SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended Commission File No.
----------------- -------------------
June 30, 2000 0-671
MOTOR CLUB OF AMERICA
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
New Jersey 22-0747730
------------------------ -------------------
(State of Incorporation) (I.R.S. Employer
Identification No.)
95 Route 17 South, Paramus, New Jersey 07653
---------------------------------------- --------
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (201) 291-2000
--------------
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. Yes x . No .
--- ---
2,124,387 shares of Common Stock were outstanding as of August 11, 2000.
1
<PAGE>
MOTOR CLUB OF AMERICA
FORM 10-Q
JUNE 30, 2000
PART I PAGE
ITEM 1. FINANCIAL STATEMENTS 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 8
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
2
<PAGE>
PART 1
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MOTOR CLUB OF AMERICA
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Investments $101,978,797 $ 86,981,849
Cash and cash equivalents 1,486,882 443,733
Premiums receivable 31,882,771 27,132,246
Reinsurance recoverable on
paid & unpaid losses and
loss expenses 33,405,730 21,163,574
Notes and accounts receivable 295,030 212,598
Deferred policy acquisition costs 12,555,116 10,560,763
Fixed assets - at cost, less
accumulated depreciation 2,634,367 1,858,621
Prepaid reinsurance premiums 4,911,285 1,485,450
Federal income tax recoverable 0 54,026
Deferred tax asset 3,874,571 4,128,766
Goodwill, less accumulated
amortization 1,703,500 1,745,848
Other assets 1,796,034 1,470,744
------------- -------------
Total Assets $196,524,083 $157,238,218
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Losses and loss expenses $ 87,209,691 $ 70,983,383
Unearned premiums 48,505,783 38,698,028
Other liabilities 10,523,803 9,997,359
Convertible subordinated debentures 10,000,000 10,000,000
Notes payable 11,500,000 -
Federal income taxes payable 385,147 -
------------- -------------
Total Liabilities 168,124,424 129,678,770
------------- -------------
Shareholders' Equity:
Common stock, par value $.50 per share
(Authorized - 10,000,000 shares;
issued and outstanding - 2,124,387
2000 and 1999) 1,062,194 1,062,194
Paid in additional capital 2,066,089 2,066,089
Accumulated other comprehensive loss (5,085,327) (5,036,515)
Retained earnings 30,356,703 29,467,680
------------- -------------
Total Shareholders' Equity 28,399,659 27,559,448
------------- -------------
Total Liabilities and
Shareholders' Equity $196,524,083 $157,238,218
============= =============
</TABLE>
(Financial statements should be read in
conjunction with the accompanying notes)
3
<PAGE>
MOTOR CLUB OF AMERICA
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Six Months Ended For the Three Months Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Insurance premiums (net of
premiums ceded totaling
$9,340,353, $3,667,516,
$6,989,835 and $1,848,619) $39,067,248 $26,266,691 $20,807,821 $13,182,492
Net investment income 2,977,990 2,384,857 1,578,704 1,192,325
Realized gains on sales
of investments 4,524 5,378 4,524 5,378
Other revenues 102,176 74,900 62,457 36,858
-------------- -------------- -------------- --------------
Total revenues 42,151,938 28,731,826 22,453,506 14,417,053
-------------- -------------- -------------- --------------
Losses and Expenses:
Insurance losses and loss
expenses incurred (net of
reinsurance recoveries
totaling $8,142,651,
$1,842,816, $5,457,950 and
$959,195) 26,095,143 17,540,281 13,613,138 8,657,338
Amortization of deferred policy
acquisition costs 11,116,776 7,889,322 5,920,892 4,057,199
Other operating expenses 2,786,293 743,718 1,388,251 405,049
Interest expense 841,010 106,796 517,403 53,857
Amortization of goodwill 42,348 - 21,174 -
-------------- -------------- -------------- --------------
Total losses and
expenses 40,881,570 26,280,117 21,460,858 13,173,443
-------------- -------------- -------------- --------------
Income before Federal income
taxes 1,270,368 2,451,709 992,648 1,243,610
Provision for Federal income
taxes:
current 21,979 55,858 7,269 27,788
deferred 359,366 398,797 345,868 204,389
-------------- -------------- -------------- --------------
Total provision for Federal
income taxes 381,345 454,655 353,137 232,177
-------------- -------------- -------------- --------------
Net income $ 889,023 $ 1,997,054 $ 639,511 $ 1,011,433
============== ============== ============== ==============
Net income per common share:
Basic $ 0.42 $ 0.95 $ 0.30 $ 0.48
============== ============== ============== ==============
