====================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934
For the quarterly period ended June 30, 1998
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
incorporation or organization) Identification No.)
222 North LaSalle Street, Chicago, Illinois 60601-1105
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (312) 456-2000
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.
[x] Yes [ ] No
The aggregate number of shares of the Registrant's Common Stock,
$.01 par value, outstanding August 5, 1998 was 32,011,628.
====================================================================<PAGE>
AMERICAN COUNTRY HOLDINGS INC.
PAGE
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at
June 30, 1998 (Unaudited)
and December 31, 1997 . . . . . . . . . . . . . . .3
Consolidated Statements of Income
(Unaudited) for the Six Months and Three Months
Ended June 30, 1998 and 1997 . . . . . . . . . . . 4
Consolidated Statements of Cash Flows
(Unaudited) for the Six Months
Ended June 30, 1998 and 1997 . . . . . . . . . . . 5
Consolidated Statements of Stockholders'
Equity at June 30, 1998 (unaudited) and
December 31, 1997 and 1996 . . . . . . . . . . . . .6
Notes to Consolidated Financial
Statements (Unaudited) . . . . . . . . . . . . . . .8
Item 2. Management's Discussion and Analysis of
Financial Condition and
Results of Operations . . . . . . . . . . . . . . 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . 19
Item 2. Changes in Securities . . . . . . . . . . . . . . 19
Item 3. Defaults upon Senior Securities . . . . . . . . . 19
Item 4. Submission of Matters to a
Vote of Security Holders . . . . . . . . . . . . . 19
Item 5. Other Information . . . . . . . . . . . . . . . . 20
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . 20
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2<PAGE>
<TABLE>
<CAPTION>
AMERICAN COUNTRY HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
1998 1997
---- ----
(IN THOUSANDS)
ASSETS
<S> <C> <C>
Investments:
Available-for-sale
Fixed maturities - At fair value
(amortized cost: 1998 - $123,669,000;
1997 - $117,542,000) $125,872 $119,476
Equity securities - At fair value
(cost: 1998- $709,000; 1997-$1,487,000) 794 1,622
------- -------
Total investments 126,666 121,098
Cash and cash equivalents 8,303 8,499
Premiums receivable (net of allowance: 1998 - $269,000; 1997 - $265,000) 21,127 7,021
Reinsurance recoverable 17,420 16,254
Deferred income taxes 4,028 3,899
Deferred policy acquisition cost 2,902 2,544
Accrued investment income 1,743 1,765
Property and equipment 936 882
Other assets 915 699
------- -------
$184,040 $162,661
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss adjustment expense $96,634 $99,087
Unearned premiums 29,410 13,413
Note payable 7,800 4,800
Accrued expenses 6,179 4,388
Income taxes payable 241 2,694
Other liabilities 6,192 3,139
------- -------
Total liabilities 146,456 127,521
Commitments and contingent liabilities
Stockholders' equity:
Common stock - $.01 par value:
Authorized - 60,000,000 shares
Issued and outstanding - shares: 1998 32,043,000;
1997 - 32,036,000 320 320
Preferred stock: Authorized - 2,000,000 shares;
Issued and outstanding - 0 shares 0 0
Additional paid-in capital 36,860 36,848
Accumulated other comprehensive income 1,360 1,076
Retained earnings (deficit) (956) (3,104)
------- -------
37,584 35,140
------- -------
$184,040 $162,661
======== ========
See Notes to the Consolidated Financial Statements.
