The Company leases all of its office space which, as of December 31, 1997, totaled approximately 154,000 square feet. The home office aggregates approximately 63,000 square feet. Branch locations range from 1,400 to 4,600 square feet. See Note 12 of Notes to Consolidated Financial Statements.
Net premiums earned increased 5% from $87,883,000 in 1996 to $92,150,000 in 1997. The increase in net premiums earned reflects the increased premium writings.
General operating costs decreased as a percentage of net premiums earned from 14.5% or $12,698,000 in 1996 to 13.7% or $12,606,000 in 1997. The decrease in the actual amount of general operating costs is primarily attributable to decreased home office occupancy costs due to the consolidation of the El Segundo and Woodland Hills home office locations in Calabasas, California during May and June of 1997.
The Company's underwriting loss decreased from $9,829,000 for the year ended December 31, 1996 to $492,000 for the year ended December 31, 1997. The combined ratio decreased from 111.2% in 1996 to 100.5% in 1997. The decrease in the underwriting loss is primarily attributable to decreased losses on the contract performance and payment bond product line and Arizona private passenger automobile lines of business as discussed above.
Interest expense decreased 11% from $2,217,000 in 1996 to $1,966,000 in 1997 primarily due to a decrease in funds held as collateral during 1997. At December 31, 1996 and 1997, the collateral balances accrued interest daily at an average rate of 3.8% and 3.7% per annum, respectively. Additionally, the average interest rate on the bank indebtedness decreased from an average rate of 7.8% during 1996 to an average rate of 7.3% during 1997 due to fluctuations during 1997 in the London Interbank Offered Rate (LIBOR) which is used as the benchmark for the Company's rate on bank indebtedness. This decrease was partially offset by an increase in the outstanding debt of $2,000,000 in June 1997. The interest rate on the Company's bank indebtedness at December 31, 1997 was 7.52%.
Merger expenses of $710,000 were incurred in 1996 in connection with the Merger of Condor Services, Inc. with and into Amwest Insurance Group, Inc. No such costs were incurred during 1997.
Lease termination costs of $1,300,000 were incurred in 1996 in connection with the signing of a definitive agreement to terminate the Company's lease at its Corporate headquarters prior to its scheduled termination in August 1998. The Company moved to a new facility in Calabasas, California at significantly reduced rental rates in June of 1997.
The effective rate of the tax benefit was 46.8% for the year ended December 31, 1996. The effective tax rate for 1997 is 26.1%. 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. Additionally, due to various factors arising during 1997, the Company eliminated its valuation allowance on its deferred tax assets.
Net income (loss) changed from a loss of $2,686,000 in 1996 to income of $5,498,000 in 1997 due to the factors outlined above.
Merger expenses of $710,000 was incurred in 1996 in connection with the Merger of CSI with and into Amwest Insurance Group, Inc. Subsequent to the Merger, the separate existence of CSI ceased. The Merger has been accounted for as a pooling of interests.
Net income (loss) decreased from income of $3,669,000 in 1995 to a loss of $2,686,000 in 1996 due to the factors outlined above.
The Company's off balance sheet collateral which primarily consists of irrevocable letters of credit and certificates of deposit declined from $215,315,000 at December 31, 1996 to $211,981,000 at December 31, 1997. This decrease is primarily attributable to competitive market conditions.
The Company believes that its cash flows from operations and other present sources of capital are sufficient to sustain its needs for the remainder of 1998.
Since 1996, the Company has been in the process of implementing a new surety production computer system. Implementation is scheduled in phases with project completion scheduled for the fourth quarter of 1998. This new surety production system is year 2000 compliant. The property and casualty operating computer systems are currently running in a version that is not year 2000 compliant. The company is working to install and test the year 2000 compliant version by October 1998. Additionally, the Company has tested and/or received certification from its vendors that the financial and corporate computer and communication systems are year 2000 compliant. The cost of achieving year 2000 compliance is not expected to have a materially adverse effect on the consolidated financial position of the Company.
The Company will adopt Statement of Financial Accounting Standards ("SFAS") No. 130, "Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" for the year ending December 31, 1998. These SFAS's require that additional information be included in a complete set of financial statements, but will have no effect on the Company's operations, cash flows or stockholders' equity.