Diluted $ 0.42 $ 0.94 $ 0.28 $ 0.48
============== ============== ============== ==============
Weighted average common and
potential common shares
outstanding:
Basic 2,124,387 2,116,429 2,124,387 2,116,429
============== ============== ============== ==============
Diluted 2,124,387 2,123,899 2,769,965 2,120,053
============== ============== ============== ==============
</TABLE>
(Financial statements should be read in
conjunction with the accompanying notes)
4
<PAGE>
MOTOR CLUB OF AMERICA
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Six Months Ended
------------------------------------------------------------
June 30,2000 June 30,1999
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
Operating activities:
Net income $889,023 $ 1,997,054
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 419,790 311,303
Gain on sale of investments (4,524) (5,378)
Changes in:
Deferred policy
acquisition costs (571,500) 520,244
Premiums receivable 1,283,188 364,044
Notes and accounts
receivable (82,432) (66,790)
Other assets (61,691) (471,615)
Losses and loss expenses 3,481,196 3,031,355
Unearned premiums (702,575) (1,809,919)
Federal income tax - current 21,979 56,057
Federal income tax - deferred 419,260 398,798
Other liabilities (1,810,721) (1,972,403)
Reinsurance recoverable on
paid and unpaid losses 457,954 (886,762)
Prepaid reinsurance premium 949,295 (9,373)
-------------- --------------
Net cash provided by
operating activities $4,688,242 $1,456,615
Investing activities:
Investments purchased (68,671,834) (48,833,930)
Fixed assets purchased (991,811) (413,662)
Acquisition of Mountain Valley,
net of cash acquired 3,962,753 -
Proceeds from sales and
maturities of investments 58,481,305 50,122,197
-------------- --------------
Net cash used in
investing activities (15,145,093) 874,605
Financing activities:
Proceeds from notes payable 11,500,000 -
-------------- --------------
Net cash provided by
financing activities 11,500,000 -
--------------- ---------------
Net increase in cash and
cash equivalents 1,043,149 2,331,220
Cash and cash equivalents at
beginning of period 443,733 2,773,427
--------------- ---------------
Cash and cash equivalents at
end of period $1,486,882 $5,104,647
=============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Interest paid $717,720 $107,049
=============== ===============
Federal income taxes paid $ - $ -
=============== ===============
</TABLE>
NON CASH INVESTING ACTIVITIES:
Invested assets and shareholders' equity decreased by $ 48,812 and
$2,012,279 in 2000 and 1999, respectively, as a result of changes in
market value, net of taxes, pertaining to the Registrant's application of
SFAS No. 115 - ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES.
(Financial statements should be read in
conjunction with the accompanying notes)
5
<PAGE>
MOTOR CLUB OF AMERICA
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPHREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
For the Six Months Ended For the Three Months Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C>
Net income $889,023 $ 1,997,054 $639,511 $ 1,011,433
Other comphrehensive income (loss):
Unrealized gains (losses) on
securities, net of tax:
Unrealized holding gains (losses)
arising during the period (45,826) (2,008,730) (4,403) (1,255,572)
Less: reclassification adjustment for
gains included in earnings (2,986) (3,549) (2,986) (3,549)
------------- --------------- ----------- ---------------
Other comprehensive income (loss) (48,812) (2,012,279) (7,389) (1,259,121)
------------- --------------- ----------- ---------------
Comprehensive income $ 840,211 $ (15,225) $ 632,122 $ (247,688)
============= =============== =========== ===============
</TABLE>
(Financial statements should be read in
conjunction with the accompanying notes)
6
<PAGE>
MOTOR CLUB OF AMERICA
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PREPARATION AND PRESENTATION
The accompanying condensed consolidated financial statements of Motor
Club of America (the "Registrant") include its accounts and those of its
subsidiary companies, Motor Club of America Insurance Company ("Motor Club"),
Preserver Insurance Company ("Preserver"), North East Insurance Company ("North
East"), American Colonial Insurance Company ("American Colonial") and Mountain
Valley Indemnity Company ("Mountain Valley") (collectively referred to as the
"Insurance Companies"), and, in the opinion of management, contain all
adjustments necessary to present fairly the Registrant's consolidated financial
position, results of operations and cash flows, in accordance with generally
accepted accounting principles.