</TABLE>
3<PAGE>
AMERICAN COUNTRY HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30, Three Months Ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
(in thousands
except per share data)
<S> <C> <C> <C> <C>
REVENUES:
Net premiums earned $27,005 $29,500 $13,876 $14,677
Net investment income 3,588 3,335 1,841 1,636
Net realized gains on investments 589 (25) 216 2
Other income 188 205 40 105
------- ------- ------ ------
Total revenues 31,370 33,015 15,973 16,420
LOSSES AND EXPENSES:
Losses and loss adjustment expenses 21,713 26,132 11,536 12,562
Amortization of deferred policy 4,767 5,043 1,741 1,961
acquisition costs
Administrative and general expenses 1,664 1,256 1,124 835
------- ------- ------ ------
Total losses and expenses 28,144 32,431 14,401 15,358
------- ------- ------ ------
Income before income taxes 3,226 583 1,572 1,061
Provision for income tax
Current 424 (29) 215 57
Deferred 653 88 388 362
------- ------- ------ ------
1,077 59 603 419
------- ------- ------ ------
Net income $ 2,149 $ 524 $ 969 $ 642
======= ======= ====== ======
Basic and dilutive earnings per share $ .07 $ .02 $ .03 $ .02
===== ===== ===== =====
See Notes to the Consolidated Financial Statements
</TABLE>
4<PAGE>
<TABLE>
<CAPTION>
AMERICAN COUNTRY HOLDINGS INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Net Cash used by operating activities $1,982 $3,787
INVESTING ACTIVITIES
Fixed maturities - available-for-sale
Purchases (104,720) (10,065)
Sales 92,632 -
Maturities, calls, and prepayments 6,475 2,957
Equity securities - available-for-sale
Purchases - (1,856)
Sales - 145
Maturities, calls, and prepayments 852 1,463
Fixed maturities - Held-to-maturity
Purchases - -
Sales - -
Maturities, calls, and prepayments - 2,745
Sale or maturity of other investments 107 76
Property, equipment and other (536) (248)
------ ------
Net cash provided (used) by investing (5,190) (4,783)
activities
FINANCING ACTIVITIES
Net proceeds from note payable 3,000 -
Exercise of options and warrants 12 -
------ ------
Net cash provided by financing activities 3,012 0
------ ------
Net increase (decrease) in cash (196) (996)
Cash at beginning of period 8,499 9,868
------ ------
Cash at end of period $8,303 $8,872
====== ======
See Notes to the Consolidated Financial Statements.
</TABLE>
5<PAGE>
<TABLE>
<CAPTION>
AMERICAN COUNTRY HOLDINGS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
(in thousands)
Accumulated
Additional Other Retained Total
Number of Common Paid-in Comprehensive Earnings Stockholders'
Shares Stock Capital Income (Deficit) Equity
--------- ------ ---------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 35,557 $356 $ 621 $2,187 $36,903 $40,067
------- ----- ------- ----- ------ -------
Comprehensive income, net of tax:
Net income 0 0 0 0 5,025 5,025
Change in unrealized investments
gains, (net of applicable income 0 0 0 (1,268) 0 (1,268)
taxes of $ (682))
Pension liability, net of deferred 0 0 0 (887) 0 (887)
taxes ----- ------ -------
Total comprehensive income
0 0 0 0 0 2,870
Dividends to stockholders 0 0 0 0 (2,500) (2,500)
----- ------ -------
Balance at December 31, 1996
35,557 356 621 32 39,428 40,437
-------
Comprehensive income, net of tax:
Net income 0 0 0 0 2,069 2,069
Change in unrealized investments gains,
(net of applicable income taxes 0 0 0 1,011 0 1,011
of $ 1,963)
Pension liability, net of deferred 0 0 0 33 0 33
taxes ----- ----- -------
Total comprehensive income 0 0 0 0 0 3,113
-------
Redemption of shares recognized
as part of reverse acquisition (35,557) (356) (621) 0 (39,273) (40,250)
Acquisition of Western Systems 7,903 79 10,205 0 (5,328) 4,956
Issuance of additional shares 24,001 240 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 1,076 (3,104) 35,140
----- ------ -------
Comprehensive income, net of tax:
Net income 0 0 0 0 2,148 2,148
Change in unrealized investments
6<PAGE>
gains, (net of applicable 0 0 0 144 0 144
income taxes of $ (74))
Pension liability, net of deferred
taxes 0 0 0 (78) 0 (78)
Other Changes 0 0 0 218 0 218
-------
Total comprehensive income 0 0 0 0 0 2,432
-------
Exercise of options and warrants 7 0 12 0 0 12
----- ------ -------
Balance at June 30, 1998 32,043 $320 $36,860 $1,360 $ (956) $37,584
====== ==== ======= ==== ======= =======
See Notes to the Consolidated Financial Statements.
