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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 September 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
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(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 November 2, 1998 was 32,012,442.
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AMERICAN COUNTRY HOLDINGS INC.
PAGE
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at
September 30, 1998 (Unaudited)
and December 31, 1997 . . . . . . . . . . . . . . . 3
Consolidated Statements of Income
(Unaudited) for the Nine Months and Three Months
Ended September 30, 1998 and 1997 . . . . . . . . . 4
Consolidated Statements of Cash Flows
(Unaudited) for the Nine Months
Ended September 30, 1998 and 1997 . . . . . . . . . 5
Consolidated Statements of Stockholders'
Equity at September 30, 1998 (unaudited) and
December 31, 1997 and 1996 . . . . . . . . . . . . 6
Notes to Consolidated Financial
Statements (Unaudited) . . . . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . 21
Item 2. Changes in Securities . . . . . . . . . . . . . . . 21
Item 3. Defaults upon Senior Securities . . . . . . . . . . 21
Item 4. Submission of Matters to a
Vote of Security Holders . . . . . . . . . . . . 21
Item 5. Other Information . . . . . . . . . . . . . . . . 21
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . 21
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
2<PAGE>
<TABLE>
<CAPTION>
AMERICAN COUNTRY HOLDINGS INC.
Consolidated Balance Sheets
(in thousands, except share amounts)
(Unaudited)
September 30, December 31,
1998 1997
---- ----
ASSETS
<S> <C> <C>
Investments:
Available-for-sale
Fixed maturities - At fair value (amortized cost: 1998 - $119,229;
1997 - $117,542) $123,478 $119,476
401 1,622
Equity securities - At fair value (cost: 1998 - $353; 1997 - $1,487) -------- --------
Total investments 123,879 121,098
Cash and cash equivalents 12,413 8,499
Premiums receivable (net of allowance: 1998 - $294; 1997 - $265) 14,684 7,021
Reinsurance recoverable 17,445 16,254
Deferred income taxes 2,802 3,899
Deferred policy acquisition cost 2,724 2,544
Accrued investment income 1,848 1,765
Property and equipment 867 882
Other assets 1,022 699
-------- --------
$177,684 $162,661
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss adjustment expense $97,235 $99,087
Unearned premiums 21,409 13,413
Note payable 9,300 4,800
Accrued expenses 6,685 4,388
Income taxes payable 0 2,694
Other liabilities 3,421 3,139
-------- --------
Total liabilities 138,050 127,521
Commitments and contingent liabilities
Stockholders' equity:
Common stock - $.01 par value:
Authorized - 60,000,000 shares
Issued and outstanding - shares: 1998 - 32,045,214; 1997 - 32,036,000 320 320
Preferred stock: Authorized - 2,000,000 shares; Issued and
outstanding - 0 shares) 0 0
Additional paid-in capital 36,864 36,848
Accumulated other comprehensive income 2,371 1,076
Retained earnings (deficit) 79 (3,104)
-------- --------
Total Stockholders' equity 39,634 35,140
-------- --------
$177,684 $162,661
======== ========
See Notes to the Consolidated Financial Statements.
</TABLE>
3<PAGE>
<TABLE>
<CAPTION>
AMERICAN COUNTRY HOLDINGS INC.
Consolidated Statements of Income
(Unaudited)
Nine Months Three Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C>
REVENUES:
Premiums earned $41,059 $44,897 $14,054 $15,397
Net investment income 5,298 5,215 1,710 1,880
Net realized gains on investments 1,094 654 505 679
Other income 287 304 99 100
------- ------- ------- -------
Total revenues 47,738 51,070 16,368 18,056
LOSSES AND EXPENSES:
Losses and loss adjustment expenses 33,675 40,360 11,962 14,228
Amortization of deferred policy acquisition costs 6,932 7,127 2,165 2,084
Administrative and general expenses 2,976 2,805 1,312 1,549
------- ------- ------- -------
Total losses and expenses 43,583 50,292 15,439 17,861
------- ------- ------- -------
Income before income taxes 4,155 778 929 195
Provision for income tax
Current 347 1 (77) 30
Deferred 625 (45) (28) (132)
------ ------ ------ ------
972 (44) (105) (102)
------ ------ ------ ------
Net income $3,183 $822 $1,034 $297
====== ====== ====== ====
Basic and diluted earnings per share $0.10 $0.02 $0.03 $0.01
===== ===== ===== =====
See Notes to the Consolidated Financial Statements
</TABLE>
4<PAGE>
<TABLE>
<CAPTION>
AMERICAN COUNTRY HOLDINGS INC.
