-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IiUiCyp303iPIrwitGZtCeTns+jYCM5hX1bEbiIQgvJFotLTXRlIv2Nn/uQPKRm+ fKju+U6yv9ZUvJGguyylCg== 0000912057-00-015368.txt : 20000405 0000912057-00-015368.hdr.sgml : 20000405 ACCESSION NUMBER: 0000912057-00-015368 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 DATE AS OF CHANGE: 20000404 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN COUNTRY HOLDINGS INC CENTRAL INDEX KEY: 0000315411 STANDARD INDUSTRIAL CLASSIFICATION: 6331 IRS NUMBER: 060995978 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-22922 FILM NUMBER: 589652 BUSINESS ADDRESS: STREET 1: 222 N LASALLE STREET STREET 2: C/O JOHN DE ELORZA CITY: CHICAGO STATE: IL ZIP: 60601-1105 BUSINESS PHONE: 3124562000 MAIL ADDRESS: STREET 1: 222 N LASALLE STREET CITY: CHICAGO STATE: IL ZIP: 60601-1105 FORMER COMPANY: FORMER CONFORMED NAME: WESTERN SYSTEMS CORP DATE OF NAME CHANGE: 19970326 FORMER COMPANY: FORMER CONFORMED NAME: WESTERN TRANSMEDIA CO INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: VIGILANCE SYSTEMS CORP DATE OF NAME CHANGE: 19920202 10-K 1 10-K - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-22922 AMERICAN COUNTRY HOLDINGS INC. (Exact Name of Registrant as specified in its charter) DELAWARE 06-0995978 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 222 NORTH LASALLE STREET CHICAGO, ILLINOIS 60601-1105 (Address of principal executive offices) (Zip Code)
(312) 456-2000 (Registrant's telephone number including area code) Securities registered pursuant to Section 12(g) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED - - ----------------------------------------------- ----------------------------------------------- Common Stock, $.01 par value NASDAQ (Small Cap Market) Common Stock Purchase Warrants NASDAQ (Small Cap Market) Entitling holders to purchase 2.19 shares of Common Stock per warrant
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / The aggregate number of shares of the Registrant's Common Stock, $.01 par value, outstanding March 13, 2000 was 32,097,371. The aggregate market value of the voting stock (Common Stock, $.01 par value) held by non-affiliates of the Registrant was $5,406,146 on March 13, 2000, based on the closing sales price of the Common Stock on such date. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's definitive Proxy Statement for the 2000 Annual Meeting of Stockholders (incorporated by reference under Part III). This Report contains a total of 71 pages, excluding exhibits. The Exhibit Index appears on page 71. - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- AMERICAN COUNTRY HOLDINGS INC. INDEX TO ANNUAL REPORT ON FORM 10-K FISCAL YEAR ENDED DECEMBER 31, 1999 PART I...................................................... 2 ITEM 1. BUSINESS....................................... 2 ITEM 2. PROPERTIES..................................... 20 ITEM 3. LEGAL PROCEEDINGS.............................. 21 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................ 21 PART II..................................................... 21 ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS................ 21 ITEM 6. SELECTED FINANCIAL DATA........................ 22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................................... 23 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.... 31 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE......... 32 PART III.................................................... 33 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................................. 33 ITEM 11. EXECUTIVE COMPENSATION........................ 34 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......................... 34 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................... 34 PART IV..................................................... 35 ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K........................... 35 ITEM 14(a)(1) AND (2), (c), AND (d) LIST OF FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..... F-1 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-19 SIGNATURES.................................................. 36 EXHIBIT INDEX............................................... 37
PART I ITEM 1. BUSINESS. GENERAL American Country Holdings Inc. ("ACHI" or "the Company") is an insurance holding company which through its direct subsidiaries American Country Insurance Company ("American Country"), American Country Financial Services Corp. ("Financial Services") and American Country Professional Services Corp. ("Professional Services") conducts business as a specialty property and casualty insurer and provides premium financing and third-party administrator claims processing services for its insurance customers. Financial Services and Professional Services also provide secured loans for certain of American Country's customers. American Country is an Illinois domestic insurance company that specializes in the underwriting and marketing of commercial property and casualty insurance for a focused book of business. American Country concentrates on types of insurance in which it has expertise: transportation, hospitality and other commercial lines. American Country previously wrote a nominal amount of personal lines automobile and homeowners insurance. This business will not be renewed and is currently being run-off. Although American Country's specialty public transportation coverages (taxicab and limousine) are primarily written on risks in the City of Chicago and the surrounding suburbs, American Country has begun to extend its geographic coverage as part of its expansion program. American Country is licensed in the states of Connecticut, Illinois, Indiana, Iowa, Massachusetts, Michigan, Minnesota, New York, Pennsylvania, Wisconsin, and in the District of Columbia and has applications pending in California and New Jersey. American Country also is admitted as an excess and surplus lines carrier in 21 states. American Country currently maintains an A.M. Best Company, Inc. ("A.M. Best") rating of "A-" (Excellent). American Country writes transportation, hospitality, other commercial and personal lines insurance coverage. Transportation lines, which include automobile liability and physical damage coverages for taxicabs and limousines, accounted for 65.4% of total gross premiums written in 1999. Other commercial lines, which include multi-peril risks, workers' compensation and automobile liability and physical damage, accounted for 22.9% of total gross premiums written in 1999. Hospitality lines, which include coverage for restaurants, taverns and banquet halls, accounted for 11.6% of total gross premiums written in 1999. Personal lines, which include both automobile and homeowners' coverages, accounted for less than 1% of total gross premiums written in 1999. American Country's business is written by in-house salaried employees and through approximately 40 independent insurance producers located in the states in which American Country is licensed. A discussion of operating segments is contained in Note 14 of the financial statements that are included in Item 14 of this Report on Form 10-K. American Country is the successor to an insurance company that was organized in 1978 under the name Calumet Insurance Company. In 1997, American Country entered into a transaction with The Western Systems Corp. (Western Systems) in which a subsidiary of Western Systems acquired substantially all of the assets and assumed substantially all of the liabilities of American Country Insurance Company (American Country) and its wholly owned subsidiary, American Country Financial Services Corp. (Financial Services) for a purchase price of $40,300,000 (the "Acquisition"). Western Systems has sold its business operations in early 1997 and subsequently until the Acquisition its business consisted primarily of managing its cash and cash equivalents as a publicly owned shell corporation. As a non-operating entity with only monetary assets and liabilities, Western Systems was actively seeking a business combination with an operating business that could use its available cash. In connection with the Acquisition, Western Systems sold 24 million shares of its common stock (approximately 75% of the shares outstanding) to three investors. Mr. Martin Solomon, Mr. Wilmer J. Thomas, Jr. and Frontier Insurance Group each acquired 8 million shares, or approximately 25% of the shares outstanding. Financing for the Acquisition was provided by Western Systems' cash on hand, the issuance of Western Systems common stock, and a line-of-credit agreement. Following the Acquisition, Western Systems changed its name to American 2 Country Holdings Inc. (ACHI or the Company) to better reflect the fact that its business operations consisted of the property and casualty and premium finance businesses of American Country. For financial reporting purposes, the Acquisition has been accounted for as a reverse Acquisition whereby American Country was deemed to be the acquirer of the Company. Paragraph 70 of APB 16 provides that presumptive evidence of the acquiring corporation in business combinations effected by an exchange of stock is obtained by identifying the former common stockholder interests of a combining company which either retain or receive the larger portion of the voting rights in the combined corporation. As described above, Messrs. Solomon and Thomas received a 50% interest in the Company in connection with the Acquisition, which was the larger portion of the voting rights of the Company. Moreover, Messrs. Solomon and Thomas had served on the Board of Directors of the previous parent of American Country and continued to serve on the board of the Company with Mr. Solomon serving as the Chairman of the Board and the Chief Executive Officer of the Company. American Country, the Company's primary operating entity, continued the same business after the Acquisition and maintained an executive management staff virtually identical to the management of American Country prior to the Acquisition, which provides additional support for accounting for the Acquisition as a reverse acquisition. Because Western Systems was a non-operating entity, with only monetary assets and liabilities, historical book value was deemed to equal fair value, and no goodwill or other intangible assets were recorded as a result of the Acqusition. Because American Country was deemed to be the accounting acquirer, the financial statements for the Company for periods prior to the business combination date (July 29, 1997), are those of American Country. The Acquisition was accounted for by the purchase method. INSURANCE LINES American Country currently writes business in three areas of insurance: transportation, hospitality and other commercial lines. American Country's major insurance niche markets include taxicabs and limousines, workers' compensation, multi-peril, automobile and umbrella coverages for specific risks, primarily artisan contractors and restaurants. Due to underwriting losses in its personal lines, American Country decided to exit the personal lines market and focus its resources on its other specialty niches and expand them geographically. The following table sets forth the gross and net premiums for the principal lines of insurance written by American Country and the related percentages of the total gross and net premiums written for the year ended December 31, 1999:
GROSS PREMIUMS WRITTEN NET PREMIUMS WRITTEN ----------------------- ---------------------- DOLLARS PERCENTAGE DOLLARS PERCENTAGE ---------- ---------- --------- ---------- (IN THOUSAND) (IN THOUSAND) Transportation..................... $50,908 65.4% $48,590 65.7% Hospitality........................ 9,116 11.6 7,930 10.7 Other Commercial................... 17,853 22.9 17,388 23.5 Personal........................... 78 0.1 75 0.1 ------- ----- ------- ----- Total.............................. $77,955 100.0% $73,983 100.0% ======= ===== ======= =====
TRANSPORTATION American Country's transportation business is comprised of liability and physical damage insurance for taxis, limousines, ground shuttle, other commercial vehicles and para-transit fleets used to transport individuals to health care providers. American Country's largest taxi fleets in Illinois are written on a direct basis by salaried employees of American Country. The remainder of American Country's transportation business is written by independent insurance producers who specialize in this type of business in their geographic regions. 3 American Country was originally organized primarily to provide insurance for the Yellow Cab Company in Chicago, which is the largest taxicab company in the United States. Transportation lines continue to be a major part of American Country's business, accounting for over $50.9 million or 65.4% of American Country's total gross premiums written in 1999. In 1999, 1998 and 1997, the Yellow Cab Company accounted for 14%, 17% and 16%, respectively, and Checker Taxi Association in Chicago accounted for 8%, 10% and 11%, respectively, of American Country's total gross premiums written. American Country or its predecessors have provided insurance to Yellow Cab Company and Checker Taxi Association for 30 and 70 years, respectively. The loss of this business could have a material adverse impact on American Country. American Country anticipates that the percentage of its business from Yellow Cab Company and Checker Taxi Association will become less significant as American Country expands its transportation business into additional geographic areas. Transportation business in the Chicago metropolitan area ranged from 41-47% of American Country's gross premiums written in the last three fiscal years. Although American Country believes that insuring taxicabs and limousines in the Chicago metropolitan area provides diversity in exposure and spread of risk between urban and suburban environments, having a large portion of the transportation business centered in one geographic area exposes American Country to certain risks, including rate competition from other insurers in the same metropolitan area and the impact of state and local regulation and judicial decisions affecting that area. American Country also provides liability coverage to taxicab associations (other than Yellow and Checker), limousine fleets, ground fleets, para-transit fleets and individual taxicab and limousine owners and operators in Chicago, surrounding communities and downstate Illinois. In late 1997 American Country extended its taxicab insurance business to Michigan, Pennsylvania and Wisconsin. American Country continued its expansion in 1998 into the states of Indiana, Minnesota, Pennsylvania and New Jersey. In 1999, American Country began providing transportation coverage in New York and Connecticut. It is seeking to expand its transportation business in these areas in order to proportionally decrease its reliance on the Chicago metropolitan market. HOSPITALITY Hospitality lines, which consist of coverages for restaurants, taverns and banquet halls, accounted for $9.1 million or 11.6% of the total gross premiums written by American Country in 1999. American Country's restaurant program is primarily designed for "white tablecloth" establishments, but does accommodate other types of restaurants, including fast food outlets. In addition to offering commercial property damage, workers compensation and commercial auto coverages, American Country also offers specialized coverages for its hospitality customers, which include liquor liability, food spoilage, boiler and machinery and employment practices liability. American Country also offers a separate tavern policy which is tailored to neighborhood establishments rather than nightclubs. OTHER COMMERCIAL Other commercial lines accounted for 22.9% or $17.9 million of 1999 total gross premiums written. American Country writes general liability, workers' compensation, multi-peril, and umbrella excess for artisan contractors and other low hazard businesses, primarily in Illinois and Wisconsin. The commercial business is written by independent agents specializing in these targeted classes. American Country's artisan contractors program offers coverages for plumbing, electrical, painting and carpentry contractors, but avoids roofing operations. The artisan contractor program targets operations of at least 10 employees and up to $5 million in payroll. 4 PERSONAL Personal lines represent both standard and preferred risks for homeowners, private passenger automobile liability and private passenger automobile physical damage coverages. Personal lines premium accounted for $78,000 or one-tenth of 1% (0.1%) of 1999 total gross premiums written. In late 1997, American Country began to significantly reduce its personal lines business and, on January 13, 1998, entered into a reinsurance agreement with Ohio Casualty Insurance Company ("Ohio Casualty"), pursuant to which Ohio Casualty reinsured American Country's personal lines business. Under the terms of this agreement, Ohio Casualty reinsures one hundred percent (100%) of the net liability of American Country for accidents and losses occurring on or after January 1, 1998 with respect to American Country's personal lines business in force on such date. The reinsurance remains in full force and effect until the expiration of all liabilities under the policies reinsured by Ohio Casualty. The agreement provides that in the event Ohio Casualty breaches or is in default with respect to any of its obligations under the agreement, American Country remains obligated and liable with respect to the reinsured policies. The agreement with Ohio Casualty is retroactive to January 1, 1998 and included an interim service agreement on the part of American Country. Upon expiration of the policies subject to this reinsurance agreement, American Country did not seek to renew the business, but rather encouraged Ohio Casualty to write the business on a direct basis. American Country's exit from the personal lines market is part of American Country's overall business plan to refocus its marketing concentration on its specialty underwriting niches, which include public transportation, primarily taxicabs and limousines, the hospitality industry and artisan contractors. REINSURANCE American Country reinsures a portion of its exposure by ceding to reinsurers a portion of the premiums received on the policies that are reinsured. Insurance is ceded primarily to reduce the net liability on individual risks and to protect against catastrophic losses. Although reinsurance does not legally discharge an insurer from its primary liability for the full amount of coverage, it does make the assuming reinsurer liable to the insurer to the extent of the losses reinsured. American Country seeks to maintain its risk exposure at appropriate levels by setting maximum coverage limits by class and type of business. American Country's current reinsurance program is divided into two main sections: Specialty Transportation Business and Commercial and Personal Lines. A detailed chart of American Country's reinsurance program is set forth below. For the first half of 1999, American Country's business was primarily reinsured by Motors Insurance Corporation (rated "A" by A.M. Best), Kemper Reinsurance Company (rated "A" by A.M. Best), Hannover Ruckversicherungs A G (rated "A+" by A.M. Best), Underwriters Reinsurance Company (rated "A+" by A.M. Best), Ohio Casualty Insurance Company (rated "A+" by A.M. Best) and various Syndicates at Lloyds of London. Effective July 1, 1999, American Country's business is reinsured by General Reinsurance Corporation (rated "A++" by A.M. Best). The decision to change reinsurers was based on General Reinsurance Corporation's A.M. Best rating, lower pricing for the reinsurance and the administrative advantages of transacting with a single reinsurer. Ratings for the industry range from "A++" (Superior) to "F" (In Liquidation) and some companies are not rated. Publications of A.M. Best indicate that "A+" rating is assigned to companies which have, on balance, superior financial strength, operating performance and market profile when compared to the standards established by A.M. Best Company and, in its opinion, have a very strong ability to meet their ongoing obligations to policyholders. The "A" and "A-" (Excellent) ratings are assigned to those companies that in A.M. Best's opinion have achieved excellent overall performance when compared to the standards established by A.M. Best and have a strong ability to meet their obligations to policyholders over a long period of time. In evaluating a company's financial and operating performance, A.M. Best reviews the 5 company's profitability, leverage and liquidity, as well as the company's spread of risk, the quality and appropriateness of its reinsurance, the quality and diversification of its assets, the adequacy of its policy or loss reserves, the adequacy of its surplus, its capital structure and the experience and objectives of its management. A.M. Best's ratings are based on factors relevant to policyholders, agents, insurance brokers and intermediaries and are not directed to the protection of investors. SPECIALTY TRANSPORTATION REINSURANCE American Country currently purchases excess of loss reinsurance protection for its transportation business. Excess of loss reinsurance requires that a company retain a predetermined dollar amount of loss, known as the "retention." The insurance company is indemnified by the reinsurer for losses which exceed this dollar amount up to the limit of the reinsurance agreement. Any portion of the loss exceeding the agreement limit is either paid by the company or by other reinsurance agreements. Under its excess of loss program for its transportation business, American Country has a retention of $350,000 and reinsurance coverage of up to $4 million per occurrence. COMMERCIAL AND PERSONAL LINES REINSURANCE American Country's commercial and personal lines business is reinsured on a multi-line, multi-layer excess of loss basis. Reinsurance coverage under the current treaty is as follows: All Property Business.................... The reinsurer pays up to $3,650,000 in excess of American Country's retention of $350,000 per risk. All Casualty Business (including workers' compensation)...... The reinsurer pays up to $3,650,000 in excess of American Country's retention of $350,000 per occurrence. A supplemental reinsurance agreement provides coverage of an additional $8,000,000 per occurrence and per claimant on American Country's Workers' compensation program.
