The Company leases office space for its remote claims offices in Minnesota, Connecticut, Pennsylvania and New York. The aggregate monthly rental is approximately $8,900.
The Company believes that it currently has adequate space for expansion at its existing facilities.
The following discussion and analysis should be read in conjunction with the 2000 Consolidated Financial Statements and notes thereto.
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 livery risks, principally taxicabs and limousines, since 1978.
American Country's hospitality lines experienced the largest percentage growth in premium revenues over other lines, increasing over 19% to $8.5 million in 2000 as compared to $7.1 million in 1999. The hospitality program accomplished its significant growth outside of Illinois by expanding into the states of Massachusetts, Michigan, Minnesota, New Jersey and Pennsylvania. The increase was offset by a quota share reinsurance agreement entered into on April 1, 2000. Under the treaty, American Country ceded 30% of the hospitality lines premium for the 2nd quarter, and 50% of the hospitality lines premium for the 3rd and 4th quarters.
Net investment income increased $904,000 or 11.9% during 2000, primarily due to increased yields on bonds held during 2000. Income earned on invested assets amounted to $8.5 million during 2000 as compared to $7.6 million for 1999, again the result of increased yield on the bond portfolio. Realized losses for 2000 decreased $148,000, a 43.3% decrease from 1999. This is the result of management's focus on investment income rather than total return. Investment expenses for 2000 increased $7,000 or 1.1% as compared to 1999.
Transportation lines loss ratio declined in 2000 to 80.1% as compared to 80.3% for 1999. This decrease is attributable to lower claims activity in the State of Illinois.
The ratio for losses and LAE for hospitality lines increased to 98.9% in 2000 from 92.7% in 1999. This is primarily due to three substantial fire losses during the year. Additionally, the quota share reinsurance agreement is a loss only treaty. Therefore, American Country incurs all of the loss adjustment expense, which results in an increase in the loss ratio.
expansion into new states and increased costs, primarily commissions paid to producers. Due to premium deficiencies in the commercial lines, certain expenses were not capitalized, but rather immediately expensed.
Premium revenues generated from American Country's other commercial lines decreased by approximately 12.5% in 1999 to $17.2 million from $19.7 million for 1998. This decrease is primarily attributable to American Country's re-underwriting program as well as continuing pricing pressures in the industry. American Country realized a small amount of return premium from its reinsurers, which resulted in additional earned premium for this line not attributable to existing policies.
Premium revenues for personal lines decreased from $297,000 for 1998 to $94,000 for 1999, a decrease of 68.3%. 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.
Losses and LAE for personal lines during 1999 increased to $861,000 compared to ($48,000) in 1998, primarily due to the expiration of the expense-sharing component of the reinsurance agreement with Ohio Casualty.
Administrative and general expenses decreased 12.0% in 1999 as a result of lower general expenses incurred in connection with the operating activities of American Country. The decrease is attributable to cost saving initiatives begun during the fourth quarter of 1997 and continued through 1999, primarily due to higher productivity per employee. The number of full-time employees increased by only 5.6%, as compared to an 18.6% increase in revenue for 1999. Interest expense for 1999 increased by $93,000 to $584,000, due to increased borrowings.
At December 31, 2000, the following table provides a profile of the Company's fixed maturity investment portfolio by rating:
On December 27, 2000, the Company sold 814,286 Units and 405,000 shares of Series A convertible preferred stock in a private placement exempt from registration under Regulation D of the Securities Act. Janney Montgomery Scott LLC, an investment banking firm, acted as placement agent. The proceeds of the private placement were $5,475,000 with the Company receiving $5,251,000 and Janney Montgomery Scott receiving $193,500 for their services as placement agent. The Company applied the proceeds toward working capital and general corporate purposes.
Cash flow generated from operations for the year ended December 31, 2000 and 1999 was $3.3 million and $3.3 million respectively, which amounts were adequate to meet all obligations during the periods. The level of operating cash flow for the years ended December 31, 2000 and December 31, 1999 is primarily related to increases in premiums and increases in loss reserves for each of the two years.
On October 5, 1999, the Board of Directors signed an agreement with The Northern Trust wherein the Company's existing $15.0 million line of credit was converted to an $8.0 million four-year term loan and a $7.0 million 364 day revolving credit facility. Under the $8.0 million term loan, as amended, the first installment of $1.0 million is due April 30, 2002 and the term was extended to six years. The interest rate on the term loan, as amended, is based upon LIBOR + 1.25% through April 30, 2004, and LIBOR + 1.50% for the remainder of the term.
Management believes that it is more likely than not that the current temporary differences will reverse during the periods in which the Company generates net taxable income. The Company expects to generate sufficient taxable income to realize its loss and credit carryforwards within the statutory carryforward period. There are, however, no assurances that the Company will generate any earnings or any specific level of continuing earnings in future years. Certain tax planning strategies could be implemented to supplement income from operations to fully utilize recorded tax benefits.
In their ongoing effort to improve solvency regulation, the NAIC and individual states have enacted certain laws and financial statement changes. The NAIC has adopted Risk-Based Capital ("RBC") requirements for property and casualty insurance companies to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks such as asset quality, mortality and morbidity, asset and liability matching, benefit and loss reserve adequacy, and other business factors. The RBC formula is used by state insurance regulators as an early warning tool to identify, for the purpose of initiating regulatory action, insurance companies that potentially are inadequately capitalized. In addition, the formula defines new minimum capital standards that supplement the current system of low fixed minimum capital and surplus requirements on a state-by-state basis. Regulatory compliance is determined by a ratio of the company's regulatory total adjusted capital, as defined by the NAIC, to its authorized control level RBC, as defined by the NAIC. Companies below specific trigger points or ratios are classified within certain levels, each of which requires specific corrective action. The levels and ratios are as follows:
The NAIC recently completed its process of recodifying statutory accounting practices ("codification"), the result of which is the only source of "prescribed" statutory accounting practices after adoption by the state of domicile. Codification will be adopted by the State of Illinois and be implemented in 2001, which will change, to some extent, prescribed, statutory accounting practices, and may result in changes in the Company's insurance subsidiary's statutory surplus.
The purpose of these regulatory efforts at all levels is to improve the monitoring of insurer solvency. These regulatory initiatives, and the overall focus on solvency, may intensify the restructuring and consolidation of the insurance industry. While the impact of these regulatory efforts on the Company's
operations cannot be quantified until enacted, the Company believes it will be adequately capitalized to compete in an environment of more stringent regulation.
Forward-looking statements are based upon estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond the Company's control and subject to change. These uncertainties can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements. Whether or not actual results differ materially from forward-looking statements may depend on numerous foreseeable and unforeseeable events or developments, some of which may be national in scope, such as general economic conditions and interest rates. Some of these events or developments may be related to the insurance industry generally, such as pricing competition, regulatory developments and industry consolidation. Others may relate to the Company specifically, such as credit, volatility and other risks associated with the Company's investment portfolio, and other factors. Investors are also directed to consider other risks and uncertainties discussed in documents filed by the Company with the SEC, including Exhibit 99 to the Annual Report to the Securities and Exchange Commission on Form 10-K for the year ended December 31, 2000. The Company disclaims any obligation to update forward-looking information.