</TABLE>
7<PAGE>
AMERICAN COUNTRY HOLDINGS INC.
PART I
FINANCIAL INFORMATION
(See Financial Statements and Exhibits Attached)
Notes to the Consolidated Financial Statements
(Unaudited)
A. NATURE OF OPERATIONS
American Country Holdings Inc. (the "Company") is an insurance
holding company which operates 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").
American Country is an Illinois domestic property and casualty
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, restaurant and artisan contractor
lines. American Country also writes personal lines auto and
homeowners insurance but is phasing out its activities in this area.
Financial Services operates principally as a premium finance company
and also provides secured loans for certain of American Country's
larger customers. Professional Services was created to be a third-
party administrator to handle claims processing for insureds, and it
expects to begin operations during 1998.
B. ACCOUNTING PRINCIPLES
The accompanying financial statements have been prepared in
accordance with the instructions to Form 10-Q and Article 10 of
Regulation S-X and, accordingly, do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. The accompanying financial statements
reflect all adjustments which are, in the opinion of management,
necessary for a fair statement of the results for the interim periods
presented. The accompanying financial statements should be read in
conjunction with the consolidated financial statements of the Company
included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
Operating results for the six-months period ended June 30, 1998,
are not necessarily indicative of the results that may be expected for
the year ending December 31, 1998.
Earnings per share information is presented on the basis of
weighted average shares outstanding for the period.
C. DEBT
On March 30, 1998, the Company borrowed $7.8 million under a
short-term note, of which $4.8 million was used to repay a loan
8<PAGE>
facility and $3.0 million was used to pay a tax liability which
resulted from the reverse acquisition of The Western Systems Corp. in
July of 1997. On April 30, 1998, the Company entered into a $15
million revolving loan credit facility pursuant to which the Company
initially borrowed $7.8 million at an initial interest rate of 6.47%
to repay the short-term note. The line of credit agreement contains
various debt covenants including certain financial covenants and
commitment fees, which are .3875% per annum of the unused line of
credit.
D. CAPITAL STOCK
No dividends have been declared or paid by the Company during the
periods presented in the accompanying financial statements. At June
30, 1998, the Company had 2,055,129 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, 1999.
E. STOCK OPTION PLAN
The Company has established a Stock Option Plan (the "Plan"), as
amended, under which options to purchase up to a total 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 date of grant and
become exercisable over a three year period. Employees who have left
the Company have 90 days to exercise their options. At June 30, 1998,
the Company had 405,199 options outstanding, all of which are fully
vested, with exercise prices ranging from $0.60 per share to $3.75 per
share.
9<PAGE>
F. REINSURANCE
The components of the net reinsurance recoverable balances in the
accompanying balance sheets were as follows:
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
-----------------------------------------
(In thousands)
<S> <C> <C>
Ceded paid losses recoverable $ 302 $ 436
Ceded unpaid losses and loss 14,411 15,114
adjustment expenses ("LAE")
Ceded unearned premiums 2,707 703
-------- --------
Total $17,420 $16,253
======== ========
</TABLE>
The components of the reinsurance ceded relating to the
accompanying statements of income were as follows:
Six months ended June 30,
1998 1997
-------------------------------
(In thousands)
Ceded premiums earned $6,198 $4,283
Ceded incurred losses 2,583 3,536
Ceded incurred LAE 321 134
The effect of reinsurance on premiums written and earned for the
six months ended June 30, 1998, and 1997 was as follows:
<TABLE>
<CAPTION>
Six months ended June 30,
1998 1997
(In Thousands)
Premiums Premiums
-------- --------
Written Earned Written Earned
------- -------- ----------- ------------
<S> <C> <C> <C> <C>
Direct $47,921 $ 32,628 $48,428 $33,364
Assumed 1,279 575 386 418
Ceded (8,202) (6,198) (4,196) (4,283)
-------- ---------- ------------ ------------
Net $ 40,998 $ 27,005 $44,618 $29,499
========= ========== ============ ============
</TABLE>
G. ACCOUNTING CHANGES
Effective January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive
10<PAGE>
Income" ("SFAS 130"). SFAS 130 establishes standards for reporting
and presentation of comprehensive income and its components in a full
set of financial statements. Comprehensive income includes all
changes in shareholder's equity (except those arising from
transactions with shareholders) and includes net income and net
unrealized gains (losses) on securities. The new standard requires
only additional disclosures in the consolidated financial statements
and does not affect the Company's financial position or results of
operations.