Property catastrophe reinsurance also is in force, which provides American Country with $3,750,000 of protection after a retention of $350,000 per catastrophic loss occurrence. Excess (umbrella) liability business is reinsured under a separate reinsurance agreement which provides coverage to American Country of up to $5,000,000 per occurrence in excess of $1,000,000 per occurrence in excess of primary limits. American Country's retention is 5% ($50,000) of the first $1,000,000 excess layer. For the period January 1 through December 31, 1998, substantially all of American Country's personal lines business was reinsured by Ohio Casualty pursuant to a reinsurance agreement. This agreement was not renewed in 1999, as American Country did not seek renewal of the personal lines policies reinsured under the treaty. The following table details American Country's reinsurance program, including the types of reinsurance and amounts reinsured with each named company for each of American Country's lines of insurance. 6 AMERICAN COUNTRY HOLDINGS INC. 1999 CEDED REINSURANCE PROGRAM FOR THE PERIOD 1/1/99 THROUGH 6/30/99 ($000)*
CONTRACT COVERAGE COMPANY RETENTION REINSURANCE LIMIT - - -------- -------------------- --------------------------- --------------------------- First Multi-Line Excess of Loss $250 $250 in excess of $250 retention Term: 7/1/96-6/30/99 $750 per risk on property claims Second Multi-Line Excess of Loss N/A Casualty: $600 excess of $500 covered by First Multi-Line Term: 7/1/96-6/30/99 Property: $500 excess of $500 covered by First Multi-Line Max: $1,500/risk Third Casualty Excess Excess of Loss N/A $3,000 excess of $1,100 covered by First and Second Multi-Line Term: 7/1/96-6/30/99 Workers' Comp only: Follow Form First Per Claimant Workers' Comp Excess N/A $8,000 excess of $4,100 covered by First and Second Multi-Line and Third Casualty Excess Term: Continuous from Term limitation: $15,000 7/1/96 First Per Occurrence Workers' Comp Excess N/A $8,000 excess of $4,100 Term: Continuous from covered by First and Second 7/1/96 Multi-Line and Third Casualty Excess Max any one life: $4,100 CONTRACT PREMIUM REINSURERS % - - -------- --------------------------- --------------------------- -------- First Multi-Line 6.0% Provisional MIC Re Corp. (Motors Ins 50% 8.0% Maximum Corp) Term: 7/1/96-6/30/99 2.0% Minimum Kemper Re Ins. Co. 40% Chartwell Reinsurance 7% Company Republic Western Ins Co. 3% Second Multi-Line 4.00% MIC Re Corp. (Motors Ins. 50% Profit sharing: Corp) % 50% of losses and 15% Kemper Re Ins. Co 40 Reinsurers expenses Term: 7/1/96-6/30/99 Chartwell Reinsurance Company 7% Republic Western Ins Co 3% Third Casualty Excess 2.15% Underwriters Re 30% Kemper Re Ins. Co. 30% Term: 7/1/96-6/30/99 Subject to one GIO (New South Wales) 15% reinstatement per 12 mos. Hanover 13% Pro rata as to amount 100% Chartwell Reinsurance Co 7% as to time Republic Western 5% First Per Claimant 0.334% Northwestern Nat'l Life 50% Duncanson & Holt 30% Term: Continuous from Amer Accident Grp I and II 7/1/96 Reinsurance Mgnt Services Pinehurst Accident & Re 20% First Per Occurrence 0.270% Northwestern Nat'l Life 50% Term: Continuous from Duncanson & Holt 30% 7/1/96 Amer Accident Grp I & II Reinsurance Mgnt Services 20% Pinehurst Accident & Re
7 AMERICAN COUNTRY HOLDINGS INC. 1999 CEDED REINSURANCE PROGRAM FOR THE PERIOD 1/1/99 THROUGH 6/30/99 ($000)*
CONTRACT COVERAGE COMPANY RETENTION REINSURANCE LIMIT - - -------- -------------------- --------------------------- --------------------------- Third Property Excess Excess per Risk N/A $1,000 excess of $1,000 covered by First and Term: Continuous from Second Multi-Line 7/1/96 Premium rate change effective 7/1/97 Fourth Property Excess Excess per Risk N/A $2,000 excess of $2,000 covered by First and Term: Continuous from Second Multi-Line and Third 7/1/96 Property Excess Excess Liability Umbrella All business: All business: 95% Quota Share 5% first $1,000 95% first $1,000 Term: Continuous from N/A next $3,000 100% next $3,000 7/1/96 Excess Property Catastrophe $250/occurrence $250 excess of $250/occurrence Term: 7/1/97-6/30/99 First Excess Property 5% / $3,500 ($175) exce ss 95% / $3,500 ($3,325) Catastrophe of $500 excess of $500 Term: 7/1/96-6/30/99 Second Excess Property 5% of $4,000 ($200) 95% of $4,000 ($3,800) Catastrophe excess of $4,000 excess of $4,000 Term: 7/1/97-6/30/99 CONTRACT PREMIUM REINSURERS % - - -------- --------------------------- --------------------------- -------- Third Property Excess 1.83% of Subject Earned First City Ins Brokers Premium Limited: Term: Continuous from Lloyd's of London & London 7/1/96 Cos 53% Premium rate change Hanover Ruck 25% effective 7/1/97 Vesta Fire Ins. Corp 15% Chartwell Reinsurance Company 7% Fourth Property Excess Based on property value First City Ins Brokers Limited: Term: Continuous from Lloyd's of London & London 7/1/96 Cos 53% Hanover Ruck 25% Vesta Fire Ins. Corp 15% Chartwell Reinsurance Company 7% Excess Liability 95% of premium on first Underwriters Reins Co 65% $1,000 Kemper Reinsurance Company 20% Term: Continuous from 100% of premium on $3,000 Hanover Ruck/Eisen 15% 7/1/96 in excess of first $1,000 27.5% Commission 30% Contingent Profit Sharing after 20% reinsurers margin Excess Property Catastrophe $50 First City Insurance Brokers Limited: Term: 7/1/97-6/30/99 One full reinstatement of Lloyd's of London 100% the limit; 100% as to time First Excess Property 3.00% Transatlantic Reinsurance 92.5% Co Catastrophe Republic Western Insurance Co 7.5% One free reinstatement: Term: 7/1/96-6/30/99 each annual period, with a maximum of 2 Second Excess Property 1.34% First City Insurance Catastrophe Brokers Limited: One reinstatement: Pro Lloyd's of London 85% Term: 7/1/97-6/30/99 rata to amount 100% as Vesta Fire Ins Co 15% to time
8 AMERICAN COUNTRY HOLDINGS INC. 1999 CEDED REINSURANCE PROGRAM FOR THE PERIOD 1/1/99 THROUGH 6/30/99 ($000)*
CONTRACT COVERAGE COMPANY RETENTION REINSURANCE LIMIT - - -------- -------------------- --------------------------- --------------------------- OTHER PROGRAMS: YELLOW CAB COMPANY (AFFILIATION) Special Cover (Affiliation) Taxi Excess $150 $150 excess of $350 retention Contingent Auto Excess Taxi Excess N/A $3,600 excess of $500 covered by Special Cover Term: 7/1/96-6/30/99 (Yellow Cab Company only) Reinstatement charge (One only) LIMO PROGRAM Special Facultative Excess Liability $350 $150 excess of $350 retention $350 $650 excess of $350 retention $350 $1,150 excess of $350 retention SPECIAL NONTREATY Ohio Casualty Company Schedulized Personal N/A None, subject to recoveries Lines under SeRe Agreements 100% Quota Share Agree. Policies Term: 12/31/98 CONTRACT PREMIUM REINSURERS % - - -------- --------------------------- --------------------------- -------- OTHER PROGRAMS: YELLOW CAB COMPANY (AFFILIATION) Special Cover (Affiliation) $135. /per cab, per year General Reinsurance 100% Corporation Contingent Auto Excess $317 per cab Hanover Ruck/Eisen 20% $657 annual deposit Kemper Reinsurance Company 22.5% Term: 7/1/96-6/30/99 $624 annual minimum (Yellow Cab Company only) Pro rata as to amount Republic Western Insurance Co 7.5% 100% as to amount GIO of New South Wales 25% 15% No claims bonus/yr First City Insurance Brokers Limited Lloyd's of London 25% See Run-off terms LIMO PROGRAM Special Facultative See Underwriting for General Re (formerly pricing schedule National) 100% SPECIAL NONTREATY Ohio Casualty Company 100% of Net Subject Ohio Casualty Company 100% Premiums 100% Quota Share Agree. Term: 12/31/98
- - ---------------------------------- * All amounts, except percentages, are in thousands (000). 9 AMERICAN COUNTRY HOLDINGS INC. 1999 CEDED REINSURANCE PROGRAM FOR THE PERIOD 7/1/99 THROUGH 12/31/99 ($000)*
CONTRACT COVERAGE COMPANY RETENTION REINSURANCE LIMIT PREMIUM - - -------- ----------------------- ----------------------- ----------------------- ----------------------- First Multi-Line Excess of Loss $350 $150 excess of $350 3.22% All Property retention 4.29% Non-Taxi Commercial Term: 7/1/99-6/30/01 Auto Liability 4.64% All other liability, excluding workers comp 1.03% Other Taxi 1.46% Workers Compensation Second Multi-Line Excess of Loss N/A Casualty: $500 excess Profit-sharing: 60% of of $500 covered by losses and 15% First Multi-Line reinsurer's expenses 3.77% All Property 4.55% Non-Taxi Commercial Auto Liability Term: 7/1/99-6/30/01 Property: $500 excess 6.95% All other of $500 covered by liability, excluding First Multi-Line workers comp .86% Other Taxi 1.35% Workers Compensation Third Casualty Excess Excess of Loss N/A $3,000 excess of $1,000 .86% All Casualty covered by First and excluding taxi and Second Multi-Line workers comp Term: 7/1/99-6/30/01 Workers' Comp only: .93% Workers Follow Form Compensation .49% Other Taxi First Per Claimant/Per Workers' Comp Excess N/A $8,000 excess of $4,000 Subject to one Occurrence covered by First and reinstatement per 12 Second Multi-Line and mos. Third Casualty Excess Pro rata as to amount 100% as to time 1.19% Term: Continuous from Term limitation: 7/1/99 $15,000 Max any one life: $4,000 CONTRACT REINSURERS COMPANY % - - -------- ----------------------- -------- First Multi-Line General Reinsurance 100% Corporation Term: 7/1/99-6/30/01 Second Multi-Line General Reinsurance 100% Corporation Term: 7/1/99-6/30/01 Third Casualty Excess General Reinsurance 100% Corporation Term: 7/1/99-6/30/01 First Per Claimant/Per General Reinsurance 100% Occurrence Corporation Term: Continuous from 7/1/99
10 AMERICAN COUNTRY HOLDINGS INC. 1999 CEDED REINSURANCE PROGRAM FOR THE PERIOD 7/1/99 THROUGH 12/31/99 ($000)*
CONTRACT COVERAGE COMPANY RETENTION REINSURANCE LIMIT PREMIUM - - -------- ----------------------- ----------------------- ----------------------- ----------------------- Third Property Excess Excess per Risk N/A $3,000 excess of $1,000 3.0781% of Gross Net covered by First and Earned Premium Second Multi-Line Term: Continuous from Umbrella 95% Quota All business: All business: 95% of premium on first 7/1/99 Share 5% first $1,000 95% first $1,000 100% $1,000 100% of premium Premium rate change N/A next $4,000 next $4,000 on next $4,000 effective 7/1/01 27.5%Commission 30% Excess Liability Contingent Profit Term: Continuous from Sharing after 20% 7/1/99 reinsurers margin Excess Property $350/occurrence $3,750 excess of 3.38% Catastrophe $350/occurrence Minimum: $132 Maximum: $137 Term: 7/1/99-6/30/01 One full reinstatement of the limit; 100% as to time OTHER PROGRAMS: YELLOW CAB COMPANY (AFFILIATION) Special Cover Taxi Excess $350 $150 excess of $350 $140 /per cab, per year (Affiliation) retention Contingent Auto Excess Taxi Excess N/A $3,500 excess of $500 $381 per cab covered by Special Cover Term: 7/1/99-6/30/01 Reinstatement charge One full reinstatement (Yellow Cab Company (One only) as to the limit; only) 100% as to amount 15% No claims bonus/ year CONTRACT REINSURERS COMPANY % - - -------- ----------------------- -------- Third Property Excess General Reinsurance 100% Corporation Term: Continuous from General Reinsurance 100% 7/1/99 Corporation Premium rate change effective 7/1/01 Excess Liability Term: Continuous from 7/1/99 Excess Property General Reinsurance 100% Catastrophe Corporation Term: 7/1/99-6/30/01 OTHER PROGRAMS: YELLOW CAB COMPANY (AFFILIATION) Special Cover General Reinsurance 100% (Affiliation) Corporation Contingent Auto Excess General Reinsurance 100% Corporation Term: 7/1/99-6/30/01 (Yellow Cab Company only)
- - ------------------------------ * All amounts, except percentages, are in thousands (000). 11 ASSUMED REINSURANCE In October 1999, American Country and Fairfield Insurance Company ("Fairfield") entered into a service agreement and a 100% quota share reinsurance agreement. Pursuant to the terms of the reinsurance agreement, American Country, as the reinsurer, assumes 100% of the premiums and losses of each insurance policy that Fairfield cedes to American Country. The types of policies ceded by Fairfield to American Country consist of transportation lines and hospitality lines. These agreements allow American Country to write business in states where licenses are pending. The service agreement permits American Country to underwrite, issue and service on behalf of Fairfield, certain commercial auto liability policies for taxi and livery and commercial multi-peril policies for restaurants in the states of Maryland, New Jersey and Rhode Island. American Country received premiums of $329,947 in 1999 for the Fairfield policies it reinsured. American Country reinsures the business it assumes from Fairfield on the same basis as it reinsures the policies it writes directly. In April 1998, American Country and Mutual Services Casualty Insurance Company ("MSI") entered into a service agreement and a 100% quota share reinsurance agreement. Pursuant to the terms of the reinsurance agreement between MSI and American Country, American Country, as the reinsurer, assumed 100% of the premiums and losses of each insurance policy that MSI ceded to American Country. The types of policies ceded by MSI to American Country consisted of transportation lines and hospitality lines. These agreements allowed American Country to write business in states where licenses are pending. The service agreement permitted American Country to underwrite, issue and service on behalf of MSI, certain commercial auto liability policies for taxi and livery and commercial multi-peril policies for restaurants in the states of Connecticut, Minnesota, Michigan and New Jersey. American Country received premiums of $1,249,399 in 1999 for the MSI policies it reinsured. American Country reinsures the business it assumes from MSI on the same basis as it reinsures the policies it writes directly. The quota-share reinsurance and service agreements were cancelled in October 1999. MARKETING American Country is licensed in Connecticut, Illinois, Indiana, Iowa, Massachusetts, Michigan, Minnesota, New York, Pennsylvania, Wisconsin and the District of Columbia. Applications are pending in California and New Jersey. American Country also is authorized to act as an excess and surplus lines insurer in 21 states. American Country markets its insurance products through multiple distribution sources consisting of independent insurance producers, managing general agents and directly through salaried employees of American Country. American Country relies on both in-house personnel and independent insurance producers to produce its Yellow Cab, Checker Taxi and other Chicago taxicab associations' liability insurance, and on approximately 40 producers and two managing general agents to market its other insurance products. American Country selects agents based on their comprehensive knowledge of the industries to which American Country provides coverages and the geographic market in which the agent operates. American Country's current marketing plan is to extend its transportation lines by writing business in additional states. American Country began writing taxicab business in Michigan and Wisconsin in 1997. In 1998, American Country wrote a substantial share (25%) of the insurance coverage for independent taxi cab operators in Philadelphia and taxi fleets throughout the state of Pennsylvania. American Country also continued its geographic expansion in the states of Indiana, Michigan, Minnesota and Wisconsin by providing insurance for taxicabs and limousines. Additionally, through a 100% quota share reinsurance agreement with MSI, American Country assumed insurance coverage for taxicabs and limousines in New Jersey. 12 In 1998 American Country was licensed to write business in the state of New York and began providing coverage for New York City Yellow Medallion taxi cabs in February of 1999. In 1999, American Country also began providing transportation coverage in Connecticut. American Country also expanded its insurance programs for restaurants into the states of Michigan, Minnesota, New Jersey and Pennsylvania during 1998. American Country's restaurant program in these states was written through an agreement with MSI through October 1999, and subsequently through Fairfield, which both produced the business consistent with American Country's underwriting and rating guidelines and filed rates. The following tables set forth for the three years ended December 31, 1999, the gross and net premiums written, whether produced directly by American Country employees or by independent agents:
YEAR ENDED DECEMBER 31, --------------------------------------------------------------- 1999 1998 1997 ------------------- ------------------- ------------------- PREMIUMS PERCENT PREMIUMS PERCENT PREMIUMS PERCENT WRITTEN OF TOTAL WRITTEN OF TOTAL WRITTEN OF TOTAL -------- -------- -------- -------- -------- -------- (DOLLAR AMOUNTS IN THOUSANDS) GROSS PREMIUMS Transportation.............................. $50,908 65.4% $35,303 51.9% $29,285 42.8% Hospitality................................. 9,116 11.6 7,424 10.9 4,654 6.8 Other Commercial............................ 17,853 22.9 22,391 32.9 25,348 37.1 Personal.................................... 78 0.1 2,952 4.3 9,129 13.3 ------- ----- ------- ----- ------- ----- Total..................................... $77,955 100.0% $68,070 100.0% $68,416 100.0% ======= ===== ======= ===== ======= ===== NET PREMIUMS Transportation.............................. $48,590 65.7% $33,694 59.3% $28,297 47.1% Hospitality................................. 7,930 10.7 6,489 11.4 3,495 5.8 Other Commercial............................ 17,388 23.5 19,270 33.9 19,974 33.2 Personal.................................... 75 0.1 (2,593) (4.6) 8,312 13.8 ------- ----- ------- ----- ------- ----- Total..................................... $73,983 100.0% $56,861 100.0% $60,078 100.0% ======= ===== ======= ===== ======= =====
OPERATING RATIOS STATUTORY COMBINED RATIO American Country's statutory combined ratio expresses losses and expenses as a percentage of premium revenues and is the traditional measure of underwriting experience. Losses and loss adjustment expenses incurred are expressed as a percentage of net premiums earned. Acquisition and underwriting expenses are expressed as a percentage of net premiums written, with the aggregate sum of those percentages equaling the combined ratio. The GAAP ratio expresses all percentages as a percentage of net premiums earned. Generally speaking, if the statutory combined ratio is below 100%, an insurance company has an underwriting profit, and if it is above 100%, the insurer has an underwriting loss. 13 The following table reflects the loss ratios, expense ratios and combined ratios of American Country, determined in accordance with statutory accounting practices, for the years indicated:
YEAR ENDED DECEMBER 31, ---------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- STATUTORY COMBINED RATIO Loss and loss expense ratio.............................. 91.3% 79.6% 88.8% 80.7% 79.6% Expense ratio............................................ 19.4% 21.3% 20.8% 21.1% 20.7% ----- ----- ----- ----- ----- Combined ratio....................................... 110.7% 100.9% 109.6% 101.8% 100.3% ===== ===== ===== ===== =====
During 1999, American Country posted an additional $3.5 million in Workers' Compensation loss reserves in excess of management's original estimate due to continuing adverse development in prior years. The main reasons for the adverse development are rising medical costs and increased length of disabilities covered under these policies. PREMIUM-TO-SURPLUS RATIO While there are no statutory provisions governing premium-to-surplus ratios, regulatory authorities regard this ratio as an important indicator since the lower the ratio, the greater the insurer's ability to withstand abnormal loss experience. The following table sets forth the ratio of net premiums written during the year to statutory-basis capital and surplus at the end of the year for American Country for the years indicated:
1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- Net premiums written during the year................................... $ 73,983 $ 56,861 $ 60,078 $ 60,760 $ 57,544 Statutory-basis capital and surplus at end of year......................... 37,173 39,083 34,555 34,080 31,288 Ratio.................................... 1.99 to 1 1.45 to 1 1.74 to 1 1.78 to 1 1.84 to 1
RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES American Country maintains reserves for the payment of losses and loss adjustment expenses ("LAE") for all lines of business. The determination of reserves for losses and LAE is based on information reported to it regarding claims and the historical loss experience of the business. The vast majority of losses are reported to American Country by its insureds in a timely fashion; however, there is always a certain percentage of losses which occurred but have not been reported ("IBNR") to American Country at any given time. American Country establishes reserves for IBNR claims, and this reserve also includes amounts for the potential adverse development of losses known to American Country (in other words, subsequent developments may occur that require that previously established reserves be increased). Upon receipt of a claim, American Country establishes a reserve, which is an estimate of the amount which will be paid upon conclusion of the claim. The reserves for the known losses, IBNR reserve and the loss adjustment expense reserve, represent the total amount American Country estimated will be needed to satisfy all losses (known and unknown) which may be paid by American Country. These reserves are reflected as liabilities on American Country's balance sheet. There can be a significant period of time between the occurrence of an insured loss, the reporting of the loss to American Country, and the payment of such loss. Liability claims have a greater period of time elapsing between the occurrence of a loss and payment than property claims. General liability claims have the longest time lag between the occurrence and final payment of the loss. Many factors are considered when establishing the IBNR reserve for a particular line of business, and the lag time between the occurrence and final payment of the loss is an important component. 14 Most claims are investigated, supervised, and adjusted by personnel of American Country. In-house counsel for American Country handle the defense of most cases for insureds located in the Chicago Metropolitan Area. All outside counsel are chosen by American Country, and American Country's staff monitors all cases and grants settlement authority on all files. Automobile property damage and physical damage reserves are established on a formula case reserve basis. Automobile theft losses and total losses are reserved for book value of the vehicle as of the time of the loss. All other lines of business are reserved based on an analysis of each individual case. The case basis reserve is an estimate of the amount of ultimate payment projected by the personnel of American Country based upon their knowledge of similar cases. All bodily injury claims are reviewed and reserves adjusted thirty days after the file is opened and every six months thereafter for the life of the file. Adjustments are made to reserves at these mandatory intervals or whenever the known exposure changes. The following table sets forth a reconciliation of the beginning and ending losses and LAE reserve balances, net of reinsurance ceded for the past three years:
YEAR ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- (IN THOUSANDS) Net reserves for losses and LAE, beginning of year.......... $ 80,465 $83,973 $79,450 Incurred losses and LAE for claims relating to: Current year.............................................. 59,227 44,244 53,613 Prior years............................................... 4,389 434 (464) -------- ------- ------- Total net claims incurred................................... 63,616 44,678 53,149 -------- ------- ------- Losses and LAE payments for claims relating to: Current year.............................................. 18,368 15,231 19,624 Prior years............................................... 34,364 32,955 29,002 -------- ------- ------- Total net claims paid....................................... 52,732 48,186 48,626 -------- ------- ------- Net reserves for losses and LAE, end of year................ 91,349 80,465 83,973 Total reinsurance recoverable on unpaid losses and LAE...... 13,144 11,952 15,114 -------- ------- ------- Gross reserves for losses and LAE, end of year.............. $104,493 $92,417 $99,087 ======== ======= =======
