The Company leases office space at 222 N. LaSalle Street, Chicago, Illinois, for its executive offices and insurance operations. The 39,000 square feet facility has a monthly rental of approximately $66,400. The current lease expires in May 2002.
The Company leases space at two additional locations in the Chicago area for purposes of storage and claim handling. The aggregate monthly rental is approximately $4,700.
American Country Holdings Inc. is engaged in the specialty property and casualty insurance, premium finance, collateralized finance, managing general underwriter and third party claims administrator business through its subsidiaries American Country Insurance Company, American Country Financial Services Corp., American Country Professional Services Corp. and American Country Underwriting Agency Inc.
In 2000, American Country continued to be adversely affected by the continuing pricing pressures in the commercial insurance market. Due to this competition, American Country believes that its commercial lines products are currently under-priced, even with the current hardening of the market, and therefore American Country has decided to non-renew its contractor commercial lines business and refocus its underwriting efforts in the public livery lines.
Administrative and general expenses increased 45.8% in 2000 as a result of higher corporate expenses incurred. The increase is also due to a reduction in the amount of expenses capitalized as deferred acquisition costs. Expenses that are not capitalized are included in administrative and general expenses. Interest expense for 2000 increased by $239,000 to $823,000, due to a lump sum interest payment due on the revolving credit agreement, and also due to increased interest rates.
Premium revenues for American Country's hospitality lines increased 38.6% to $7.1 million in 1999 as compared to $5.1 million in 1998. The hospitality program continued its significant growth outside of Illinois by expanding into the states of Minnesota and New Jersey.
Loss and loss adjustment expenses for 1999 increased from 79.6% of premium revenues during 1998 to 91.3% for 1999. This increase is attributable to higher claims activity, particularly in the commercial lines, and includes the $3.5 million reserve adjustment for prior years' Workers Compensation losses.
Transportation lines loss ratios increased during 1999, with a loss and loss adjustment expense ratio of 80.3% as compared to 79.6% for 1998. This increase is attributable to higher claims frequency and a conservative reserving philosophy in American Country's new markets.
The ratio for losses and LAE for hospitality lines increased from 75.2% in 1998 to 92.7% in 1999. Claims activity increased during 1999 due to the geographic and market expansion of this program. Additionally, the loss ratio increased due to three substantial fire losses.
The Company generally invests in securities with fixed maturities with the objective of providing reasonable returns while limiting liquidity and credit risk. As a result, its investment portfolio consists primarily of fixed income debt securities of which the vast majority are rated as investment grade. The investment portfolio has a carrying value of $126.4 million and constitutes 98% of the Company's fixed maturity investments.
At December 31, 2000 and 1999, the Company's fixed asset maturity securities included mortgage-backed bonds of $46.1 million and $35.4 million, respectively, which are subject to risks associated with variable prepayments of the underlying mortgage loans. Prepayments can cause those securities to have different actual maturities than that expected at the time of purchase. Securities that have an amortized cost greater than par that are backed by mortgages that prepay faster than expected will incur a reduction in yield or loss, while securities that have an amortized cost less than par that are backed by mortgages that prepay faster than expected will generate an increase in gain or yield. The degree to which a security is susceptible to either gains or losses is influenced by the difference between its amortized cost and par, the relative sensitivity of the underlying mortgages backing the assets to prepayments in a changing interest rate environment and the repayment priority of the securities in the overall securitization structure.
The Company does not own or utilize derivative financial instruments for the purpose of hedging, enhancing the overall return of its investment portfolio, or reducing the cost of its debt obligations. The Company employs traditional investment management tools and techniques to address the yield and valuation exposures of its invested assets. The long term fixed maturity investment portfolio is managed so as to limit various risks inherent in the bond market. Credit risk is addressed through adequate diversification and the purchase of investment grade securities. Reinvestment rate risk is controlled by concentrating on non-callable issues, and through asset-liability matching practices. Purchases of mortgage and asset backed securities, which have variable principal prepayment options, are monitored. Market value risk is limited through the purchase of bonds of intermediate maturity. The combination of these investment management tenets generally provides a more stable long term fixed maturity investment portfolio that is
not subject to extreme interest rate sensitivity and principal deterioration. The market value of the Company's long term fixed maturity investment portfolio is sensitive, however, to fluctuations in the level of interest rates, but not materially affected by changes in anticipated cash flows caused by any prepayments. The impact of interest rates movements on the long term fixed maturity investment portfolio generally affects net realized gains or losses when securities are sold. With a market value of approximately $126.4 million, the long term fixed maturity investment portfolio has an average maturity of 5.2 years and an indicated duration of 3.41 years. This implies that a 100 basis point parallel increase in interest rates from current levels would result in a possible decline in the market value of the long term fixed maturity investment portfolio of approximately 3.5%, or $4.8 million. These possible declines in values for bond portfolios would affect negatively the common stockholders' equity at any point in time, but would not necessarily result in the recognition of realized investment losses as long as operating cash flow and the ongoing emergence of bond maturities continued to provide sufficient funds to meet obligations to policyholders and claimants, as well as debt service and cash dividend requirements at the holding company level.
The Company files a consolidated return with its subsidiaries, and accordingly the Company has executed a tax sharing agreement, which requires the subsidiaries to pay the Company amounts equal to the federal income tax that would be payable if the subsidiaries filed on a stand-alone basis.
*Or, 2.5 with negative trend. The ratios of total adjusted capital to authorized control level RBC for American Country were in excess of their required amounts at both December 31, 2000 and 1999.
The Company cautions readers regarding certain forward-looking statements contained in the foregoing sections and elsewhere and in any other statements made by, or on behalf of, the Company, whether or not in future filings with the Securities and Exchange Commission. Forward-looking statements are statements not based on historical facts. In particular, statements using verbs such as "expect," "intend," "plan," "anticipate," "believe" or similar words generally involve forward-looking statements. Forward-looking statements include but may not be limited to, statements relating to future plans, targets and objectives, financial results, cyclical industry conditions, government and regulatory policies, the uncertainties of the reserving process and the competitive environment in which the Company operates.
The following is a summary of unaudited quarterly results of operations for 2000 and 1999 (in thousands, except per share data):