These statements should be read in conjunction with the Summary of
Significant Accounting Policies and other notes included in the Notes to
Financial Statements in the Registrant's 1999 Annual Report on Form 10-K.
2. PER SHARE DATA
Basic earnings per share are computed based upon the weighted average
number of common shares outstanding during each year. Diluted earnings per share
are computed based upon the weighted average number of common shares outstanding
including outstanding stock options and convertible subordinated debentures.
7
<PAGE>
3. FEDERAL INCOME TAXES
The Registrant and its subsidiaries file a consolidated Federal income
tax return. In the three and six month periods ended June 30, 2000 and 1999, the
provision for Federal income taxes resulted in effective tax rates different
from the expected statutory Federal income tax rates, principally as a result of
(i) certain adjustments, principally those enacted under the Tax Reform Act of
1986; (ii) utilization of Net Operating Loss ("NOL") carryforwards; and (iii)
the recognition as a deferred tax asset of certain tax credit carryforwards for
alternative minimum tax purposes. The Registrant has NOL carryforwards of
$8,017,320 remaining, which expire beginning in 2009. The NOL carryforward
includes $5,944,177 attributable to North East, which expire in 2015; under the
prevailing tax laws, these losses must be offset against taxable income of North
East only, are not available to offset taxable income of other operations and
are subject to an estimated annual limitation of $587,000.
The Company believes it is more likely than not that it will generate
future taxable income to realize the benefits of the net deferred tax asset,
including those net deferred tax assets attributable to North East only.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW OF BUSINESS OPERATIONS
The Registrant owns and operates five regionally focused property and
casualty insurance companies, including companies that specialize in small and
mid-sized commercial insurance through the Preserver Insurance Group.
8
<PAGE>
The Preserver Insurance Group consists of Preserver, which writes small
commercial and homeowners insurance in New Jersey, and Mountain Valley, which
writes small and mid-sized commercial insurance in New England and New York. The
Preserver Insurance Group is rated B++ (Very Good) by A.M. Best Company
("Best"). American Colonial plans to commence operations in New York in the
third quarter 2000, writing commercial lines in tandem with Mountain Valley.
Motor Club writes private passenger automobile insurance ("PPA") in New
Jersey and is rated B+ (Very Good) by Best. North East writes personal
automobile and small commercial lines insurance in the State of Maine and is
rated B (Fair) by Best.
The Registrant is pursuing a strategy to: (1) increase its
identification as a provider of small commercial lines insurance and has
continued to expand its product line in support of this objective; and (2)
expand and diversify its insurance operations outside the State of New Jersey.
The Registrant believes that both of these objectives can be attained through
the acquisition of other insurance companies that present opportunities to write
these product lines in different geographic areas. The Registrant expects to
continue to follow this strategy.
Mountain Valley was acquired on March 1, 2000; North East was acquired
in September 1999. The Registrant believes that these acquisitions fully
establish it as a regional commercial lines company in the New England and
Mid-Atlantic regions. As evidence of this, only 45% of the Registrant's
consolidated revenues emanated from New Jersey PPA in the first six months of
2000, the lowest in its history. This percentage is expected to continue to
decline in the future.
The Registrant anticipates continued reductions in its operating
expenses, namely through the implementation of operating efficiencies that
should reduce overhead expenditures.