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
1998 1997
---- ----
(In Thousands)
<S> <C> <C>
Net cash provided (used) by operating activities ($677) $2,757
INVESTING ACTIVITIES
Fixed maturities - available-for-sale:
Purchases (155,231) (124,558)
Maturities, calls, and prepayments 11,273 7,553
Sales 143,186 82,452
Equity securities - available-for-sale:
Purchases - (11,263)
Maturities, calls, and prepayments 1,238 1,963
Sales - 13,666
Fixed maturities- held-to-maturity:
Maturities, calls, and prepayments - 5,028
Sales - 22,641
Sale or maturity of other investments 180 62
Purchase of property, equipment, and other investments (571) (329)
Business combination-net of cash acquired - (31,072)
------- -------
Net cash provided (used) by investing activities 75 (33,858)
FINANCING ACTIVITIES
Proceeds from notes payable 4,500 4,800
Proceeds from the issuance of common stock - 26,667
Proceeds from the exercise of options and warrants 16 -
------- -------
Net cash provided (used) by financing activities 4,516 31,467
------- -------
Net increase (decrease) in cash 3,914 366
Cash and cash equivalents at beginning of period 8,499 9,868
-------
Cash and cash equivalents at end of period $12,413 $10,234
======= =======
</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 STOCKHOLDER'S
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 taxes of $ (682)) 0 0 0 (1,268) 0 (1,268)
Pension liability, net of deferred taxes 0 0 0 (887) 0 (887)
------- ---- ------- ------ ------ -------
Total comprehensive income 0 0 0 (2,155) 5,025 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 investment gains,
(net of applicable income taxes of $1,963) 0 0 0 1,011 0 1,011
Pension liability, net of deferred taxes 0 0 0 33 0 33
------- ---- ------- ------ ------ -------
Total comprehensive income 0 0 0 1,044 2,069 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 3,183 3,183
Change in unrealized investments gains,
(net of applicable income taxes of $758) 0 0 0 1,470 0 1,470
Pension liability, net of deferred taxes 0 0 0 (78) 0 (78)
Other Changes 0 0 0 (97) 0 (97)
------- ---- ------- ------ ------ -------
Total comprehensive income 0 0 0 1,295 3,183 4,478
Exercise of options and warrants 9 0 16 0 0 16
------- ---- ------- ------ ------ -------
Balance at September 30, 1998 32,045 $320 $36,864 $2,371 $79 $39,634
======= ==== ======= ====== === =======
</TABLE>
6<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 a focused book of commercial property and casualty insurance.
American Country concentrates on types of insurance in which it has a
special expertise: transportation, restaurant and artisan contractor
lines. American Country also wrote personal lines auto and homeowners
insurance but has largely phased 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 1999.
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 nine-months period ended September 30,
1998, are not necessarily indicative of the results that may be
expected for the year ended December 31, 1998.
Earnings per share information is presented on the basis of
weighted average shares outstanding for the period.
7<PAGE>
C. DEBT
On March 30, 1998, the Company borrowed $7.8 million of short-
term debt, of which $4.8 million was used to repay a loan 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
debt. The Company has borrowed an additional $1.5 million (of which
$1.3 million was used to repay a loan to the Company from Financial
Services and the remaining $200,000 was used to pay expenses) under
the revolving loan credit facility at an interest rate of 6.47% for
operational purposes. The line of credit agreement contains various
debt covenants including certain financial covenants and commitment
fees, which are .25% 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
September 30, 1998, the Company had 2,055,129 warrants outstanding.
