-----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, GveOIbt64/oqkx2UASYu6kqiIRIsD0B4EnPjr7WeDF4wXepIgDMsA6BYiLAtPwPz Lwrn/bJRPh2ueZ/1gqVxtw== 0000780118-99-000010.txt : 19990812 0000780118-99-000010.hdr.sgml : 19990812 ACCESSION NUMBER: 0000780118-99-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMWEST INSURANCE GROUP INC CENTRAL INDEX KEY: 0000780118 STANDARD INDUSTRIAL CLASSIFICATION: SURETY INSURANCE [6351] IRS NUMBER: 952672141 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09580 FILM NUMBER: 99684229 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 FORM 10Q 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, 1999 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____ to ____ Commission file number: 1-9580 AMWEST INSURANCE GROUP, INC. (Exact name of registrant as specified in its charter) Delaware 95-2672141 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5230 Las Virgenes 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, 1999, 4,328,210 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, 1999 and 1998 (unaudited) 3 Consolidated Balance Sheets as of June 30, 1999 (unaudited) and December 31, 1998 4 Consolidated Statements of Cash Flows for the three months and six months ended June 30, 1999 and 1998 (unaudited) 6 Notes to Interim Consolidated Financial Statements 8 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Part II. OTHER INFORMATION: Item 1 Legal Proceedings 16 Item 2 Changes in Securities 16 Item 3 Defaults Upon Senior Securities 16 Item 4 Submission of Matters to a Vote of Security Holders 16 Item 5 Other Information 17 Item 6 Exhibits and Reports on Form 8-K 17 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, -------- -------- 1999 1998 1999 1998 ---- ---- ---- ---- OPERATIONS Gross premiums written $ 36,042 $ 35,044 $ 68,177 $ 64,386 -------- -------- -------- -------- Net premiums earned ............................................................ $ 26,986 $ 27,248 $ 53,979 $ 54,372 Net investment income .......................................................... 1,705 1,560 3,474 3,137 Net realized investment gains .................................................. 1,297 1,065 2,037 1,885 Commissions and fees ........................................................... 522 515 1,129 728 -------- -------- -------- -------- Total revenues ....................................................... 30,510 30,388 60,619 60,122 -------- -------- -------- -------- Net losses and loss adjustment expenses ........................................ 10,003 11,188 19,089 20,096 Policy acquisition costs ....................................................... 12,736 13,317 25,923 27,464 General operating costs ........................................................ 4,558 3,794 8,497 7,161 Interest expense ............................................................... 493 506 1,047 911 -------- -------- -------- -------- Total expenses ........................................................ 27,790 28,805 54,556 55,632 -------- -------- -------- -------- Income before income taxes ..................................................... 2,720 1,583 6,063 4,490 Provision for income taxes ..................................................... 980 608 1,958 1,459 -------- -------- -------- -------- Net income .............................................................. $ 1,740 $ 975 $ 4,105 $ 3,031 ======== ======== ======== ======== Earnings per common share: Basic ................................................................... $ 0.40 $ 0.23 $ 0.95 $ 0.72 ======== ======== ======== ======== Diluted ............................................................... $ 0.40 $ 0.22 $ 0.95 $ 0.70 ======== ======== ======== ======== COMPREHENSIVE INCOME (LOSS) Net income ..................................................................... $ 1,740 $ 975 $ 4,105 $ 3,031 Other comprehensive income (loss): Unrealized gains(losses) on securities, net of income taxes of $253 and $49 for the three months ended June 30, 1999 and 1998, and $563 and $(982) for the six months ended June 30, 1999 and 1998, respectively ................................ (491) (96) (1,093) 1,907 Reclassification adjustment for gains included in net income ............................................................... (822) (659) (1,374) (1,271) -------- -------- -------- -------- Comprehensive income ............................................... $ 427 $ 220 $ 1,638 $ 3,667 ======== ======== ======== ========