In 1997 the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This statement
establishes standards for providing disclosures related to products
and services, geographic area and major customers. In February 1998
the FASB issued Statement No. 132, "Employers' Disclosure about
Pensions and Other Postretirement Benefits." This statement
standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practicable. The Company
anticipates adopting these statements in its 1998 year-end financial
statements as required. Implementation of these statements is not
expected to have a material effect on the Company's financial
statements.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion and analysis should be read in
conjunction with the consolidated financial statements and notes
thereto included elsewhere in this Report.
Overview
American Country Holdings Inc. (the "Company") is an insurance
holding company which operates 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").
American Country is an Illinois domestic property and casualty
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, restaurant and artisan contractor
11<PAGE>
lines. American Country also writes personal lines auto and
homeowners insurance. Financial Services operates principally as a
premium finance company and also provides secured loans for certain of
American Country's larger customers. Professional Services was
created to be a third-party administrator to handle claims processing
for insureds, and it expects to begin operations during 1998.
Three Months Ended June 30, 1998 compared to Three Months Ended
June 30, 1997
Overall premium revenues declined 5.4% in the second quarter of
1998 to $13.9 million from $14.7 million in the comparable period in
1997, reflecting the ceding of nearly all of American Country s
Personal lines business as of January 1, 1998.
The following table sets forth the net premiums earned by the
principal lines of insurance underwritten by American Country for the
periods indicated and the dollar amount and percentage of change
therein from period to period:
12<PAGE>
Net Premiums Earned
Increase (Decrease)
Three Months Ended
June 30 1998 to 1997
================ ===================
1998 1997 Amount Percent
==== ==== ====== =======
(in thousands)
Transportation lines $ 7,663 $ 6,978 $ 685 9.8
Commercial lines 6,175 5,532 643 11.6
Personal lines 38 2,166 (2,127) (98.2)
------- ------- -------- ------
Totals $13,876 $14,676 ($ 799) ( 5.4%)
======= ======= ======== =======
Transportation lines, which consist of taxicab and limousine
liability and physical damage programs, expanded in the second quarter
of 1998 by 9.8% to $7.7 million. The major contributor to this
increase was the geographic expansion of the Company s taxicab product
outside of the Chicago metropolitan area into the states of
Pennsylvania, Michigan and Wisconsin.
Commercial lines experienced an increase of 11.6% to $6.2 million
in the second quarter of 1998, the result of increased volume from
commercial multi-peril, commercial automobile and workers
compensation products.
The decrease of 98% in Personal lines is due to the reinsurance
agreement entered into with Ohio Casualty effective January 1, 1998,
pursuant to which Ohio Casualty assumed nearly all of the Company s
Personal lines business. As a result, net premiums earned for
Personal lines decreased from $2.1 million in the second quarter of
1997 to $38,000 in the second quarter of 1998.
Net investment income increased approximately 25.6%, to $2.0
million in the second quarter of 1998 as compared to $1.6 million in
the comparable period in 1997. Realized gains amounted to $216,000
in the second quarter of 1998 compared to $2,000 in the comparable period in
1997. Interest income remained flat in the second quarter of 1998 due to
continuing lower interest rates. In addition, due to the Company's
engagement of two professional investment managers at the end of the
third quarter in 1997, costs relative to the investment activities of the
Company decreased 55%, resulting in savings of $206,000 in the second
quarter of 1998 over the comparable period in 1997.
