three months and nine months ended September 30, 1999, respectively, to 69% and 67% for the three months and nine months ended September 30, 2000, respectively, and the loss and loss adjustment expense ratio for the property and casualty business increased from 48% and 72% for the three months and nine months ended September 30, 1999, respectively, to 58% and 80% for the three months and nine months ended September 30, 2000, respectively. Policy acquisition costs decreased as a percentage of net premiums earned from 56%, or $15,543,000, and 51%, or $41,466,000, for the three months and nine months ended September 30, 1999, respectively, to 48%, or $11,991,000 and 49%, or $41,052,000, for the three months and nine months ended September 30, 2000, respectively. The decrease is primarily attributable to higher ceding commissions pursuant to the Company's surety quota share reinsurance. General operating costs increased as a percentage of net premiums earned from 12%, or $3,285,000 to 13%, or $3,269,000, for the three months ended September 30, 1999 and September 30, 2000, respectively, and the ratio decreased from 14%, or $11,782,000 to 13%, or $11,083,000, for the nine months ended September 30, 1999 and September 30, 2000, respectively. The increase in general and administrative ratio for the three months ended September 30, 2000 is reflective of decreased net premiums earned for the three months ended September 30, 2000. Interest expense increased 2% and 13% from $593,000 and $1,640,000 for the three months and nine months ended September 30, 1999, respectively, to $602,000 and $1,852,000 for the three months and nine months ended September 30, 2000, respectively. The increase is attributable to an increase in average funds held on which the Company pays interest from $38,511,000 for the nine months ended September 30, 1999 to $46,800,000 for the nine months ended September 30, 2000. Income before income taxes decreased from loss of $4,091,000 and income of $1,972,000 for the three months and nine months ended September 30, 1999, respectively, to a loss of $4,236,000 and $20,558,000 for the three months and nine months ended September 30, 2000, respectively, due to the factors outlined above. The effective tax rate was a benefit of 33% and an effective tax rate of 31% for the three months and nine months ended September 30, 1999, respectively, as compared to a benefit of 26% and 30% for the three months and nine months ended September 30, 2000, respectively. The primary reason for the variance from the corporate income tax rate of 34% is tax advantaged income received on a portion of the Company's investment portfolio offset by certain non-deductible expenses. Changes to the Company's estimated effective tax rate are recorded quarterly. Net results decreased from a net loss of $2,746,000 and net income of $1,359,000 for the three months and nine months ended September 30, 1999, respectively, to net loss of $3,127,000 and $14,316,000 for the three months and nine months ended September 30, 2000, respectively, due to the factors outlined above. Liquidity and Capital Resources As of September 30, 2000, the Company held total cash and cash equivalents and invested assets of $101,656,000. This amount includes an aggregate of $43,328,000 in funds held as collateral, which is shown as a liability on the Company's consolidated balance sheets. As of September 30, 2000, the Company's invested assets consisted of $75,187,000 in fixed maturities, $4,617,000 in common equity securities, $3,100,000 in preferred equity securities, $4,654,000 in other invested assets and $3,366,000 in short-term investments, including certificates of deposit with original maturities less than one year. Because the Company depends primarily on dividends from its insurance subsidiaries for its net cash flow requirements, absent other sources of cash flow, the Company cannot pay dividends materially in excess of the amount of dividends that could be paid by the insurance subsidiaries to the Company. The State of Nebraska regulates, through the Office of the Insurance Commissioner, the amount of dividends which can be paid by a domestic insurance company utilizing various formula methodology. The Company has entered into a revolving credit agreement, as amended, with Union Bank for $15,000,000. At September 30, 2000, $14,500,000 of the $15,000,000 line is currently utilized and the remaining $500,000 is no longer available. The bank loan has a variable rate of interest and has amortizing principal payments. The first installment is due September 30, 2001. The interest rate at September 30, 2000 was 9.75%. The credit agreement contains certain financial covenants with respect to capital expenditures, business acquisitions, liquidity ratio, leverage ratio, tangible net worth, net profit and dividend payments. The Company is currently in violation of Section 5.13 of the revolving credit agreement pertaining to a minimum of $32,500,000 in policyholder surplus, Section 5.14 pertaining to a maximum operating leverage ratio of 3:1, and Section 5.15 pertaining to maintaining an A.M. Best rating of A- or better for Amwest Surety Insurance Company and its subsidiaries. On August 30, 2000, the Company received notification from Union Bank acknowledging violation of these financial covenants and stating that no further borrowings are