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 $6,000.
American Country Holdings Inc. (the "Company") is engaged in the specialty property and casualty insurance and premium finance business through its subsidiaries American Country Insurance Company ("American Country"), American Country Financial Services Corp. ("Financial Services") and American Country Professional Services Corp. ("ACPS").
American Country is a property and casualty insurance carrier domiciled in the State of Illinois. American Country and its predecessor has been a writer of commercial and personal lines of business, specializing in public transportation risks, principally taxicabs and limousines, for nearly twenty years.
American Country and Financial Services experienced non-recurring costs related to the Acquisition of approximately $1 million in late 1996 and the first nine months of 1997 which will not impact future operations. Subsequent to the Acquisition in July, 1997, American Country no longer pays annual management fees and administrative fees in excess of $1 million. Since the Acquisition, American Country has been repositioning and refocusing its strategic philosophy to expand its transportation and restaurant and hospitality products, significantly reduce its personal lines business (which had an underwriting loss of $1.7 million for 1997 and $1.9 million for 1996), implement plans to improve operating efficiencies and reduce the costs of managing its business. At the end of 1997, American Country decided not to market any personal lines business and not to accept any new personal lines business from independent agents. As a result of these efforts, American Country recorded a charge of approximately $400,000 in 1997 primarily for termination benefits that were paid in 1997 that is estimated to result in future annual savings in salaries and benefits. In addition, fixed income advisors have been engaged to enhance the quality and yield on the portfolio of invested assets.
Premium revenues for personal lines decreased from $8.6 million for 1997 to $297,000 for 1998, a decrease of 96.5%. The decrease is attributable to the reinsurance agreement entered into at the beginning of 1998, pursuant to which nearly all of American Country's personal lines business was reinsured by Ohio Casualty and to American Country's decision to cease marketing personal lines business and to cease accepting personal lines business from independent agents.
Net investment income increased nominally during 1998. Income earned on invested assets amounted to $7.1 million during 1998 as compared to $7.0 million for 1997. Although invested assets increased 3.6% during the period, declining yields resulted in only a 1.6% increase in earned investment income. Realized gains for 1998 decreased $134,000, an 8.3% decrease from 1997. Upon the appointment of professional investment advisors in late 1997, the Company's portfolio of invested assets was restructured to achieve stated guidelines, and as a result, significant gains were realized. Investment expenses for 1998 were $702,000 as compared to $1.1 million in 1997, which resulted in savings of $423,000 in 1998, primarily the result of the appointment of professional investment advisors.
Loss and loss adjustment expenses for 1998 decreased from 88.8% of premium revenues during 1997 to 79.6% for 1998. This decrease is attributable to lower claims activity in all lines and also reflects cost reductions effected in late 1997 primarily through savings in payments to staff and legal support.
The ratio for losses and LAE for hospitality lines declined slightly to 75.2% in 1998 from 76.0% in 1977. Although claims activity increased during 1998 due to the geographic and market expansion of this program, loss ratios remained relatively constant during the year.
The ratio of losses and LAE for personal lines during 1998 decreased to 8.4% compared to 94.4% in 1997, primarily due to the reinsurance agreement with Ohio Casualty and the decision to cease marketing this business and accepting personal lines business from independent agents.
Policy acquisition costs decreased $300,000 or 3.3% during 1998. However, when expressed as a percentage of premium revenues, policy acquisition costs increased from 15.2% in 1997 to 15.7% for 1998. The increase is attributable to additional acquisition expenses being incurred in connection with American Country's geographical expansion into new states and increased costs, primarily commissions paid to producers.
The following table sets forth the net premiums earned by the principal lines or products of insurance underwritten by American Country for the periods indicated and the dollar amount and percentage of change therein from year to year:
Transportation lines, which consists of taxi and limousine liability and physical damage programs, grew during the period as more accounts were underwritten and American Country began its geographic diversification program after the Acquisition in July, 1997.
Hospitality lines premium revenues decreased slightly to $3.4 million from $3.7 million in 1996. This decrease is attributable to the softening of certain commercial pricing and also to the re-underwriting program initiated during the fourth quarter of 1997.
Other commercial lines declined in revenue contribution by decreasing approximately 14% over 1996. This decrease was due to the continuing soft pricing market being experienced industry-wide. Average premiums on American Country's workers' compensation line (its largest commercial lines product) decreased 30.5% on new business over the same period for 1996 and 10.7% on renewal business. Management is observing this situation very closely and in the fourth quarter of 1997 instituted a re-underwriting program to reevaluate each risk on the policy's renewal date.
Personal lines' premiums generated revenues of $8.6 million in 1997, representing a 4.1% increase over 1996. This slower growth rate over the recent years represents action taken by management due to its concern with the poor returns experienced for this line. Effective as of January 1, 1998, an agreement was signed with Ohio Casualty, a major writer of personal lines business, pursuant to which Ohio Casualty reinsures nearly all of American Country's personal lines business.
Losses and loss adjustment expenses for 1997 increased from 80.7% of premium revenues during 1996 to 88.1% for 1997. This increase is attributable to higher claims in personal and commercial lines.
American Country's transportation lines continued to perform well, resulting in a combined ratio of 90.0% for 1997. This compared to a combined ratio of 88.3% for 1996. This slight deterioration is attributable to a slight increase in the loss and LAE ratio and to increased acquisition costs due to geographic expansion of this program during the fourth quarter.
Losses and loss adjustment expense for American Country's hospitality lines decreased from 1996 levels resulting in a loss ratio of 63.0% for 1997 as compared to 82.2% for 1996. This reduction is the result of lower frequency of claims for hospitality lines, as well as reduced adjustment costs.
At December 31, 1998, the Company's total assets of $168.3 million was comprised of the following: Cash and investments, 82.0%; reinsurance recoverables, 8.0%, premiums receivable, 4.4%; deferred expenses (policy acquisition costs and deferred taxes) 3.6%; fixed assets, .5%; and other assets, 1.5%.
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 which are rated as investment grade with a carrying value of $122.4 million and constituting 98% of the Company's fixed maturity investments.
At December 31, 1998, the following table provides a profile of the Company's fixed maturity investment portfolio by rating:
On April 30, 1998 the Company negotiated a $15 million revolving line of credit facility with a new lender bearing a maturity date of April 30, 2001. Interest on the borrowings under the facility may be based on the prime rate minus one percent (1%), Eurodollar loan or the Federal Funds rate. At December 31, 1998, the unused portion of the line of credit was $5.7 million. The weighted average interest rate on the outstanding line of credit for 1998 was 6.4%. Total interest expense in 1998 and 1997 was $491,000 and $161,000 respectively. Repayment of this debt is expected to be funded by dividends from the operating subsidiaries.
The Company's federal income tax returns for all periods prior to the Acquisition were consolidated with those of its former owner. Income tax expenses were computed on a separate company basis.
For the period April 17, 1997, through July 29, 1997, American Country and Financial Services filed a consolidated return with its previous parent, American Country Holdings Corp.
Effective with the acquisition on July 29, 1997, 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.
The ratios of total adjusted capital to authorized control level RBC for American Company were in excess of their required amounts at both December 31, 1998 and 1997.