Each warrant allows the 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
In connection with the change in ownership of the Company in July
1997, the Company obtained 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. At September 30, 1998,
the Company had 401,996 options outstanding, all of which are fully
vested, with exercise prices ranging from $0.60 per share to $3.75 per
share.
8<PAGE>
F. REINSURANCE
The components of the net reinsurance recoverable balances in the
accompanying balance sheets were as follows:
September 30, 1998 December 31, 1997
------------------ -----------------
Ceded paid losses recoverable $519 $437
Ceded unpaid losses and loss 15,128 15,114
adjustment expenses ("LAE")
Ceded unearned premiums 1,798 703
------- -------
Total $17,445 $16,254
======= =======
The components of the reinsurance ceded relating to the
accompanying statements of income were as follows:
Nine months ended September 30,
1998 1997
---- ----
(In thousands)
Ceded premiums earned $8,777 $6,475
Ceded incurred losses 6,157 5,365
Ceded incurred LAE 305 207
The effect of reinsurance on premiums written and earned for the
nine months ended September 30, 1998, and 1997 was as follows:
Nine months ended September 30,
1998 1997
---- ----
(In thousands)
Premiums Premiums
-------- --------
Written Earned Written Earned
------- ------ ------- ------
Direct $55,631 $48,641 $58,265 $50,726
Assumed 2,201 1,195 628 646
Ceded (9,872) (8,777) (6,677) (6,475)
------- ------- ------- -------
Net $47,960 $41,059 $52,216 $44,897
======= ======= ======= =======
9<PAGE>
G. ACCOUNTING CHANGES
Effective January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive
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 modifications to the Consolidated Statements of Stockholders'
Equity, which modifications have been made, 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 a focused book of commercial property and casualty insurance.
American Country concentrates on types of insurance in which it has a
special expertise: transportation, restaurant and artisan contractor
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
10<PAGE>
created to be a third-party administrator to handle claims processing
for insureds, and it expects to begin operations during 1999.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
Overall premium revenues declined 8.7% in the third quarter of
1998 to $14.1 million from $15.4 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, which was partially
offset by increased business in Transportation lines.
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
Three Months Ended Increase (Decrease)
September 30, 1998 to 1997
------------------ -------------------
1998 1997 Amount Percent
---- ---- ------ -------
(in thousands)
Transportation lines $ 8,067 $ 7,072 $ 995 14.1%
Commercial lines 5,925 6,111 ( 186) (3.0)
Personal lines 62 2,215 ( 2,153) (97.2)
------- ------- -------- -------
Totals $14,054 $15,398 ($1,344) ( 8.7%)
======= ======= ======== =======
Net premiums earned from Transportation lines, which consist of
taxicab and limousine liability and physical damage programs,
increased in the third quarter of 1998 by 14.1% to $8.1 million. The
increase is due primarily to the geographic expansion of the marketing
of the Company's taxicab products into the states of Indiana,
Michigan, Pennsylvania and Wisconsin.
Commercial lines premiums decreased 3.0% to $5.9 million in the
third quarter of 1998 due to decreased volume from the Company's
commercial multi-peril, commercial automobile and workers'
compensation products. This decrease is a result of continuing
pricing pressure being experienced throughout the insurance industry
for these lines of business and the re-underwriting program
implemented in 1998.
The decrease of 97.2% in Personal lines premiums is due to the
agreement effective January 1, 1998, pursuant to which Ohio Casualty
Insurance Company assumed nearly all of the Company's Personal lines'
11<PAGE>
business. As a result, premiums decreased from $2.2 million in the
third quarter of 1997 to $62,000 in the third quarter of 1998.
Net investment income decreased approximately 9.1% in the third
quarter of 1998 as compared to the comparable period in 1997 due to
decreased interest rates on the Company's fixed maturity portfolio.
