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.
------------------ -------------------
September 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 nNumber, 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 November 8, 2000.
1 OF __
<PAGE>
MOTOR CLUB OF AMERICA
FORM 10-Q
SEPTEMBER 30, 2000
PART I PAGE
------ ----
ITEM 1. FINANCIAL STATEMENTS 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 9
PART II
-------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21
2
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MOTOR CLUB OF AMERICA
AND SUBSIDIARIES
----------
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Investments $104,441,525 $ 86,981,849
Cash and cash equivalents 1,088,261 443,733
Premiums receivable 35,222,282 27,132,246
Reinsurance recoverable on
paid & unpaid losses and
loss expenses 35,579,038 21,163,574
Notes and accounts receivable 212,700 212,598
Deferred policy acquisition costs 12,522,339 10,560,763
Fixed assets - at cost, less
accumulated depreciation 3,105,928 1,858,621
Prepaid reinsurance premiums 4,051,759 1,485,450
Federal income tax recoverable -- 54,026
Deferred tax asset 4,025,843 4,128,766
Goodwill, less accumulated
amortization 1,682,327 1,745,848
Other assets 1,544,106 1,470,744
------------ ------------
Total Assets $203,476,108 $157,238,218
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Losses and loss expenses $ 92,760,519 $ 70,983,383
Unearned premiums 48,182,569 38,698,028
Other liabilities 9,769,944 9,997,359
Convertible subordinated debentures 10,000,000 10,000,000
Notes payable 11,500,000 --
Federal income taxes payable 402,744 --
------------ ------------
Total Liabilities 172,615,776 129,678,770
------------ ------------
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 (4,156,456) (5,036,515)
Retained earnings 31,888,505 29,467,680
------------ ------------
Total Shareholders' Equity 30,860,332 27,559,448
------------ ------------
Total Liabilities and
Shareholders' Equity $203,476,108 $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 Nine Months Ended For the Three Months Ended
September 30, 2000 September 30, 1999 September 30, 2000 September 30, 1999
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
REVENUES:
Insurance premiums (net of
premiums ceded totaling
$9,196,634,$5,299,714
($143,519) and $1,632,198) $61,983,283 $39,643,239 $22,916,035 $13,376,548
Net investment income 4,673,887 3,600,727 1,695,897 1,215,870
Realized gains on sales
of investments 8,263 5,365 3,739 (13)
Other revenues 132,000 109,579 29,824 34,679
----------- ----------- ----------- -----------
Total revenues 66,797,433 43,358,910 24,645,495 14,627,084
----------- ----------- ----------- -----------
LOSSES AND EXPENSES:
Insurance losses and
loss expenses incurred
(net of reinsurance recoveries
totaling $11,014,091, $2,832,542
$2,871,440 and $989,726) 41,186,980 28,413,303 15,091,837 10,873,022
Amortization of deferred policy
acquisition costs and
other operating expenses 21,472,620 12,355,499 7,923,648 3,722,468
Interest expenses 1,366,976 176,858 525,966 70,062
Amortization of goodwill 63,522 -- 21,174 --
Merger expenses 354,097 800,000 -- 800,000
----------- ----------- ----------- -----------
Total losses and expenses 64,444,195 41,745,669 23,562,625 15,465,552
----------- ----------- ----------- -----------
Income before Federal
income taxes 2,353,238 1,613,241 1,082,870 (838,468)
Provision (benefit) before
Federal Income taxes:
current 39,576 45,159 17,597 (10,699)
deferred (119,758) (558,717) (479,124) (957,514)
----------- ----------- ----------- -----------
Total (benefit) for
Federal income taxes (80,182) (513,558) (461,527) (968,213)
----------- ----------- ----------- -----------
Net income $ 2,433,420 $ 2,126,799 $ 1,544,397 $ 129,745
=========== =========== =========== ===========
Net income per common share:
Basic $ 1.15 $ 1.01 $ 0.73 $ 0.06
=========== =========== =========== ===========
Diluted $ 1.15 $ 1.00 $ 0.73 $ 0.06
=========== =========== =========== ===========
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 2,140,275 2,124,387 2,173,028
=========== =========== =========== ===========
</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 Nine Months Ended
-------------------------------------------------------------
September 30, 2000 September 30, 1999
-------------------------- --------------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,433,420 $ 2,126,799
Adjustments to reconcile net income
to net cash provided by operating
activities:
Net assets of North East 0 (1,653,398)
Depreciation and amortization 681,062 474,687
Gain on sale of investments (8,263) (5,365)
Changes in:
Deferred policy
acquisition costs (538,723) 783,467
Premiums receivable (2,056,323) 523,229
Notes and accounts
receivable (102) (61,504)
Other assets 177,647 (16,978)
Losses and loss expenses 9,032,024 5,321,983
Unearned premiums (1,025,789) (2,702,923)
Federal income tax - current 39,576 45,358
Federal income tax - deferred (121,622) (558,717)
Other liabilities (2,564,580) (748,468)
Reinsurance recoverable on