9
<PAGE>
Historically, the Insurance Companies' results of operations have been
influenced by factors affecting the property and casualty insurance industry in
general and the New Jersey PPA market in particular. The operating results of
the U.S. property and casualty insurance industry have been subject to
significant variations due to competition, weather, catastrophic events,
regulation, general economic conditions, judicial trends, fluctuations in
interest rates and other changes in the investment environment.
RESULTS OF OPERATIONS
The consolidated results of operations include, using the purchase
method of accounting, the results of operations of North East for the three and
six months ended June 30, 2000 and Mountain Valley for the three months ended
June 30, 2000 and from March 1, 2000, the date of acquisition. North East and
Mountain Valley are collectively referred to as the "Acquired Companies". The
table below details the results of operations for the Acquired Companies as
included in the condensed consolidated statement of operations for the three and
six months ended June 30, 2000:
<TABLE>
<CAPTION>
Three Months Ended June 30, 2000
------------------------------------------------------
North Mountain Total Acquired
East Valley Companies
----------------- ---------------- -----------------
<S> <C> <C> <C>
Insurance premiums $4,595,180 $3,948,924 $8,544,104
Net investment income 240,041 94,207 334,248
----------------- ---------------- -----------------
Total revenues 4,835,221 4,043,131 8,878,352
----------------- ---------------- -----------------
Losses and loss adjustment expenses incurred 3,157,269 2,501,804 5,659,073
Amortization of deferred policy acquisition
costs and other operating expenses 1,470,597 1,411,485 2,882,082
----------------- ---------------- -----------------
Total losses and expenses 4,627,866 3,913,289 8,541,155
----------------- ---------------- -----------------
Income before Federal income taxes 207,355 129,842 337,197
Provision for Federal income taxes 70,501 64,613 135,114
----------------- ---------------- -----------------
Net income $ 136,854 $ 65,229 $ 202,083
================= ================ =================
Loss ratio 68.7% 63.4% 66.2%
Expense ratio 32.0% 35.7% 33.7%
----------------- ---------------- -----------------
Combined ratio 100.7% 99.1% 100.0%
================= ================ =================
<CAPTION>
Six Months Ended June 30, 2000
------------------------------------------------------
North Mountain Total Acquired
East Valley Companies
----------------- ----------------- ----------------
<S> <C> <C> <C>
Insurance premiums $8,924,393 $5,379,870 $14,304,263
Net investment income 474,306 130,084 604,390
----------------- ----------------- ----------------
Total revenues 9,398,699 5,509,954 14,908,653
----------------- ----------------- ----------------
Losses and loss adjustment expenses incurred 6,527,875 3,496,916 10,024,791
Amortization of deferred policy acquisition
costs and other operating expenses 2,856,009 1,904,601 4,760,610
----------------- ----------------- ----------------
Total losses and expenses 9,383,884 5,401,517 14,785,401
----------------- ----------------- ----------------
Income before Federal income taxes 14,815 108,437 123,252
Provision for Federal income taxes 5,037 38,449 43,486
----------------- ----------------- ----------------
Net income $ 9,778 $ 69,988 $ 79,766
================= ================= ================
Loss ratio 73.1% 65.0% 70.1%
Expense ratio 32.0% 35.4% 33.3%
----------------- ----------------- ----------------
Combined ratio 105.1% 100.4% 103.4%
================= ================= ================
</TABLE>
In addition, the Registrant incurred in the first quarter of 2000
$268,000, net of tax, in expenses related to the acquisition of Mountain Valley.
For purposes of the following discussion, the North East and Mountain Valley
results and the non-recurring acquisition expenses are excluded in order to
afford comparability. This discussion is referred to as "Recurring Operations".
The Mountain Valley and North East results are discussed separately below.
