EXHIBIT 99.1
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CONFIDENTIAL BUSINESS DESCRIPTION
MEMORANDUM
AMERICAN COUNTRY HOLDINGS INC.
Janney Montgomery Scott LLC
William J. Barrett David J. DiPaolo
212/510-0688 212/510-0661
THE PREFERRED STOCK AND THE UNITS OFFERED HEREBY (THE "SECURITIES")
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY
STATE SECURITIES COMMISSION OR OTHER REGULATORY AUTHORITY, NOR HAVE
ANY OF THE THESE AUTHORITIES PASSED UPON OR ENDORSED THE MERITS OF
THIS OFFERING OR THE ACCURACY OR ADEQUACY OF THIS MEMORANDUM. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
IN MAKING AN INVESTMENT DECISION, YOU MUST RELY ON YOUR OWN
EXAMINATION OF US AND THE TERMS OF THIS OFFERING, INCLUDING THE MERITS
AND RISKS INVOLVED. THE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY
FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY.
FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY
OR DETERMINED THE ADEQUACY OF THIS MEMORANDUM. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THE INFORMATION PRESENTED IN THIS MEMORANDUM WAS PREPARED BY US AND IS
BEING FURNISHED BY THE PLACEMENT AGENT SOLELY FOR YOUR USE IN
CONNECTION WITH THIS OFFERING. THE PLACEMENT AGENT MAKES NO
REPRESENTATIONS AS TO OUR FUTURE PERFORMANCE. THE PLACEMENT AGENT
EXPRESSLY DISCLAIMS ANY REPRESENTATION RESPECTING ANY PROJECTIONS
CONCERNING OUR FUTURE OPERATING RESULTS THAT ARE INCLUDED IN THIS
MEMORANDUM.
THIS MEMORANDUM (TOGETHER WITH ANY AMENDMENTS OR SUPPLEMENTS AND ANY
OTHER INFORMATION THAT MAY BE FURNISHED TO YOU BY US) INCLUDES OR MAY
INCLUDE CERTAIN STATEMENTS, ESTIMATES AND FORWARD-LOOKING PROJECTIONS
WITH RESPECT TO OUR ANTICIPATED FUTURE PERFORMANCE. SUCH STATEMENTS,
ESTIMATES AND FORWARD-LOOKING PROJECTIONS REFLECT VARIOUS ASSUMPTIONS
OF OUR MANAGEMENT THAT MAY OR MAY NOT PROVE TO BE CORRECT AND INVOLVE
VARIOUS RISKS AND UNCERTAINTIES. THE PLACEMENT AGENT HAS NOT
PARTICIPATED IN THE PREPARATION OF, AND TAKES NO RESPONSIBILITY FOR,
THESE STATEMENTS, ESTIMATES OR PROJECTIONS.
THIS MEMORANDUM DOES NOT PURPORT TO BE ALL-INCLUSIVE OR CONTAIN ALL
INFORMATION THAT YOU MAY DESIRE IN INVESTIGATING US. YOU MUST RELY ON
YOUR OWN EXAMINATION OF US AND THE TERMS OF THIS OFFERING, INCLUDING
THE MERITS AND RISKS INVOLVED IN MAKING AN INVESTMENT DECISION WITH
RESPECT TO THE SECURITIES. PRIOR TO MAKING AN INVESTMENT DECISION
REGARDING THE SECURITIES, YOU SHOULD CONSULT YOUR OWN COUNSEL,
ACCOUNTANTS AND OTHER ADVISORS AND CAREFULLY REVIEW AND CONSIDER THIS
ENTIRE MEMORANDUM.
THIS MEMORANDUM DOES NOT CONSTITUTE AN OFFER TO SELL TO, OR A
SOLICITATION OF AN OFFER TO BUY FROM, ANYONE IN ANY STATE OR IN ANY
OTHER JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT
AUTHORIZED. EXCEPT AS OTHERWISE INDICATED, THIS MEMORANDUM SPEAKS AS
OF THE DATE INDICATED ABOVE. NEITHER THE DELIVERY OF THIS MEMORANDUM
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN OUR AFFAIRS AFTER THE
DATE INDICATED ABOVE.