The $4,389,000 increase in prior years' reserves during 1999 is attributable to reserve strengthening, including additional reserves for Workers' Compensation of $3,500,000, for losses incurred in calendar years 1998 and prior. This is primarily due to increased medical costs and longer duration disabilities covered under these policies. The $434,000 increase in prior years' reserves during 1998 are attributable to reserve strengthening for losses incurred in calendar years 1997 and prior. This is due primarily to increased medical costs and longer duration disabilities covered under these policies. The $464,000 decrease in the prior years' reserves in 1997 is attributable to American Country's overall favorable development for the period, particularly in the transportation lines. This is attributable to favorable weather conditions in the Midwest, which resulted in both a lower frequency and severity of transportation claims. This was slightly offset by higher settlements on personal lines claims, which is due to increased real and personal property values. Additionally, the commercial lines claims were marginally higher than expected. As referred to throughout this document, the commercial lines insurance industry has suffered from a prolonged soft market. Pricing pressures have resulted in premium revenue that is inadequate to cover the losses incurred. As a result, American Country has recorded losses that are substantially higher than management's original estimate. Consequently, in 1999, American Country increased its reserves for Workers' Compensation by $3.5 million over its original 1999 estimate. The bulk of this reserve increase related to 1996 and 1997. 15 The following table reflects American Country's losses and LAE reserve development, net of estimated salvage and subrogation recoveries, through December 31, 1999, for each of the preceding ten years:
CUMULATIVE REDUNDANCY (DEFICIENCY) (000'S ONLY) YEAR ENDED DECEMBER 31, -------------------------------------------------------------------------- 1989 1990 1991 1992 1993 1994 1995 -------- -------- -------- -------- -------- -------- -------- Reserve for loss and loss expenses net of reinsurance recoverables.................. $43,263 $49,526 $57,846 $62,234 $64,274 $66,494 $74,582 Reserve re-estimate as of:...... One year later.................. 48,501 50,580 56,684 63,751 65,868 66,665 75,577 Two years later................. 48,041 54,584 60,869 66,607 63,759 67,693 78,628 Three years later............... 50,100 57,120 62,717 63,744 65,559 69,172 79,634 Four years later................ 51,944 58,592 60,875 64,040 66,524 68,541 79,624 Five years later................ 52,724 57,072 61,207 64,770 65,670 68,186 Six years later................. 52,219 57,484 61,554 64,553 65,497 Seven years later............... 52,770 57,803 61,484 64,658 Eight years later............... 52,999 57,704 61,633 Nine years later................ 53,075 57,776 Ten years later................. 53,296 Cumulative redundancy (deficiency).................. (10,033) (8,250) (3,787) (2,424) (1,223) (1,692) (5,042) Percentage...................... (23.2)% (16.7)% (6.5)% (3.9)% (1.9)% (2.5)% (6.8)% Reserve for claims and expenses, gross......................... 75,780 73,922 73,209 81,633 Reinsurance recoverables........ 13,546 9,652 6,716 7,051 ------- ------- ------- ------- ------- ------- ------- Reserve for claims and expenses, net........................... $62,234 $64,270 $66,493 $74,582 ======= ======= ======= ======= ======= ======= ======= CUMULATIVE REDUNDANCY (DEFICIENCY) (000'S ONLY) YEAR ENDED DECEMBER 31, ----------------------------------------- 1996 1997 1998 1999 -------- -------- -------- -------- Reserve for loss and loss expenses net of reinsurance recoverables.................. $79,450 $83,973 $80,465 $91,349 Reserve re-estimate as of:...... One year later.................. 78,988 84,407 84,854 Two years later................. 82,604 91,015 Three years later............... 86,277 Four years later................ Five years later................ Six years later................. Seven years later............... Eight years later............... Nine years later................ Ten years later................. Cumulative redundancy (deficiency).................. (6,827) (7,042) (4,389) Percentage...................... (8.6)% (8.4)% (5.5)% Reserve for claims and expenses, gross......................... 90,965 99,087 92,417 104,493 Reinsurance recoverables........ 11,515 15,114 11,952 13,144 ------- ------- ------- ------- Reserve for claims and expenses, net........................... $79,450 $83,973 $80,465 $91,349 ======= ======= ======= =======
PAID LOSSES (000'S ONLY) YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------------- 1989 1990 1991 1992 1993 1994 1995 1996 -------- -------- -------- -------- -------- -------- -------- -------- Cumulative amount of losses paid, net of Reinsurance recoverables through: One year later.................. $14,687 $16,626 $17,141 $21,331 $23,271 $22,495 $25,938 $29,002 Two years later................. 25,226 26,858 31,753 37,778 37,843 38,161 43,579 50,707 Three years later............... 31,836 37,389 44,070 48,653 48,178 48,658 59,041 64,768 Four years later................ 39,850 46,088 51,495 56,212 54,636 57,939 68,066 Five years later................ 47,138 51,321 57,099 58,792 60,174 62,953 Six years later................. 49,834 55,374 58,481 61,695 63,016 Seven years later............... 51,567 56,112 59,652 63,056 Eight years later............... 51,905 56,752 60,702 Nine years later................ 52,334 57,024 Ten years later................. 52,737 Eleven years later PAID LOSSES (000'S ONLY) YEAR ENDED DECEMBER 31, ------------------------------ 1997 1998 1999 -------- -------- -------- Cumulative amount of losses paid, net of Reinsurance recoverables through: One year later.................. $32,949 $34,364 Two years later................. 54,663 Three years later............... Four years later................ Five years later................ Six years later................. Seven years later............... Eight years later............... Nine years later................ Ten years later................. Eleven years later
16 INVESTMENTS Funds, including reserve funds, are invested until required for American Country's operations, subject to restrictions on permissible investments established by applicable state insurance codes. American Country's investment policy is to maximize after-tax income while generally limiting investments to investment grade securities with high liquidity. American Country's investment portfolio is managed solely by BlackRock Financial Management, Inc The following table contains information concerning American Country's investment portfolio at December 31, 1999:
AMORTIZED FAIR AMOUNT REFLECTED ON PERCENT COST VALUE BALANCE SHEET OF TOTAL --------- -------- ------------------- -------- (IN THOUSANDS) Available-for-sale securities Fixed maturity securities: U.S. Treasury securities and obligations of U.S. Government corporations and agencies.... $ 12,750 $ 12,641 $ 12,641 10.0% Obligations of states and political subdivisions................................. 30,620 30,233 30,233 23.9% Foreign governments............................ 1,299 1,261 1,261 1.0% Corporate securities........................... 48,203 46,781 46,781 36.9% Mortgage-backed securities..................... 36,654 35,381 35,381 27.9% -------- -------- -------- ----- Total fixed maturity securities.............. 129,526 126,297 126,297 99.7% Equity securities............................ 353 367 367 0.3% -------- -------- -------- ----- Total available-for-sale securities.......... $129,879 $126,664 $126,664 100.0% ======== ======== ======== =====
The following table sets forth a profile of American Country's fixed maturity investment portfolio by rating at December 31, 1999:
FAIR PERCENT S&P/MOODY'S RATING(1) VALUE OF TOTAL - - --------------------- -------- -------- (IN THOUSANDS) AAA/Aaa (including U.S. Treasuries of $8,476)............. $ 69,569 55.1% AA/Aa..................................................... 17,340 13.7% A/A....................................................... 25,807 20.4% BBB/Ba.................................................... 9,959 7.9% All other................................................. 3,622 2.9% -------- ----- Total................................................... $126,297 100.0% ======== =====
- - ------------------------ (1) Ratings are as assigned primarily by Standard & Poor's Corporation, with remaining ratings as assigned by Moody's Investors Service Inc. 17 The following table sets forth a profile of American Country's fixed maturity investment portfolio by maturity at December 31, 1999:
FAIR PERCENT MATURITY VALUE OF TOTAL - - -------- -------- -------- (IN THOUSANDS) Due in one year or less................................... $ 1,808 1.4% Due after one year through five years..................... 34,891 27.6% Due after five years through ten years.................... 34,081 27.0% Due after ten years....................................... 20,136 15.9% Mortgage-backed securities................................ 35,381 28.0% -------- ----- Total fixed maturity securities........................... $126,297 100.0% ======== =====
The following table summarizes the Company's investment results for the five years ended December 31, 1999:
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (IN THOUSANDS) Total net investment income................... $7,618 $7,134 $7,025 $7,032 $6,465 Average annual pre-tax yield.................. 6.1% 6.0% 6.4% 6.7% 6.7% Average annual after-tax yield................ 4.7% 4.4% 4.6% 4.6% 4.7% Effective federal income tax on investment income...................................... 25.0% 25.0% 31.1% 25.3% 24.9%
REGULATION American Country is subject to varying degrees of regulation and supervision in the jurisdictions in which it transacts business under statutes which delegate regulatory, supervisory and administrative powers to state insurance commissioners. Such regulation is designed to protect policyholders rather than investors and relates to such matters as standards of solvency, which must be met and maintained; the licensing of insurers and their agents and producers; the nature of and examination of the affairs of insurance companies, which includes periodic financial and market conduct examinations by the regulatory authorities; annual and other reports, prepared on a statutory accounting principles basis, required to be filed on the financial condition of insurers or for other purposes. In general, American Country must file all rates for insurance directly underwritten with the insurance department of each state in which it operates on an admitted basis; reinsurance generally is not subject to state regulation. Further, state insurance statutes typically place limitations on the amount of dividends or other distributions payable by insurance companies in order to protect their solvency. Illinois, the domicile state of American Country, requires that dividends be paid only out of earned surplus, and limits the annual amount payable without prior approval of the Department to the greater of 10% of policyholders' surplus or the amount of the prior year's statutory net income. American Country is also subject to statutes governing insurance holding company systems in various jurisdictions. Such statutes require American Country to file an annual Holding Company System Registration statement with the state insurance regulatory authorities, which includes information concerning its capital structure, ownership, financial condition and general business operation. Under the terms of applicable state statutes, any person or entity desiring to purchase more than a specified percentage (commonly 10%) of American Country's outstanding voting securities is required to obtain regulatory approval for the purchase of such voting securities. Section 131.2 of the Illinois Insurance Code relating to holding companies, to which American Country is subject, requires disclosure of transactions between American Country and its subsidiaries and affiliates. Such transactions must satisfy certain standards, including that they be fair, equitable and reasonable and that certain material transactions be specifically 18 non-disapproved by the Director of Insurance. Further, prior approval by the Director is required of affiliated sales, purchases, exchanges, loans or extensions of credit, or investments, any of which involve 10% or more of American Country's admitted assets as of the preceding December 31st. The National Association of Insurance Commissioners facilitates the regulation of multi-state companies through uniform reporting requirements, standardized procedures for financial examinations, and uniform regulatory procedures embodied in model acts and regulations. Current developments address the reporting and regulation of the adequacy of capital and surplus. The NAIC has a risk-based capital model act for property/casualty companies, which calculates a minimum required statutory policyholders' surplus based on the underwriting, investment, credit loss reserve and other business risks applicable to the insurance company's operations. At December 31, 1999, American Country's required risk-based capital was $7.3 million; and its reported statutory capital and surplus was $37.2 million, so that at December 31, 1999, American Country substantially exceeded the risk-based capital requirements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Regulation" for additional information. COMPETITION The property and casualty insurance business is highly competitive on the basis of both price and service. In recent years, the property and casualty insurance industry has been characterized by relatively high levels of competition and aggressive pricing and marketing. American Country faces its most active competition in public transportation lines from captive insurance programs that are put together by agents and reinsurers using an insurance company that writes the insurance business as a fronting carrier and then reinsures substantially all of the business with the reinsurer. Many of these programs are short-lived, but they generally are priced aggressively. Besides creating instability, they generally do not provide continuity of claims practices and settlements, which adversely affects future pricing for property and casualty insurance generally. Presently, there are two national carriers still pursuing taxi/livery business through general agents, but both of these carriers have reduced their presence in certain geographic areas (Midwest, California, New Jersey). A few smaller regional carriers remain that continue to target smaller accounts. In Illinois, the competition for coverage of artisan contractors is primarily from national carriers, regional carriers and mono-line workers' compensation carriers. The competition for restaurants is mainly from regional carriers. American Country benefits in all classes of its business by maintaining long term agency relationships. In addition, American Country's agents have specialized in these classes of business for many years. American Country believes it has been able to compete successfully by underwriting specialty coverages for niche areas in which American Country has expertise. ENVIRONMENTAL ISSUES American Country believes that it has extremely limited risk of claims arising from environmental exposures. The underwriting philosophy of American Country excludes writing insurance for business which presents possible environmental exposures. Its liability policies contain an absolute pollution coverage exclusion and a lead paint exclusion. The industry, however, has seen a dramatic increase in the number of environmental claims being presented to insurers for defense and indemnification, and recent court cases have diminished the protection granted by the absolute pollution exclusion PREMIUM FINANCING Financial Services operates principally as a premium finance company under the regulations of the Illinois Department of Insurance, financing commercial insurance premiums, and also offers secured loans 19 to some of American Country's larger customers. Professional Services operates principally as a finance company providing collateral loan financing to members of certain taxi associations. All loans are secured either through unearned premiums on insurance policies or, by taxicab medallions and equipment assets. For the year ended December 31, 1999, Financial Services and Professional Services had combined net income of $109,000 a 26% decrease from 1998. This decrease is due primarily to a reduction in the financing being provided by Financial Services and greater operating expenses for both Financial Services and Professional Services. YEAR 2000 The Company has successfully managed the transition from one century to the next. Although some internal systems and third parties experienced minor problems, these were quickly resolved and had no significant effect on the Company's clients, businesses or results of operations. The following information is provided in order to update prior disclosures with respect to this matter. Early in 1999, the Company completed Year 2000 renovation and validation for all of its critical information technology systems, including those provided by third parties. The Company also completed during 1999, the necessary remediation of other infrastructure items or developed contingency plans to allow critical functions to continue in the event of infrastructure problems. The estimated total cost for the Company's Year 2000 compliance is $66,000 . This estimate includes the cost of software modification and/or replacement as well as hardware and software implementation and testing. Although no problems that have had or are expected to have a material effect on the Company have become apparent, the Company continues to monitor its own systems and those of third parties as they perform required functions for the first time in the Year 2000. It is also possible that as yet undetected Year 2000 problems with the systems of important vendors, insurance agents and brokers and clients may emerge as the year progresses, and the Company continues to monitor for issues of this type as well. EMPLOYEES As of December 31, 1999, American Country employed approximately 150 full time employees, 8 of whom are executive management, and 8 part-time employees. American Country is not a party to any collective bargaining agreement. ITEM 2. PROPERTIES. 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 $63,000. 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 $6,600. The Company believes that it currently has adequate space for expansion at its existing facilities. 20 ITEM 3. LEGAL PROCEEDINGS. There are no pending material legal proceedings to which the Company or its subsidiaries is a party or of which any of the properties of the Company or its subsidiaries is subject, except as noted below. The Company is subject to claims arising in the ordinary course of business. Most of these lawsuits involve claims under insurance policies issued by American Country. These lawsuits are considered by American Country in estimating the reserves for losses and loss adjustment expenses. On May 20, 1999, Frontier Insurance Group, Inc. (which owns approximately 25% of the outstanding shares of the Company) filed a purported shareholder derivative action in Delaware Chancery Court against the Company's directors and the Company itself as a nominal defendant. The complaint seeks a declaration that certain amendments to the Company's Stock Option Plan, which were approved at the Company's Annual Meeting on May 18, 1999 are void or, alternatively, should be rescinded. The complaint further challenges the grant of options to purchase 1.1 million shares (approximately 3% of the Company's total shares outstanding) to certain of its officers and directors. The individual defendants have advised the Company that they believe that they have substantial defenses to the claims asserted by Frontier Insurance Group, Inc. In the opinion of management, the ultimate resolution of such litigation will not have a material effect on the financial condition of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There were no matters submitted to a vote of security holders during the fourth quarter of 1999. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS. The Company's Common Stock is traded on the NASDAQ (Small Cap Market) under symbol ("ACHI") and the Company's Warrants are traded on the NASDAQ (Small Cap Market) under the symbol ("ACHIW"). The following table sets forth the high and low bid prices as reported on NASDAQ for the Company's Common Stock during the quarters indicated. The prices reported reflect inter-dealer quotations and may not represent actual transactions and do not include retail mark-ups, markdowns or commissions. COMMON STOCK
QUARTER ENDED HIGH LOW - - ------------- -------- -------- March 31, 1999.............................................. $1.47 $1.37 June 30, 1999............................................... 1.25 1.22 September 30, 1999.......................................... 1.12 1.07 December 31, 1999........................................... 1.03 0.93 March 31, 1998.............................................. 2.50 1.94 June 30, 1998............................................... 1.97 1.66 September 30, 1998.......................................... 1.94 1.06 December 31, 1998........................................... 1.88 1.06
At March 13, 2000, there were approximately 250 holders of record of the Company's Common Stock. This number does not include an indeterminate number of stockholders whose shares are held by brokers in "street name." The Company has not paid any cash dividends on the Common Stock since it became publicly traded. (See "Business Regulation" for restrictions on the payment of dividends by the Company's insurance subsidiary.) 21 WARRANTS The following table sets forth the high and low bid prices as reported on NASDAQ for the Company's Common Warrants during the quarters indicated. The prices reported reflect inter-dealer quotations and may not represent actual transactions and do not include retail markups, markdowns or commissions. COMMON WARRANTS
QUARTER ENDED HIGH LOW - - ------------- -------- -------- March 31, 1999.............................................. $.35 $.33 June 30, 1999............................................... 0.25 0.19 September 30, 1999.......................................... 0.16 0.14 December 31, 1999........................................... 0.33 0.33 March 31, 1998.............................................. 1.38 1.00 June 30, 1998............................................... 0.72 0.50 September 30, 1998.......................................... 0.50 0.38 December 31, 1998........................................... 0.56 0.50
At March 13, 2000, the Company had 2,054,129 warrants outstanding. The warrants give the warrant holder the right to purchase 2.19 shares of the Company's Common Stock at a price of $1.83 per share through August 31, 2000. ITEM 6. SELECTED FINANCIAL DATA. 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. AMERICAN COUNTRY HOLDINGS INC. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31, 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- INCOME STATEMENT DATA: Revenues: Gross premiums written....................... $77,955 $68,070 $68,416 $67,828 $64,898 ======= ======= ======= ======= ======= Net premiums written......................... $73,983 $56,861 $60,078 $60,760 $57,544 ======= ======= ======= ======= ======= Net premiums earned.......................... $69,677 $56,135 $59,814 $60,550 $56,909 Net investment income........................ 7,618 7,134 7,025 7,032 6,465 Realized capital gains (losses).............. (342) 1,479 1,613 915 222 Other income................................. 215 315 331 219 150 ------- ------- ------- ------- ------- Total revenues........................... 77,168 65,063 68,783 68,716 63,746 Expenses: Losses and loss adjustment expenses.......... 63,617 44,679 53,149 48,845 45,305 Amortization of policy acquisition costs, underwriting, and other expenses........... 14,009 12,932 12,911 12,860 11,185 ======= ======= ======= ======= ======= Interest expense............................. 584 491 161 0 0 ------- ------- ------- ------- ------- Total expenses........................... 78,210 58,102 66,221 61,705 56,490 ------- ------- ------- ------- ------- Income before income taxes..................... (1,042) 6,961 2,562 7,011 7,256 Income taxes................................... (967) 1,585 493 1,986 2,287 ======= ======= ======= ======= ======= Net Income (loss)............................ $ (75) 5,376 2,069 5,025 4,969 ======= ======= ======= ======= ======= Net income per share: basic.................... $ 0.00 $ 0.17 $ 0.06 $ 0.14 $ 0.14 ======= ======= ======= ======= ======= Net income per share: diluted.................. $ 0.00 $ 0.17 $ 0.06 $ 0.14 $ 0.14 ======= ======= ======= ======= ======= Cash dividends declared per share(1)........... $ 0.00 $ 0.00 $ 0.00 $ 0.07 $ 0.08 ======= ======= ======= ======= =======