10
<PAGE>
RECURRING OPERATIONS
Net income decreased $574,000 and $920,000, or $0.27 and $.44 basic and
diluted net income per share, for the three and six months ended June 30, 2000
as compared to the same periods in 1999. The decline in earnings in the three
and six month periods was primarily due to: 1) interest expense related to the
Notes and Debentures issued in connection with the Acquired Companies of
approximately $464,000 and $734,000, respectively; 2) lower pre-tax earnings
from the PPA operations as a result of the AICRA rate rollback of $381,000 and
$554,000, respectively; offset by; 3) continued improvements in Preserver's
pre-tax operations due to lower loss ratios and positive revenue growth of
$322,000 and $403,000, respectively.
The combined ratio for the three and six month periods ended June 30,
2000 was 101.0% and 100.4% as compared to 99.5% and 99.6% for the same periods
in 1999.
REVENUES
INSURANCE PREMIUMS
Insurance premiums from Recurring Operations declined $919,000 or 7%
and $1,504,000 or 6% in the three and six months ended June 30, 2000 compared to
the same period in 1999, respectively. Continuing decreases in Motor Club PPA
premium due to the rate rollback in New Jersey were offset by increases in
Commercial Lines business written by Preserver.
The following table details the changes in insurance premiums from
Recurring Operations and underlying in force policy counts for the six months
ended June 30, 2000 as compared to the same period in 1999:
<TABLE>
<CAPTION>
Change in Change in
Class of Business Net Premium Percent Policy Count Percent
----------------- ----------- ------- ------------ -------
<S> <C> <C> <C> <C>
Private Passenger Automobile $(2,174,000) (11)% 381 2%
Commercial Lines 691,000 6% 508 9%
Personal Property (21,000) (1)% (290) (2)%
------------ ----- ----- ----
Total $(1,504,000) (6)% 599 1%
============ ===== ===== ====
</TABLE>
11
<PAGE>
The increase in Preserver's Commercial Lines business is being driven
by the Registrant's strategic focus on this class of business. As the table
above demonstrates, Preserver's gains in premium are advancing faster than gains
in policy count. This is being caused by Preserver writing larger accounts
(resulting in higher average premium) and retaining more of these accounts on
renewal (due to improving market conditions and an increased rating for
Preserver by A.M. Best), including gaining rate increases on accounts retained.
NET INVESTMENT INCOME
Net investment income from Recurring Operations increased $52,000 or 4%
for the three months ended June 30, 2000 and decreased $11,000 or less than 1%
for the six months ended June 30, 2000 as compared to the same periods in 1999.
The increase in the second quarter is principally due to investment income
earned by Preserver from the $3 million surplus contribution it received from
the Registrant on March 1, 2000, combined with its continuing positive
operations and cash flow.
Recurring Operations average invested assets for the three month period
ended June 30, 2000 were $74,227,000 compared to $73,107,000 for the same period
in 1999. The investment portfolio (including short-term investments and
excluding capital gains) yielded 6.40% for the six months ended June 30, 2000 as
compared to 6.52% for the same period in 1999.
12
<PAGE>
LOSSES AND EXPENSES
LOSSES AND LOSS EXPENSES INCURRED
Loss and loss expenses from Recurring Operations incurred decreased
$593,000 or 7% and $1,360,000 or 8% in the three and six month periods ended
June 30, 2000 as compared to the same periods in 1999, which produced the
following loss ratios:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Motor Club 70.1% 68.8% 69.7% 70.4%
Preserver 53.0% 56.8% 53.9% 56.5%
----- ----- ----- -----
Total 64.9% 65.7% 64.9% 66.8%
===== ===== ===== =====
</TABLE>
Preserver has continued to produce excellent net loss ratios in the
first half of 2000, although its direct loss ratio was slightly higher than in
1999. Reinsurance recoveries accounted for the reduction in its 2000 loss ratio
compared to 1999. Motor Club's PPA six-month loss ratio was comparable to 1999
despite the effects of the AICRA rate rollback. This is primarily due to
improved overall results in Personal Injury Protection ("PIP") (No Fault) first
party medical claims; this is so, particularly compared to the third and fourth
quarters of 1999.