Realized gains amounted to $505,000 in the third quarter of 1998
compared to $679,000 during the comparable period in 1997. These
decreases were offset in part by savings in the costs of the
investment activities of the Company. The savings were the result of
the Company's engagement of professional investment managers at the
end of the third quarter in 1997.
Other income, which consists primarily of interest and fees
earned on the Company's premium financing activities decreased 0.2% in
the third quarter of 1998 due to the lower volume of financed
premiums.
Losses and loss adjustment expenses (LAE) of the Company
decreased 15.9% or $2.3 million in the third quarter of 1998, from
$14.2 million in the third quarter of 1997 to $11.9 million in the
third quarter of 1998, resulting in a loss ratio of 85.1% in the third
quarter of 1998 compared to 92.4% in the third quarter of 1997. Pure
losses (that is, losses without LAE) decreased more than 17%, which
is attributable to lower severity and frequency in claims than in the
comparable 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 upgraded its
computer system in the first quarter of 1998. In addition, there are
ongoing savings resulting from a reduction in staff in the fourth
quarter of 1997 in connection with reinsuring nearly all of the
Personal lines' business.
Losses and LAE for Transportation lines increased $165,000 in the
third quarter of 1998 or 2.6% over the comparable period in 1997 as a
result of a higher number of claims due to the additional premium
volume primarily due to the geographic expansion of this line outside
of the Chicago Metropolitan area.
Commercial lines experienced a 13.4% decrease in losses and LAE
that resulted in a loss ratio of 87.1% in the third quarter of 1998
compared to 97.5% in the comparable period in 1997. The decrease is
due to savings in the Company's workers' compensation and commercial
automobile liability products, which is attributable to better weather
conditions in the Company's underwriting territories and the Company's
re-underwriting program implemented in 1998.
The 82.5% decrease in Personal lines' losses and LAE is the
result of reinsuring nearly all of the Company's Personal lines'
business as of January 1, 1998.
12<PAGE>
Amortization of deferred policy acquisition costs increased
slightly during the third quarter of 1998 as a result of increased
policy acquisition costs related to the geographic expansion of the
Company's Transportation lines. The increase was slightly offset by
reduced commission expense incurred on the Company's Commercial and
Personal lines'.
Administrative and general expenses, including interest on
borrowed funds, decreased $237,000, or 15.3% in the third quarter of
1998, primarily due to cost reductions in the Company's operations
partially offset by additional legal and accounting expenses related
to the holding company. Interest and other expense, which totaled
$178,000 in the third quarter of 1998 was $185,000 in the comparable
period of 1997. The increase in interest expense is due to increased
borrowing in the third quarter of 1998 as compared to the same period
in 1997. The increase in other expenses is due to the Company's
ceding of its Personal lines in early 1998.
The Company made an election under Section 847 of the Internal
Revenue Code of 1986, as amended, which resulted in a tax savings of
$105,000 for the period.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Overall premium revenues declined 8.5% in the nine months ended
September 30, 1998 to $41.1 million from $44.9 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,
which was partially offset by increased business in the Company's
other lines.
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
Nine Months Ended Increase (Decrease)
September 30, 1998 to 1997
----------------- -------------------
1998 1997 Amount Percent
---- ---- ------ -------
(in thousands)
Transportation lines $22,919 $20,701 $ 2,218 10.7%
Commercial lines 17,981 17,725 256 1.4
Personal lines 159 6,470 ( 6,311) (97.5)
------- ------- -------- -------
Totals $41,059 $44,897 ($3,837) ( 8.5%)
======= ======= ======== =======
13<PAGE>
Net premiums earned from Transportation lines, which consist of
taxicab and limousine liability and physical damage programs,
increased in the nine months ended September 30, 1998 by 10.7% to
$22.9 million. Most of the Company's Transportation lines generated
premium revenue increases, particularly those products that the
Company offered outside of the Chicago Metropolitan area as part of
its geographic expansion. This geographical expansion was
accomplished by underwriting programs in the states of Indiana,
Michigan, Pennsylvania and Wisconsin.
