10-Q 1 0001.txt QUARTERLY REPORT 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 __ 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 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MOTOR CLUB OF AMERICA AND SUBSIDIARIES ---------- CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, DECEMBER 31, 2000 1999 ------------- ------------ 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 ============ ============
(Financial statements should be read in conjunction with the accompanying notes) 3 MOTOR CLUB OF AMERICA AND SUBSIDIARIES ---------- CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Nine Months Ended For the Three Months Ended September 30, 2000 September 30, 1999 September 30, 2000 September 30, 1999 ------------------ ------------------ ------------------ ------------------ 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 =========== =========== =========== ===========
(Financial statements should be read in conjunction with the accompanying notes) 4 MOTOR CLUB OF AMERICA AND SUBSIDIARIES ---------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended ------------------------------------------------------------- September 30, 2000 September 30, 1999 -------------------------- -------------------------- 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 $ - $ - ========== ==========
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 MOTOR CLUB OF AMERICA AND SUBSIDIARIES ---------- CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
For the Nine Months Ended For the Three Months Ended September 30, 2000 September 30, 1999 September 30, 1999 September 30, 1999 ------------------ ------------------ ------------------ ------------------ 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) =========== =========== =========== ===========
(Financial statements should be read in conjunction with the accompanying notes) 6 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 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 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 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 "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:
Three Months Ended September 30, 2000 -------------------------------------------------------- North Mountain Total Acquired East Valley Companies ----------- ---------- -------------- 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% =========== ========== =========== Nine Months Ended September 30, 2000 -------------------------------------------------------- North Mountain Total Acquired East Valley Companies ----------- ---------- -------------- 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% =========== ========== ===========
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 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 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:
Change in Change in Class of Business Net Premium Percent Policy Count Percent ----------- ------- ------------ ------- 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% ============ ==== ===== ====
13 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
Three Months Ended Nine Months Ended --------------------------------------- --------------------------------------- September 30, 2000 September 30, 1999 September 30, 2000 September 30, 1999 ------------------ ------------------ ------------------ ------------------ 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% ==== ==== ==== ====
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 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 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. 17 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 18 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. 19 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 20 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 21 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 22