paid and unpaid losses (1,715,354) (828,280)
Prepaid reinsurance premiums 1,808,821 (14,352)
------------ ------------
Net cash provided by
operating activities $6,141,794 $2,685,528
INVESTING ACTIVITIES:
Investments purchased (110,530,936) (75,516,508)
Fixed assets purchased (1,701,826) (489,140)
Acquisition of Moutain Valley,
net of cash acquired (3,962,753)
Proceeds from sales and
maturities of investments 99,198,249 72,648,259
------------ ------------
Net cash used in
investing activities (16,997,266) (3,357,389)
FINANCING ACTIVITIES:
Proceeds from notes payable 11,500,000 -
Convertible subordinated debentures - 10,000,000
------------ ------------
Net cash provided by financing activities 11,500,000 10,000,000
---------- ----------
Net increase in cash and
cash equivalents 644,528 9,328,139
Cash and cash equivalents at
beginning of period 443,733 2,773,427
---------- ----------
Cash and cash equivalents at
end of period $1,088,261 $12,101,566
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $1,240,701 $ 161,293
========== ==========
Federal income taxes paid $ - $ -
========== ==========
</TABLE>
NON CASH INVESTING ACTIVITIES:
Invested assets and shareholders' equity increased by $880, 059 and decreased by
$2,291,426 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
----------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months Ended For the Three Months Ended
September 30, 2000 September 30, 1999 September 30, 1999 September 30, 1999
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Net income $ 2,433,420 $ 2,126,799 $ 1,544,397 $ 129,745
Other comprehensive income (loss):
Unrealized gains(losses)on
securities, net of tax:
Unrealized holding gains (losses)
arising during the period 885,513 (2,287,885) 931,339 (279,155)
Less: reclassification adjustment
for gains included in earnings (5,454) (3,541) (2,468) 9
----------- ----------- ----------- -----------
Other comprehensive income (loss) 880,059 (2,291,426) 928,871 (279,146)
----------- ----------- ----------- -----------
Comprehensive income $ 3,313,479 $ (164,627) $ 2,473,268 $ (149,401)
=========== =========== =========== ===========
</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 PRESENTATIONS
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 nine month periods ended September 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; (iii) in 1999, the recognition as deferred tax assets, certain
tax credit carryforwards for alternative minimum tax purposes totaling $234,000;
and (iv) in both 2000 and 1999, the recognition as deferred tax assets
additional NOL's from an insolvent subsidiary totaling $577,000 and $641,000,
respectively.
The Registrant has NOL carryforwards of $10,002,710 remaining, which
expire beginning in 2009. The NOL carryforward includes $5,757,122 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.
8
<PAGE>
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.
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
fourth 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 and mid-sized 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.
9
<PAGE>
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 44% of the Registrant's
consolidated revenues emanated from New Jersey PPA in the first nine 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.
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
nine months ended September 30, 2000 and Mountain Valley for the three months
ended September 30, 2000 and from March 1, 2000, the date of acquisition. North
East and Mountain Valley are collectively referred to as the
10
<PAGE>
"Acquired Companies". The table below details the results of operations for the
Acquired Companies as included in the condensed consolidated statements of
operations for the three and nine months ended September 30, 2000:
<TABLE>
<CAPTION>
Three Months Ended September 30, 2000
--------------------------------------------------------
North Mountain Total Acquired
East Valley Companies
----------- ---------- --------------
<S> <C> <C> <C>
Insurance premiums $ 4,795,669 $4,237,154 $ 9,032,823
Net investment income 268,566 209,514 478,080
Realized investment gains 3,739 -- 3,739
----------- ---------- -----------
Total revenues 5,067,974 4,446,668 9,514,642
----------- ---------- -----------
Losses and loss adjustment expenses incurred 2,593,727 2,734,150 5,327,877
Amortization of deferred policy acquisition
costs and other operating expenses 1,825,197 1,805,265 3,630,462
----------- ---------- -----------
Total losses and expenses 4,418,924 4,539,415 8,958,339
----------- ---------- -----------
Income (loss) before Federal income taxes 649,050 (92,747) 556,303
Provision (benefit) for Federal income taxes 220,677 (33,114) 187,563
----------- ---------- -----------
Net income (loss) $ 428,373 $ (59,633) $ 368,740
=========== ========== ===========
Loss ratio 54.1% 64.5% 59.0%
Expense ratio 38.1% 42.6% 40.2%
----------- ---------- -----------
Combined ratio 92.2% 107.1% 99.2%
=========== ========== ===========
<CAPTION>
Nine Months Ended September 30, 2000