PRIOR TO YOUR PURCHASE OF THE SECURITIES, YOU WILL HAVE THE
OPPORTUNITY TO ASK QUESTIONS OF, AND RECEIVE ANSWERS FROM, ONE OF OUR
REPRESENTATIVES AT OUR PRINCIPAL OFFICE DURING BUSINESS HOURS,
CONCERNING THE TERMS AND CONDITIONS OF THIS OFFERING AND TO OBTAIN ANY
ADDITIONAL INFORMATION WHICH WE POSSESS OR CAN ACQUIRE WITHOUT
UNREASONABLE EFFORT OR EXPENSE THAT IS NECESSARY TO VERIFY THE
ACCURACY OF INFORMATION FURNISHED IN THIS MEMORANDUM. IF YOU WISH TO
OBTAIN ANY SUCH INFORMATION, PLEASE CONTACT KARLA VIOLETTO, CHIEF
FINANCIAL OFFICER, AMERICAN COUNTRY HOLDINGS INC., 222 NORTH LASALLE
STREET, SUITE 1600, CHICAGO, ILLINOIS 60601, TELEPHONE 312-456-2000.
NO OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THE
INFORMATION AND REPRESENTATIONS CONTAINED IN THIS MEMORANDUM, AND, IF
SUCH INFORMATION OR REPRESENTATIONS ARE GIVEN, THEY MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY US OR THE PLACEMENT AGENT.
ANY ADDITIONAL INFORMATION OR REPRESENTATIONS GIVEN OR MADE BY US OR
THE PLACEMENT AGENT IN CONNECTION WITH THIS OFFERING, WHETHER ORAL OR
WRITTEN, ARE QUALIFIED IN THEIR ENTIRETY BY THE INFORMATION SET FORTH
IN THIS MEMORANDUM, INCLUDING, BUT NOT LIMITED TO, THE RISK FACTORS
SET FORTH IN THIS MEMORANDUM. PLEASE SEE "RISK FACTORS."
YOU SHOULD NOT CONSTRUE ANY STATEMENTS MADE IN THIS MEMORANDUM AS TAX
OR LEGAL ADVICE. YOU AND YOUR INVESTMENT, TAX OR OTHER ADVISORS,
ACCOUNTANTS AND LEGAL COUNSEL, IF ANY, SHOULD REVIEW THIS MEMORANDUM
AND ITS EXHIBITS.
THE INFORMATION CONTAINED IN THIS MEMORANDUM IS CONFIDENTIAL AND
PROPRIETARY TO US AND IS BEING SUBMITTED TO YOU SOLELY FOR YOUR
CONFIDENTIAL USE WITH THE EXPRESS UNDERSTANDING THAT, WITHOUT OUR
PRIOR EXPRESS WRITTEN PERMISSION, YOU WILL NOT RELEASE THIS MEMORANDUM
OR DISCUSS THE INFORMATION CONTAINED IN IT OR MAKE REPRODUCTIONS OF OR
USE THIS MEMORANDUM FOR ANY PURPOSE OTHER THAN EVALUATING A POTENTIAL
INVESTMENT IN THE SECURITIES.
BY ACCEPTING DELIVERY OF THIS MEMORANDUM, YOU AGREE TO PROMPTLY RETURN
TO THE PLACEMENT AGENT OR US THIS MEMORANDUM AND ANY OTHER DOCUMENTS
OR INFORMATION FURNISHED BY OR ON BEHALF OF THE PLACEMENT AGENT OR US
IF YOU ELECT NOT TO PURCHASE THE SECURITIES.
THE SALE OF THE SECURITIES IS SUBJECT TO THE PROVISIONS OF A
SUBSCRIPTION AGREEMENT AND OTHER RELATED AGREEMENTS, WHICH YOU WILL BE
REQUIRED TO EXECUTE IF YOU PURCHASE SECURITIES. THE TERMS OF THE
SECURITIES WILL BE SET FORTH IN OUR ARTICLES OF INCORPORATION, AS
AMENDED, OR BY RESOLUTION OF OUR BOARD OF DIRECTORS PURSUANT TO
AUTHORITY CONTAINED IN OUR ARTICLES OF INCORPORATION. YOU SHOULD NOT
PURCHASE SECURITIES UNLESS YOU HAVE COMPLETELY AND THOROUGHLY REVIEWED
THE PROVISIONS OF THE SUBSCRIPTION AGREEMENT AND OTHER RELATED
AGREEMENTS AND OUR ARTICLES OF INCORPORATION. IN THE EVENT THAT ANY OF
THE TERMS, CONDITIONS OR OTHER PROVISIONS OF THE AGREEMENTS OR OUR
ARTICLES OF INCORPORATION ARE INCONSISTENT WITH OR CONTRARY TO THE
INFORMATION PROVIDED IN THIS MEMORANDUM, THE AGREEMENTS AND OUR
ARTICLES OF INCORPORATION WILL CONTROL.
