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 spring 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 18 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, 1995, 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 auditors. The consolidated financial statements as of December 31, 1995 and 1994 and for each of the years in the three year period ended December 31, 1995 and the report thereon are included elsewhere in this Annual Report on Form 10-K.
Results of Operations Year ended December 31, 1995 compared to year ended December 31, 1994
Premiums written decreased 0.6% from $70,486,000 in 1994 to $70,083,000 in 1995. The decrease in premiums written is attributable primarily to the court and non-contract product lines, while the contract performance product line experienced a slight increase in premium. Premium growth in the contract performance line is attributable to increased volume in the central region and the acquisition of Basic Bonding of Louisiana in February of 1995.
Net premiums earned increased 8.8% from $61,829,000 in 1994 to $67,298,000 in 1995. The increase in net premiums earned reflects the increased premium writings in the latter half of 1994 which were earned during 1995. The Company earns premiums ratably over the estimated bond terms.
Net losses and loss adjustment expenses increased 56.9% from $14,104,000 in 1994 to $22,134,000 in 1995. This resulted in an increase in the loss and loss adjustment expense ratio from 22.8% in 1994 to 32.9% in 1995. The increased loss ratio is primarily attributable to increased loss severity in the contract performance product line.
Policy acquisition costs as a percentage of net premiums earned decreased from a ratio of 51.6% or $31,898,000 in 1994 to 50.1% or $33,709,000 in 1995. The decrease is attributable to a combination of an increase in contingent commissions recorded by the Company from its reinsurers based on the experience of the excess of loss treaty and increased average commission rates paid to agents in 1995.
General operating costs also decreased as a percentage of net premiums earned from 20.3% or $12,582,000 in 1994 to 16.9% or $11,351,000 in 1995. The decrease in the actual amount of general operating costs is primarily attributable to earthquake related charges and the loss on subleasing a portion of the Company's headquarters facility during 1994 together with decreased bonus accruals during 1995 due to less profitable results in 1995 versus 1994.
Income before income taxes decreased 40.8% from $5,952,000 in 1994 to $3,522,000 in 1995 due to the factors outlined above. Excluding the Proposition 103 accrual income before income taxes decreased to $5,522,000 in 1995.
The effective tax rate was 23% for the year ended December 31, 1994 as compared to 17.2% 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 36.4% from $4,588,000 in 1994 to $2,917,000 in 1995 due to the factors outlined above. Excluding the accrual of the Proposition 103 premium refund net income decreased by 7.7% to $4,237,000.
Year ended December 31, 1994 compared to year ended December 31, 1993
Net losses and loss adjustment expenses increased 17.4% from $12,012,000 in 1993 to $14,104,000 in 1994. The loss and loss adjustment expense ratio decreased slightly from 24.0% in 1993 to 22.8% in 1994.
Income before income taxes and extraordinary item increased 9% from $5,439,000 in 1993 to $5,952,000 in 1994 due to the factors outlined above.
The effective tax rate, including the effective rate on the extraordinary loss, was 25% for the 1993 period as compared to an effective rate of 23% for the 1994 period. The lower effective tax rate in 1994 is attributed to a greater amount of investment income derived from tax-advantaged securities in 1994.
Extraordinary loss from early extinguishment of debt of $249,000, net of income tax benefit of $128,000, was recorded during 1993 due to the refinancing of $12,300,000 of bank indebtedness which was completed in August 1993. The Company incurred a prepayment penalty associated with the existing loan which was accrued in the second quarter of 1993. There were no extraordinary items incurred during 1994.
Effective with such closing of the merger (the "Merger"), the separate existence of Condor ceased. In the Merger, each outstanding share of Condor's Common Stock (other than shares owned by Condor as treasury stock or by Amwest or its subsidiaries, all of which were canceled) were converted into the right to receive 0.5 of a share of Amwest Common Stock. No fractional shares of Amwest Common Stock were issued in the Merger. After the Merger, there were approximately 3,320,000 shares of Amwest Common Stock outstanding.
As of December 31, 1995, the Company had total cash and cash equivalents and investments of $111,037,000. Included in these amounts is an aggregate of $37,650,000 in funds held as collateral which are shown as a liability on the Company's consolidated balance sheet. As of December 31, 1995, the Company's investment balances were comprised of $97,785,000 in fixed maturities held at market, $5,588,000 in common equity securities, $2,956,000 in preferred equity securities, $797,000 in other invested assets and $745,000 in short-term investments.
At various times from 1989 through 1995, the Company has engaged in programs to repurchase its common stock on the open market. During 1995, the Company repurchased and retired 15,000 shares for a cost of $226,000, before brokerage commissions and fees. From January 1, 1989 through December 31, 1995, the Company has repurchased and retired 299,200 shares at an aggregate cost of approximately $3,020,000 before brokerage commissions and fees.
On December 30, 1988, the Company borrowed $12,300,000 (the "1988 Loan") pursuant to a credit agreement with Security Pacific National Bank of which $10,000,000 was contributed on that date to the surplus of Amwest Surety. See Note 10 of Notes to Consolidated Financial Statements.
The Company is a party to a lease with Trillium/Woodland Hills regarding its corporate headquarters. Such lease contains provisions for scheduled lease charges and escalations in base rent over the lease term. The Company's minimum commitment with respect to this lease in 1996 (without cost of living escalation) is approximately $2,058,000. This lease expires in July 1998. See Note 12 of Notes to Consolidated Financial Statements.
Other than the Company's obligations with respect to funds held as collateral, the Company's obligations to pay claims as they arise, the Company's commitments to pay principal and interest on the bank debt, the Company's obligation under Proposition 103 and lease expenses as noted above, the Company has no significant cash commitments.