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, 1999 1998 -------------------- --------------------- (unaudited) Investments: Fixedmaturities, available-for-sale (amortized cost of $104,145 and $105,355 at June 30, 1999 and December 31, 1998, respectively) $102,537 $107,227 Common equity securities, available-for-sale (cost of $4,124 and $7,692 at June 30, 1999 and December 31, 1998, respectively) 6,837 10,572 Preferred equity securities, available-for-sale (cost of $4,417 and $4,258 at June 30, 1999 and December 31, 1998, respectively) 4,695 4,265 Other invested assets (cost of $7,478 and $4,058 at June 30, 1999 and December 31, 1998, respectively) 7,430 4,375 Short-term investments 2,482 2,201 -------------------- --------------------- Total investments 123,981 128,640 Cash and cash equivalents 1,779 2,431 Accrued investment income 1,557 1,470 Agents balances and premiums receivable (less allowance for doubtful accounts of $1,015 at June 30, 1999 and December 31, 1998, respectively) 22,237 17,309 Reinsurance recoverable: Paid loss and loss adjustment expenses 5,140 6,236 Unpaid loss and loss adjustment expenses 11,941 9,837 Ceded unearned premiums 7,810 8,584 Deferred policy acquisition costs 22,274 20,209 Furniture, equipment and improvements, net 6,475 6,267 Income taxes recoverable 121 951 Other assets 17,904 14,357 -------------------- --------------------- Total assets $221,219 $216,291 ==================== =====================
AMWEST INSURANCE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Continued) (Dollars in thousands, except share data) LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, December 31, 1999 1998 -------------------- --------------------- (unaudited) Liabilities: Unpaid losses and loss adjustment expenses $ 38,932 $ 42,244 Unearned premiums 52,779 51,627 Funds held 40,405 30,542 Bank indebtedness 14,500 14,500 Amounts due to reinsurers 331 4,393 Deferred Federal income taxes 2,411 3,185 Other liabilities 8,689 7,898 -------------------- --------------------- Total liabilities 158,047 154,389 Stockholders' equity: Preferred stock, $.01 par value, 1,000,000 shares authorized; issued and outstanding: none - - Common stock, $.01 par value, 10,000,000 shares authorized, issued and outstanding: 4,316,977 at June 30, 1999 and 4,311,580 at December 31, 1998 43 39 Additional paid-in capital 19,583 19,183 Net unrealized appreciation of investments carried at market, net of income taxes 881 3,349 Retained earnings 42,665 39,331 ------------------- --------------------- Total stockholders' equity 63,172 61,902 -------------------- --------------------- Total liabilities and stockholders' equity $221,219 $216,291 ==================== =====================
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, -------- -------- 1999 1998 1999 1998 ---- ---- ---- ---- Cash flows from operating activities: Net income $ 1,740 $ 975 $ 4,105 $ 3,031 Adjustments to reconcile net income to cash provided by operating activities: Change in agents' balances and premiums receivable and unearned premiums (699) 3,138 (3,776) (329) Change in accrued investment income 58 15 (87) (42) Change in unpaid losses and loss adjustment expenses (110) 1,907 (3,312) 1,440 Change in reinsurance recoverable on paid and unpaid losses and loss adjustment expenses and ceded unearned premiums 2,854 (1,585) (234) (814) Change in amounts due to/from reinsurers (6,250) 289 (4,062) 433 Change in other assets and other liabilities (1,988) 2,631 (3,011) 3,126 Change in income taxes, net 326 (451) 1,327 1,397 Change in deferred policy acquisition costs (1,565) (1,852) (2,065) (2,156) Net realized gain on sale of investments (1,297) (1,066) (2,037) (1,885) Net realized (gain)loss on sale of fixed assets (1) 6 (5) 8 Provision for depreciation and amortization 454 356 947 749 ---------------- --------------- ---------------- -------------- Net cash provided (used) by operating activities (6,478) 4,363 (12,210) 4,958 Cash flows from investing activities: Cash received from investments sold prior to maturity 12,489 15,214 27,418 31,967 Cash received from investments matured or called 3,613 3,347 6,374 6,908 Cash paid for investments acquired (13,907) (23,207) (30,928) (43,436) Amortization of discount on bonds 47 42 93 75 Capital expenditures, net (495) (488) (1,150) (876) Acquisition of agencies, net - (73) 256 (673) ---------------- --------------- ---------------- ------------ Net cash provided (used) by investing activities 1,747 (5,165) 2,063 (6,035) Cash flows from financing activities: Proceeds from issuance of common stock 51 540 409 719 Change in funds held 2,566 940 9,863 4,315 Dividends paid (389) (390) (777) (771) --------------- ---------------- ---------------- ------------ Net cash provided by financing activities 2,228 1,090 9,495 4,263 ---------------- --------------- ---------------- ------------ Net increase (decrease) in cash and cash equivalents (2,503) 288 (652) 3,186 Cash and cash equivalents at beginning of period 4,282 6,705 2,431 3,807 ---------------- --------------- ---------------- ------------ Cash and cash equivalents at end of period $ 1,779 $ 6,993 $1,779 $6,993 ================ =============== ================ ============ Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 493 $ 506 $ 1,047 $ 911 Income taxes 654 1,565 655 1,727
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, 1998. (2) Stock Dividend On April 15, 1999, the Company paid a 10% stock dividend to stockholders of record as of March 31, 1999. All share and per share amounts included in the accompanying consolidated financial statements and notes are based on the increased number of shares giving retroactive effect to the stock dividend. (3) Earnings Per Share Basic EPS is calculated based on the weighted average number of common shares outstanding and diluted EPS includes the effects of dilutive potential common shares. The calculation of basic and diluted EPS for the three months ended June 30, 1999 and 1998 is as follows:
Three months ended June 30, Income Shares Per-Share (Numerator) (Denominator) Amount ($ in thousands) (Dollars) ------------------- -------------------- ---------------- Basic EPS: 1999 $ 1,740 4,318,254 $ .40 1998 $ 975 4,248,499 $ .23 Effect of Dilutive Securities: 1999 6,910 1998 110,615 Diluted EPS: 1999 $ 1,740 4,325,164 $ .40 1998 $ 975 4,359,114 $ .22
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Premiums written increased 3% and 6% from $35,044,000 and $64,386,000 for the three months and six months ended June 30, 1998, respectively, to $36,042,000 and $68,177,000 for the three months and six months ended June 30, 1999, respectively. The premium growth was due to premium increases in the surety product lines. Premiums for the surety business increased 6% and 8% from $27,208,000 and $49,842,000 for the three months and six months ended June 30, 1998, respectively, to $28,916,000 and $53,949,000 for the three months and six months ended June 30, 1999, respectively. The increase is attributable to increased writings in the commercial surety and court operations. Premiums for the property and casualty business decreased 9% and 2% from $7,836,000 and $14,544,000 for the three months and six months ended June 30, 1998, respectively, to $7,126,000 and $14,228,000 for the three months and six months ended June 30, 1999, respectively. The decrease is primarily due to discontinuation of the Arizona Private Passenger Automobile and California Homeowners programs in 1999. Net premiums earned decreased 1% from $27,248,000 and $54,372,000 for the three months and six months ended June 30, 1998, respectively, to $26,986,000 and $53,979,000 for the three months and six months ended June 30, 1999, respectively. The decrease is primarily attributable to an increase in premiums ceded by the Company pursuant to its quota share reinsurance treaties. The Company generally earns premiums ratably over the assigned bond terms for the surety business and the policy term for the specialty property and casualty business. Net investment income increased 9% and 11% from $1,560,000 and $3,137,000 for the three months and six months ended June 30, 1998, respectively, to $1,705,000 and $3,474,000 for the three months and six months ended June 30, 1999, respectively. The increase is due to an increase in the amount of average invested assets from $124,340,000 at June 30, 1998 to $126,311,000 at June 30, 1999, and higher investment yields in 1999 due to rising interest rates in 1999. Realized investment gains increased from $1,065,000 and $1,885,000 for the three months and six months ended June 30, 1998, respectively, to $1,297,000 and $2,037,000 for the three months and six months ended June 30, 1999, respectively. The investments sold during the three months and six months ended June 30, 1999 were primarily equity securities and certain fixed income investments including mortgage-backed and municipal bond securities. Commissions and fees increased 1% and 55% from $515,000 and $728,000 for the three months and six months ended June 30, 1998, respectively, to $522,000 and $1,129,000 for the three months and six months ended June 30, 1999, respectively. The increase is primarily due to an increase in fee income from the Liberty Retail Bail division which was purchased in May, 1998. Net losses and loss adjustment expenses decreased 11% and 5% from $11,188,000 and $20,096,000 for the three months and six months ended June 30, 1998, respectively, to $10,003,000 and $19,089,000 for the three months and six months ended June 30, 1999, respectively. This decrease was driven by the surety business where the loss and loss adjustment expense ratio decreased from 31% and 27% for the three months and six months ended June 30, 1998, respectively, to 18% and 22% for the three months and six months ended June 30, 1999, respectively. The loss and loss adjustment expense ratio for the property and casualty operations increased from 80% and 79% for the three months and six months ended June 30, 1998, respectively, to 112% and 88% for the three months and six months ended June 30, 1999, respectively, primarily due to an increase of $1,800,000 for prior accident years, primarily relating to the 1997 underwriting year for the commercial trucking product. Policy acquisition costs decreased as a percentage of net premiums earned from 49%, or $13,317,000, and 51%, or $27,464,000, for the three months and six months ended June 30, 1998, respectively, to 47%, or $12,736,000, and 48%, or $25,923,000, for the three months and six months ended June 30, 1999, respectively. The decrease is primarily attributable to an increase in ceding commissions earned by the Company pursuant to its quota share reinsurance treaties. General operating costs increased as a