The Registrant does note that the initial results in PIP for Accident
Year 2000 have been consistent (i.e., higher) with those experienced in Accident
Year 1999 after the AICRA rate rollback was implemented. However, savings on
losses in older Accident Years have offset current accident year experience.
AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS AND OTHER OPERATING EXPENSES
Expenses from Recurring Operations decreased $35,000 or less than 1%
and increased $155,000 or less than 2% in the three and six months ended June
30, 2000, respectively, as compared to the same periods in 1999. This produced
an expense ratio of 34.9% in 2000 as compared to 32.3% in 1999. The increase in
the expense ratio is primarily due to the continuing reductions in insurance
premium resulting from the AICRA rate rollback. There were no meaningful changes
in underlying expenses that netted to the changes in expenses described above.
13
<PAGE>
The Registrant remains committed to reducing overhead expenses relative
to premium volume. However, the Registrant is presently making certain capital
improvements in the Acquired Companies, particularly with regard to technology
platforms at Mountain Valley and also at Preserver. These capital outlays are
anticipated to total approximately $1 million. The depreciation of these
improvements, along with associated implementation and conversion costs, are
expected to cause an increase in the Registrant's expenses in future periods
beginning in the third quarter of 2000. However, the Registrant also anticipates
that these improvements will enable Mountain Valley and Preserver to grow
efficiently in the future and will ultimately result in cost savings in 2001 and
beyond. Therefore, any increase in expenses is expected to be temporary, and
should result in a lower expense ratio in the future.
NORTH EAST
North East's net income of $137,000 and $10,000 for the three and six
months ended June 30, 2000, is generally typical for these periods of the
calendar year, respectively. North East experiences increased frequency and
severity of automobile claims directly resulting from winter weather. The loss
ratio for the three and six months ended June 30, 2000 was 68.7% and 73.1% as
compared to 61.9% and 70.2% in the same periods in 1999. Despite the 35% growth
in insurance premium in 2000 as compared to 1999, North East's loss ratio
reflects an increase in a limited number of severe losses that have occurred in
2000.
Despite the increase in severe losses, North East's net income is
significantly better than the net loss of $121,000 and $595,000 reported in the
three and six months ended June 30, 1999. This is primarily attributable to
significantly lower expenses, particularly reinsurance costs and salaries. As a
result, the expense ratio in the three and six months ended June 30, 2000 was
14
<PAGE>
32.0% as compared to 48.0% in 1999. An additional contributing factor to the
improved ratios is revenue growth of 42%, which in part is affected by the
aforementioned reductions in reinsurance costs, combined with growth in all
aspects of North East's insurance products. North East expects to introduce a
commercial package product in the State of Maine similar to that offered by
Preserver in the third quarter of 2000.
MOUNTAIN VALLEY
The bulk of Mountain Valley's income from operations through June 30 is
the result of investment income being generated from positive cash flow. Under
the terms of the Purchase Agreement, Mountain Valley is running off the 100%
quota share it maintained with a former affiliate. Therefore, all net losses
reported by the Registrant subsequent to its purchase of Mountain Valley pertain
to Accident Year ("AY") 2000. Based on the short period of time that Mountain
Valley has been owned by the Registrant, no meaningful loss trends on AY 2000
have been discerned and reserves are being provided based on Mountain Valley's
historical development patterns prior to application of the quota share.
Given the quota share reinsurance protection that Mountain Valley has,
loss payments are presently very low in relation to losses incurred and
therefore Mountain Valley is generating very positive cash flow presently, with
$3,051,000 in cash flow from operations in the period from acquisition through
June 30, 2000. These assets are being invested in a manner that reflects the
ultimate liability payment patterns anticipated by Mountain Valley and applying
an investment philosophy similar to the other insurance units of the Registrant.
Mountain Valley's recurring direct premiums written have grown
$3,202,000 or 49% in the six months ended June 30, 2000 as compared to the same
period in 1999. The majority of this
15
<PAGE>
growth is being experienced in the States of New York and Massachusetts. Growth
has been fairly uniform in its distribution between the various commercial
package, commercial auto and supporting commercial lines products which Mountain
Valley offers.