Other income, which is net of other expenses, decreased 61.9% in the
second quarter of 1998 as compared to the second quarter of 1997. Income
produced from the Company's premium financing activities decreased from
$105,000 in the second quarter of 1997 to $97,000 in the second quarter of
1998, a decrease of 7.7%. This decrease is attributable to the lower volume
of financed premiums. Other expenses increased due to additonal
expenses at the parent company, which were non-existent in 1997.
Losses and loss adjustment expenses (LAE) decreased 8.2% or $1.0
million in the second quarter of 1998, from $12.5 million in the
second quarter of 1997 to $11.5 million in the second quarter of 1998,
13<PAGE>
resulting in a loss ratio of 83.1% in the second quarter of 1998
compared to 85.6% in the comparable period in 1997. Pure losses (that
is, losses without LAE) decreased more than 6%, which is attributable
to lower severity and frequency of claims than in the prior period.
Much of the savings in LAE are attributable to the Company s
continuing efforts to improve operating efficiencies. Management has
streamlined the Company s operations and has invested over $400,000 in
systems improvements. In addition, ceding the Personal lines business
to Ohio Casualty resulted in both a reduction in staff (and related
expenses) and reduced LAE.
Losses and LAE for Transportation lines decreased $286,000 in the
second quarter of 1998 or 4.4% over the comparable period in 1997, in
part as a result of decreased LAE due to operating efficiencies, which
were somewhat offset by an increase in frequency of claims resulting
from the Company s geographic expansion of this line. Pure loss
ratios for this line in the second quarter of 1997 were 71.7% compared
to 65.5% in the comparable period in 1998.
Commercial lines experienced a 30% increase in losses and LAE
that resulted in a loss ratio of 89.4% in the second quarter of 1998
as compared to 76.9% in the comparable period in 1997. The increase
was concentrated in the workers compensation and commercial
automobile liability products and was due to an increase in the
severity and frequency of claims in these lines.
Personal lines experienced a 105.4% decreases in losses and LAE
as a result of the reinsurance agreement pursuant to which Ohio
Casualty assumed nearly all of the Company s Personal lines business
as of January 1, 1998.
Amortization of deferred policy acquisition costs decreased
$220,000 in the second quarter of 1998 due to reduced commission
expense incurred on Commercial and Personal lines, offset somewhat by
increased policy acquisition costs related to the geographic expansion
of the Company s transportation products.
Administrative and general expenses, which includes interest expense,
increased $289,000 or 34.6% in the second quarter of 1998. Although the
Company experienced cost efficiencies in its operating areas, additional
costs related to the holding company, including interest expense and legal
and auditing fees, offset these savings. Interest expense, which totaled
$126,000 in the second quarter of 1998, was nonexistent in 1997 as the
Company did not have any borrowings.
Six Months Ended June 30, 1998 compared to Six Months Ended June 30,
1997
Overall premium revenues declined 8.5% in the six months ended
June 30, 1998 to $27.0 million from $29.5 million in the comparable
period in 1997, reflecting the ceding of nearly all of American
Country s Personal lines business as of January 1, 1998.
14<PAGE>
The following table sets forth the net premiums earned by the
principal lines of insurance underwritten by American Country for the
periods indicated and the dollar amount and percentage of change
therein from period to period:
Net Premiums Earned
Increase (Decrease)
Six Months Ended
June 30, 1998 to 1997
================ =============
1998 1997 Amount Percent
==== ==== ======= =======
(in thousands)
Transportation lines $14,852 $13,629 $ 1,223 9.0%
Commercial lines 12,056 11,614 441 3.8
Personal lines 97 4,256 ( 4,158) (97.7)
------- ------- --------- -------
Totals $27,005 $29,499 ($ 2,494) ( 8.5%)
====== ====== ====== =====
Transportation lines, which consist of taxicab and limousine
liability and physical damage programs, expanded in the six months
ended June 30, 1998 by 9% to $14.8 million over the comparable period
in 1997. Nearly all the transportation programs offered by the
Company generated premium revenue increases, especially those products
representing the Company s expansion outside its historical region of
the Chicago metropolitan area. This geographical expansion was
accomplished by underwriting programs in the states of Pennsylvania,
Michigan and Wisconsin.