22
DECEMBER 31, ---------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- BALANCE SHEET DATA: Total investments......................... $129,385 $126,028 $121,098 $114,237 $113,687 Total assets.............................. 176,033 168,305 162,661 151,790 140,627 Liabilities for gross unpaid losses and loss adjustment expenses................ 104,493 92,417 99,087 90,965 81,633 Notes payable............................. 11,150 9,300 4,800 0 0 Total liabilities......................... 139,323 127,183 127,521 111,353 100,560 Total shareholders' equity................ 36,710 41,122 35,140 40,437 40,067 Book value per share...................... $ 1.14 $ 1.28 $ 1.10 $ 1.14 $ 1.13 Statutory Combined Ratio.................. 110.7% 100.9% 109.6% 101.8% 100.3% GAAP Combined Ratio....................... 111.4% 102.6% 109.9% 101.3% 98.8%
- - ------------------------ (1) Cash dividends declared are those of American Country. Dividends per share declared by Western Systems prior to the Acquisition were $0 for each year presented. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis should be read in conjunction with the 1999 Consolidated Financial Statements and notes thereto. OVERVIEW 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 is the successor to an insurance company that was organized in 1978 under the name Calumet Insurance Company. In 1997, American Country entered into a transaction with The Western Systems Corp. ("Western Systems") in which a subsidiary of Western Systems acquired substantially all the assets and assumed substantially all the liabilities of American Country and its wholly owned subsidiary, Financial Services, for a purchase price of $40.3 million (the "Acquisition"), and contemporaneously Western Systems sold 24 million shares of its common stock to three investors, two of whom were shareholders of the parent company of American Country. Following the Acquisition, Western Systems changed its name to American Country Holdings Inc. to better reflect its property and casualty and premium finance business. 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 did 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, eliminate its personal lines business (which had an underwriting loss of $1.7 million for 1997), 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 23 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. 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. THE CALENDAR YEAR 1999 COMPARED TO THE CALENDAR YEAR 1998 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: NET PREMIUMS EARNED:
INCREASE YEAR ENDED (DECREASE) DECEMBER 31, 1999 TO 1998 ------------------- ------------------- 1999 1998 AMOUNT % -------- -------- -------- -------- Transportation lines...................................... $45,246 $31,028 $14,218 45.8% Other Commercial lines.................................... 17,221 19,677 (2,456) (12.5) Hospitality lines......................................... 7,116 5,133 1,983 38.6 Personal lines............................................ 94 297 (203) (68.3) ------- ------- ------- ----- Totals.................................................. $69,677 $56,135 $13,542 24.1% ======= ======= ======= =====
Transportation lines, which consists of taxi and limousine liability and physical damage programs, grew during 1999 as a result of American Country's geographic expansion into additional states. Total premium revenues generated by transportation lines grew 45.8% to $45.2 million in 1999 as compared to $31.0 million in 1998. In 1999, revenues generated outside of Illinois increased from 8.6% or $2.7 million in 1998 to 25.8% or $11.7 million in 1999. This increase is attributable to growth of new programs established in 1998 in Pennsylvania, Michigan, Minnesota, New Jersey, Wisconsin, and in 1999 in New York and Connecticut. 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. 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 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. 24 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. The following table sets forth American Country's Statutory Combined Ratio and GAAP Combined Ratio for the periods indicated:
STATUTORY GAAP COMBINED COMBINED RATIO RATIO YEAR YEAR ENDED ENDED DECEMBER 31, DECEMBER 31, ------------------- ------------------- 1999 1998 1999 1998 -------- -------- -------- -------- Losses...................................................... 74.1% 64.8% 74.1% 64.8% Loss Adjustment Expenses (LAE).............................. 17.2 14.8 17.2 14.8 ----- ----- ----- ----- Losses and LAE.............................................. 91.3 79.6 91.3 79.6 Policy acquisition, other Underwriting expenses............. 19.4 21.3 20.1 23.0 ----- ----- ----- ----- Total combined ratio...................................... 110.7% 100.9% 111.4% 102.6% ===== ===== ===== =====
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 ratio of losses and LAE for other commercial lines increased to 115.0% in 1999 from 82.1% in 1998. Much of this increase is the result of the continuing prior years' adverse development of the Workers' Compensation line, which resulted in American Country posting additional reserves for this line of $3.5 million over management's initial estimate. Additionally, the poor results of the commercial line are attributable to continuing pricing pressures commonplace throughout the industry. 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. Policy acquisition costs increased $1.6 million or 17.9% during 1999. However, when expressed as a percentage of premium revenues, policy acquisition costs decreased from 15.7% in 1998 to 14.8% for 1999. This indicates that the increase in policy acquisition costs is attributable to substantial premium growth rather than increased commission rates paid to producers. 25 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. THE CALENDAR YEAR 1998 COMPARED TO THE CALENDAR YEAR 1997 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: NET PREMIUMS EARNED:
INCREASE YEAR ENDED (DECREASE) DECEMBER 31, 1998 TO 1997 ------------------- ------------------- 1998 1997 AMOUNT % -------- -------- -------- -------- Transportation lines....................................... $31,028 $28,056 $ 2,972 10.6% Other Commercial lines..................................... 19,677 19,802 (125) (0.6) Hospitality lines.......................................... 5,133 3,379 1,754 51.9 Personal lines............................................. 297 8,577 (8,278) (96.5) ------- ------- ------- ----- Totals................................................. $56,135 $59,814 $(3,679) (6.2)% ======= ======= ======= =====
Transportation lines, which consists of taxi and limousine liability and physical damage programs, grew during 1998 as a result of American Country's geographic expansion into additional states. Total premium revenues generated by transportation lines grew 10.6% to $31.0 million in 1998 as compared to $28.1 million in 1997. In 1998, revenues generated outside of Illinois increased from 1.5% in 1997 to 8.6% in 1998. This increase is attributable to the establishment of new programs in Pennsylvania, Michigan, Minnesota, New Jersey, Wisconsin. American Country's hospitality lines experienced the largest percentage growth in premium revenues over other lines, increasing nearly 52% to $5.1 million in 1998 as compared to $3.4 million in 1997. The hospitality program accomplished its significant growth outside of Illinois by expanding into the states of Minnesota and New Jersey. Premium revenues generated from American Country's other commercial lines decreased slightly in 1998 to $19.7 million from $19.8 million for 1997, a 0.6% decrease. This decrease is attributable to American Country's re-underwriting program as well as the continuing pricing competition industry-wide for commercial lines. American Country also realized additional savings by renegotiating reinsurance costs for its commercial lines. 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 26 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. Other income, which consists of interest and fees earned on premium financing activities decreased from $331,000 in 1997 to $315,000 in 1998, a 4.8% decrease. The decrease is the result of the lower volume of premiums finance contracts entered into in 1998. The following table sets forth American Country's Statutory Combined Ratio and GAAP Combined Ratio for the periods indicated:
STATUTORY GAAP COMBINED COMBINED RATIO RATIO YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, ------------------- ------------------- 1998 1997 1998 1997 -------- -------- -------- -------- Losses...................................................... 64.8% 72.0% 64.8% 72.0% Loss Adjustment Expenses (LAE).............................. 14.8 16.8 14.8 16.8 ----- ----- ----- ----- Losses and LAE.............................................. 79.6 88.8 79.6 88.8 Policy acquisition, other Underwriting expenses............. 21.3 20.8 23.0 21.1 ----- ----- ----- ----- Total combined ratio.................................... 100.9% 109.6% 102.6% 109.9% ===== ===== ===== =====
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. Transportation lines loss ratios continued to improve during 1998, with a loss and loss adjustment expense ratio of 79.6% as compared to 81.5% for 1997. This decrease is attributable to savings in loss adjustment expense realized through staff reductions effected in the fourth quarter of 1997. The ratio for losses and LAE for hospitality lines declined slightly to 75.2% in 1998 from 76.0% in 1997. 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 other commercial lines decreased to 82.1% in 1998 as compared to 99.0% in 1997. Although it is impossible to determine how much of this improvement is the result of the re-underwriting program, management believes the impact was significant. Additionally, the commercial lines experienced a lower severity in claims during the year. Workers' compensation and multi-peril liability and property coverages were the lines most responsible for effecting this improvement. 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. Administrative and general expenses increased 16% in 1998 as a result of higher corporate expenses incurred in connection with acquisition and financing activities of the Company. Expenses of the operating companies decreased to $6.6 million as compared to $6.7 million in 1997. The decrease is attributable to 27 cost saving initiatives begun during the fourth quarter of 1997, primarily staff reductions. Interest expense for 1998 increased by $330,000 to $491,000, due to increased borrowings and to a full period of interest expense. ASSET PORTFOLIO REVIEW 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. At December 31, 1999 and 1998, the Company's fixed asset maturity securities included mortgage-backed bonds of $35.4 million and $25.7 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. At December 31, 1999, the following table provides a profile of the Company's fixed maturity investment portfolio by rating:
AMOUNT MARKET PERCENT OF S&P/MOODY'S RATING VALUE PORTFOLIO - - ------------------ -------- ---------- AAA/Aaa (including US Treasuries of $8,476)................. $ 69,569 55.1% AA/Aa....................................................... 17,340 13.7% A/A......................................................... 25,807 20.4% BBB/Ba...................................................... 9,959 7.9% All other................................................... 3,622 2.9% -------- ----- Total................................................... $126,297 100.0% ======== =====
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 generally avoided. 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 28 generally affects net realized gains or losses when securities are sold. With a market value of approximately $126.3 million, the long term fixed maturity investment portfolio has an average maturity of 5.8 years and an indicated duration of 3.7. 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 3.9%, or $4.8 million. These possible declines in values for bond and stock 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. LIQUIDITY AND CAPITAL RESOURCES 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. The Company maintains a liquid operating position and follows investment guidelines that are intended to provide acceptable return on investment while preserving capital, maintaining sufficient liquidity to meet obligations and maintaining a sufficient margin of capital and surplus to ensure American Country's unimpaired ability to write insurance. 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 July 28, 1997, the Company obtained a $7 million revolving loan credit facility under which it borrowed $4.8 million at an initial rate of 7.5% based upon LIBOR, payable quarterly, to fund a portion of the $40.3 million paid in connection with the Acquisition. 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. On October 5, 1999, the Board of Directors approved a loan proposal from Northern Trust wherein the line of credit was converted to an $8.0 million four year term loan and a $7.0 million 364 day revolving credit. Under the $8.0 million term loan, the first installment of $2.0 million is due April 30, 2001. The interest rate on the term loan may be based upon LIBOR + 1%, the New York Federal Funds rate +1%, or the prime rate minus 1%. The $7.0 million revolving credit agreement has a maturity of 364 days, with a Commitment Fee of .25% per annum on the unused portion. 29 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. INCOME TAXES 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. 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. 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. REGULATION In its 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:
RATIO OF TOTAL ADJUSTED CAPITAL TO AUTHORIZED CONTROL LEVEL RBC REGULATORY EVENT (LESS THAN OR EQUAL TO) - - ---------------- ---------------------------------- Company action level............................. 2* Regulatory action level.......................... 1.5 Authorized control level......................... 1 Mandatory control level.......................... 0.7
- - ------------------------ * 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, 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 30 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. The purpose of these regulatory efforts at all levels is to improve the solvency of insurers. 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. IMPACT OF INFLATION 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 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. 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See Index to Financial Statements on Page F-1. 31 SUPPLEMENTAL DATA Unaudited Quarterly Results of American Country Holdings Inc. and Subsidiaries The following is a summary of unaudited quarterly results of operations for 1999 and 1998 (in thousands, except per share data):
1999 1998 ----------------------------------------- ----------------------------------------- MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 -------- -------- -------- -------- -------- -------- -------- -------- Net premiums earned.................. $14,552 $17,758 $17,707 $19,660 $13,129 $13,876 $14,054 $15,076 Total net investment income.......... 1,836 $ 1,830 1,918 2,033 1,747 1,841 1,709 1,837 Income before income tax............. 437 389 456 (2,324) 1,654 1,572 929 1,810 Net income (loss).................... 525 358 181 ($1,139) 1,180 969 1,034 2,193 Per share data: Basic earnings per common share....................... .02 .01 .01 (.04) 0.04 0.03 0.03 0.07 Diluted earnings per common share.... .02 .01 .01 (.04) 0.04 0.03 0.03 0.07
32 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. On January 15, 1998 the Board of Directors of the Company, upon the advice of its Audit Committee, elected to not retain Ernst & Young LLP as its independent auditors, effective for fiscal year 1998. The decision to change accountants was based upon a cost analysis of services provided. There were no disagreements between management of the Company and the former accountants on any matters of accounting principles or practices, financial statement disclosures, or auditing scope or procedures during any period through the date of dismissal. The accountant's reports on the financial statements of the Company for the 1997 fiscal year was unqualified, not modified as to uncertainty, audit scope or accounting principles, and did not express any adverse opinion or disclaimer of opinion. In addition, on January 15, 1998, the Audit Committee recommended, and the Board of Directors approved, the appointment of Coopers & Lybrand L.L.P. (now PricewaterhouseCoopers LLP) as the Company's new independent accountants, effective for fiscal year 1998. The selection of PricewaterhouseCoopers was through a request for proposal process with no consideration requested or made on the application of accounting principles, the type of audit opinion that might be rendered on the financial statements, or any other factor for reaching a decision as to accounting, auditing or financial reporting issues. 32 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The following table lists each director and each executive officer of the Company, together with their respective age and office(s) held:
NAME AGE OFFICE - - ---- -------- ------------------------------------------ Martin L. Solomon......................... 63 Chairman of the Board, President, CEO and Director Edwin W. Elder III........................ 56 Exec. Vice President, COO and Director William J. Barrett........................ 60 Director Karla M. Violetto......................... 32 Vice President and Chief Financial Officer Wilmer J. Thomas, Jr...................... 73 Director John G. McMillian......................... 72 Director Ronald Jay Gold........................... 58 Secretary
MARTIN L. SOLOMON has been the Chairman and Chief Executive Officer and a director of the Company since July 1997. He has been a Private investor since 1990. From 1988 to 1990 he was a Managing Director and general partner of Value Equity Associates, I, L.P., an investment partnership. From 1985 to 1987, Mr. Solomon was an investment analyst and portfolio manager with Steinhardt Partners, an investment partnership. From 1985 to 1996, Mr. Solomon was a Director and Vice-Chairman of the Board of Great Dane Holdings, Inc., a company engaged in the manufacture of transportation equipment, automobile stamping, the leasing of taxis and insurance. Since 1990, Mr. Solomon has been a Director of XTRA Corp., a lessor of truck trailers, marine containers, and intermodal equipment. In May 1996 he was appointed a Director of Hexel Corp. and, since June 1997, Mr. Solomon has been a Director of Telephone and Data Systems, Inc., a diversified telecommunications service company with established wireless and wireline operations. Effective March 1999, Mr. Solomon was named a director of MFN Financial Corporation, a consumer finance company. Mr. Solomon is also a director of various privately held corporation and civic organizations. EDWIN W. ELDER has been President and a director of American Country since 1993. From 1985 to 1993, he served as Senior Vice President of Operations for Employer's Health Insurance Company and IDS Property Casualty. Mr. Elder has 29 years of experience in the insurance industry and started his career with State Farm Insurance Company after leaving the United States Army, where he attained the rank of Captain. He is a CPCU and an FLMI. Mr. Elder has served as a director of the Company since July 1997. WILLIAM J. BARRETT served as a director of The Western Systems Corp. and, subsequent to the Acquisition, the Company, since January 1992. Mr. Barrett has been employed as a Senior Vice President of Janney Montgomery Scott Inc., an investment banking firm, for more than five years. Mr. Barrett is a director of the following publicly held corporations: Supreme Industries, Inc., a specialized truck body manufacturer; Fredericks of Hollywood, Inc., an apparel marketing company; Shelter Components Corporation, a supplier to the manufactured housing and recreation vehicle industries and a manufacturer of bathrooms products; and TGC Industries, Inc., a provider of geophysical services to the oil and gas industries. Mr. Barrett served as the Secretary of the Company until from August 1992 until March 9, 1999. KARLA M. VIOLETTO was appointed Vice President and Chief Financial Officer of American Country in March, 2000, succeeding James P. Byrne, who served as Vice President and Controller of American Country from 1988 through 1999. Ms. Violetto has 11 years of experience in the insurance industry. Prior to joining American Country as Manager, Corporate Reporting and Financing in July of 1999, Ms. Violetto was a senior associate at PricewaterhouseCoopers, LLP. Ms. Violetto received her bachelor's degree in accountancy from De Paul University in 1989 and is a certified public accountant. 33 WILMER J. THOMAS, JR. is a private investor and financial consultant. He has served as a director of the Company since July 1997. From 1989 to 1996, Mr. Thomas was a director and Vice President of Great Dane Holdings Inc. (former parent of American Country), formerly in the business of manufacturing truck trailers and automobile stampings, leasing taxis, and through American Country, property and casualty insurance. Mr. Thomas is a director of Moore Medical Corp., a publicly held pharmaceutical and surgical supply company. JOHN G. MCMILLIAN In 1973, Mr. McMillian founded Northwest Energy Company, a natural gas supplier, and from 1973 through 1983 served as its first chairman and chief executive officer. From 1987 to 1995, Mr. McMillian was also the chairman, president and chief executive officer of Allegheny & Western Energy Corporation, an oil and gas company. Mr. McMillian is currently the chairman and chief executive officer of Chapparal Resources, Inc., a gas and oil exploration and production company.He also serves on the board of directors of Excalibur Technologies Corp., a designer of knowledge retrieval software products, the U.S. Ski Team Foundation and the Steadman Hawkins Sports Medicine Foundation. RONALD J. GOLD became Secretary of the Company on March 9, 1999. Mr. Gold has been an attorney in the legal department of American Country since 1968. Since 1993, he has served as the Secretary of American Country and the senior attorney in American Country's legal department. All directors hold office until the next annual meeting of stockholders and until their successors are elected and qualified. Officers are elected annually and serve at the pleasure of the Board of Directors, subject to rights, if any, under contracts of employment. ITEM 11. EXECUTIVE COMPENSATION. For information regarding executive compensation, reference is made to the Registrant's definitive proxy statement for its Annual Meeting of Stockholders to be held on June 20, 2000, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1999, which is incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. For information regarding security ownership of certain beneficial owners and management, reference is made to the Registrant's definitive proxy statement for its Annual Meeting of Stockholders to be held on June 20, 2000, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1999, which is incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. For information regarding certain relationships and related transactions, reference is made to the Registrant's definitive Proxy Statement for its annual meeting of stockholders to be held on June 20, 2000, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1999 which is incorporated herein by reference. 34 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K. List of documents filed as part of this report. (a)(1) Financial Statements and Schedules. See List of Financial Statements and Financial Statement Schedules on page F-1. (a)(2) The following consolidated financial statement schedules of the Company listed below are contained in the index to Financial Statement Schedules on page F-1 herein: Schedule II Condensed Financial Information of Registrant Schedule IV Reinsurance Schedule V Valuation and Qualifying Accounts Schedule VI Supplemental Information concerning Property/Casualty Insurance Operations (b) Reports on Form 8-K. There were no reports on Form 8-K filed in the fourth quarter of 1999. (c) Exhibits. See Exhibit Index immediately following financial statement schedules. (d) Financial statements, fifty percent or less owned persons. Not applicable.