Over the remainder of 2000, as AY 2000 losses become more prevalent in
relation to older accident years, Mountain Valley's net results should begin to
reflect its underwriting operations, in addition to the expenses related to the
deployment of technology platforms previously noted.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Registrant's book value increased to $13.37 per share at June 30,
2000 from $12.97 per share at December 31, 1999. The sources of the net increase
were net income of $889,000 or $0.42 described previously, offset by a decrease
of $0.02 (net of deferred taxes) in the market value of fixed maturity
investments accounted for as available-for-sale under SFAS No. 115.
Interest rates have continued to move upward, causing unrealized losses
during this period in the Registrant's investment portfolio. Because the
Insurance Companies' investment portfolios are composed completely of securities
that are generally highly liquid and no default notices have been received on
any of those securities, there are no grounds to believe that the unrealized
losses incurred are other than temporary. In addition, the combination of the
duration of the portfolio being sufficiently short, combined with the highly
liquid nature of those securities and the Registrant's proclivity to hold bonds
to maturity, the par value of bonds should be fully realized at maturity,
resulting in those unrealized losses being temporary.
The net unrealized loss of fixed maturity investments, net of
applicable deferred taxes, and included in accumulated other comprehensive loss
in the condensed consolidated balance sheet as of June 30, 2000 was $1,817,000
or $.86 per share.
16
<PAGE>
The Insurance Companies' need for liquidity arises primarily from the
obligation to pay claims. The primary sources of liquidity are premiums
received, collections from reinsurers and proceeds from investments.
Reserving assumptions and payment patterns of the Insurance Companies
did not materially change from the prior year and there were no unusually large
retained losses resulting from claim activity. Unpaid losses are not discounted.
OPERATING AND INVESTING ACTIVITIES
Net cash provided by operating activities were $4,688,000 and
$1,457,000 in the six months ended June 30, 2000 and 1999, respectively. The
increase in cash flow from operating activities in the six months ended June 30,
2000 as compared to 1999 reflects the positive results of Motor Club and
Preserver.
Excluding the acquisition of Mountain Valley, net cash utilized in
investing activities was $5,187,000 in 2000 and $875,000 in 1999 reflecting the
investment of cash provided by operating and financing activities.
FINANCING ACTIVITIES
The Registrant paid no dividend on its common stock in 2000 or 1999.
The Registrant issued $11.5 million of Promissory Notes on February 28,
2000.
The Registrant has no other material outstanding capital commitments
that would require additional financing.
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SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Report on Form 10-Q contains statements that are not historical
facts and are considered "forward-looking statements" (as defined in the Private
Securities Litigation Reform Act of 1995), including statements concerning the
expected benefits of the merger with North East and acquisition of Mountain
Valley and the expected future plans related thereto. These statements can be
identified by terms such as "believes", "expects", "may", "will", "should",
"anticipates", the negatives thereof, or by discussions of strategy. Certain
statements contained herein are forward-looking statements that involve risks,
uncertainties, opinions and predictions, and no assurance can be given that the
future results will be achieved since events or results may differ materially as
a result of risks facing the Company. These include, but are not limited to
economic, market or regulatory conditions as well as catastrophic events.
Consummation of the merger with North East and acquisition of Mountain Valley
and future benefits therefrom involve various risks and uncertainties, including
the risk of material adverse changes in financial markets or the condition of
the Company; risks associated with the Company's entry into new markets; and
state regulatory and legislative actions which can affect the profitability of
certain lines of business and impede the companies' ability to charge adequate
rates. Accordingly, Motor Club of America's premium growth and underwriting
results has been and will continue to be potentially materially affected by
those factors.
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PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
None
b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOTOR CLUB OF AMERICA
/s/ Stephen A. Gilbert
-----------------------------------------
By: Stephen A. Gilbert
President and Chief Executive Officer
/s/ Patrick J. Haveron
-----------------------------------------
By: Patrick J. Haveron
Executive Vice President -
Chief Executive Officer
Chief Financial Officer
and Chief Accounting Officer
Dated: August 14, 2000
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