WE RESERVE THE RIGHT, IN OUR SOLE DISCRETION AND FOR ANY REASON, TO
CHANGE AND/OR WITHDRAW SOME OR ALL OF THE OFFERING AND/OR ACCEPT OR
REJECT SOME OR ALL OF ANY PROSPECTIVE INVESTMENT IN THE SECURITIES OR
TO ALLOT TO YOU LESS THAN THE NUMBER OF SECURITIES THAT YOU DESIRE TO
PURCHASE. WE WILL HAVE NO LIABILITY TO ANY INVESTOR OR RECIPIENT OF
THIS MEMORANDUM IN THE EVENT THAT WE TAKE ANY OF THESE ACTIONS.
ADDITIONAL INFORMATION
We are subject to the information requirements of the Securities
Exchange Act of 1934, as amended, and, in accordance therewith, file
reports, proxy statements and other information with the Securities
and Exchange Commission (the "Commission" or the "SEC"). Such reports,
proxy statements and other information can be inspected and copies can
be made at the Public Reference Room of the Commission at its
principal office at 450 Fifth Street, N.W., Washington, D.C. 20549, or
at its regional office at Seven World Trade Center, 500 West Madison
Street, Suite 1300, New York, NY 10048. Copies of this material can
also be obtained from the Commission's site on the Internet located at
www.sec.gov.
CONFIDENTIAL BUSINESS DESCRIPTION MEMORANDUM
THIS MEMORANDUM SHOULD BE READ IN CONJUNCTION WITH THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS APPEARING IN OUR ANNUAL REPORT ON
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999. THIS MEMORANDUM
CONTAINS FORMS OF FORWARD-LOOKING STATEMENTS. WHEN USED IN THIS
MEMORANDUM, THE WORDS "BELIEVE," "EXPECT," "ANTICIPATE," "ESTIMATE"
AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS,
UNCERTAINTIES AND ASSUMPTIONS, WHICH ARE IDENTIFIED AND DESCRIBED IN
THE "RISK FACTORS" SECTION BELOW. SHOULD ONE OR MORE OF THESE RISKS OR
UNCERTAINTIES MATERIALIZE, OR SHOULD UNDERLYING ASSUMPTIONS PROVE
INCORRECT, ACTUAL RESULTS MAY VARY FROM THOSE ANTICIPATED, ESTIMATED,
OR PROJECTED AND THE VARIATIONS MAY BE MATERIAL. WE CAUTION YOU NOT TO
PLACE ANY RELIANCE ON ANY SUCH FORWARD-LOOKING STATEMENTS.
AMERICAN COUNTRY HOLDINGS INC.
CONFIDENTIAL BUSINESS DESCRIPTION MEMORANDUM
American Country Holdings Inc. 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 select American Country customers.
ACHI became a public company through a merger in 1997 with Western
Systems Inc. (a company that had liquidated its business for cash).
American Country is an Illinois domestic insurance company that
specializes in the underwriting and marketing of commercial property
and casualty insurance and 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 which has not been renewed
and is currently being run off. Although historically American
Country's specialty public transportation coverages (taxicab and
limousine) were primarily written on risks in the City of Chicago and
surrounding suburbs, American Country has extended 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 intends to pursue licenses in
Missouri, Nevada, Maryland, Ohio and Virginia. 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).
ACHI's Chicago cab business has been highly profitable. The strategy
of the Company is to take this expertise into other geographic
markets; accordingly, the Company has entered the New York, Indiana,
Wisconsin, Connecticut, Minnesota, Michigan, and Pennsylvania markets
during the past three years. ACHI's experience with these markets has
generally been good and the business is forecasted to grow at a 10%
annual rate through 2005.
In August 2000, John Dore joined the Board of Directors and
contemporaneously was elected Co-Chairman of the Board and Chief
Executive Officer. Mr. Dore is an experienced insurance executive who
will become sole Chairman and Chief Executive Officer in early January
2001. The Board of Directors believes that Mr. Dore's experience in
managing insurance company operations will enable the Company to
improve its profitability. See "Action Plan" below. Mr. Dore's resume
is attached as Exhibit A.