Commercial lines premiums increased 1.4% to $18.0 million in the
nine months ended September 30, 1998, due to increased revenues from
the Company's commercial multi-peril and automobile products in the
first half of the year. The Company's worker's compensation product,
which generated revenues of $9.3 million in the nine months ended
September 30, 1998, experienced a 9.2% decrease from $10.2 million of
net premiums earned in the comparable period in 1997. This decrease
is attributable to continuing pricing competition for this line.
The decrease of 97.5% in Personal lines premiums is due to the
agreement effective January 1, 1998, pursuant to which Ohio Casualty
assumed nearly all of the Company's Personal lines' business. As a
result, premiums decreased from $6.5 million in the nine months ended
September 30, 1997 to $159,000 in the comparable period for 1998.
Net investment income increased approximately 1.6% in the nine
months ended September 30, 1998, as compared to the comparable period
in 1997. Interest income earned decreased by $263,000 in the nine
months ended September 30, 1998, resulting in total interest income
earned of $5.8 million. Realized gains amounted to $1.1 million in
the nine months ended September 30, 1998 compared to $654,000 during
the comparable period in 1997, representing a 67.3% increase. In
addition, decreased costs relative to the investment activities of the
Company resulted in savings of $344,000 in the nine months ended
September 30, 1998. The savings were the result of the Company's
engagement of professional investment managers at the end of the third
quarter in 1997.
Other income, which consists primarily of interest and fees
earned on the Company's premium financing activities decreased 5.5%
in the nine months ended September 30, 1998 due to lower volume of
financed premiums.
Losses and loss adjustment expenses (LAE) decreased 16.6% or $6.7
million in the nine months ended September 30, 1998, from $40.4
million in the comparable period in 1997 to $33.7 million in 1998,
resulting in a loss ratio of 82.0% in 1998 compared to 89.9% in the
comparable period in 1997. Pure losses (that is losses without LAE)
decreased more than 16% which is attributable to lower severity and
frequency of claims than in the nine months ended September 30 1997.
Much of the 18% savings in LAE can be attributed to management's
continuing efforts to improve operating efficiencies. Management has
14<PAGE>
streamlined the Company's operations and upgraded its computer system
in the first quarter of 1998. In addition, there are ongoing savings
resulting from a reduction in staff in the fourth quarter of 1997.
Losses and LAE for Transportation lines increased $788,000 in the
nine months ended September 30, 1998 or 4.4% over the comparable
period in 1997, as a result of a higher number of claims due to
additional premium volume primarily due to the geographic expansion of
this line outside of the Chicago Metropolitan area and also to
additional losses incurred for certain Chicago Metropolitan area
programs. The loss ratio for this line decreased to 81.0% in the nine
months ended September 30, 1998 as compared to 85.8% in the same
period in 1997.
Commercial lines experienced a 9.7% decline in losses and LAE
that resulted in a loss ratio of 82.3% in the nine months ended
September 30, 1998 compared to 92.5% for the comparable period in
1997. This decrease is attributable to the improved performance in
the workers' compensation and commercial multiple peril products,
which experienced decreases in their LAE ratios of 6.6 % and 23.3%,
respectively. These decreases are attributable to better weather
conditions in the Company's underwriting territories during the nine
months ended September 30, 1998 and to the effects of the re-
underwriting program inaugurated during the fourth quarter 1997, which
resulted in higher premium volume and reduced loss costs.
The 94.7% decrease in Personal lines' losses and LAE is the
result of reinsuring nearly all of the Company's Personal lines'
business as of January 1, 1998.
Amortization of deferred policy acquisition costs decreased by
$195,000 during the nine months ended September 30, 1998. The
decrease in commission expenses for the Company's Commercial and
Personal lines' in the nine months ended September 30, 1998
contributed to this savings, although they were somewhat offset by the
policy acquisition costs incurred in connection with the geographic
expansion of the Company's transportation products.
