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 $61,600. The current lease expires in May 2002. On March 1, 2002, the Company entered into a new lease for office space at 500 West Madison Street, Chicago, Illinois, for its executive officers and insurance operations. The new lease expires on December 31, 2012.
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 $7,200.
Transportation lines, which consists of taxi and limousine liability and physical damage programs and Workers Compensation, grew during 2001 as a result of increased writings in the Chicago taxi market as well as American Country's geographic expansion into additional states. Total premium revenues generated by transportation lines grew 11.8% to $55.9 million in 2001 as compared to $50.0 million in 2000. In 2001, revenues generated outside of Illinois increased from $18.8 million in 2000 to $21.4 million in 2001. This represents 38.3% of total transportation premium earned in 2001. This increase is attributable to the programs in Connecticut, Indiana, Michigan, Minnesota, New York and Wisconsin.
attributable to American Country's decision to exit the contractor commercial lines market effective April 1, 2001.
American Country's hospitality lines experienced a decrease in premium revenues of 29.1% to $6.0 million in 2001 as compared to $8.5 million in 2000. In 2000, the hospitality program accomplished its significant growth outside of Illinois by expanding into the states of Massachusetts, Michigan, Minnesota, New Jersey and Pennsylvania. In 2001, American Country chose to non-renew the non-Illinois hospitality program effective June 1, 2001, resulting in the current year decrease in premium revenue. The decrease is also the result of a quota share reinsurance agreement entered into on April 1, 2000. Under the treaty, American Country ceded 50% of the hospitality lines premium for the period of January 1 through June 1, 2001.
Other income, which consists of interest and fees earned on premium financing activities decreased to $108,000 in 2001 as compared to $217,000 for 2000. This is due to reduced premium finance activity.
Loss and loss adjustment expenses for 2001 increased from 94.5% of premium revenues in 2000 to 112.6% for 2001. This increase is attributable to the substantial reserve increase taken in 2001, as described in Note 6.
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.
Loss and loss adjustment expenses for 2000 increased from 91.3% of premium revenues in 1999 to 94.5% for 2000. This increase is attributable to higher claims activity in all lines.
At December 31, 2001, the Company's total assets of $196.2 million was comprised of the following: cash and investments, 70.0%; reinsurance recoverables, 12.1%, premiums receivable, 7.6%; deferred expenses (policy acquisition costs and deferred taxes) 6.5%; fixed assets, 0.5%; and other assets, 1.7%.
The Company generally invests in securities with fixed maturities with the objective of providing reasonable returns while limiting liquidity and credit risk. In February 2001, the Company began investing in convertible securities. Embedded derivatives are classified as fixed maturities or equity securities in the Consolidated Balance Sheets, consistent with the host instruments. The Company's investment portfolio consists primarily of fixed income debt securities of which the vast majority are rated as investment grade. The fixed maturity investment portfolio has a carrying value of $126.9 million and constitutes 97% of the Company's total investments.
The amortized cost and fair value of fixed maturities by contractual maturity at December 31, 2001, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
At December 31, 2001, the following table provides a profile of the Company's fixed maturity investment portfolio by rating:
As a holding company, the Company receives cash principally through fees and dividends from subsidiaries and borrowings, certain of which are subject to restrictions and regulatory approval. The ability of insurance companies to underwrite insurance is based on maintaining liquidity and capital resources sufficient to pay claims and expenses as they become due. The primary sources of liquidity for American Country are funds generated from insurance premiums, investment income, and proceeds from the sales and maturities of portfolio investments. The principal expenditures are for payment of losses and
LAE, operating expenses, commissions and dividends to stockholders. The Company believes its sources of liquidity are sufficient to meet its cash requirements.
On October 5, 1999, the Board of Directors entered into a loan agreement with 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.
On November 7, 2001, the outstanding balance on the revolver was $2.25 million. On March 5, 2002, the amendment reduced the amount available under the agreement to $2.0 million through May 30, 2002, and to $1.0 million thereafter. The Company made a payment of $250,000 on March 20, 2002 to reduce the balance to $2.0 million. Under the terms of the amended agreement, the revolving line of credit matures on November 30, 2002.
The Company intends to fund the $1.0 million payment on the revolver due May 30, 2002 and the $2.0 million payment on the term loan due on May 31, 2002 via a loan from the insurance company. The Illinois Insurance Code allows for a loan of the lessor of 3% of admitted assets or 25% of policyholders surplus of the prior year without prior approval by the Illinois Insurance Department. Statutory Admitted Assets at December 31, 2001 were $157,296,658 and Policyholders Surplus was $25,557,272. Therefore, the Company may borrow up to $4.7 million from the insurance company without prior approval from the Illinois Insurance Department.
In the event of a change in control, which is defined in part as the ceasing of Wilmer J. Thomas, Jr. and Martin L. Solomon to own collectively, at least 51% of the outstanding voting shares of the Company, the full amount of the debt becomes immediately due and payable. If the Tender Offer by KFS Acquisition Corp. ("KFS") (see Note 15) is successful, the change in control provision in the amended agreement would be triggered. KFS has indicated that it has sufficient cash on hand to repay the debt in full.
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, 2001 and 2000.
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.