PROPOSED OFFERING
Up to $5 million of equity securities in two traunches. The attached
term sheets outline the two separate proposed financing structures (a)
a 6% convertible preferred stock and (b) a unit consisting of one
share of common stock and a five-year warrant to purchase an
additional share of common stock.
Board members have committed to purchase in excess of $2.25 million of
these securities.
USE OF PROCEEDS
To maintain its A.M. Best "A-" rating, the Company believes that it
should increase its equity by a minimum of $4 million. The proceeds of
the offering will be invested by ACHI as additional equity into
American Country. A.M. Best has a series of financial tests which must
be met to retain ratings. The equity increase, coupled with the
implementation of the action plan, should enable the Company to comply
with these ratio tests.
ACTION PLAN
In December 2000, Mr. Dore presented an action plan to the Board to
increase profitability and enhance operations. The key points of this
plan are to:
1. continue the geographic and local expansion of its profitable
core transportation business;
2. eliminate certain unprofitable hospitality lines and
substantially all other commercial lines including workman's
compensation (except for Chicago cabs);
3. change the focus of the commercial artisan contractor business to
a commission basis where ACHI will earn fees for marketing,
underwriting and claims handling functions;
4. enhance the return on the Company's portfolio currently managed
by Black Rock;
5. conduct an extensive review of operating costs, including
commission expenses;
6. increase selective premiums; and
7. revise investment strategy to include higher yielding securities,
including convertible notes, convertible preferreds and medallion
loans.
Based upon a successful implementation of the action plan, the Company
expects to achieve the following premiums earned:
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Business Line FYE December 31
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2000 2001
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Transportation $46.5 $50.9
Hospitality 8.1 8.4
Other Commercial 16.5 14.9
Total $71.1 $74.2
$$ in millions
Management estimates pre tax profits of $5 - $6 million in 2001. Upon
signing a confidentiality agreement, ACHI will provide detailed
forecasted financial statements.
RISK FACTORS (See Exhibit B)
Recent Operating Results
ACHI has reported a loss for the nine months ended September 30, 2000
after recognizing a $930,000 reinsurance return premium relating to
prior year periods.
Although the transportation business line remains strong, recent
operating results have been unfavorable primarily due to prior years'
poor results of workers compensation and year-2000 non-Illinois
hospitality business. As a result, the Company has been required by
its actuaries to increase its reserves for these lines. Management
expects the fourth quarter to have a loss caused principally by a
$500,000 portfolio loss, and 2001 results to be in a pre-tax range of
$5.0 million to $6.0 million. Based upon achieving these 2001
forecasted results and a tax rate of 18%, earnings per share on a
diluted basis (all existing warrants and options are non-dilutive)
would be $0.42 to $0.51 after giving effect to the issuance of the new
securities.
A.M.Best Rating
While the Company presently is rated as "A-" by Best, there can be no
assurance that Best, based upon its rating criteria, will not attempt
to downgrade the Company. However, management presently believes that,
with the $4 million - $5 million of new capital, together with
increased profitability and a temporary reinsurance arrangement, the
A- rating will be retained.
Dilution of Book Value
The securities will be sold at a discount to the September 30, 2000,
$4.77 book value per share, based on equity of $38.5 million and 8.06
million outstanding shares.
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INVESTMENT RATIONALE
The majority of the property and casualty insurance industry has
reported poor operating results for the last three years. ACHI
believes that commencing in 2001 it will be able to achieve
significantly improved operating results for the reasons enumerated in
the action plan developed by its new Chief Executive Officer. If the
forecasted results are achieved, the Company believes that its equity
value will be significantly enhanced.
INVESTOR PROCEDURE
The Company will make available to interested parties its action plan
which contains detailed financial projections. Management is available
to fully discuss the plan and future Company prospects. The Company
would like to close or receive binding commitments on or before
December 31, 2000.
EXHIBITS ATTACHED
Exhibit A Resume of John Dore
Exhibit B Proposed Term Sheets
Exhibit C Risk Factors
AVAILABLE PROCEDURE
All public filings are available on request to prospective investors.
EXHIBIT B
As discussed, the Company is selling a total $5 million of securities
in two traunches: a) Units and b) Convertible Preferred
Stock. It is anticipated that $2.5 million convertible preferred will
be sold to officers and directors. Investors may participate in either
or both traunches.