possible under the Credit Agreement and all outstanding Eurodollar Rate Borrowings will, at the expiration of the applicable interest period, be converted into Base Rate Borrowings. In addition, the debt was reassigned to the Special Asset Group ("SAG") for purposes of future negotiations. The Company is currently working to provide the SAG with pertinent information regarding an action plan and will attempt to negotiate new terms and covenants, however, no assurance can be given that the Company would be successful in doing so. Should the Company be unsuccessful in negotiating new terms and covenants, the Company could be deemed to be in default and all sums then owing shall be due and immediately payable. The Company is a party to a lease with ACD2 for its corporate headquarters. This lease has a term of 15 years and contains provisions for scheduled lease charges. The Company's minimum commitment with respect to this lease in 2000 is approximately $223,000. The Company also has the option to purchase this office building and land commencing on April 27, 2000 and extending for a seven months period at a predetermined rate for the building, with the value of land based on then existing market rates. The Company has exercised such option in the second quarter of 2000 and currently anticipates closing by December 1, 2000. Other than the Company's obligations with respect to funds held as collateral, the Company's obligation to pay claims as they arise, the Company's commitments to pay principal and interest on the bank debt and lease expenses as noted above, the Company has no significant cash commitments. The Company generated $7,461,000 and used $4,748,000 in cash from operating activities for the three months and nine months ended September 30, 1999, respectively, as compared to using $9,443,000 and $28,413,000 for the three months and nine months ended September 30, 2000, respectively. The significant increase noted in cash used from operating activities for the nine months ended September 30, 2000 was primarily attributed to higher frequency and severity of losses, primarily within the contract surety product line, and the resulting claim payments. The Company generated $657,000 and $2,720,000 in cash from investing activities for the three months and nine months ended September 30, 1999, respectively, as compared to generating $15,744,000 and $30,292,000 for the three months and nine months ended September 30, 2000. The Company generated $5,612,000 and $15,106,000 in cash from financing activities for the three months and nine months ended September 30, 1999, respectively, as compared to using $639,000 and $6,968,000 for the three months and nine months ended September 30, 2000, respectively. As a result of significant operating losses experienced during the nine months of 2000, the Company's capital levels have materially decreased. The Company is currently undergoing an intensive analysis of operations designed to improve operating results by refining the Company's market focus, decreasing net retention levels on our property and casualty business and significantly reducing operating expenses. The Company believes that such actions will also improve the recent negative trends of cash outflows from operating activities. Additionally, the Company believes it must quickly raise additional capital or enter into one or more strategic alliances which would provide same. The Company has engaged Cochran, Caronia, & Co. LLC, an investment-banking firm, to immediately seek strategic alliances or other capital-raising alternatives on behalf of the Company. No assurance can be given such efforts will succeed. Other Matters Year 2000 issues: The Company did not experience material Year 2000 problem and does not expect to incur any significant additional costs related to Year 2000 matters. Other issues: Certain statements contained in this Form 10-Q regard matters which are not historical facts and are forward looking statements. Because such forward-looking statements include risks and uncertainties, actual results may differ materially from those expressed in or implied by such forward looking statements. Factors that could cause actual results to differ materially include, but are not limited to: the ineffectiveness of changes made by management, a deterioration in premiums written or losses incurred in the Company's surety and other specialty businesses, the ability to achieve increased percentage writings of commercial surety and court products, the lack of adherence by branch personnel to Company underwriting guidelines, the ability of the Company to obtain a waiver or amendment regarding a covenant included in the Company's revolving bank credit agreement, failure of the Company to raise additional capital or to successfully consummate a strategic alliance, a reduction in the investment yield earned on the Company's investment portfolio, or general economic decline. The Company undertakes no obligation to release publicly the results of any revisions to these forward looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. The table on this page shows, for the periods indicated, the gross premiums written, net premiums earned, net losses and loss adjustment expenses and loss and loss adjustment expenses ratios for the Company's specialty property and casualty operations and surety operations.