--------------------------------------------------------
North Mountain Total Acquired
East Valley Companies
----------- ---------- --------------
<S> <C> <C> <C>
Insurance premiums $13,720,062 $9,617,024 $23,337,086
Net investment income 742,872 339,598 1,082,470
Realized investment gains 3,739 -- 3,739
----------- ---------- -----------
Total revenues 14,466,673 9,956,622 24,423,295
----------- ---------- -----------
Losses and loss adjustment expenses incurred 9,121,602 6,231,066 15,352,668
Amortization of deferred policy acquisition
costs and other operating expenses 4,681,206 3,709,866 8,391,072
----------- ---------- -----------
Total losses and expenses 13,802,808 9,940,932 23,743,740
----------- ---------- -----------
Income before Federal income taxes 663,865 15,690 679,555
Provision for Federal income taxes 225,714 5,335 231,049
----------- ---------- -----------
Net income $ 438,151 $ 10,355 $ 448,506
=========== ========== ===========
Loss ratio 66.5% 64.8% 65.8%
Expense ratio 34.1% 38.6% 36.0%
----------- ---------- -----------
Combined ratio 100.6% 103.4% 101.8%
=========== ========== ===========
</TABLE>
In addition, the Registrant incurred in the first quarter of 2000,
$268,000 or $.13 per share, net of taxes, in expenses related to the acquisition
of Mountain Valley. During the third quarter 1999, the Registrant incurred
expenses related to the North East acquisition totaling $597,000 or $.28 per
share, net of taxes.
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
11
<PAGE>
discussion is referred to as "Recurring Operations". The Mountain Valley and
North East results are discussed separately below.
RECURRING OPERATIONS
Net income from Recurring Operations increased $449,000 or $.21 per
share and decreased $471,000 or $.23 per share in the three and nine month
periods ended September 30, 2000, respectively, as compared to the same periods
in 1999.
However, results from Recurring Operations for the three and nine month
period ended September 30, 2000 and 1999 included the following unusual or
non-recurring events: 1) losses and expenses from Hurricane Floyd in September
1999 totaling $482,000 or $.23 per share; 2) in the three and nine months ended
September 30, 1999, recognition as deferred tax assets, certain minimum tax
credits not previously recognized totaling $115,000 or $.05 per share and
$234,000 or $.11 per share, respectively; and 3) in September 2000 and 1999,
recognition as deferred tax assets of additional net operating loss
carryforwards from an insolvent subsidiary not previously recognized totaling
$597,000 or $.28 per share and $641,000 or $.30 per share, respectively.
Excluding these items, net income from Recurring Operations increased
$125,000 or $.06 basic net income per share and decreased $677,000 or $.32 basic
net income per share in the three and nine months ended September 30, 2000 as
compared to the same periods in 1999, respectively.
In the three months ended September 30, 2000, the improvement in
earnings is principally due to continuing improvements in Preserver's pre-tax
operations due to lower loss ratios and positive revenue growth, offset by
higher interest expense related to the Notes and Debentures.
12
<PAGE>
In the nine months ended September 30, 2000, the decline in earnings is
principally due to higher interest expense related to the Notes and Debentures
as well as lower pre-tax earnings from the PPA operations as a result of the New
Jersey Automobile Cost Reduction Act ("AICRA") rate rollback, offset by
continuing improvements in Preserver's pre-tax operations due to lower loss
ratios and positive revenue growth.
Excluding the unusual and non-recurring items, the combined ratio for
the three and nine month periods ended September 30, 2000 was 101.3% and 100.7%
as compared to 106.0% and 101.8% in the same periods in 1999.
REVENUES
INSURANCE PREMIUMS
Insurance premiums from Recurring Operations increased 507,000 or 4%
and declined $997,000 or 3% in the three and nine months ended September 30,
2000 compared to the same period in 1999, respectively. Although smaller than in
prior periods, 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 nine months
ended September 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 $(2,140,000) (7)% 116 --%
Commercial Lines 1,093,000 18% 508 9%
Personal Property 50,000 1% (349) (3)%
------------ ---- ----- ----
Total $ (997,000) (3)% 275 1%
============ ==== ===== ====
</TABLE>
13
<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 $2,000 or
less than 1% for the three months ended September 30, 2000 and decreased $9,000
or less than 1% for the nine months ended September 30, 2000 as compared to the
same periods in 1999.
Recurring Operations average invested assets for the nine month period
ended September 30, 2000 were $74,002,000 compared to $75,196,000 for the same
period in 1999. The investment portfolio (including short-term investments but
excluding realized capital gains) yielded 6.49% for the nine months ended
September 30, 2000 as compared to 6.37% for the same period in 1999.