Unit Offering
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Form: Units, each to consist of one share of common stock and
a five-year warrant to purchase one share of common
stock.
Pricing: Units at the high bid price of common stock at closing.
Warrant exercise price up 10% from the Unit price.
During the past six months, the common stock has traded
at a high of 4-1/2 and a low of 2 5/32.
Registration
Rights: Common stock and warrants have immediate registration
rights.
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Terms of
Warrants: Customary terms with standard anti-dilution provisions
(no ratchet-down provisions).
CONVERTIBLE PREFERRED OFFERING
Form: 6% Convertible Preferred Stock.
Dividend: 6% of offering price paid quarterly commencing April 1,
2001.
Offering
Price: $10 per share.
Convertible: Into common stock at any time at the following
conversion rate: $10 divided by the high bid price of
common stock at closing. Protected against dilution.
LIQUIDATION
Preference: $10 per share.
Votes: Equal to the amount of common equivalent votes as if
converted.
REGISTRATION
Rights: Underlying shares to have immediate registration
rights.
Sinking
Fund: None.
Callable: At any time at $10 per share plus accrued dividends.
Terms of
Convertible: Customary terms with standard anti-dilution provisions.
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EXHIBIT C
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RISK FACTORS
Before investing you should carefully consider the following factors,
as well as other information contained in this memorandum. References
to "we," "us," "our," "ACHI" or the "Company" refer to American
Country Holdings Inc. and its subsidiaries.
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. Continued
or increased levels of highly competitive conditions could have a
material adverse effect on our subsidiary, American Country Insurance
Company ("American Country").
American Country faces 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 all of the business
with the reinsurer. Many of these programs are short-lived but they
generally enter the market with extremely aggressive pricing. Besides
creating instability, they generally do not provide continuity of
claims practices and settlements, which adversely affects future
pricing for property and casualty insurance. However, American
Country's long-term agreements with the taxi companies tend to
mitigate this circumstance. 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. Competition for workers' compensation
insurance (American Country's largest commercial lines product)
resulted in a decrease in average premiums for 1999. Due to this
competition, American Country believes that the commercial lines
products are currently under-priced and therefore American Country has
decided to restrict writings in this market and refocus its
underwriting efforts in the public transportation lines.
We benefit in both classes of our business by maintaining long-term
agency relationships. In addition, our agents have specialized in
these classes of business for many years. We believe that we have been
able to compete successfully by underwriting specialty coverages for
niche areas in which we have expertise.
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ADEQUACY OF LOSS RESERVES
The liabilities for unpaid losses and loss adjustment expenses are
estimated by American Country management utilizing methods and
procedures which they believe are reasonable. These liabilities are
necessarily subject to the impact of future changes in claim severity
and frequency, judicial theories of liability and 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 has in
the past and may in the future vary significantly from the estimated
amounts included in the accompanying financial statements. To the
extent that the actual loss experience varies from the assumptions
used in the determination of these liabilities, the liabilities are
adjusted to reflect actual experience. Such adjustments, to the extent
they occur, are reported in the period recognized and may materially
adversely affect American Country's reported financial results. For
the years ended December 31, 1998, 1997 and 1996, American Country had
cumulative reserve redundancies (deficiencies) of $(4,389), ($7,042)
and $(6,827), respectively.
FLUCTUATIONS IN FINANCIAL RESULTS
The financial results of American Country, similar to those of many
other property and casualty insurers, 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.
An insurance company's statutory combined ratio (its loss plus its
expense ratio) expresses losses and expenses as a percentage of
premium revenues and is the traditional measure of underwriting
experience. Generally speaking, if the statutory combined ratio is
below one hundred percent (100%), an insurance company has an
underwriting profit and if it is above one hundred 100%, the insurance
company has an underwriting loss. For 1999, 1998 and 1997, American
Country's combined ratio was 110.7%, 100.9%, and 109.6%, respectively.
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DEPENDENCE ON MANAGEMENT
We are dependent upon our executive management and upon our ability to
attract and retain qualified employees.
DEPENDENCE ON INVESTMENT INCOME
American Country, similar to many other property and casualty
insurers, has experienced underwriting losses on its insurance
business and depends primarily on interest income from its investment
portfolio for a substantial portion of its earnings. Its statutory
combined ratio for the years ended December 31, 1999, 1998 and 1997
was 110.7%, 100.9% and 109.6%, respectively. A significant decline in
investment yields could have a material adverse effect on American
Country's financial results.