percentage of net premiums earned from 14%, or $3,794,000, and 13%, or $7,161,000, for the three months and six months ended June 30, 1998, respectively, to 17%, or $4,558,000, and 16%, or $8,497,000, for the three months and six months ended June 30, 1999, respectively. The increase is primarily attributable to accrued severance expenses relating to personnel changes in the property and casualty operations during 1999 as well as higher bonus accruals in 1999 due to improved profitability. Interest expense decreased 3% from $506,000 to $493,000 for the three months ended June 30, 1998 and June 30, 1999, respectively, and increased 15% from $911,000 to $1,047,000 for the six months ended June 30, 1998 and June 30, 1999, respectively. The increase is attributable to an increase in average funds held on which the Company pays interest from $25,274,000 for the six months ended June 30, 1998 to $35,474,000 for the six months ended June 30, 1999. This is partially offset by a decrease in the interest rate on the bank indebtedness from an average rate of 7.5% for the six months ended June 30, 1998 to an average rate of 6.9% for the six months ended June 30, 1999. Income before income taxes increased from $1,583,000 and $4,490,000 for the three months and six months ended June 30, 1998, respectively, to $2,720,000 and $6,063,000 for the three months and six months ended June 30, 1999, respectively, due to the factors outlined above. The effective tax rate was 38% and 32% for the three months and six months ended June 30, 1998 as compared to an effective tax rate of 36% and 32% for the three months and six months ended June 30, 1999. The primary reason for the variance from the corporate income tax rate of 34% is tax advantaged income received on a portion of the Company's investment portfolio offset by certain non-deductible expenses. The Company has recorded for the six months ended June 30, 1999 its estimated effective tax rate for the year based on current underwriting and investment income recorded. Changes to the Company's estimated effective tax rate are recorded quarterly. Net income increased from $975,000 and $3,031,000 for the three months and six months ended June 30, 1998, respectively, to $1,740,000 and $4,105,000 for the three months and six months ended June 30, 1999, respectively, due to the factors outlined above. Liquidity and Capital Resources As of June 30, 1999, the Company held total cash and cash equivalents and invested assets of $125,760,000. This amount includes an aggregate of $40,405,000 in funds held which is shown as a liability on the Company's consolidated balance sheets. As of June 30, 1999, the Company's invested assets consisted of $102,537,000 in fixed maturities, $6,837,000 in common equity securities, $4,695,000 in preferred equity securities, $7,430,000 in other invested assets and $2,482,000 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, 1999, $14,500,000 of the $15,000,000 line is currently utilized leaving $500,000 currently available. The bank loan has a variable rate of interest based upon fluctuations in the London Interbank Offered Rate (LIBOR) and has amortizing principal payments. The first installment is due September 30, 2000. The interest rate at June 30, 1999 was 6.7%. The credit agreement contains certain financial covenants with respect to capital expenditures, business acquisitions, liquidity ratio, leverage ratio, tangible net worth, net profit and dividend payments. The Company is a party to a lease with ACD2 for its corporate headquarters. This lease has a term of 15 years and contains provisions for scheduled lease charges. The Company's minimum commitment with respect to this lease in 1999 is approximately $466,000. 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. Other than the Company's obligations with respect to funds held as collateral, the Company's obligation to pay claims as they arise, the Company's commitments to pay principal and interest on the bank debt and lease expenses as noted above, the Company has no significant cash commitments. The Company believes that its cash flows from operations and other present sources of capital are sufficient to sustain its needs for at least the remainder of 1999. The Company generated $4,363,000 and $4,958,000 in cash from operating activities for the three months and six months ended June 30, 1998, respectively, as compared to using $6,478,000 and $12,210,000 for the three months and six months ended June 30, 1999, respectively. The increase in usage of funds during the six months ended June 30, 1999 is primarily attributable to the timing of loss and reinsurance payments as well as an increase in agents balances and premiums receivable related to increased premiums written. There has been no significant increase in agents balance bad debt write offs, which is closely monitored by the Company. The Company used $5,165,000 and $6,035,000 in cash from investing activities for the three months and six months ended June 30, 1998, respectively, as compared to generating $1,747,000 and $2,063,000 for the three