On January 26, 1996, the Company entered into a lease agreement for new home office space in the City of Calabasas, located approximately 7 miles from its current home office. The expected occupancy date for this office space is June 1997. The lease term is for a period of 15 years and covers approximately 63,000 square feet. The Company also has the option to purchase this new home office building and land three years into the lease period at a predetermined rate for the building, with the value of land based on then existing market rates.
The selected data presented on page 20 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, 1996, are derived from the consolidated financial statements of Amwest Insurance Group, Inc. and subsidiaries, which financial statements have been audited by KPMG Peat Marwick LLP, independent certified public accountants. The consolidated financial statements as of December 31, 1996 and 1995 and for each of the years in the three year period ended December 31, 1996 and the report thereon, are included elsewhere in this Annual Report on Form 10-K.
Year ended December 31, 1996 compared to year ended December 31, 1995
Premiums written increased 3.3% from $94,184,000 in 1995 to $97,242,000 in 1996. The increase in premiums written is attributable primarily to court probate bonds subsequent to the Company's acquisition of Southern California Bonding, Inc. in March of 1996.
Net losses and loss adjustment expenses increased 32.3% from $35,265,000 in 1995 to $46,647,000 in 1996. This resulted in an increase in the loss and loss adjustment expense ratio from 41.4% in 1995 to 53.1% in 1996. The increased loss ratio is primarily attributable to an increase in the loss and loss adjustment expense ratio for contract performance and payment bonds from 40.3% in 1995 to 52.9% in 1996 as well as adverse loss experience on the Company's private passenger automobile program in the State of Arizona. The loss ratio on contract performance and payment bonds was negatively impacted by increased severity caused by a number of large losses reported in 1996. Such losses were not limited to any one geographic area. The adverse loss development on private passenger business in Arizona is due to general rate inadequacy for that program.
The Company's underwriting loss increased from $4,474,000 for the year ended December 31, 1995 to $9,829,000 for the year ended December 31, 1996. The combined ratio increased from 105.3% in 1995 to 111.2% in 1996. The increase in the underwriting loss is primarily attributable to increased losses on the contract performance and payment bond and Arizona private passenger automobile lines of business as discussed above.
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's lease at its current headquarters will now terminate on June 30, 1997 at which time the Company intends to occupy a new facility in Calabasas, California at significantly reduced rental rates.
Income (loss) before income taxes decreased from income of $4,498,000 in 1995 to a loss of $5,046,000 in 1996 due to the factors outlined above.
Year ended December 31, 1995 compared to year ended December 31, 1994
Premiums written remained relatively flat at $94,222,000 in 1994 as compared to $94,184,000 in 1995. No product line had significant changes in written premium from 1994 to 1995.
Net losses and loss adjustment expenses increased 22.7% from $28,737,000 in 1994 to $35,265,000 in 1995. This resulted in an increase in the loss and loss adjustment expense ratio from 35.5% in 1994 to 41.4% in 1995. The increased loss ratio is primarily attributable to an increase in the loss and loss adjustment expense ratio on the contract performance and payment bond product line from 26.0% in 1994 to 40.3% in 1995. The loss ratio on contract performance and payment bonds was negatively impacted by increased severity caused by a number of large losses reported in 1995. Such losses were not limited to any one geographic area.
Underwriting income (loss) decreased from income of $329,000 for the year ended December 31, 1994 to an underwriting loss of $4,474,000 for the year ended December 31, 1995. Excluding the Proposition 103 accrual, the Company would have had an underwriting loss of $2,474,000 for the year ended December 31,1995. The reason for the underwriting loss is a combination of the facts previously discussed. The combined ratio increased from 99.6% in 1994 to 105.3% in 1995.
Net investment income and realized investment gains (losses) increased 35.6% from $7,402,000 in 1994 to $10,039,000 in 1995. This increase is primarily due to an increase in realized gains on sales of investments from $65,000 in 1994 to $2,176,000 in 1995. This change of $2,111,000 was augmented by slightly higher yields on larger invested balances during 1995. Such higher yields were predominately attributable to investments made prior to the general decline in interest rates during 1995.
The effective tax rate was 21.2% for the year ended December 31, 1994 as compared to 18.4% for the year ended December 31,1995 . The lower effective tax rate in 1995 is attributed to a greater amount of income before income taxes derived from tax-advantaged securities in 1995.
Net income decreased 27.2% from $5,041,000 in 1994 to $3,669,000 in 1995 due to the factors outlined above. Excluding the accrual of the Proposition 103 premium refund net income decreased by 1.0% to $4,989,000.
In addition, cash collateral declined from $37,650,000 at December 31, 1995 to $29,928,000 at December 31, 1996. The Company reflects in its consolidated financial statements only funds received as collateral on which net earnings inure to the benefit of the Company. The decline in this amount is primarily attributed to decreased writings in those lines of business for which cash collateral is generally accepted. These include contractor's license bonds and sales tax bonds. The amount of cash collateral can also be impacted by the timing and payment of claims activity related to draws on irrevocable letters of credit and certificates of deposit.
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 1997.
The Company generated $8,534,000, used $1,252,000 and generated $1,346,000 in cash from operating activities in the fiscal years ended December 31, 1994, 1995 and 1996, respectively. The Company used $12,394,000 and generated $10,363,000 and $8,741,000 in cash for investing activities for the fiscal years ended December 31, 1994, 1995 and 1996, respectively. The Company generated $1,327,000, and used $10,143,000 and $8,885,000 in cash from financing activities for the fiscal years ended December 31, 1994, 1995 and 1996, respectively. The cash used for investing activities in 1994 was funded principally by operating activities.