Administrative and general expenses, including interest on
borrowed funds, increased $171,000, or 6.1% in the nine months ended
September 30, 1998, primarily due to additional costs related to the
operation of the holding company partially offset by cost reductions
in the Company's operations. Interest and other expense, which
totaled $471,000 during the nine months ended September 30, 1998, was
$232,000 higher than the comparable period in 1997. The increase in
interest expense is due to a full quarter charge on higher borrowings
for the nine months ended September 30, 1998 as compared to the
comparable period in 1997.
During the nine months ended September 30, 1998, the Company
recorded significant savings in its income tax expense by making an
15<PAGE>
election under Section 847 of the Internal Revenue Code of 1986, as
amended, which reduced the Company's effective tax rate to 23.3%.
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 insurance subsidiary's ability to pay cash dividends to
the parent company is generally restricted by law or subject to the
approval of the Insurance Department of the state of Illinois. The
ability of insurance and reinsurance companies to underwrite insurance
and reinsurance 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 subsidiaries 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,
commissions and dividends to the holding company. At September 30,
1998, the Company's total assets of $177.7 million were comprised of
the following: Cash and investments, 77.7%; reinsurance recoverables,
9.8%; premiums receivable, 8.3%; deferred expenses (policy acquisition
costs and deferred taxes) 3.1%; fixed assets, .5%; and other assets,
.6%. The Company's subsidiaries seek to maintain liquid operating
positions and follow investment guidelines that are intended to
provide for an acceptable return on investment while preserving
capital, maintaining sufficient liquidity to meet their obligations
and, as to the Company's insurance subsidiary, maintaining a
sufficient margin of capital and surplus to ensure their 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 September 30, 1998:
Market Percent of
S&P/Moody's Rating Value Portfolio
------ ----------
(000's omitted)
AAA/Aaa (including US Treasuries of $16,057) $68,242 55.3%
AA/Aa 19,472 15.8%
A/A 24,061 19.5%
BBB/Ba 10,277 8.3%
All other 1,426 1.1%
Total $123,478 100.0%
======== ======
16<PAGE>
YEAR 2000 COMPLIANCE
A significant percentage of the software that runs most of the
computers in the United States and the rest of the world relies on
two-digit date codes to perform computations and decision making
functions. Commencing January 1, 2000, these computer programs may
fail from an inability to interpret date codes properly,
misinterpreting 00" as the year 1900 rather than 2000, which may
result in computer systems processing information incorrectly. This,
in turn, may significantly and adversely affect the integrity and
reliability of information databases and may result in a wide variety
of adverse consequences to a company. In addition, Year 2000 problems
that occur with third parties with which a company does business, such
as suppliers, computer vendors, distributors and others may also
adversely affect any given company.
The Company is heavily dependent upon complex computer systems
for all phases of its operations, including customer service,
insurance processing, risk analysis, reserve valuation and investment
processing. As an insurance company, American Country has numerous
individual and business customers that have insurance policies.
Nearly all of these policies contain date sensitive data, such as
policy expiration dates, birth dates, premium payment dates, and the
like. The Company also has business relationships with numerous third
parties that affect virtually all aspects of the Company's business,
including, without limitation, suppliers, computer hardware and
software vendors, and insurance agents and brokers. The Company has
been and continues to work closely with its suppliers, vendors, agents
and brokers and other business partners in an effort to bring all
information technology and non-information technology systems into
Year 2000 compliance. The Company expects to be Year 2000 compliant
by the end of 1998.
During the first quarter of 1998, a team of information systems
experts was assembled at the Company to address Year 2000 issues. The
team consists of managers from the Company's software development and
network operations areas, as well as staff responsible for operations,
development and information systems functions. The team has developed
a plan to achieve Year 2000 compliance based on a model suggested by
many industry standard sources.