months and six months ended June 30, 1999, respectively. The Company generated $1,090,000 and $4,263,000 in cash from financing activities for the three months and six months ended June 30, 1998, respectively, as compared to generating $2,228,000 and $9,495,000 for the three months and six months ended June 30, 1999, respectively. Other Matters Year 2000 issues: The Company has summarized its exposure to Y2K issues by four general categories which are: 1. Corporate Systems 2. Surety Specific Systems 3. Property and Casualty Systems 4. Third Party (Vendor) Systems The Company's state of readiness with respect to each of these categories is as follows: Corporate Systems: The Company has four significant corporate wide applications which include Oracle financials, the system providing electronic interface between Oracle financials and the Company's bank, fixed asset accounting, payroll, and corporate e-mail. The Company has completed its assessment of these systems and believes that all of these systems are Y2K compliant. This conclusion is based on either certifications received from the third party vendor(s) supplying the system or testing performed by the Company for internally developed or modified systems. Surety Specific Systems: The Company has fourteen surety specific systems which vary in their significance from critical (such as the surety production system commonly known as ABS) to non-critical applications which only affect a small portion of the surety business (such as several retail bail production systems). The Company has completed its assessment of its fourteen surety specific systems and believes that all of the mission critical surety specific systems are Y2K compliant other than the Company's probate production system, cash collateral system and one bail system. This conclusion is based on either certifications received from the third party vendor(s) supplying the system or testing performed by the Company for internally developed or modified systems. The Company is currently in the process of modifying its ABS system in order for it to be used for probate production and is proceeding with completing system changes for the cash collateral and bail systems. The Company expects that these modifications will be completed during the third quarter of 1999, and will be implemented immediately thereafter. Property and Casualty Systems: The Company has four mission critical systems for its property and casualty operations. These include a personal lines system supplied by an outside vendor, a commercial lines system also supplied by an outside vendor, a system for electronic transmission of the Company's program business and data replicating software supplied by an outside vendor. The Company has completed its assessment of these four systems and believes that the personal lines system, the internally developed system for electronic transmission of program business and the data replicating system are Y2K compliant while the commercial lines system is not Y2K compliant. This conclusion is based on either certifications received from the third party vendor(s) supplying the system or testing performed by the Company for internally developed or modified systems. The Company is currently in the process of developing a new commercial lines system to replace the non-Y2K compliant system supplied by an outside vendor. The Company currently estimates that this system will be completed and installed during the third quarter of 1999. Third Party (Vendor) Systems: In addition to the above systems where the Company is primarily responsible for assessing, analyzing and implementing Y2K compliant systems, the Company may also be affected by any of the agents, brokers, suppliers, financial institutions or others with whom the Company does business who may be materially affected by Y2K problems and thus indirectly affect the Company. Where appropriate, the Company has inquired as to the state of readiness with respect to these third parties, but the Company has not performed any independent Y2K testing of these systems as the Company does not believe that such independent testing would be cost justified. Costs to Address the Year 2000 Issues: The majority of the costs associated with system development of year 2000 compliant systems have been associated with the development of the ABS surety production system and the property and casualty personal and commercial lines systems. In all three of these cases, the underlying previously utilized systems had significant business related flaws, such that they needed to be replaced without regard to year 2000 compliance issues. The Company does not believe that the incremental costs of making the replacement systems Y2K compliant were or will be significant. Further, for those systems which have been modified solely to assure Y2K compliance, the Company does not believe that these costs are material. Risks of the Company's Year 2000 Issues: The Company has analyzed the risks associated with the year 2000 issues and concluded that the biggest risk which the Company can have a reasonable