LOSSES AND EXPENSES
LOSSES AND LOSS EXPENSES INCURRED
Loss and loss expenses incurred from Recurring Operations decreased
$1,109,000 or 10% and $2,579,000 or 9% in the three and nine month periods ended
September 30, 2000 as compared to the same periods in 1999. As noted previously,
losses and loss expenses incurred include $523,000 from Hurricane Floyd in
September 1999. Loss ratios for the three and nine month periods ended September
30, 2000 were as follows:
14
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------------------- ---------------------------------------
September 30, 2000 September 30, 1999 September 30, 2000 September 30, 1999
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Motor Club 74.4% 81.6% 71.4% 74.2%
Preserver 60.3% 80.3% 56.1% 64.6%
---- ---- ---- ----
Total 70.3% 81.3% 66.9% 71.7%
==== ==== ==== ====
</TABLE>
The absence of catastrophe losses in 2000 enabled more favorable
comparisons to 1999 to emerge; notwithstanding catastrophe losses, Preserver has
continued to produce excellent net loss ratios in the third quarter 2000, as it
has for the entire year. Motor Club's PPA loss ratio in the third quarter 2000
was poorer than it had been in the first six months of the year, primarily due
to poorer Accident Year ("AY") 2000 loss ratios in Personal Injury Protection
("PIP") (No Fault) first party medical claims and collision claims. The
Registrant does note that the initial results in PIP for AY 2000 have been
consistent with those poorer results experienced in AY 1999 after the AICRA rate
rollback and related reforms were implemented.
This has been offset in calendar year 2000 by improved AY 2000
experience in third party claims, including reduced litigation, in Motor Club's
Bodily Injury ("BI") coverages. While this is consistent with the stated
objectives of the AICRA reforms (as detailed in the Registrant's Annual Report
on Form 10-K), the Registrant believes it is premature to conclude that such
favorable BI development will continue.
AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS AND OTHER OPERATING EXPENSES
Excluding unusual and non-recurring items noted previously, expenses
from Recurring Operations increased $629,000 or 17% and $785,000 or 6% in the
three and nine months ended September 30, 2000, respectively, as compared to the
same periods in 1999. This produced an expense ratio of 33.8% as compared to
31.1% for the nine months ended September 30, 2000 and 1999, respectively. The
increase in the expense ratio is due to the continuing reductions in insurance
premium resulting from the AICRA rate rollback
15
<PAGE>
and higher overhead expenditures, including salaries, related to the
Registrant's growth strategies.
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 $1.5 million in 2000, with additional similar
investments also anticipated in 2001 and beyond. 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 fourth 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 $428,000 and $438,000 for the three and nine
months ended September 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 nine months ended September 30, 2000 was 54.1% and 66.5%
as compared to 62.3% and 69.9% in the same periods in 1999, respectively.
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.
16
<PAGE>
Despite the increase in severe losses, North East's net income is
significantly better than the net loss of $662,000 and $1,257,000 reported in
the three and nine months ended September 30, 1999. This is primarily
attributable to significantly lower expenses, particularly reinsurance costs,
salaries and $1,157,000 in non-recurring expenses in 1999, primarily severance
and expenses incurred in conjunction with North East's acquisition by the
Registrant. As a result, the expense ratio for the nine months ended
September 30, 2000 was 34.1% as compared to 57.8% in 1999. An additional
contributing factor to the improved ratios is revenue growth of 34%, 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
introduced 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 September
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: 1) there is
no loss development, adverse or favorable, net of non-affiliated reinsurance,
that the Registrant will retain on loss occurrences prior to March 1, 2000; and
2) only Mountain Valley loss occurrences on or after March 1, 2000 will be
retained, net of reinsurance, by the Registrant. 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.
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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, with $3,050,000
in cash flow from operations in the period from acquisition through September
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
$4,399,000 or 39% in the nine months ended September 30, 2000 as compared to the
same period in 1999. The majority of this 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 $14.53 per share at September
30, 2000 from $12.97 per share at December 31, 1999. The sources of the increase
were net income of $1.15 described previously, and an increase of $0.41 (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
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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 September 30, 2000 as
$888,000 or $.42 per share.
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 $6,142,000 and
$2,686,000 in the nine months ended September 30, 2000 and 1999, respectively.
The increase in cash flow from operating activities in the nine months ended
September 30, 2000 as compared to 1999 reflects the positive results of Motor
Club and Preserver.
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Excluding the acquisition of Mountain Valley, net cash utilized in
investing activities was $13,035,000 in 2000 and $3,357,000 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 ("Notes") on
February 28, 2000. The increase in interest paid of $1,079,000 in 2000 as
compared to 1999 is due to the issuance of the Notes, in addition to the
issuance of $10 million in Convertible Subordinated Debentures in September
1999.
The Registrant has no other material outstanding capital commitments
that would require additional financing.
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
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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.
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: November 14, 2000
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