Commercial lines experienced an increase of 3.8% to $12.1 million
in the six months ended June 30, 1998, the result of increased
revenues from the commercial multi-peril and automobile products.
However, the Company s worker s compensation products, which generated
revenues of $6.5 million in the six months ended June 30, 1998,
decreased 2.7% from $6.7 million in the comparable period in 1997.
The decrease of 98% in Personal lines is a direct result of the
reinsurance agreement entered into with Ohio Casualty effective
January 1, 1998, in which Ohio Casualty has assumed nearly all of the
Company s Personal lines business. As a result, premium revenues
decreased from $4.3 million in the six months ended June 30, 1997 to
$97,000 in the comparable period in 1998.
Net investment income increased approximately 26%, to $4.2
million in the six months ended June 30, 1998, as compared to $3.3
million in the same period in 1997. Interest income decreased by
$74,000 in the six months ended June 30, 1998, resulting in total
interest income earned of $3.9 million. Realized gains amounted to
$590,000 in the six months ended June 30, 1998 compared to a loss of
$25,000 in the same period in 1997. In addition, in the six months
ended June 30, 1998, costs relative to the investment activities of
the Company decreased 48%, resulting in savings of $326,000 over the
comparable period in 1997. These savings are attributable to the
15<PAGE>
Company's engagement of two professional investment managers in the
third quarter of 1997.
Other income, which is net of other expenses, decreased 8.3% in
the six months ended June 30, 1998 as compared to the six months ended
June 30, 1997. Income produced from the Company's premium financing
activities decreased from $205,000 in the six months ended June 30,
1997 to $188,000 in the six months ended June 30, 1998, a decrease of
8.0%. This decrease is attributable to the lower volume of financed
premiums. Other expenses increased due to additional expenses at the
parent company, which were non-existent in 1997.
Losses and loss adjustment expenses (LAE) decreased 16.9% or $4.4
million in the six months ended June 30, 1998, from $26.1 million in
the comparable period in 1997 to $21.7 million in the six months ended
June 30, 1998, resulting in a loss ratio of 80.4% in the six months
ended June 30, 1998 compared to 88.6% in the comparable period in
1997. Pure losses (that is, losses without LAE) decreased more than
15%, which is attributable to lower severity and frequency of claims
than in the prior period. Much of the 16% savings in LAE can be
attributed to management s continuing efforts to improve operating
efficiencies. In addition, ceding the Personal lines business to Ohio
Casualty resulted in both a reduction in staff (and related expenses)
and reduced LAE.
Losses and LAE for Transportation lines increased $624,000 or
5.4% in the six months ended June 30, 1998, over the comparable period
in 1997, in part due to an increase in frequency of claims resulting
from the geographic expansion of this line and also to losses
incurred for certain Chicago area programs. Loss ratios for this line
in the six months ended June 30, 1997 were 84.2% compared to 81.5% in
the comparable period in 1998.
Commercial lines experienced a decline in losses and the
resulting loss ratios in the six months ended June 30, 1998. The
decrease was most significant in the workers compensation and
commercial multiple peril products. The loss ratio was 79.9% in the
six months ended June 30, 1998, compared to 89.8% in the comparable
period in 1997. This decrease is attributable to better weather
conditions in the Company s underwriting territories in the six months
ended June 30, 1998, than in the comparable period of 1997, as well as
to the effects of the re-underwriting program inaugurated during the
fourth quarter of 1997, which contributed to the generation of higher
premium volume and also to reduced LAE.
Personal lines experienced a 100.4% decrease in losses and LAE as
a result of the reinsurance agreement pursuant to which Ohio Casualty
assumed nearly all of the Company s Personal lines business as of
January 1, 1998.
Amortization of deferred policy acquisition costs decreased
$275,000 in the six months ended June 30, 1998. Although policy
acquisition costs decreased for the Company s Commercial and Personal
lines, policy acquisition costs for the Transportation lines reflect
an increase due to the geographic expansion into new territories.