35 ANNUAL REPORT ON FORM 10-K ITEM 14(A)(1) AND (2), (C), AND (D) LIST OF FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA FINANCIAL STATEMENT SCHEDULES YEAR ENDED DECEMBER 31, 1999 AMERICAN COUNTRY HOLDINGS INC. CHICAGO, ILLINOIS ITEM 14. Report of Independent Accountants on Financial Statement Schedules.................. F-2 Schedule II Condensed Balance Sheet..................................... F-4 Condensed Statement of Income............................... F-5 Condensed Statement of Cash Flows........................... F-6 Condensed Statement of Stockholders' Equity................. F-7 Schedule IV Reinsurance................................................. F-8 Schedule V Valuation and Qualifying Accounts........................... F-9 Supplemental Information Concerning Property/Casualty Schedule VI..... Insurance Operations........................................ F-10 Reports of Independent Accountants.................................................. F-12 Consolidated Balance Sheets......................................................... F-14 Consolidated Statements of Income................................................... F-15 Consolidated Statements of Stockholders' Equity..................................... F-16 Consolidated Statements of Cash Flows............................................... F-17 Notes to Consolidated Financial Statements.......................................... F-18
F-1 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES Board of Directors American Country Holdings Inc. Our audits of the consolidated financial statements referred to in our report dated March 29, 2000 appearing under Item 14(a)(1) of this Form 10-K also included audits of the financial statement schedules listed in Item 14(a)(2) of this Form 10-K, as of December 31, 1999 and 1998 and for the years then ended. In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. The financial statement schedules of the Company for the year ended December 31, 1997 were audited by other independent accountants whose report dated February 24, 1998 expressed an unqualified opinion on those financial statement schedules. /s/ PricewaterhouseCoopers LLP PRICEWATERHOUSECOOPERS LLP Chicago, Illinois March 29, 2000 F-2 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES Report of Ernst & Young LLP, Independent Auditors Board of Directors and Stockholders American Country Holdings Inc. We have audited the consolidated financial statements of American Country Holdings Inc. and subsidiaries for the year ended December 31, 1997, and have issued our report thereon dated February 24, 1998 (included elsewhere in this Form 10-K). Our audit also included the financial statement schedules listed in the Index at Item 14(a). These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audit. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP Chicago, Illinois February 24, 1998 F-3 SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT AMERICAN COUNTRY HOLDINGS INC. CONDENSED BALANCE SHEET (PARENT COMPANY ONLY) (IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, ------------------- 1999 1998 -------- -------- ASSETS Cash and cash equivalents................................... $ 202 $ 22 Investments in subsidiaries: American Country Insurance Company........................ 44,147 47,769 American Country Financial Services Corp.................. 1,931 1,806 American Country Professional Services Corp............... (8) 10 Deferred Income Taxes....................................... -- 506 Income taxes recoverable.................................... -- Due from subsidiaries....................................... 1,441 977 Prepaid Expenses............................................ 47 28 ------- ------- Total assets............................................ $47,760 $51,118 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accrued expenses............................................ $ 159 $ 187 Income taxes payable........................................ (333) 411 Notes payable--from subsidiary.............................. -- 97 Deferred income taxes....................................... 74 -- Note payable................................................ 11,150 9,300 ------- ------- Total liabilities....................................... 11,050 9,995 ======= ======= Stockholders' equity: Common stock--$.01 par value. Authorized 60,000 shares Issued and outstanding: 1999--32,097,371; 1998--32,045,214........................................ 320 320 Preferred stock Authorized--2,000,000 shares Issued and outstanding shares: 0............................................... -- -- Additional paid in capital.................................. 36,864 36,864 Accumulated other comprehensive income...................... (1,784) 2,553 Retained earnings (deficit)................................. 1,310 1,385 ------- ------- Total equity............................................ 36,710 41,122 ------- ------- Total liabilities and stockholders' equity.............. $47,760 $51,118 ======= =======
See notes to condensed financial statements. F-4 SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT AMERICAN COUNTRY HOLDINGS INC. CONDENSED STATEMENTS OF INCOME (PARENT COMPANY ONLY) (IN THOUSANDS)
PERIOD YEAR ENDED YEAR ENDED JULY 29- DECEMBER 31, DECEMBER 31, DECEMBER 31, 1999 1998 1997 ------------- ------------- ------------- REVENUES Net investment income.................................. $ 39 $ 3 $ 7 Management fees from subsidiaries...................... 900 900 250 ----- ------ ------ Total Revenues..................................... 939 903 257 ----- ------ ------ EXPENSES General and administrative expenses.................... 580 737 186 Interest expense....................................... 584 579 171 ----- ------ ------ Total Expenses..................................... 1,164 1,316 357 ----- ------ ------ Loss before income tax benefit and equity in undistributed income of subsidiaries................. (225) (414) (100) Income tax expense..................................... (114) (649) (47) ----- ------ ------ Income (Loss) before equity in undistributed income of subsidiaries......................................... (339) 235 (53) Undistributed income of subsidiaries................... 264 5,141 1,344 ----- ------ ------ Net income (Loss)...................................... $ (75) $5,376 $1,291 ===== ====== ======
See notes to condensed financial statements. F-5 SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT AMERICAN COUNTRY HOLDINGS INC. CONDENSED STATEMENT OF CASH FLOWS (PARENT COMPANY ONLY) (IN THOUSANDS)
PERIOD YEAR ENDED YEAR ENDED JULY 29- DECEMBER 31, DECEMBER 31, DECEMBER 31, 1999 1998 1997 ------------- ------------- ------------- Net cash provided by (used in) operating activities..... (1,670) $(4,667) $ 361 Investing Activities: Business combination--net of cash acquired............ -- -- (31,862) Capitalization of subsidiary.......................... -- (10) -- ------ ------- -------- Net cash provided by (used in) investing activities..... -- (10) (31,862) Financing activities: Proceeds from note payable............................ 1,850 4,500 4,800 Issuance of common stock.............................. -- -- 26,667 Exercise of options and warrants...................... -- 16 217 ------ ------- -------- Net cash provided by financing activities............... 1,850 4,516 31,684 ------ ------- -------- Net increase (decrease) in cash......................... 180 (161) 183 Cash at beginning of year............................... 22 183 -- ------ ------- -------- Cash at end of year..................................... $ 202 $ 22 $ 183 ====== ======= ========
See notes to condensed financial statements. F-6 SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT AMERICAN COUNTRY HOLDINGS INC. CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY (PARENT COMPANY ONLY) (IN THOUSANDS) FOR THE PERIOD JULY 29, 1997 THROUGH DECEMBER 31, 1999
ACCUMULATED NUMBER ADDITIONAL OTHER RETAINED TOTAL OF COMMON PAID-IN COMPREHENSIVE EARNINGS STOCKHOLDERS' SHARES STOCK CAPITAL INCOME (DEFICIT) EQUITY -------- -------- ---------- -------------- --------- ------------- BALANCE AT BEGINNING OF PERIOD: July 29, 1997 pre-acquisition................... 7,903 $ 79 $10,205 $ 0 $(1,548) $ 8,736 Adjustment for reverse acquisition.............. 0 0 0 3,398 (3,734) (336) Issuance of additional shares................... 24,001 240 26,427 0 0 26,667 ------ ---- ------- ------- ------- ------- Adjusted beginning balance at July 29, 1997..... 31,904 319 36,632 3,398 (5,282) 35,067 Comprehensive income, net of tax: Net income (for period from July 29, 1997 to December 31, 1997)............................ 0 0 0 0 1,291 1,291 Change in net unrealized investment gains (net of applicable income tax of $(207))........... 0 0 0 (403) 0 (403) Less: Elimination of realized gains included in income as reported (net of applicable income tax of $(548))................................ 0 0 0 (1,065) 0 (1,065) Other........................................... 0 0 0 33 0 33 ------- Total comprehensive income...................... (144) Issuance of additional shares upon exercise of options and warrants.......................... 132 1 216 0 0 217 ------ ---- ------- ------- ------- ------- BALANCE AT DECEMBER 31, 1997.................... 32,036 $320 $36,848 $ 1,963 $(3,991) $35,140 Comprehensive income, net of tax: Net income...................................... 0 0 0 0 5,376 5,376 Change in net unrealized investment gains (net of applicable income tax of $862)............. 0 0 0 1,558 0 1,558 Less: Elimination of realized gains included in income as reported (net of applicable income tax of $(503))................................ 0 0 0 (976) 0 (976) Other........................................... 0 0 0 8 0 8 ------- Total comprehensive income...................... 5,966 Issuance of additional shares upon exercise of options and warrants.......................... 9 0 16 0 0 16 ------ ---- ------- ------- ------- ------- BALANCE AT DECEMBER 31, 1998.................... 32,045 $320 $36,864 $ 2,553 $ 1,385 $41,122 Comprehensive income, net of tax: Net income...................................... 0 0 0 0 (75) (75) Change in net unrealized investment gains (net of applicable income tax of ($2,160))......... 0 0 0 (4,522) 0 (4,522) Less: Elimination of realized gains included in income as reported (net of applicable income tax of $116).................................. 0 0 0 226 0 226 Other........................................... 0 0 0 (41) 0 (41) ------- Total comprehensive income...................... (4,412) Issuance of additional shares upon exercise of options and warrants.......................... 0 0 0 0 0 0 ------ ---- ------- ------- ------- ------- BALANCE AT DECEMBER 31, 1999.................... 32,045 $320 $36,864 ($1,784) $ 1,310 $36,710 ====== ==== ======= ======= ======= =======
See Notes to Consolidated Financial Statements. F-7 SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT AMERICAN COUNTRY HOLDINGS INC. (PARENT COMPANY ONLY) NOTES TO CONDENSED FINANCIAL STATEMENTS 1. These condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto. 2. As discussed in Note 1 to the consolidated financial statements, on July 29, 1997, the Registrant entered into a business combination with American Country Insurance Company ("American Country") that was accounted for as a reverse acquisition (the "Acquisition"). As a result, the historical financial statements of the Registrant prior to July 29, 1997 are those of American Country. The Registrant is the parent company of American Country only from the date of the Acquisition. Accordingly, the condensed financial statements of the parent company only included herein reflect the period from July 29, 1997 through December 31, 1999. The Company has presented a condensed statement of stockholders' equity for purposes of disclosing the beginning equity balances of the Registrant when it became the parent company of American Country. F-8 SCHEDULE IV--REINSURANCE AMERICAN COUNTRY HOLDINGS INC. AND SUBSIDIARIES (IN THOUSANDS)
COL. C COL. E ---------------------- ---------- A B COL. D PERCENTAGE COL. A COL. B CEDED TO ASSUMED -------- OF AMOUNT - - ------ -------- OTHER FROM OTHER NET ASSUMED DESCRIPTION DIRECT COMPANIES COMPANIES AMOUNT TO NET - - ----------- -------- --------- ---------- -------- ---------- Year ended December 31, 1999 Premiums written.......................... $76,027 $ 3,972 $1,928 $73,983 2.6% Year ended December 31, 1998 Premiums written.......................... $65,180 $11,210 $2,891 $56,861 5.1% Year ended December 31, 1997 Premiums written.......................... $67,576 $ 8,338 $ 840 $60,078 1.4%
F-9 SCHEDULE V VALUATION AND QUALIFYING ACCOUNTS AMERICAN COUNTRY HOLDINGS INC. AND SUBSIDIARIES (IN THOUSANDS)
COL. A COL. B COL. C COL. D COL. E ---------- ---------- ---------- ---------- ---------- CHARGED TO BALANCE AT CHARGED TO OTHER (A) BALANCE AT BEGINNING COSTS AND ACCOUNTS DEDUCTIONS END OF DESCRIPTION OF PERIOD EXPENSES (DESCRIBE) (DESCRIBE) PERIOD - - ----------- ---------- ---------- ---------- ---------- ---------- Year ended December 31, 1999 Reserves and allowances deducted from asset accounts: Allowance for bad debts.............. $(262) $(120) $ 34 $(348) Year ended December 31, 1998 Reserves and allowances deducted from asset accounts: Allowance for bad debts.............. $(265) $ (96) $ 99 $(262) Year ended December 31, 1997............. $(155) $ (94) $ (16) $(265) Reserves and allowances deducted from asset accounts: Allowance for bad debts.............. $ (22) $ (84) $ (49) $(155)
- - ------------------------ (A) Amounts charged off less recoveries. F-10 SCHEDULE VI--SUPPLMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS AMERICAN COUNTRY HOLDINGS INC. AND SUBSIDIARIES (IN THOUSANDS)
DECEMBER 31, YEAR ENDED DECEMBER 31, ----------------------------------------------- ----------------------------------------------- COL. A COL. B COL. C COL. D COL. E COL. F COL. G COL. H - - --------------------- ----------- ---------- --------- -------- -------- ---------- ----------------------- RESERVES DISCOUNT, LOSS AND LOSS FOR UNPAID IF ANY, ADJUSTMENT EXPENSES LOSS AND DEDUCTED ---------- ---------- DEFERRED CLAIM IN TOTAL NET INCURRED RELATED TO POLICY ADJUSTMENT COLUMN UNEARNED EARNED INVESTMENT CURRENT PRIOR PERIOD ACQUISITION EXPENSES C PREMIUMS PREMIUMS INCOME YEAR YEAR - - ------ ----------- ---------- --------- -------- -------- ---------- ---------- ---------- 1999 Transportation....... $1,296 $ 61,023 -- $ 8,557 $45,246 $3,429 $36,568 $ (211) Hospitality.......... 868 7,553 -- 3,915 7,116 513 5,973 625 Commercial........... 1,084 33,248 -- 6,244 17,221 1,779 16,415 3,385 Other................ 3 2,669 -- 12 94 140 271 590 Not allocated........ 0 0 -- 0 0 1,757 0 0 ------ -------- --- ------- ------- ------ ------- ------- Totals............... 3,251 104,493 -- 18,728 69,677 7,618 59,227 4,389 ====== ======== ======= ======= ====== ======= ======= 1998 Transportation....... 406 49,357 -- 2,982 31,028 2,878 23,399 813 Hospitality.......... 629 4,092 -- 3,124 5,133 832 4,390 (292) Commercial........... 1,314 35,565 -- 8,032 19,677 3,253 16,023 298 Other................ 7 3,403 -- 323 297 171 432 (384) Not allocated........ 0 0 -- 0 0 200 0 0 ------ -------- --- ------- ------- ------ ------- ------- Totals............... 2,356 92,417 -- 14,461 56,135 7,134 44,244 434 ====== ======== ======= ======= ====== ======= ======= 1997 Transportation....... -- 46,473 -- 278 28,056 2,810 22,471 394 Hospitality.......... 362 3,027 -- 1,762 4,313 819 2,716 567 Commercial........... 1,434 43,696 -- 8,453 18,869 2,900 21,205 (1,726) Other................ 748 5,891 -- 2,920 8,576 239 7,221 301 Not allocated........ 0 0 -- 0 0 257 0 0 ------ -------- --- ------- ------- ------ ------- ------- Totals............... $2,544 $ 99,087 -- $13,413 $59,814 $7,025 $53,613 $ (464) ====== ======== ======= ======= ====== ======= ======= YEAR ENDED DECEMBER 31, ------------------------------------ COL. A COL. I COL. J COL. K - - --------------------- ------------ ---------- -------- AMORTIZATION PAID OF DEFERRED LOSSES POLICY AND LOSS ACQUISITION ADJUSTMENT PREMIUMS PERIOD COSTS EXPENSES WRITTEN - - ------ ------------ ---------- -------- 1999 Transportation....... $ 5,761 $29,095 $48,590 Hospitality.......... 1,170 3,382 7,930 Commercial........... 3,441 18,916 17,388 Other................ 5 1,337 75 Not allocated........ 0 0 0 -------- ------- ------- Totals............... 10,377 52,730 73,983 ======== ======= ======= 1998 Transportation....... 3,141 21,880 33,694 Hospitality.......... 1,228 2,817 6,489 Commercial........... 3,694 20,502 19,270 Other................ 741 2,988 (2,592) Not allocated........ 0 0 0 -------- ------- ------- Totals............... 8,804 48,187 56,861 ======== ======= ======= 1997 Transportation....... 2,324 20,756 28,297 Hospitality.......... 907 1,926 4,395 Commercial........... 3,804 18,971 19,074 Other................ 2,069 6,973 8,312 Not allocated........ 0 0 0 -------- ------- ------- Totals............... $ 9,104 $48,626 $60,078 ======== ======= =======
Investment income is allocated to segments based on each segment's percentage of insurance reserves. Investment income not allocated to segments includes investment income allocable to capital and surplus and realized gains and losses. F-11 REPORT OF INDEPENDENT ACCOUNTANTS Board of Directors and Stockholders American Country Holdings Inc. In our opinion, the accompanying consolidated balance sheets as of December 31, 1999 and 1998, and the related consolidated statements of income, stockholders' equity, and cash flows for the years then ended present fairly, in all material respects, the financial position of American Country Holdings Inc. and its subsidiaries (the "Company") at December 31, 1999 and 1998, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. The consolidated statements of income, stockholders' equity, and cash flows of the Company for the year ended December 31, 1997 were audited by other independent accountants whose report dated February 24, 1998 expressed an unqualified opinion on those statements. PRICEWATERHOUSECOOPERS LLP Chicago, Illinois March 29, 2000 F-12 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors and Stockholders American Country Holdings Inc. We have audited the accompanying consolidated statements of income, stockholders' equity, and cash flows for the year ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amount and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of American Country Holdings Inc. and Subsidiaries for the year ended December 31, 1997, in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LLP Chicago, Illinois February 24, 1998 F-13 AMERICAN COUNTRY HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------- 1999 1998 -------- -------- (IN THOUSANDS) ASSETS Investments (NOTES 2 AND 3): Available-for-sale: Fixed maturities--At fair value (amortized cost: 1999 $129,526,000; 1998--$122,010,000)....................... $126,297 $125,086 Equity securities--At fair value (cost: 1999 $353,000; 1998--$353,000)......................................... 367 402 Collateral loans (at amortized cost, which approximates fair value).................................................... 2,721 540 -------- -------- Total investments........................................... 129,385 126,028 Cash and cash equivalents................................... 4,973 10,353 Premiums receivable (net of allowance: 1999 $348,000; 1998--$262,000)........................................... 13,048 7,378 Reinsurance recoverable..................................... 15,233 13,402 Deferred income taxes....................................... 6,535 3,624 Deferred policy acquisition costs........................... 3,251 2,355 Accrued investment income................................... 1,772 1,705 Property and equipment...................................... 832 820 Other assets................................................ 929 2,640 -------- -------- Total assets................................................ $175,958 $168,305 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Unpaid losses and loss adjustment expenses................ $104,493 $ 92,417 Unearned premiums......................................... 18,728 14,461 Note payable (NOTE 8)..................................... 11,150 9,300 Accrued expenses.......................................... 3,179 3,854 Premium deposits.......................................... 9 2,894 Drafts outstanding........................................ 2,023 3,792 Income taxes payable...................................... (334) 465 -------- -------- Total liabilities........................................... 139,248 127,183 Commitments and contingent liabilities (NOTES 11 AND 12) Stockholders' equity (NOTES 1 AND 7): Common Stock--$.01 par value. Authorized--60,000,000 shares Issued and outstanding shares: 1999 32,045,214; 1998 32,045,214.............................................. 320 320 Preferred Stock Authorized--2,000,000 shares Issued and outstanding shares: 0........................ Additional paid-in capital................................ 36,864 36,864 Accumulated other comprehensive income (loss)............. (1,784) 2,553 Retained earnings......................................... 1,310 1,385 -------- -------- Total stockholders' equity.................................. 36,710 41,122 -------- -------- $175,958 $168,305 ======== ========
See notes to consolidated financial statements. F-14 AMERICAN COUNTRY HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31 ------------------------------ 1999 1998 1997 -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) REVENUES Premiums earned............................................. $69,677 $56,135 $59,814 Net investment income....................................... 7,618 7,134 7,025 Net realized gains (losses) on investments.................. (342) 1,479 1,613 Other income................................................ 215 315 331 ------- ------- ------- Total revenues.............................................. 77,168 65,063 68,783 LOSSES AND EXPENSES Losses and loss adjustment expenses......................... 63,617 44,679 53,149 Amortization of deferred policy acquisition costs........... 10,377 8,804 9,104 Administrative and general expenses......................... 4,216 4,619 3,968 ------- ------- ------- Total losses and expenses................................... 78,210 58,102 66,221 ------- ------- ------- Income (loss) before income taxes........................... (1,042) 6,961 2,562 Provision for income tax (NOTE 5): Current................................................... 125 1,374 4,163 Deferred.................................................. (1,092) 2110 (3,670) ------- ------- ------- (967) 1,585 493 ------- ------- ------- Net income (loss)........................................... $ (75) $ 5,376 $ 2,069 ======= ======= ======= Basic and dilutive earnings per share....................... $ .00 $ .17 $ .06 ======= ======= =======
See notes to consolidated financial statements. F-15 AMERICAN COUNTRY HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
ACCUMULATED ADDITIONAL OTHER RETAINED TOTAL NUMBER OF COMMON PAID-IN COMPREHENSIVE EARNINGS STOCKHOLDERS' SHARES STOCK CAPITAL INCOME (DEFICIT) EQUITY --------- -------- ---------- ------------- --------- ------------- Balance at December 31, 1996............... 35,557 356 0 919 39,162 40,437 Comprehensive income, net of tax: Net Income................................. 0 0 0 0 2,069 2,069 Change in net unrealized investment gains (net of applicable income taxes of $904).................................... 0 0 0 2,076 0 2,076 Less: Elimination of realized gains included in income as reported (net of applicable income tax of $(548))......... 0 0 0 (1,065) 0 (1,065) Other...................................... 0 0 0 33 0 33 ------- Total comprehensive income................. 3,113 Redemption of shares recognized as part of reverse acquisition...................... (35,557) (356) 0 0 (39,894) (40,250) Acquisition of Western Systems............. 7,903 79 10,205 0 (5,328) 4,956 Issuance of additional shares.............. 24,001 204 26,427 0 0 26,667 Issuance of additional shares upon exercise of options and warrants.................. 132 1 216 0 0 217 ------- ---- ------ ------ ------- ------- Balance at December 31, 1997............... 32,036 320 36,848 1,963 (3,991) 35,140 Comprehensive income, net of tax: Net Income................................. 0 0 0 0 5,376 5,376 Change in net unrealized investment gains (net of applicable income taxes of $862).................................... 0 0 0 1,558 0 1,558 Less: Elimination of realized gains included in income as reported (net applicable income tax of $(503))......... 0 0 0 (976) 0 (976) Other...................................... 0 0 0 8 0 8 ------- Total comprehensive income................. 5,966 Issuance of additional shares upon exercise of options and warrants.................. 9 0 16 0 16 ------- ---- ------ ------ ------- ------- Balance at December 31, 1998............... 32,045 320 36,864 2,553 1,385 41,122 Comprehensive income, net of tax: Net Income................................. 0 0 0 0 (75) (75) Change in net unrealized investment gains (net of applicable income taxes of $(2,160))................................ 0 0 0 (4,522) 0 (4,522) Less: Elimination of realized gains included in income as reported (net of applicable income tax of $116)........... 0 0 0 226 0 226 Other...................................... 0 0 0 (41) (41) ------- Total comprehensive income................. (4,412) Issuance of additional shares upon exercise of options and warrants.................. 0 0 0 0 0 0 ------- ---- ------ ------ ------- ------- Balance at December 31, 1999............... 32,045 320 36,864 (1,784) 1,310 36,710 ======= ==== ====== ====== ======= =======