influence toward preventing is the lack of Y2K compliance by the commercial lines property and casualty production system. The commercial lines represent approximately $20,000,000 of written premiums for the Company and the lack of a Y2K compliant system for this business could have a significant adverse impact on the Company's results. The Company has also reviewed the underwriting risks associated with its insureds for both the property and casualty and surety products and believes that the major risk with respect to Y2K non-compliance relates to the surety product. Should Y2K problems affect the ability of the Company's principals to complete projects and pay subcontractors on a timely basis it could have a material adverse affect on the Company's surety loss ratio. Further, should Y2K problems affect the ability of obligees to pay for work performed on bonded projects, liquidity issues for principals could also impact the Company's surety loss ratio. The Company is unable to estimate the affect such risks will have on the Company's financial results. Contingency Plans: Due to the potential for sweeping problems associated with the Y2K issue, the Company believes that any contingency plan for addressing Y2K must be flexible and part of a broad based disaster recovery plan. The Company's experience with disaster recovery (the Northridge earthquake) has led it to believe that a rigid disaster recovery plan will be less effective than a flexible plan which analyzes the specific problems associated with each unique disaster and proposes solutions based on the problems encountered. Other than for the specific internal systems which are not currently Y2K compliant and for which the Company is developing contingency plans (substantially based on temporary manual intervention), the Company believes that a broad based disaster recovery plan will be more effective in addressing the multitude of potential Y2K problems. The Company has developed a disaster recovery plan and will use this plan in responding to scenarios created by the Y2K problem. 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, poor results from the Company's new non-premium income generating programs, a deterioration in premiums written or losses incurred in the Company's surety and other specialty businesses, 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 1999 1998 1999 1998 1998 1997 ------------ ---- ---- ---- ---- ---- ---- Surety Gross premiums written $28,916 $27,208 $53,949 $49,842 $ 102,270 $ 82,611 Net premiums earned 21,395 21,631 42,895 43,562 84,166 70,565 Net losses and loss adjustment expenses 3,747 6,689 9,388 11,597 23,262 20,013 Loss and loss adjustment expense ratio 18% 31% 22% 27% 28% 28% Property & Casualty Gross premiums written $ 7,126 $ 7,836 $14,228 $14,544 $30,549 $25,480 Net premiums earned 5,591 5,617 11,084 10,810 21,805 21,585 Net losses and loss adjustment expenses 6,256 4,499 9,701 8,499 17,569 14,644 Loss and loss adjustment expense ratio 112% 80% 88% 79% 81% 68% Total Company Gross premiums written $36,042 $35,044 $68,177 $64,386 $132,819 $108,091 Net premiums earned 26,986 27,248 53,979 54,372 105,971 92,150 Net losses and loss adjustment expenses 10,003 11,188 19,089 20,096 40,831 34,657 Loss and loss adjustment expense ratio 37% 41% 35% 37% 39% 38%
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 21, 1999. (b) (i) The following directors were elected to serve until the 2002 Annual Meeting of Stockholders or until their successors have been duly elected and qualified: John E. Savage Guy A. Main Thomas R. Bennett (ii) The other directors whose terms of office continued after the meeting are: Richard H. Savage Steven R. Kay Neil F. Pont Bruce A. Bunner Robert W. Kleinschmidt Arthur F. Melton Roland D. Miller Charles L. Schultz (c) (i) Of the 3,850,628 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 John E. Savage 3,847,148 3,480 Guy A. Main 3,843,642 6,986 Thomas R. Bennett 3,845,696 4,932 Item 5: OTHER INFORMATION None Item 6: EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits See the Exhibit Index on page 19. (b) Reports on Form 8-K There were no reports filed on Form 8-K during the three months ended June 30, 1999. 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 10, 1999 by: /s/ JOHN E. SAVAGE ------------------------------------- John E. Savage President, Co-Chief Executive Officer and Chief Operating Officer (Principal Executive Officer) by: /s/ STEVEN R. KAY ------------------------------------ Senior Vice-President, Chief Financial Officer, Treasurer and Director (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 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 FDS --
7 (Replace this text with the legend) 0000780118 SIOBHAN HORTON 1,000 U.S. DOLLARS 3-MOS DEC-31-1998 APR-01-1999 JUN-30-1999 1 0 0 102,537 11,532 0 0 123,981 1,779 17,081 22,274 221,219 38,932 52,779 0 0 14,500 0 0 43 63,129 221,219 26,986 1,705 1,297 522 10,003 12,736 4,558 2,720 980 1,740 0 0 0 1,740 .40 .40 42,244 18,934 4,798 6,584 20,460 38,932 0
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