Administrative and general expenses, which includes interest expense,
increased $408,000, or 32.5% in the six months ended June 30, 1998.
Although the Company experienced cost efficiencies in its
16<PAGE>
operations, additional costs related to the holding company offset these
savings. Interest expense totaled $219,000 in the six months ended June
30, 1998, and was nonexistent in the comparable period in 1997, due to the
fact that the Company did not have any borrowings.
Liquidity and Capital Resources
The Company is a holding company, receiving cash principally
through fees and dividends from its 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 the Company's insurance subsidiary are funds generated
from insurance premiums, investment income, commission and fee income,
capital contributions from the Company and proceeds from sales and
maturities of portfolio investments. The principal expenditures are
for payment of losses and LAE, operating expenses and commissions.
At June 30, 1998, the Company's total assets of $180.8 million
was comprised of the following: Cash and investments, 75.6%; premiums
receivable, 11.7%; reinsurance recoverables, 7.9%; deferred expenses
(policy acquisition costs and deferred taxes) 3.8%; fixed assets, .5%;
and other assets, .5%.
The Company's insurance subsidiary seeks to maintain liquid
operating positions and follow investment guidelines and state
regulations for investments that are intended to provide for an
acceptable return on investment while preserving capital, maintaining
sufficient liquidity to meet its obligations and maintaining a
sufficient margin of capital and surplus to ensure its unimpaired
ability to write insurance and assume reinsurance.
The following table provides a profile of the Company's fixed
maturities investment portfolio by rating at June 30, 1998:
Market Percent of
S&P/Moody s Ratings Value Portfolio
------ ----------
AAA/Aaa (including US
Treasuries of $17,300) $68,589 54.5%
AA/Aa 14,708 11.7%
A/A 28,852 23.0%
BBB/Ba 9,876 7.8%
All other 3,847 3.0%
------- -----
Total $125,872 100.0%
Forward-Looking Statements
The Company cautions readers regarding certain forward-looking
statements contained in the foregoing 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-
17<PAGE>
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 also 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, 1997. The Company disclaims any obligation to update
forward-looking information.
18<PAGE>
PART II
OTHER INFORMATION
Item 1. 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. The Company
is subject to claims arising in the ordinary course of its 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. 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 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to Vote of Security Holders
(a) The annual meeting of stockholders of American Country
Holdings Inc. was held on May 22, 1998.
(b) All director nominees were elected.
(c) Certain matters voted upon at the meeting and the votes cast
with respect to such matters are as follows:
(1) Election of Directors.
Director Votes Received Votes Withheld
Martin L. Solomon 22,062,479 76,761
William J. Barrett 22,132,507 6,733
Edwin W. Elder 22,132,507 6,733
Peter H. Foley 22,132,507 6,733
Wilmer J. Thomas, Jr. 22,132,507 6,733
(2) Ratification of PriceWaterhouseCoopers LLP, formerly Coopers
& Lybrand L.L.P. as the Company s independent auditors for
the fiscal year ended December 31, 1998.
VOTES CAST
FOR AGAINST ABSTAIN BROKER NONVOTE
22,067,872 233 71,135 0
19<PAGE>
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
(27) Financial Data Schedule
b. Reports on Form 8-K:
On April 9, 1998, the Company filed a Current Report on Form
8-K reporting that Ernst & Young LLP had completed its audit of the
Company's financial statements for the two most recent fiscal years
ended December 31, 1997 and 1996 and that PriceWaterhouseCoopers LLP,
formerly Coopers & Lybrand LLP would be serving as auditors to the Company
for the fiscal year ending December 31, 1998. On April 17, 1998, the
Company filed a Current Report on Form 8-K/A to clarify and supplement the
disclosure included in the Form 8-K filed on April 9, 1998.
20<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act
of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Date: August 14, 1998
AMERICAN COUNTRY HOLDINGS INC.
(Registrant)
By: /s/ James P. Byrne
======================================
Vice President and Chief Financial
Officer
21<PAGE>
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