F-16 AMERICAN COUNTRY HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 ------------------------------ 1999 1998 1997 -------- -------- -------- (IN THOUSANDS) OPERATING ACTIVITIES Net income.................................................. $ (75) $ 5,376 $ 2,069 Adjustments to reconcile net income to net cash provided by operating activities: Change in premiums receivables and reinsurance recoverables.............................................. (7,499) 2,495 (4,613) Change in reserve for unpaid losses and loss adjustment expenses.................................................. 12,076 (6,670) 8,122 Change in reserve for unearned premiums..................... 4,267 1,048 170 Amortization of deferred policy acquisition costs........... 10,377 8,804 9,104 Deferred policy acquisition costs capitalized............... (11,273) (8,614) (8,782) Net realized losses (gains) on investments.................. 342 (1,479) (1,613) Provision for depreciation.................................. 475 315 308 Change in accrued expenses.................................. (5,383) (647) (893) Change in income taxes payable.............................. (724) (2,229) 2,329 Change in other assets and liabilities...................... 758 1,991 (2,245) -------- -------- -------- Net cash provided by operating activities................... 3,300 390 3,956 -------- -------- -------- INVESTING ACTIVITIES Fixed maturities Available-for-sale: Purchases................................................... (155,717) (193,727) (141,633) Sales....................................................... 133,926 174,614 109,758 Maturities, calls, and prepayments.......................... 13,803 15,855 10,038 Equity securities........................................... -- -- -- Available-for-sale: Purchases................................................... -- -- (1,968) Sales....................................................... -- -- 10,646 Maturities, calls, and prepayments.......................... -- 1,238 -- Fixed maturities Held-to-maturity: Purchases................................................... -- -- Maturities, calls, and prepayments.......................... 4,715 Net sales of short-term investments......................... -- 7 1,230 Sale or maturity of other investments....................... 564 262 2,562 Net issuance of collateral loans............................ (3,106) (1,301) (496) Business combination Net of cash acquired................... -- -- (31,862) -------- -------- -------- Net cash used by investing activities....................... (10,530) (3,052) (37,009) -------- -------- -------- FINANCING ACTIVITIES Proceeds from note payable.................................. 1,850 4,500 4,800 Issuance of common stock.................................... -- -- 26,667 Options and warrants exercised.............................. -- 16 217 Dividends paid to stockholders.............................. -- -- -- -------- -------- -------- Net cash and cash equivalents provided by financing activities................................................ 1,850 4,516 31,684 -------- -------- -------- Net increase (decrease) in cash and cash equivalents........ (5,380) 1,854 (1,369) Cash and cash equivalents at beginning of year.............. 10,353 8,499 9,868 -------- -------- -------- Cash and cash equivalents at end of year.................... $ 4,973 $ 10,353 $ 8,499 ======== ======== ========
See notes to consolidated financial statements. F-17 AMERICAN COUNTRY HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION. BUSINESS COMBINATION American Country is the successor to an insurance company that was organized in 1978 under the name Calumet Insurance Company. In 1997, American Country entered into a transaction with The Western Systems Corp. (Western Systems) in which a subsidiary of Western Systems acquired substantially all the assets and assumed substantially all the liabilities of American Country Insurance Company (American Country) and its wholly owned subsidiary, American Country Financial Services Corp. (Financial Services) for a purchase price of $40,300,000 (the "Acquisition"). Western Systems had sold its business operations in early 1997 and subsequently until the Acquisition its business consisted primarily of managing its cash and cash equivalents as a publicly owned shell corporation. As a non-operating entity with only monetary assets and liabilities, Western Systems was actively seeking a business combination with an operating business that could use its available cash. In connection with the Acquisition, Western Systems sold 24 million shares of its common stock (approximately 75% of the shares outstanding) to three investors. Mr. Martin Solomon, Mr. Wilmer J. Thomas, Jr. and Frontier Insurance Group each acquired 8 million shares, or approximately 25% of the shares outstanding. Financing for the Acquisition was provided by Western Systems' cash on hand, the issuance of Western Systems common stock, and a line-of-credit agreement. Following the Acquisition, Western Systems changed its name to American Country Holdings Inc. (ACHI or the Company) to better reflect the fact that its business operations consisted of the property and casualty and premium finance businesses of American Country. For financial reporting purposes, the Acquisition has been accounted for as a reverse Acquisition whereby American Country was deemed to be the acquirer of the Company. Paragraph 70 of APB 16 provides that presumptive evidence of the acquiring corporation in business combinations effected by an exchange of stock is obtained by identifying the former common stockholder interests of a combining company which either retain or receive the larger portion of the voting rights in the combined corporation. As described above, Messrs. Solomon and Thomas received a 50% interest in the Company in connection with the Acquisition, which was the larger portion of the voting rights of the Company. Moreover, Messrs. Solomon and Thomas had served on the Board of Directors of the previous parent of American Country and continued to serve on the board of the Company with Mr. Solomon serving as the Chairman of the Board and the Chief Executive Officer of the Company. American Country, the Company's primary operating entity, continued the same business after the Acquisition, which provides additional support for accounting for the Acquisition as a reverse acquisition. Because Western Systems was a non-operating entity, with only monetary assets and liabilities, historical book value was deemed to equal fair value, and no goodwill or other intangible assets were recorded as a result of the Acquisition. Because American Country was deemed to be the accounting acquirer, the financial statements for the Company for periods prior to the business combination date (July 29, 1997), are those of American Country. The Acquisition was accounted for by the purchase method. The following pro forma data is presented as if the Acquisition had occurred on January 1, 1997:
YEAR ENDED DECEMBER 31 ---------------- 1997 ---------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues.................................................... $68,783 Net income.................................................. 1,769 Basic and dilutive earnings per share....................... .05
F-18 AMERICAN COUNTRY HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION. (CONTINUED) NATURE OF OPERATIONS American Country is a property and casualty insurance company, domiciled in the State of Illinois, which underwrites and markets specialty transportation, commercial, and personal lines of insurance. Transportation lines, principally liability and collision coverage for taxicabs and limousine companies, accounted for approximately 65.4% of American Country's 1999 gross premiums written. Other commercial lines, principally workers' compensation, multiperil and auto liability and physical damage accounted for approximately 22.9% of American Country's gross premiums written in 1999. Hospitality lines, which include coverage for restaurants, taverns and banquet halls accounted for 11.6% of total gross premiums written in 1999. Personal lines, primarily auto and homeowners' policies, accounted for the balance. American Country Financial Services Corp. operates principally as a premium finance company. Formed in 1998, American Country Professional Services Corp. (Professional Services) is a finance company that provides collateral loans to American Country's larger customers. The Company's business segments are defined in Note 14. Yellow Cab Company was an affiliate of American Country prior to December 31, 1996, and accounted for $11,250,000, $11,953,000 and $10,972,000 of premiums earned in 1999, 1998 and 1997, respectively. In addition, included in premiums earned is $6,231,000, $7,088,000 and $7,447,000 in 1999, 1998 and 1997, respectively, related to Checker Taxi members. The segment reporting of this income is under Transportation lines. Prior to January 3, 1997, Western Systems primarily operated under a franchise agreement with Transmedia Network, Inc. (Transmedia) which granted Western Systems the right to operate a franchise in California, Washington, Oregon, and certain parts of Nevada. The franchise provided the rights to receive food and beverage credits from restaurants that accept the Transmedia restaurant card. On January 3, 1997, Western Systems sold its Transmedia franchise. At July 29, 1997, Western Systems had no operating activities and its business consisted primarily of managing the cash and cash equivalents of Western Systems. Prior to the Acquisition, Western Systems was a public shell actively seeking a business combination with an operating business that would use its available cash. 2. SIGNIFICANT ACCOUNTING POLICIES. BASIS OF PRESENTATION The accompanying consolidated financial statements of the Company have been prepared in conformity with generally accepted accounting principles (GAAP) and include the accounts and operations of ACHI and its wholly owned subsidiaries, American Country, Financial Services and Professional Services. Significant intercompany accounts and transactions have been eliminated. American Country maintains its records in accordance with accounting practices prescribed or permitted by the Illinois Department of Insurance. In consolidating American Country, adjustments have been made to conform its accounts to GAAP. USE OF ESTIMATES AND CONCENTRATION OF RISK The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Such estimates and assumptions, which include the reserves for losses and loss adjustment expenses and fair market value of financial instruments, could change in the future as more information becomes F-19 AMERICAN COUNTRY HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SIGNIFICANT ACCOUNTING POLICIES. (CONTINUED) known which could impact the amounts reported and disclosed herein. American Country has a concentration of risk that is both geographic and customer-based in Chicago. PREMIUM REVENUE Premiums are earned pro rata over the terms of the policies. The reserve for unearned premiums is determined on a daily basis. LOSSES AND LOSS ADJUSTMENT EXPENSES Losses and loss adjustment expenses (LAE) represent the estimated ultimate net cost of all reported and unreported losses incurred through December 31. The reserves for unpaid losses and LAE are estimated using individual case-basis valuations and statistical analyses and are not discounted. Those estimates are subject to the effects of trends in loss severity and frequency. Although considerable variability is inherent in the estimates of reserves for losses and LAE, management believes that the reserves for losses and LAE are adequate. The estimates are continually reviewed and adjusted as necessary as experience develops or new information becomes known; such adjustments are included in current operations. Salvage and subrogation recoveries are accrued when the related losses are incurred. REINSURANCE Reinsurance premiums, losses, and LAE are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums earned and losses incurred ceded to other companies have been reported as a reduction of premium revenue and losses and LAE. Commissions allowed by reinsurers on business ceded have been accounted for as a reduction of the related policy acquisition costs. Reinsurance recoverables are reported relating to the portion of reserves and paid losses and LAE that are ceded to other companies. The Company remains contingently liable for all loss payments, in the event of failure to collect from the reinsurers. DEFERRED POLICY ACQUISITION COSTS Costs of acquiring new business, principally commissions and premium taxes, are deferred, subject to recoverability, and amortized as the related premium is earned. The Company considers anticipated investment income in determining whether a premium deficiency relating to short duration contracts exists. INVESTMENTS The Company follows Financial Accounting Standards Board (FASB) Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which requires categorization of fixed maturities either as held to maturity, available for sale, or trading and equity securities as available for sale or trading. Fixed maturities (bonds and redeemable preferred stocks) that the Company has both the positive intent and ability to hold to maturity are carried at amortized cost. Fixed maturities that the Company does not have the positive intent and ability to hold to maturity and all equity securities (common stocks and nonredeemable preferred stocks) are classified as available-for-sale and are reported at fair value. Unrealized gains and losses on fixed maturities available for sale and equity securities are excluded from income and are recorded directly to stockholders' equity as accumulated other comprehensive income, net F-20 AMERICAN COUNTRY HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SIGNIFICANT ACCOUNTING POLICIES. (CONTINUED) of related deferred income taxes. The Company has not classified any fixed maturity or equity securities as trading. FASB Statement No. 115 allows companies to transfer securities between categories for events that are isolated, nonrecurring, and unusual that could not have been reasonably anticipated. Accordingly, in connection with the Acquisition, the Company chose to reclassify all held to maturity securities to available for sale. As a result, the Company transferred securities with amortized costs of $23,000,000 of held-to-maturity fixed maturities to available for sale resulting in a $300,000 increase to unrealized investment gains. The Company no longer holds any fixed maturities as held-to-maturity. Collateral loans are carried at amortized cost. Short-term investments are carried at cost, which approximates fair value, and include investments with maturities of less than one year at the date of acquisition. Net investment income consists primarily of interest and dividends less expenses. Interest on fixed maturities and mortgage loans, adjusted for any amortization of discount or premium, is recorded as income when earned and includes adjustments resulting from anticipated prepayments of collateralized mortgage obligations. Investment expenses are accrued as incurred. Realized investment gains or losses are computed using specific costs of securities sold, and include write-downs on investments having an other-than-temporary decline in value. INCOME TAXES American Country's federal income tax return was consolidated with Great Dane Holdings Inc. and subsidiaries for the period January 1, 1997 to April 16, 1997. Income tax expense during those periods was computed on a separate company basis. For the period April 17, 1997 through July 29, 1997, American Country has filed a consolidated return with its then Parent, American Country Holdings Corp. Effective with the Acquisition the Company files its tax return on a consolidated basis with its subsidiaries. Deferred income tax has been provided for the effects of temporary differences between financial reporting and tax bases of assets and liabilities and has been measured using the enacted marginal tax rates and laws that are currently in effect. PROPERTY AND EQUIPMENT Property and equipment, primarily data processing equipment and leasehold improvements, are reported at depreciated cost, with depreciation recorded on a straight-line basis with lives of five years for data processing equipment and a range of six to eleven years for leasehold improvements. Accumulated depreciation amounted to $3,447,000 and $3,123,000 at December 31, 1999 and 1998, respectively. Depreciation expense amounted to $346,000, $315,000 and $308,000 for the years 1999, 1998 and 1997 respectively. STOCK OPTIONS The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," (APB 25) and related interpretations in accounting for its employee stock options rather than the alternative fair value accounting provided for under Financial Accounting Standards Board (FASB) Statement No. 123, "Accounting for Stock-Based Compensation." Under F-21 AMERICAN COUNTRY HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SIGNIFICANT ACCOUNTING POLICIES. (CONTINUED) APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. EARNINGS PER SHARE In 1999 and 1998, basic earnings per share is computed based on the weighted-average number of common shares outstanding, excluding any dilutive effect of options and warrants. In calculating basic earnings per share for 1997, the number of shares used is based on the number of shares received by American Country in the transaction. Each 22.5% shareholder received 8,000,000 and each 27.5% shareholder received 9,778,000 shares, for a total of 35,557 shares. In a reverse acquisition, the historical shareholder's equity of the acquirer prior to the merger is retroactively restated (a recapitalization) for the equivalent number of shares received in the merger after giving effect to any difference in par value of the issuers and acquirer's stock by an offset to paid in capital. Dilutive earnings per share is computed based on the weighted-average number of common shares outstanding plus the dilutive effects of options and warrants. The dilutive effect of options and warrants is calculated under the treasury stock method using the average market price for the period. Earnings per share is calculated as follows (in thousands, except per share data):
YEAR ENDED DECEMBER 31 ------------------------------ 1999 1998 1997 -------- -------- -------- Net income.................................................. (75) $ 5,376 $ 2,069 ======= ======= ======= Weighted average basic shares outstanding................... 32,045 32,043 34,028 Shares for options and warrants............................. 36 247 431 ------- ------- ------- Dilutive shares outstanding................................. 32,081 34,459 35,557 ======= ======= ======= Basic earnings per share.................................... $ .00 $ .17 $ .06 ======= ======= ======= Dilutive earnings per share................................. $ .00 $ .17 $ .06 ======= ======= =======
CASH FLOWS Short-term investments, consisting principally of commercial paper which have a maturity of 90 days or less at date of purchase, are considered cash equivalents. FINANCIAL INSTRUMENTS Fair value for fixed maturity and equity securities is based on quoted market prices or, if they are not actively traded, on estimated values obtained from independent pricing services. Fair values of other financial instruments approximate their carrying values. RECLASSIFICATION Certain amounts in the prior years' consolidated financial statements have been reclassified to conform to the 1999 presentation. F-22 AMERICAN COUNTRY HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. INVESTMENTS The components of net investment income are as follows:
YEAR ENDED DECEMBER 31 ------------------------------ 1999 1998 1997 -------- -------- -------- Fixed maturities.................................... $7,568 $7,313 $6,724 Equity securities................................... 30 64 524 Short-term investments.............................. 456 331 678 Other............................................... 232 128 224 Gross investment income............................. 8,286 7,836 8,150 Investment expenses................................. 668 702 1,125 Net investment income............................... $7,618 $7,134 $7,025
Realized gains (losses) on investments are as follows:
YEAR ENDED DECEMBER 31 ------------------------------ 1999 1998 1997 -------- -------- -------- (IN THOUSANDS) Fixed maturities: Gross gains....................................... $ 760 $1,661 $1,053 Gross losses...................................... (1,102) (286) (213) Equity securities: Gross gains....................................... -- 111 904 Gross losses...................................... -- (7) (131) Net realized gains (losses) on investments.......... $ (342) $1,479 $1,613
The components of net unrealized investment gains, included in other comprehensive income, are as follows:
DECEMBER 31, -------------------------------- 1999 1998 1997 -------- ---------- -------- (IN THOUSANDS) Fixed maturities available-for-sale............ $(3,230) $3,077 $1,934 Equity securities available-for-sale........... 14 48 135 Deferred tax credit (charge)................... 1,431 (613) (139) Net unrealized investment gains (losses)....... $(1,785) $2,512 $1,930
In connection with the Acquisition, the tax basis of certain assets and liabilities changed. As a result, the deferred tax charges related to the net unrealized investment gains at December 31, 1999, 1998 and 1997 do not represent the corporate federal income tax rate of 34%, because the tax basis of these securities was changed to equal the market value on the Acquisition date. As these securities are sold or mature, the deferred taxes will approach the federal income tax rate of 34%. F-23 AMERICAN COUNTRY HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. INVESTMENTS (CONTINUED) The changes in net unrealized investment gains (losses) are as follows:
YEAR ENDED DECEMBER 31 ------------------------------ 1999 1998 1997 -------- -------- -------- (IN THOUSANDS) Fixed maturities available-for-sale................ $(6,306) $1,028 $ 870 Equity securities available-for-sale............... (35) (87) (215) Deferred tax credit (charge)....................... 2,044 (359) 356 ------- ------ ------ Total.............................................. $(4,297) $ 582 $1,011 ======= ====== ======
There were no held-to-maturity securities in 1999 or 1998. The change in net unrealized investment gains (losses) on fixed maturities held-to-maturity was, $(596,000) for the year ended December 31, 1997. The following is a summary of available-for-sale securities:
GROSS UNREALIZED -------------------------------------------- AMORTIZED COST GAINS LOSSES FAIR VALUE --------- -------- -------- ---------- (IN THOUSANDS) DECEMBER 31, 1999 AVAILABLE-FOR-SALE SECURITIES Fixed maturities: U.S. government....................................... $ 12,750 $ 82 $ 191 $ 12,641 States and political subdivision...................... 30,620 164 552 30,233 Foreign governments................................... 1,299 2 40 1,261 Corporate securities.................................. 48,203 204 1,627 46,781 Mortgage-backed securities............................ 36,654 1 1,273 35,381 -------- ------ ------ -------- Total fixed maturities.................................. 129,526 452 3,682 126,297 Equity securities....................................... 353 39 25 367 -------- ------ ------ -------- Total................................................... $129,879 $ 491 $3,707 $126,664 ======== ====== ====== ======== DECEMBER 31, 1998 AVAILABLE-FOR-SALE SECURITIES Fixed maturities: U.S. government....................................... $ 15,626 $ 519 $ 13 $ 16,132 States and political subdivision...................... 37,513 1,194 10 38,697 Foreign governments................................... 1,068 -- 5 1,062 Corporate securities.................................. 42,124 1,373 40 43,457 Mortgage-backed securities............................ 25,679 230 172 25,738 -------- ------ ------ -------- Total fixed maturities.................................. 122,010 3,316 240 125,086 Equity securities....................................... 353 48 -- 402 -------- ------ ------ -------- Total................................................... $122,363 $3,364 $ 240 $125,488 ======== ====== ====== ========
F-24 AMERICAN COUNTRY HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. INVESTMENTS (CONTINUED) The amortized cost and fair value of fixed maturities by contractual maturity at December 31, 1999, 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.