TABLE 1 AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES SUMMARY OF PREMIUMS AND LOSSES BY PRODUCT LINE (Dollars in thousands) Three months ended Nine months ended Year ended September 30, September 30, December 31, ------------- ------------- ------------ Type of Bond 2000 1999 2000 1999 1999 1998 ------------ ---- ---- ---- ---- ---- ---- Surety Gross premiums written $28,200 $28,773 $88,861 $82,722 $ 108,184 $ 102,270 Net premiums earned 18,740 20,638 61,675 63,533 85,500 84,166 Net losses and loss adjustment expenses 12,975 10,955 41,303 20,343 27,373 23,262 Loss ratio and loss adjustment expense ratio 69% 53% 67% 32% 32% 28% Property & Casualty Gross premiums written $10,958 $7,196 $30,244 $21,424 $ 28,304 $ 30,549 Net premiums earned 6,406 7,094 21,378 18,178 25,044 21,805 Net losses and loss adjustment expenses 3,726 3,376 17,189 13,077 20,937 17,569 Loss ratio and loss adjustment expense ratio 58% 48% 80% 72% 84% 81% Total Company Gross premiums written $ 39,158 $ 35,969 $ 119,105 $ 104,146 $136,488 $132,819 Net premiums earned 25,146 27,732 83,053 81,711 110,544 105,971 Net losses and loss adjustment expenses 16,701 14,330 58,492 33,419 48,310 40,831 Loss ratio and loss adjustment expense ratio 66% 52% 70% 41% 44% 39%
PART II - OTHER INFORMATION AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES Items 1-4: LEGAL PROCEEDINGS, CHANGE IN SECURITIES, DEFAULTS UPON - --------- SENIOR SECURITIES, SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None Item 5: OTHER INFORMATION - ------ ----------------- Effective October 6, 2000, Neil F. Pont resigned as the Company's Senior Vice President and as a member of its Board of Directors. He also resigned from all positions with the Company's subsidiaries in order to pursue other business interests. Item 6: EXHIBITS AND REPORTS ON FORM 8-K - ------ (a) Exhibits See the Exhibit Index on page 17. (b) Reports on Form 8-K The Company filed one Form 8-K during the three months ended September 30, 2000: The report dated August 30, 2000 included an Item 5 matter and Press Release announcing A.M. Best's rating change. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMWEST INSURANCE GROUP, INC. Date: November 14, 2000 by: /s/ JOHN E. SAVAGE ----------------------- John E. Savage President, Co-Chief Executive Officer and Chief Operating Officer (Principal Executive Officer) by: /s/ PHILLIP E. HUFF ----------------------- Phillip E. Huff Senior Vice-President, Treasurer (Principal Financial and Principal Accounting Officer) AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES EXHIBIT INDEX Exhibit Number Description Location 2 Plan of acquisition, reoganization, arrangement, liquidation or succession None 4 Instruments defining the rights of security holders, including indentures Not required 11 Statement re computation of per share earnings Page 8, Note 4 15 Letter re unaudited interim financial information None 18 Letter re change in accounting principles None 19 Previously unfiled documents None 20 Report furnished to security holders None 23 Published report regarding matters submitted to vote of security holders None 24 Consents of experts and counsel None 25 Power of attorney None 28 Additional exhibits None EX-27 2 0002.txt FDS --
7 (Replace this text with the legend) 0000780118 Phillip Huff 1,000 U.S. Dollars 3-mos DEC-31-1999 JUL-01-2000 SEP-30-2000 1 0 0 75,187 7,717 0 0 90,924 10,732 42,844 19,734 251,807 76,030 62,640 0 0 14,500 0 0 43 42,569 251,807 25,146 1,540 1,198 443 16,701 11,991 3,269 (4,236) (1,109) (3,127) 0 0 0 (3,127) (.73) (.73) 56,466 63,614 13,407 26,079 31,379 76,030 0
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