The Company leases all of its office space which, as of December 31, 1999, totaled approximately 156,000 square feet. The home office aggregates approximately 63,000 square feet. Branch locations range from 150 to 4,600 square feet. See Note 12 of Notes to Consolidated Financial Statements.
The selected data presented below under the captions "Summary of Earnings," "Year End Financial Position" and "Operating Ratios" for, and as of the end of, each of the years in the five year period ended December 31, 1999, are derived from the consolidated financial statements of Amwest Insurance Group, Inc. and subsidiaries, which financial statements have been audited by KPMG LLP, independent certified public accountants. The consolidated financial statements as of December 31, 1999 and 1998 and for each of the years in the three year period ended December 31, 1999 and the report thereon, are included elsewhere in this Annual Report on Form 10-K.
Year ended December 31, 1999 compared to year ended December 31, 1998
The premium growth was due to premium increases in the surety product lines. Premiums for the surety business increased 6% from $102,270,000 in 1998 to $108,184,000 in 1999. The increase is attributable to increased writings in the court and commercial surety operations. The Company is focused on increasing non-contract surety production and has increased the percentage of this business from 39% of total surety writings in 1998 to 43% of total surety writings in 1999.
Premiums for the property and casualty business decreased 7% from $30,549,000 in 1998 to $28,304,000 in 1999. The decrease is primarily due to discontinuation of the California and Arizona Private Passenger Automobile and California Homeowners programs during 1999.
Commissions and fees decreased 4% from $2,854,000 in 1998 to $2,736,000 in 1999. The decrease is primarily due to a decrease in fees charged to the policyholders on the property and casualty business due to discontinuation of the California and Arizona Private Passenger Automobile and California Homeowners programs in 1999 partially offset by an increase in fee income on property bonds and funds control business.
Interest expense increased 18% from $1,917,000 in 1998 to $2,267,000 in 1999. The increase is attributable to an increase in average funds held on which the Company pays interest from $27,488,000 for 1998 to $40,407,000 for 1999.
Income before income taxes decreased from $9,012,000 in 1998 to $516,000 in 1999 due to the factors outlined above.
The effective tax rate was 30% in 1998 as compared to 15% in 1999. The primary reason for the variance from the corporate income tax rate of 34% is tax-advantaged income received on a portion of the Company's investment portfolio offset by certain non-deductible expenses.
Commissions and Fees increased 365% from $615,000 in 1997 to $2,854,000 in 1998. The increase is primarily due to the addition of funds control business in 1998 and the purchase of Liberty Bonding Company in 1998 which writes property bonds.
Competitive market conditions and the Company's ability to write surety bonds for larger contractors has resulted, on many bonds, in the substitution of indemnity agreements for liquid and non-liquid collateral. The Company, through its ongoing reserve analysis, has estimated the benefit to be derived from such agreements and reduced estimates of ultimate losses incurred accordingly. In the fourth quarter of 1998, the Company increased its estimate of such "salvage and subrogation" recoveries by approximately $5.4 million which is partially attributable to salvage and subrogation on losses incurred during the fourth quarter. The increase relates primarily to the 1998 and 1997 years and reflects the Company's belief that the underlying data is maturing. Further, subsequent collection efforts have proven prior estimates to be conservative. Since the Company had also pierced it's aggregate excess contract in the fourth quarter, the net benefit attributable to the increased "salvage and subrogation" estimate was approximately $1,025,000.
General operating costs decreased as a percentage of net premiums earned from 14% or $12,624,000 in 1997 to 13% or $14,310,000 in 1998. The decrease in the ratio is due to increased efficiency in servicing an increased premium base. The 1998 amounts include a non-recurring $319,000 charge in connection with the disposition and write-off of the Company's New York probate operation.
The Company's off balance sheet collateral which primarily consists of irrevocable letters of credit and certificates of deposit increased from $218,360,000 at December 31, 1998 to $241,649,000 at December 31, 1999. This increase is primarily attributable to increased commercial surety writings.
The Company is a party to a lease with ACD2 regarding its corporate headquarters. The lease term is for a period of 15 years and contains provisions for scheduled lease charges. The Company's minimum commitment with respect to this lease in 2000 is approximately $893,000. The Company has the option to purchase this home office building and land commencing on April 27, 2000 and extending for a six month period at a predetermined rate for the building, with the value of land based on then existing market rates. See Note 12 of Notes to Consolidated Financial Statements.
Other than the Company's obligations with respect to funds held, the Company's obligations to pay claims as they arise, the Company's commitments to pay principal and interest on the bank debt and lease expenses as noted above, the Company has no significant cash commitments.
The Company used $1,538,000, $697,000 and $9,716,000 in cash from operating activities in the fiscal years ended December 31, 1997, 1998 and 1999, respectively. The Company generated $3,835,000, used $7,526,000 and generated $4,382,000 in cash for investing activities for the fiscal years ended December 31, 1997, 1998 and 1999, respectively. The Company used $4,924,000, generated $6,847,000 and generated $18,724,000 in cash from financing activities for the fiscal years ended December 31, 1997, 1998 and 1999, respectively. The cash used for operating activities in 1999 increased approximately $9,000,000 due primarily to an increase in contract settlement funds receivable. Such increase is attributable to increased funding of principals to complete various contracts currently in claim.
Certain statements contained in this Form 10-K regard matters which are not historical facts and are forward looking statements. Because such forward-looking statements include risks and uncertainties, actual results may differ materially from those expressed in or implied by such forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to: the ineffectiveness of the recently modified commercial transportation products, a deterioration in premiums written or losses incurred in the Company's surety and other specialty business, the inability to achieve increased percentage writings of commercial surety and court products, a decline in the Company's credit or other third party ratings, the lack of adherence by branch personnel to Company underwriting guidelines, a reduction in the investment yield earned on the Company's investment portfolio, or a general economic decline. The Company undertakes no obligation to release publicly the results of any revisions to these forward looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.