AMORTIZED FAIR COST VALUE --------- -------- (IN THOUSANDS) Due in one year or less................................. $ 1,799 $ 1,808 Due after one year through five years................... 35,333 34,891 Due after five years through ten years.................. 35,202 34,081 Due after ten years..................................... 20,538 20,136 Mortgage-backed-securities.............................. 36,654 35,381 -------- -------- $129,526 $126,297 ======== ========
At December 31, 1999, investments in fixed maturities with an admitted asset value of $2,299,000 were on deposit with state insurance departments to satisfy regulatory requirements. 4. REINSURANCE. American Country reinsures a portion of its exposure by ceding to reinsurers a portion of the premiums received on the policies that are reinsured. Insurance is ceded primarily to reduce the net liability on individual risks and to protect against catastrophic losses. Although reinsurance does not legally discharge an insurer from its primary liability for the full amount of coverage, it does make the assuming reinsurer liable to the insurer to the extent of the losses reinsured. American Country seeks to maintain its risk exposure at appropriate levels by setting maximum coverage limits by class and type of business. These agreements also provide American Country with increased capacity to write larger risks and to maintain it exposure to loss within its capital resources. SPECIALTY TRANSPORTATION REINSURANCE American Country currently purchases excess of loss reinsurance protection for its transportation business. Excess of loss reinsurance requires that a company retain a predetermined dollar amount of loss, known as the "retention." The insurance company is indemnified by the reinsurer for losses which exceed this dollar amount up to the limit of the reinsurance agreement. Any portion of the loss exceeding the agreement limit is either paid by the company or by other reinsurance agreements. Under its excess of loss program for its transportation business, American Country has a retention of $350,000 and reinsurance coverage of up to $4 million per occurrence. F-25 AMERICAN COUNTRY HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. REINSURANCE. (CONTINUED) COMMERCIAL AND PERSONAL LINES REINSURANCE American Country's commercial and personal lines business is reinsured on a multi-line, multi-layer excess of loss basis. Reinsurance coverage under the current treaty is as follows: All Property Business The reinsurer pays up to $3,650,000 in excess of American Country's retention of $350,000 per risk. All Casualty Business The reinsurer pays up to $3,650,000 in excess of (including workers' compensation) American Country's retention of $350,000 per occurrence. A supplemental reinsurance agreement provides coverage of $8,000,000 per occurrence and per claimant on American Country's Workers' compensation program.
Property catastrophe reinsurance also is in force, which provides American Country with $3,750,000 of protection after a retention of $350,000 per catastrophic loss occurrence. Excess (umbrella) liability business is reinsured under a separate reinsurance agreement which provides coverage to American Country of up to $5,000,000 per occurrence in excess of $1,000,000 per occurrence in excess of primary limits. American Country's retention is 5% ($50,000) of the first $1,000,000 excess layer. For the period January 1 through December 31, 1998, substantially all of American Country's personal lines business was reinsured by Ohio Casualty pursuant to a reinsurance agreement. This agreement was not renewed in 1999, as American Country did not seek renewal of the personal lines policies reinsured under the treaty. Assumed and ceded reinsurance arrangements are summarized as follows:
YEAR ENDED DECEMBER 31 ------------------------------ 1999 1998 1997 -------- -------- -------- ASSUMED REINSURANCE Premiums written.................................... $1,928 $2,890 $ 840 Premiums earned..................................... 2,352 1,870 862 Losses and LAE...................................... 2,385 1,437 598 Losses and LAE reserves*............................ 4,503 3,097 2,575 Unearned premium reserves*.......................... 860 1,284 264 CEDED REINSURANCE Premiums written.................................... 3,972 11,210 8,338 Premiums earned..................................... 4,011 10,888 8,432 Losses and LAE...................................... 7,116 5,300 6,261 Losses and LAE reserves*............................ 13,141 11,952 15,114 Unearned premium reserves*.......................... 986 1,025 703
- - ------------------------ * As of year-end. The Company remains obligated for amounts reinsured in the event that reinsurers do not meet their obligations. On June 1, 1998, an endorsement to the Company's first excess multi-line reinsurance treaty was executed, which effectively changed the treaty from a flat-rated contract with a contingent profit F-26 AMERICAN COUNTRY HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. REINSURANCE. (CONTINUED) sharing provision to a swing-rated contract. A swing rated contract is based on the Company's loss experience, i.e., there is a maximum premium rate and a minimum premium rate, whereas a flat rated contract has a set rate, regardless of results. The change from a flat rated contract to a swing rated contract in the 1996 through 1998 years resulted in a decrease in ceded premium because the rate charged under the swing rated contract was lower than the flat rate. This was due to the Company's reinsurance loss experience which resulted in a premium rate under the swing rated contract that was lower than the premium rate under the previous flat rated contract. The reduction in ceded premium resulted in an increase in net earned premium of $776,000, net of tax. Under this changed agreement, the effects of subsequent changes in either actual or estimated development are accounted for by adjusting the previously deferred amount to the balance that would have existed had the revised estimate been available at the inception of the reinsurance transactions, with a corresponding charge or credit to income. The largest balance of ceded premiums by American Country to any one reinsurer during 1999 was $4,133,000, or 5.3% of gross premiums written. This amount represents the placing of nearly all of the treaty reinsurance with General Reinsurance Corporation effective July 1, 1999. Although American Country remains ultimately responsible for the payment of losses and loss expenses, management does not believe that this presents an excess concentration of credit risk. The largest net amount recoverable from any one reinsurer was $4.2 million, or 2.4% of total assets. Although there may be a concentration of risk element in existence at December 31, 1999, the Company believes that this risk is manageable and not excessive as of that date. 5. FEDERAL INCOME TAXES. The Company recognized a total income tax benefit of $967,040. This amount is comprised of current tax expense of $124,800 and deferred tax benefit of $1,091,840. Reconciliation of the corporate federal income tax rate to the Company's effective income tax rates are as follows:
YEAR ENDED DECEMBER 31 ------------------------------ 1999 1998 1997 -------- -------- -------- Corporate federal income tax rate........................... 34% 34% 34% Nontaxable investment income................................ 44 (17) (15) Prior Year Return to Provision Adjustment................... 14 -- -- State income taxes.......................................... -- 6 -- Other....................................................... -- -- -- Effective income tax rate................................... 92% 23% 19%
In connection with the Acquisition in 1997, the tax basis of certain assets and liabilities changed. The current tax provision increased while the deferred tax provision decreased as a result of the change in tax basis. F-27 AMERICAN COUNTRY HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. FEDERAL INCOME TAXES. (CONTINUED) Significant components of the Company's deferred tax liabilities and assets are as follows:
DECEMBER 31 ------------------- 1999 1998 -------- -------- (IN THOUSANDS) Deferred tax assets: Insurance reserves........................................ $ 5,509 $ 4,406 Unrealized investment losses.............................. 1,430 -- Pension liability......................................... 389 405 Loss and Credit Carryforwards............................. 305 -- Other..................................................... 461 351 ------- ------- Total deferred tax assets................................... 8,094 5,162 Deferred tax liabilities: Policy acquisition costs.................................. (1,105) (801) Unrealized investment gains............................... -- (613) Other..................................................... (454) (124) ------- ------- Total deferred tax liabilities.............................. (1,559) (1,538) ------- ------- Net deferred tax assets..................................... $ 6,535 $ 3,624 ======= =======
The nature of the Company's deferred tax assets and liabilities is such that the reversal pattern for these temporary differences should generally result in realization of the deferred tax assets. Accordingly, management has determined that no valuation allowance is necessary. A net operating loss carryforward of $465,000, which was generated in 1999, will expire in 2018. An alternative minimum tax credit of $145,800 was also generated in 1999. F-28 AMERICAN COUNTRY HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. LOSSES AND LOSS ADJUSTMENT EXPENSES. The following table provides a reconciliation of the beginning and ending reserve balances for losses and LAE:
YEAR ENDED DECEMBER 31 ------------------------------ 1999 1998 1997 -------- -------- -------- (IN THOUSANDS) Balance at January 1........................................ $ 92,417 $99,087 $90,965 Less reinsurance recoverables............................. 11,952 15,114 11,515 -------- ------- ------- Net balance at January 1.................................... 80,465 83,973 79,450 Add net incurred claims related to: Current year.............................................. 59,227 44,244 53,613 Prior years............................................... 4,389 434 (464) -------- ------- ------- Total net claims incurred................................... 63,616 44,678 53,149 Deduct net claims paid related to: Current year.............................................. 18,368 15,231 19,624 Prior years............................................... 34,364 32,955 29,002 -------- ------- ------- Total net claims paid....................................... 52,732 48,186 48,626 -------- ------- ------- Net balance at December 31.................................. 91,349 80,465 83,973 Plus reinsurance recoverables............................. 13,144 11,952 15,114 -------- ------- ------- Balance at December 31...................................... $104,493 $92,417 $99,087 ======== ======= =======
The $4,389,000 increase in prior years' reserves during 1999 is attributable to reserve strengthening, including additional reserves for Workers' Compensation reserves of $3,500,000, for losses incurred in calendar years 1997 and prior. This is primarily due to increased medical costs and longer duration disabilities covered under these policies. 7. STOCKHOLDERS' EQUITY. Statutory accounting practices prescribed or permitted for American Country by regulatory authorities differ from generally accepted accounting principles. American Country's statutory-basis capital and surplus was $37,173,000 and $39,083,000 at December 31, 1999 and 1998, respectively, and American Country's statutory-basis net income was $(2,036,115), $5,218,000 and $2,590,000 for the years ended December 31, 1999, 1998, and 1997, respectively. Property/casualty insurance companies are subject to certain Risk-Based Capital (RBC) requirements as specified by the National Association of Insurance Commissioners. Under those requirements, the amount of statutory capital and surplus maintained by a property/casualty insurance company is to be determined based on the various risk factors. At December 31, 1999, American Country exceeds the RBC requirements. The maximum amount of dividends that can be paid from American Country to ACHI without regulatory approval is the greater of net income or 10% of capital and surplus, each as of the preceding December 31. Accordingly, the maximum total dividend amount available in 1999 is $3,717,000. American Country did not declare or pay dividends to ACHI during 1999. F-29 AMERICAN COUNTRY HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. STOCKHOLDERS' EQUITY. (CONTINUED) In July 1997, the Company changed the par value of its common stock to $.01 per share from $.60 per share. The change in the par value of the common stock resulted in a decrease to common stock and a corresponding increase in additional paid-in capital and has been recorded retroactively in the accompanying consolidated balance sheets. In connection with the Acquisition, the Company sold and issued 16,000,000 shares of its common stock to certain former shareholders of the former Parent of American Country and 8,000,000 shares of its common stock to Frontier Insurance Group. The proceeds from the issuance of the common stock were $26,700,000. At December 31, 1999, the Company had 2,054,000 warrants outstanding. The warrants allow the warrant holder to purchase 2.19 shares of common stock at a price of $1.83 per share through August 31, 2000. Accumulated other comprehensive income at December 31, 1999 and 1998 consists of the following components (in thousands):
1999 1998 -------- -------- Unrealized gain (loss) on securities........................ (1,784) 2,512 Other....................................................... -- 41 ------ ----- Accumulated other comprehensive income...................... (1,784) 2,553 ====== =====
8. DEBT. On April 30, 1998 the Company negotiated a $15 million revolving 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. The amount of interest paid in 1999 and 1998 was $530,000 and $491,000 respectively. The line of credit agreement contains various debt covenants including conditions for prepayment and certain financial covenants. The most restrictive covenant is the ratio of debt to equity. The Company is in compliance with all covenants of the agreement as of December 31, 1999. In addition, there is a commitment fee of .25 per annum charged for the unused portion of the total credit facility. 9. EMPLOYEE BENEFITS. RETIREMENT PLAN Substantially all salaried employees of the Company who are at least 21 years of age are eligible to participate in a 401(k) retirement plan. Employees may contribute from 1% to 15% of their eligible compensation to the plan. The Company matches 50% of employee contributions up to a maximum of 8% of eligible compensation. Total contributions by the Company to the plan were $368,000, $135,000 and $83,000 in 1999, 1998, and 1997, respectively. F-30 AMERICAN COUNTRY HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. EMPLOYEE BENEFITS. (CONTINUED) PENSION PLAN Prior to December 4, 1996, substantially all salaried employees of the Company were covered by a defined-benefit pension plan sponsored by its former Parent. Benefits were based on the employee's length of service and wages and minimum benefits, as defined by the plan. The former Parent's funding policy of the plan was generally to contribute amounts required to maintain minimum funding standards in accordance with the Employee Retirement Income Security Act. Pension cost allocated to the Company amounted to $53,000, $60,000 and $224,000 in 1999, 1998 and 1997. Effective December 31, 1997, upon resolution by the board of directors, the plan was frozen. POST-RETIREMENT BENEFITS In addition to the defined benefit plan and the 401(k) retirement plan, substantially all salaried employees of the Company are covered by a postretirement benefit plan. The plan is noncontributory and provides medical and life insurance benefits for employees who retire after attaining age 62 with 25 years of service. The net periodic postretirement benefit costs during 1999, 1998 and 1997 were $77,000, $71,000 and $70,000 respectively. The accumulated postretirement benefit costs at December 31, 1999, 1998 and 1997 were $793,000, $716,000 and $645,000 respectively. The changes in the projected benefit obligation are as follows (in thousands):
PENSION BENEFITS OTHER BENEFITS YEARS ENDED YEARS ENDED DECEMBER 31, DECEMBER 31, ------------------------------ ------------------------------ 1999 1998 1997 1999 1998 1997 -------- -------- -------- -------- -------- -------- Projected benefit obligation at beginning of year:...... $2,617 $2,677 $2,519 $638 $609 $570 Increases (decreases) during the year attributable to: Service cost.......................................... 0 0 258 33 29 28 Interest cost......................................... 183 174 192 44 42 42 Actuarial (gains) losses.............................. 98 (130) 259 (8) (17) (8) Benefits paid......................................... (150) (104) (76) (25) (25) (23) Effect of curtailment................................. 0 0 (475) 0 0 0 Net (decrease) increase for year........................ 131 (60) 158 44 29 39 Projected benefit obligation at end of year............. $2,748 $2,617 $2,677 $682 $638 $609
F-31 AMERICAN COUNTRY HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. EMPLOYEE BENEFITS. (CONTINUED) The changes in the fair value of net assets available for plan benefits are as follows (in thousands):
PENSION BENEFITS OTHER BENEFITS YEARS ENDED YEARS ENDED DECEMBER 31, DECEMBER 31, ------------------------------ ------------------------------ 1999 1998 1997 1999 1998 1997 -------- -------- -------- -------- -------- -------- Fair value of net assets available for plan benefits at beginning of the year................................... $1,560 $1,397 $1,250 0 0 0 Increases (decreases) during the year attributable to: Actual return on plan assets............................ (2) 104 117 0 0 0 Sponsor contributions................................... 196 163 106 0 0 0 Benefits paid........................................... (150) (104) (76) 0 0 0 Net increase for year..................................... 44 163 147 0 0 0 Fair value of net assets available for plan benefits at the end of the year..................................... $1,604 $1,560 $1,397 0 0 0
A reconciliation of the funded status of the plans is as follows (in thousands):
PENSION BENEFITS OTHER BENEFITS DECEMBER 31, DECEMBER 31, ------------------------------ ------------------------------ 1999 1998 1997 1999 1998 1997 -------- -------- -------- -------- -------- -------- Projected benefit obligations in excess of Plan Assets................................................ $1,144 $1,057 $1,294 $705 $638 $609 Unrecognized prior service cost......................... 0 0 0 0 8 25 Unrecognized net gain................................... 0 135 0 88 0 0 Unfunded accrued pension liability recognized in the consolidated balance sheet............................ $1,144 $1,192 $1,294 $793 $630 $584
Because the Pension Plan was frozen on December 31, 1997, American Country did not recognize service cost for 1999 or 1998. The components of annual net periodic benefit cost for the plans consisted of the following (in thousands):
PENSION BENEFITS OTHER BENEFITS YEARS ENDED YEARS ENDED DECEMBER 31, DECEMBER 31, ------------------------------ ------------------------------ 1999 1998 1997 1999 1998 1997 -------- -------- -------- -------- -------- -------- Service cost................................................ $ 0 $ 0 $258 $33 $29 $28 Interest cost............................................... 183 174 192 44 42 42 Expected return on plan assets.............................. (130) (114) (101) 0 0 0 Amortization of unrecognized transition liability........... 0 0 25 0 0 0 Curtailment gain............................................ 0 0 (150) 0 0 0 Net cost.................................................... $ 53 $ 60 $224 $77 $71 $70
F-32 AMERICAN COUNTRY HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. EMPLOYEE BENEFITS. (CONTINUED) The projected benefit obligations for the plans were determined using the following weighted-average assumptions at the dates shown:
PENSION BENEFITS OTHER BENEFITS YEARS ENDED YEARS ENDED DECEMBER 31, DECEMBER 31, ------------------------------ ------------------------------ 1999 1998 1997 1999 1998 1997 -------- -------- -------- -------- -------- -------- Settlement discount rates............................... 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% Rates of compensation increase.......................... -- -- 3.00% -- -- -- Long-term rates of return on assets..................... 8.00% 8.00% 8.00% -- -- --
The assumed health care trend rates for 1999 that were used to measure the expected cost of the benefits covered by the plan are 9.0% for individuals age 65 and younger and 8.0% for individuals age 64 and older. The trend rates are expected to decrease every year through 2006, when the expected rates are 5.5% for individuals age 65 and younger and 5.0% for individuals age 66 and older. The effect of a one-percentage point increase and decrease in the health care trend rates for each future year will result in the following:
1-PERCENTAGE 1-PERCENTAGE POINT INCREASE POINT DECREASE -------------- -------------- Increase (decrease) of total service and interest cost components of post-retirement benefit expense............. 97 (97) Increase (decrease) of post-retirement benefit obligation... 782 (782)