HOLDING COMPANY STRUCTURE; INSURANCE REGULATION; PAYMENT OF CASH
DIVIDENDS
We are a holding company whose principal asset is all of the
outstanding Common Stock of American Country, which is an insurance
company organized under the laws of the State of Illinois. Our ability
to pay expenses and pay cash dividends to our stockholders depends
primarily on our ability to obtain dividends and other payments from
American Country. Illinois permits insurance companies to pay
dividends only out of earned surplus, and limits the annual amount
payable without prior approval of the Department of Insurance to the
greater of 10% of policyholders' surplus or the amount of the prior
year's statutory net income. American Country's surplus as of December
31, 1999 was $37.2 million, and its statutory net income for 1999 was
$(2.0) million.
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
and amount of insurance the company can write; the 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; establishment and maintenance of reserves for unearned
premiums, losses and loss adjustment expenses; and requirements
regarding numerous other matters. 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.
Accordingly, state regulation may adversely affect American Country.
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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 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 ("NAIC")
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. The NAIC has developed Property-Casualty Risk-Based
Capital (RBC) standards that relate an insurer's reported statutory
capital and surplus to the risks inherent in its overall operations.
The RBC formula uses the capital and surplus reported in the statutory
annual statement to calculate the minimum indicated capital level to
support asset (investment and credit) risk and underwriting (loss
reserves, premiums written, and unearned premium) risk. The NAIC model
law calls for various levels of regulatory action based on the
magnitude of an indicated RBC capital deficiency, if any. At December
31, 1999, American Country's reported capital and surplus was $37.2
million and its required risk-based capital and surplus was $7.3
million.
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-" (Excellent) by A.M. Best Company, Inc. ("A.M. Best").
Ratings for the industry range from "A++" (Superior) to "F" (In
Liquidation) and some companies are not rated. 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
9
of time. In evaluating a company's financial and operating
performance, A.M. Best reviews the 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." In addition, Standard & Poor's has given American Country
a rating of "BBBpi" (Rated Good). Standard & Poor's ratings range from
"AAA" (Extremely Strong) to "CC" (situations where a default is
expected imminently on any financial obligation). The "BBB" rating is
assigned to companies with good financial security characteristics,
but capacity to meet policyholder obligations is susceptible to
adverse economic and underwriting conditions. (the "pi" subscript
indicates that the rating is based solely on publicly available
financial information and was not requested by the Company). There can
be no assurance 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.
DEPENDENCE ON KEY CUSTOMERS
In 1999, 1998 and 1997, the Yellow Cab Company accounted for 14%, 17%
and 16%, respectively, and Checker Taxi Association (located in
Chicago) accounted for 8%, 10% and 11%, respectively, of American
Country's total gross premiums written. 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.
EXPANSION INTO NEW GEOGRAPHIC MARKETS
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 intends on pursuing licenses in
Missouri, Nevada, Maryland, Ohio and Virginia. 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 a
particular jurisdiction in which it applies.
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REINSURANCE
The majority of American Country's reinsurance is placed with a
limited number of reinsurers. The availability and cost of reinsurance
affect American Country's ability to write additional insurance and
the profitability of that insurance and are subject to prevailing
market conditions that are beyond the control of American Country. A
contingent liability exists to the extent that American Country's
reinsurers may be unable to meet their contractual obligations.
CONTROL BY PRINCIPAL STOCKHOLDERS; EFFECT ON MARKET FOR COMMON STOCK
Our executive officers and directors, together with Frontier Insurance
Group, Inc. (a principal stockholder), beneficially own approximately
80%, in the aggregate, of the outstanding shares of common stock, par
value $.01 ("Common Stock"). Consequently, such officers, directors
and stockholder could, by acting together, control the outcome of
matters submitted to a vote of our stockholders, such as the election
of our board of directors and our direction and future operations. The
concentration of ownership of Common Stock could also have the effect
of discouraging, delaying or preventing a change in control and may
impair the liquidity of the Common Stock by adversely affecting the
ability of an active market to develop for the Common Stock on the
Nasdaq Small Cap Market or otherwise due to the relatively small
number of shares of Common Stock that are publicly held by our other
stockholders.
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