The plan includes six project phases:
Commitment Phase: To obtain management support for the project
Planning Phase: To establish a project methodology
Assessment: To identify exposure to the Year 2000 problem
Renovation: To modify and/or replace hardware and
software as necessary
Validation and Testing: To test modifications and new hardware and/or
software
Implementation: To certify computer systems as Year 2000
compliant
17<PAGE>
The Company's plan also includes testing six key dates which
could impact a date-sensitive system. The dates are September 9,
1999, January 1, 2000, February 29, 2000, January 1, 2001, February
28, 2001, and February 29, 2004.
The Company's plan is being implemented and is on schedule to
achieve Year 2000 compliance by the end of 1998. An internal
assessment of the Company's information technology systems was
completed in May of 1998. The Company's internal Novell network
system was tested in July of 1998 and passed all Year 2000 date tests.
All desktop and laptop computers have been tested for Year 2000
compliance and have passed all test dates. Some database software was
renovated due to age and non-compliance. The databases are
operational as of the third quarter of 1998 and have passed all Year
2000 date tests. The Company's Rolm phone system was tested for Year
2000 compliance at the end of July of 1998 and passed all Year 2000
tests. The Company's critical information technology systems will be
tested offsite at the Sungard company in December of 1998.
The Company has sought certifications from all of its vendors,
suppliers, agents and brokers and other business partners to confirm
that they are Year 2000 compliant. The Company has also sought
certification from the building management for its facilities,
including, without limitation, elevators, lighting and heating and air
conditioning. The Company's vendors, suppliers, agents and brokers
and other business partners have advised that they will be Year 2000
compliant by the end of 1998 or the first quarter of 1999. The
building managements of the Company's facilities has advised the
Company that all facilities will be Year 2000 compliant by the end of
1998. The Company, however, does not have control over any of these
third parties and, as a result, the Company cannot currently determine
to what extent future operating results may be adversely affected by
the failure of these third parties to successfully address their Year
2000 issues. The Company expects to develop plans to attempt to
minimize identified third party exposures.
As of June 1998 the Company has refused to accept any equipment
that is not Year 2000 compliant. If any vendor or supplier of
information technology software or hardware is not Year 2000 compliant
by April 1999, the Company intends to replace any noncompliant
software or hardware. The Company has already been in contact with
software vendors that will be able to provide Year 2000 compliant
software to the Company and install such software at any time during
1999.
The Company estimates that its costs of modifications to become
Year 2000 compliant are $150,000, which is not material to the
Company's financial position. However, as noted above, there can be
no assurance that the systems or equipment of third parties which
interact with the Company's systems will be compliant on a timely
basis. The Company believes that the failure of systems or equipment
of one or more of these third parties is the most reasonably likely
18<PAGE>
worst case Year 2000 scenario, and this could have a material adverse
effect on the results of operations, liquidity or financial position
of the Company.
The Company has a business interruption contingency plan to
address internal and external issues specific to Year 2000 issue.
This plan is intended to enable the Company to continue to operate
include repairing or obtaining replacement systems, changing suppliers
or vendors and reducing or suspending business with agents and brokers
of other business partners. The Company, believes, however, that due
to the widespread nature of potential Year 2000 issues, the
contingency planning process is an ongoing one which will require
further modifications as the Company obtains additional information
regarding (1) the Company's internal systems and equipment during the
remediation and testing phases of its Year 2000 program; and (2) the
status of third party readiness.
FORWARD-LOOKING STATEMENTS
The Company cautions readers regarding certain forward-looking
statements contained in the foregoing section entitled "Year 2000
Compliance" 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 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
19<PAGE>
December 31, 1997. The Company disclaims any obligation to update
forward-looking information.
20<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
None.
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:
None.
21<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: November 13, 1998
AMERICAN COUNTRY HOLDINGS INC.
(Registrant)
By: /s/ James P. Byrne
---------------------------------
Name: James P. Byrne
Title: Vice President and Chief
Financial Officer
22<PAGE>
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<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
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(1) Available on an annual basis only.
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