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 $6,600.
The following selected financial data are derived from the Company's consolidated financial statements. The data should be read in conjunction with the consolidated financial statements, related notes and other financial information included elsewhere in this report.
The following discussion and analysis should be read in conjunction with the 1999 Consolidated Financial Statements and notes thereto.
In 1999, American Country continue the run-off of its personal lines business. Due to the expiration of the expense-sharing component of the reinsurance agreement with Ohio Casualty, American Country has recognized expenses in 1999 that were previously shared under the agreement. Additionally, American Country increased loss and loss adjustment reserves for its Workers Compensation line by $3.5 million over management's original estimate. The reserve increase is attributable to prior years, primarily 1996 through 1998, and is the result of increasing medical costs and extended length of disability experienced by workers covered under these policies. In addition, American Country continues to be adversely affected by the continuing pricing pressures in the commercial insurance market.
Premium revenues for personal lines decreased from $297,000 for 1998 to $94,000 for 1999, a increase 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.
Net investment income increased 6.8% during 1999. Income earned on invested assets amounted to $7.6 million during 1999 as compared to $7.1 million for 1998. Although invested assets increased $1.2 million during the period, declining yields resulted in only a modest increase in earned investment income. Realized gains for 1999 decreased $1.8 million, a 123.1% decrease from 1998. 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 in 1998. These gains did not continue in 1999. Investment expenses for 1999 were $670,000 as compared to $702,000 in 1998, which resulted in savings of $32,000 in 1999, primarily the result of lower market values of bonds held.
Other income, which consists of interest and fees earned on premium financing activities decreased from $315,000 in 1998 to $215,000 in 1999, a 31.7% decrease. The decrease is the result of the lower volume of premium finance contracts entered into in 1999.
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, as well as the reduced premium base of this line.
Administrative and general expenses decreased 12.0% in 1999 as a result of lower general expenses incurred in connection with the operating activities of the Company. 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.
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
At December 31, 1999, the Company's total assets of $176 million was comprised of the following: Cash and investments, 76.3%; reinsurance recoverables, 8.6%, premiums receivable, 7.4%; deferred expenses (policy acquisition costs and deferred taxes) 5.6%; fixed assets, .5%; and other assets, 1.6%.
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 $126.6 million and constituting 98% of the Company's fixed maturity investments.
As a holding company, the Company receives cash principally through fees and dividends from subsidiaries and borrowings, certain of which are subject to dividend 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, commissions and fee 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.
Cash flow generated from operations for the year ended December 31, 1999 and 1998 was $3.3 million and $390,000 respectively, which amounts were adequate to meet all obligations during the periods. The increase in cash flow for the year ended December 31, 1999 compared to the year ended December 31, 1998 is primarily related to the increase in premiums and to an increase in loss reserves.
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, 1999, the unused portion of the line of credit was $3.8 million. The weighted average interest rate on the outstanding line of credit for 1999 was 6.0%. Total interest expense in 1999 and 1998 was $584,000 and $491,000 respectively. Repayment of this debt is expected to be funded by dividends from the operating subsidiaries.
The line of credit agreement contains various debt covenants including conditions for prepayment and certain financial covenants, the most restrictive covenant being the ratio of debt to equity. American Country was in compliance with all covenants of the agreement as of December 31, 1999.
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 Country were in excess of their required amounts at both December 31, 1999 and 1998.
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. It is expected that codification will be adopted by the State of Illinois and be
implemented in 2001, which will likely change, to some extent, prescribed, statutory accounting practices, and may result in changes in the Company's insurance subsidiary's statutory surplus.
Property and casualty insurance premiums are established before the amount of losses and LAE, or the extent to which inflation may affect such expenses, are known. Consequently, American Country attempts, in establishing its premiums, to anticipate the potential impact of inflation. However, for competitive and regulatory reasons, American Country may be limited in raising its premiums commensurate with anticipated inflation, in which event American Country, rather than its insureds, would absorb inflation costs. Inflation also affects the rate of investment return on American Country's investment portfolio with a corresponding effect on American Country's investment income.
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, 1999. The Company disclaims any obligation to update forward-looking information.
The following is a summary of unaudited quarterly results of operations for 1999 and 1998 (in thousands, except per share data):