10. STOCK OPTION PLAN. Effective with the Acquisition, the Company currently maintains a Stock Option Plan (the Plan), as amended, under which options to purchase up to a maximum of 750,000 shares of common stock may be granted to officers and other key employees. Stock options granted under this Plan, which may be either incentive stock-options or nonqualified stock options for federal income tax purposes, expire up to ten years after the date of grant. As part of the business combination with Western Systems, the Company assumed the fully vested stock option plan of Western Systems. At the time of the Acquisition, options to purchase 474,000 shares were outstanding. Because the Acquisition was accounted for as a reverse acquisition, financial data presented for periods prior to the Acquisition is that of American Country. In January 1998, additional stock options were granted to employees of the Company. These additional options have five-year terms and vest at 20% per year and become fully exercisable five years after the date of grant. In January 1999, additional stock options were granted to employees of the company. These additional options have five-year terms and vest at 20% per year and become fully exercisable five years after the date of grant. In May, 1999, the stockholders of the Company approved an amendment of the Company's Stock Option Plan, whereby options to purchase 1.1 million shares were granted to certain directors and officers of the Company. 100,000 of these additional options have a ten-year term and vest at 33 1/3% per year and become fully exercisable three years after the date of grant. The remaining 1,000,000 options were fully exercisable at the date of grant, and also have a 10 year term. F-33 AMERICAN COUNTRY HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. STOCK OPTION PLAN. (CONTINUED) Pro forma information regarding net income and earnings per share is required by FASB Statement No. 123. For the purposes of pro forma disclosures, the estimated fair value of the options at the date of grant is amortized to expense over the options vesting period. As a result of the Plan amendment whereby the options were 100% vested prior to the Acquisition, there is no pro-forma effect on net income and earnings per share for the Company, as any pro forma income statement impact would have been recorded by Western Systems prior to the Acquisition. Accordingly, the activity of the Western Systems Plan for the period of January 1 through July 29, 1997 is not presented. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1998: dividend yield of 0; expected volatility of 66%; risk-free interest rate of 5.6%; and expected life of 5 years. For 1999, the following weighted average assumptions were used for grants: dividend yield of 0, annualized standard deviation of 81.1%, risk free interest rate of 5.9%, and expected life of 9.6 years. A summary of the status of the Company's stock option plan as of December 31, 1999 and 1998, and changes during the years ending on those dates is presented below:
1999 1998 1997 --------------------- -------------------- -------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISED EXERCISED EXERCISED FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE - - ------------- --------- --------- -------- --------- -------- --------- Outstanding at the beginning of the year... 529,968 $ 2.23 390,000 $ 2.43 474,000 $2.24 Granted.................................... 1,205,000 1.24 175,982 1.81 -- -- Exercised.................................. -- -- -- -- (56,000) 1.39 Forfeited.................................. (28,075) 1.75 (16,014) 1.81 0 -- Expired.................................... 0 -- (20,000) 2.75 (28,000) 1.34 --------- ------- ------- Outstanding at the end of the year......... 1,706,893 1.54 529,968 2.23 390,000 2.43 ========= ======= ======= Options Exercisable at year end............ 1,479,090 -- 401,994 -- 390,000 -- ========= ======= ======= Weighted average grant date fair value of options granted during the year.......... $ 1.0020 $1.1445
The following table summarizes information about stock options outstanding at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------- ---------------------------- WEIGHTED AVERAGE/ NUMBER REMAINING NUMBER OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED RANGE OF AS OF CONTRACTUAL AVERAGE AT AVERAGE EXERCISE PRICES 12/31/99 LIFE (YEARS) EXERCISE PRICE 12/31/99 EXERCISE PRICE --------------- ----------- ------------ -------------- ----------- -------------- $0.60.............................. 45,000 2.5 $0.60 45,000 $0.60 1.19-2.75.......................... 1,441,893 7.9 1.35 1,166,714 1.28 2.76-3.75.......................... 220,000 1.5 2.97 220,000 2.97 --------- --------- $.60-3.75.......................... 1,706,893 6.9 1.54 1,431,714 1.52 ========= =========
F-34 AMERICAN COUNTRY HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. STOCK OPTION PLAN. (CONTINUED) The Company applies APB Opinion 25 and related interpretations in accounting for its plan. Accordingly, no compensation cost has been recognized for its stock option plan. Had compensation cost for the Company's stock-based compensation been determined based on the fair value at the grant dates for awards under those plans consistent with the method of FASB Statement 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands):
1999 1998 1997 -------- -------- -------- Net Income............................................ As Reported $ (75) $5,376 $2,069 Pro Forma $ (795) $5,349 $2,069 Basic EPS............................................. As Reported $ 0.00 $ 0.17 $ 0.06 Pro Forma $(0.02) $ 0.17 $ 0.06 Diluted EPS........................................... As Reported $ 0.00 $ 0.17 $ 0.06 Pro Forma $(0.02) $ 0.17 $ 0.06
11. COMMITMENTS. American Country leases office space and equipment under noncancelable operating leases expiring in various years through 2002. Certain of those leases provide for escalation based on increases in operating expenses and the Consumer Price Index. Rent expense was $851,000, 843,000 and $870,000, in 1999, 1998, and 1997, respectively. At December 31, 1999, future rental commitments under those leases are as follows (in thousands): 2000........................................................ 878 2001........................................................ 884 2002........................................................ 719 ------ $2,481 ======
12. CONTINGENCIES. The Company is named as defendant in various legal actions arising principally from claims made under insurance policies and contracts. Those actions are considered by the Company in estimating the reserves for losses and LAE. The Company's management believes that the resolution of those actions will not have a material adverse effect on the Company's financial position or results of operations. On May 20, 1999, Frontier Insurance Group, Inc. (which owns approximately 25% of the outstanding shares of the Company) filed a purported shareholder derivative action in Delaware Chancery Court against the Company's directors and the Company itself as a nominal defendant. The complaint seeks a declaration that certain amendments to the Company's Stock Option Plan, which were approved at the Company's Annual Meeting on May 18, 1999 are void or, alternatively, should be rescinded. The complaint further challenges the grant of options to purchase 1.1 million shares (approximately 3% of the Company's total shares outstanding) to certain of its officers and directors. The individual defendants have advised the Company that they believe that they have substantial defenses to the claims asserted by Frontier Insurance Group, Inc. In the opinion of management, the ultimate resolution of such litigation will not have a material effect on the financial condition of the Company. F-35 t AMERICAN COUNTRY HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. CONTINGENCIES. (CONTINUED) Pursuant to the assumption reinsurance agreement entered into with Mutual Services Casualty Insurance Company, the Company is required to fund the liability for loss and loss expense reserves and unearned premium reserves with a letter of credit. 13. FAIR VALUE OF FINANCIAL INSTRUMENTS. Accounting standards require the disclosure of fair values for certain financial instruments. The fair value disclosures are not intended to encompass the majority of claim liabilities, various other nonfinancial instruments, or other assets related to the Company's business. Accordingly, care should be exercised in deriving conclusions about the Company's business or financial condition based on the fair value disclosures. The Company does not have any financial instruments held or issued for trading purposes. The carrying value and fair value of certain of the Company's financial instruments are as follows:
DECEMBER 31 --------------------------------------------------------------- 1999 1998 1997 ------------------- ------------------- ------------------- CARRYING FAIR CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE VALUE VALUE -------- -------- -------- -------- -------- -------- (IN THOUSANDS) ASSETS Fixed maturities and equity securities (NOTE 3)............................. $126,664 $126,664 $125,488 $125,488 $121,098 $121,098 Collateral loans....................... $ 2,721 $ 2,721 540 540 -- -- Cash and cash equivalents and receivables.......................... $ 18,021 $ 18,021 17,731 17,731 15,520 15,520 Accrued investment income.............. $ 1,772 $ 1,772 1,705 1,705 1,765 1,765 LIABILITIES Loan Payable........................... $ 11,150 $ 11,150 9,300 9,300 4,800 4,800
14. BUSINESS SEGMENTS. The Company through American Country is engaged primarily as a property and casualty insurance carrier, providing automobile liability and physical damage, workers' compensation, multiple peril liability and property damage, among other coverage in four key niche markets: transportation, hospitality, other commercial and personal lines. In addition, the Company through its other subsidiaries provides premium and other financing services through secured loans to certain larger customers. All revenues are derived from markets in the United States. F-36 AMERICAN COUNTRY HOLDINGS INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. BUSINESS SEGMENTS. (CONTINUED) Segment revenues for the years ended December 31, 1999, 1998 and 1997 were (in thousands):
1999 1998 1997 -------- -------- -------- SEGMENT REVENUES Transportation.............................................. 48,675 34,115 31,148 Hospitality................................................. 7,629 5,955 4,078 Other commercial............................................ 19,000 22,843 23,097 Personal lines.............................................. 234 469 8,748 Other....................................................... 215 357 381 ------ ------ ------ Total Segment revenues.................................. 75,753 63,739 67,452 Other Reconciling Items: Investment and other income not attributable to segments.... 1,415 1,324 1,331 ------ ------ ------ Total revenues.............................................. 77,168 65,063 68,783 ====== ====== ======
Segment Operating Profit for the years ended December 31, 1999, 1998 and 1997 were (in thousands):
1999 1998 1997 -------- -------- -------- SEGMENT OPERATING PROFIT Transportation.............................................. 5,030 5,298 5,290 Hospitality................................................. (151) 765 (324) Other commercial............................................ (4,827) 1,710 (1,714) Personal lines.............................................. (426) (212) (1,705) Other....................................................... 156 304 369 ------- ------ ------ Total Segment Operating Profit.......................... (218) 7,865 1,916 ======= ====== ====== Other Reconciling Items: Investment and other income not attributable to segments.... 1,415 1,324 1,331 General corporate expenses.................................. (580) (730) (180) Interest and other expenses, net............................ (1,659) (1,498) (505) ------- ------ ------ Total Adjustments........................................... (824) (904) 646 ------- ------ ------ Total Operating Profit.................................. $(1,042) $6,961 $2,562 ======= ====== ======
Asset information by reportable segment is not reported since the Company does not produce such information internally. Segment Operating Profit is net of depreciation expense of $346,000, $315,000 and $308,000 for the years 1999, 1998 and 1997, respectively. F-37 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICAN COUNTRY HOLDINGS INC. BY: /S/ MARTIN L. SOLOMON ----------------------------------------- Martin L. Solomon CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
Date: March 30, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this annual report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ MARTIN L. SOLOMON Chairman Of The Board, ------------------------------------------- Chief Executive Officer March 30, 2000 Martin L. Solomon And Director Vice President, Chief /s/ KARLA M. VIOLETTO Financial Officer and ------------------------------------------- Principal Accounting March 30, 2000 Karla M. Violetto Officer /s/ WILLIAM J. BARRETT ------------------------------------------- Director March 30, 2000 William J. Barrett /s/ EDWIN W. ELDER ------------------------------------------- Director March 30, 2000 Edwin W. Elder /s/ WILMER J. THOMAS, JR. ------------------------------------------- Director March 30, 2000 Wilmer J. Thomas, Jr. /s/ JOHN G. MCMILLIAN ------------------------------------------- Director March 30, 2000 John G. McMillian
36 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - - ----------- ------------------------------------------------------------ 3 ARTICLES OF INCORPORATION AND BY-LAWS 3.1 Amended and Restated Articles of Incorporation of the Company were filed with the Commission as Exhibit 3.1 to the Company's Report on Form 10-K for the year ended December 31, 1997 and are incorporated herein by reference. 3.2 Amended and Restated By-Laws of the Company were filed with the Commission as Exhibit 3.2 to the Company's Report on Form 10-K for the year ended December 31, 1997 and are incorporated herein by reference. 4 INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES 4.1 Credit Agreement dated as of July 29, 1997 between the Company and The First National Bank of Chicago, individually and as agent, was filed with the Commission as Exhibit 4 to the Company's Report on Form 8-K dated August 31, 1997 and is incorporated herein by reference. 4.2 Form of Warrant Certificate was filed with the Commission as Exhibit 4(b) to The Western Systems Corp.'s Registration Statement on Form S-1 (File No. 33-84234) and is incorporated herein by reference. 4.3 Warrant Agreement, dated as of June 25, 1993, between the Company and American Stock Transfer & Trust Company, as Warrant Agent, was filed with the Commission as Exhibit 4(c) to The Western Systems Corp.'s Registration Statement on Form S- 1 (File No. 33-84234) and is incorporated herein by reference. 4.4 Warrant Agreement Amendment No. 4, dated as of July 31, 1998 between the Company and American Stock Transfer & Trust Company, as Warrant Agent, was filed with the Commission as Exhibit 4 to the Company's Report on Form 10-K for the year ended December 31, 1998 and is incorporated herein by reference. 4.5 Warrant Agreement Amendment No. 5, dated as of July 30, 1999 between the Company and American Stock Transfer & Trust Company, as Warrant Agent, was filed with the Commission as Exhibit 4.5 to the Company's Report on Form 10-Q for the quarter ended September 30, 1999 and is incorporated herein by reference. 21 SUBSIDIARIES OF THE REGISTRANT 21 Subsidiaries of American Country Holdings Inc. 23 CONSENTS OF EXPERTS AND COUNSEL 23.1 Consent of PricewaterhouseCoopers LLP 23.2 Consent of Ernst & Young LLP 27 FINANCIAL DATA SCHEDULE 27 Financial Data Schedule 99 ADDITIONAL EXHIBITS 99 American Country Holdings Inc. Safe Harbor Statement
37 (This page has been left blank intentionally.) 38 EX-21 2 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF THE COMPANY
STATE OR JURISDICTION OF SUBSIDIARY INCORPORATION - - ---------- ------------- American Country Insurance Company Illinois American Country Financial Services Illinois Corp. American Country Professional Services Delaware Corp.
EX-23.1 3 EXHIBIT 23.1 Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of American Country Holdings, Inc. on Form S-8 (File Nos. 333-39657 and 333-94737) of our reports dated March 29, 2000, on our audits of the consolidated financial statements and financial statement schedules of American Country Holdings, Inc. as of December 31, 1999 and 1998, and for the years then ended, which reports are included in this Annual Report on Form 10-K. /s/ PRICEWATERHOUSECOOPERS LLP March 30, 2000 EX-23.2 4 EXHIBIT 23.2 Exhibit 23.2 CONSENT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders American Country Holdings, Inc. We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-39657 and Form S-8 No. 333-94737) pertaining to the Stock Option Plan of American Country Holdings, Inc. of our reports dated February 24, 1998, with respect to the consolidated statements of income, stockholders' equity and cash flows for the year ended December 31, 1997, and related schedules of American Country Holdings Inc. and subsidiaries included in this Annual Report (Form 10-K) for the year ended December 31, 1999. /s/ ERNST & YOUNG LLP Chicago, Illinois March 29, 2000 EX-27 5 EXHIBIT 27
7 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 129,526 0 0 353 0 0 129,879 4,973 15,233 3,251 176,033 104,493 18,728 0 0 11,150 0 0 320 36,390 176,033 69,677 7,618 (342) 215 63,617 10,377 4,216 (1,042) (1,092) (75) 0 0 0 (75) 0.00 0.00 92,417 59,227 4,389 18,368 34,364 91,349 (4,389)
EX-99 6 EXHIBIT 99 EXHIBIT 99 AMERICAN COUNTRY HOLDINGS INC. SAFE HARBOR STATEMENT Information provided by the Company may contain certain forward- looking information, which, as defined by the Private Securities Litigation Reform Act of 1995 (the "Act"), may relate to such matters as future plans, targets and objectives, cyclical industry conditions, government and regulatory policies, the uncertainties of the reserving process and the competitive environment in which the Company operates or the assumptions relating to any of the forward-looking information. This Safe Harbor Statement is being made pursuant to the Act and with the intention of obtaining the benefits of the so-called "safe harbor" provisions of the Act. The Company cautions that forward-looking statements are not guarantees since there are inherent difficulties in predicting future results, and that actual results could differ materially from those expressed or implied in the forward-looking statements. Factors that could cause actual results to differ include, but are not necessarily limited to, the following: * PROPERTY AND CASUALTY INSURANCE INDUSTRY. American Country's business depends on its ability to retain its current insurance customers and write new insurance business. The property and casualty insurance industry is highly competitive on the basis of both price and service. American Country faces competition from national and regional insurance carriers and innovative insurance programs put together by insurance agents and reinsurance companies. See "Business--Competition" for additional information. * FLUCTUATIONS IN INDUSTRY RESULTS. The financial results of property and casualty insurers historically have been subject to significant fluctuations. Profitability is affected significantly by volatile and unpredictable developments (including catastrophes), changes in loss reserves resulting from changing legal environments as different types of claims arise and judicial interpretations develop relating to the scope of insurers' liability, fluctuations in interest rates and other changes in the investment environment which affect returns on invested capital, and inflationary pressures that affect the size of losses. Further, underwriting results have been cyclical in the property and casualty insurance industry, with protracted periods of overcapacity adversely impacting premium rates, resulting in higher combined ratios, followed by periods of under capacity and escalating premium rates, resulting in lower combined ratios. * REGULATION. American Country is subject to governmental regulation in each of the jurisdictions in which it conducts business. Insurance regulatory agencies have broad administrative powers with respect to all aspects of an insurance company's business, including rates, policy forms, dividend payments, capital adequacy and the amount and type of investments it may have. These regulations are intended primarily to protect policyholders rather than securityholders. The insurance regulatory framework continues to be subject to scrutiny by the National Association of Insurance Commissioners, state legislatures and the United States Congress. No assurance can be given that future legislative or regulatory changes resulting from such activity will not adversely affect American Country. See "Business--Regulation" and "Management's Discussion and Analysis of Financial Conditions and Results of Operations-- Regulation" for additional information. * MARKETING. Becoming licensed as an authorized insurer and writing business in additional states is one of the foundations of American Country's growth strategy. American Country's ability to enter and write new business in these markets is contingent upon its becoming licensed by the insurance department of each jurisdiction. Each jurisdiction has its own licensing requirements and it may be difficult for American Country to obtain a license in the particular jurisdiction in which it applies. See "Business--Marketing," and "--Regulation" for additional information. * REINSURANCE. The majority of American Country's reinsurance is placed with a limited number of reinsurers. American Country is required to obtain reinsurance in a competitive marketplace and a contingent liability exists to the extent that American Country's reinsurers are unable to meet their contractual obligations. * ADEQUACY OF LOSS RESERVES. The liabilities for unpaid losses and loss adjustment expenses are estimated by management utilizing methods and procedures which they believe are reasonable. These liabilities are necessarily subject to the impact of future changes in claims severity and frequency, as well as numerous other factors. Although management believes that the estimated liabilities for losses and loss adjustment expenses are reasonable, because of the extended period of time over which such losses are reported and settled, the subsequent development of these liabilities may not conform to the assumptions inherent in their determination and, accordingly, may vary significantly from the amounts estimated by American Country. * RATINGS. Increased public and regulatory concerns with the financial stability of insurers have resulted in greater emphasis by policyholders upon insurance company ratings, with a resultant potential competitive advantage for carriers with higher ratings. American Country currently is rated "A-" by A.M. Best. In addition, Standard & Poor's has given American Country an Insurer Claims-Paying Ability Rating of "BBBq" (Adequate). There can be no assurance, however, that American Country will maintain its ratings; any downgrade could materially adversely affect its operations. A.M. Best's and Standard & Poor's ratings are based on an analysis of the financial condition and operations of American Country as they relate to the industry in general and are not designed for the protection of investors. 2 -----END PRIVACY-ENHANCED MESSAGE-----