-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HgcWqWmJjPkj8G+6OeXEHp72jh8GNNcyVhD1aKOqdRAsGhCL2DfzagzWHi1CzMwc RUd8vqgvQLvI+oDBkNPDCw== 0001104659-01-500292.txt : 20010418 0001104659-01-500292.hdr.sgml : 20010418 ACCESSION NUMBER: 0001104659-01-500292 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010417 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MOTOR CLUB OF AMERICA CENTRAL INDEX KEY: 0000068480 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 220747730 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-00671 FILM NUMBER: 1604517 BUSINESS ADDRESS: STREET 1: 95 ROUTE 17 SOUTH CITY: PARAMUS STATE: NJ ZIP: 07653 BUSINESS PHONE: 2012912000 MAIL ADDRESS: STREET 1: 95 ROUTE 17 SOUTH CITY: PARAMUS STATE: NJ ZIP: 07653-0931 10-K405 1 j0246_10k405.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year end Commission File Number December 31, 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 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock (par value) $.50 per share (Title of Class) Indicate by check mark whether the registrant (l) 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 . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] The aggregate market value of the voting Common Stock (par value $.50 per share) held by non-affiliates on March 23, 2000 was $7,653,221 based on the closing selling price of $7.188 per share. 2,124,387 shares of Common Stock were outstanding as of March 23, 2001. Documents Incorporated by Reference: Portions of the Registrant's definitive proxy statement issued in conjunction with the June 6, 2001 Annual Meeting of Shareholders (Part III). MOTOR CLUB OF AMERICA ANNUAL REPORT ON FORM 10-K DECEMBER 31, 2000
PAGE PART I ITEM 1. BUSINESS 4 ITEM 2. PROPERTIES 41 ITEM 3. LEGAL PROCEEDINGS 41 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF 41 SECURITY HOLDERS PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY 43 AND RELATED STOCKHOLDER MATTERS ITEM 6. SELECTED FINANCIAL DATA 44 ITEM 7. MANAGEMENT'S DISCUSSION AND 45 ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 8. FINANCIAL STATEMENTS AND 72 SUPPLEMENTARY DATA ITEM 9. CHANGES IN AND DISAGREEMENTS WITH 72 ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF 72 THE REGISTRANT ITEM 11. EXECUTIVE COMPENSATION 72 ITEM 12. SECURITY OWNERSHIP OF CERTAIN 72 BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 72 TRANSACTIONS PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS 73 SCHEDULES AND REPORTS ON FORM 8-K
Cautionary Statement This Report on Form 10-K contains statements that are not historical facts and are considered "forward-looking statements" (as defined in the Private Securities Litigation Reform Act of 1995), which 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, the cyclical nature of the property casualty insurance industry, the impact of competition, product demand and pricing, claims development and the process of estimating reserves, the level of the Company's retentions, catastrophe and storm losses, legislative and regulatory developments, changes in the ratings assigned to the Company by rating agencies, investment results, availability of reinsurance, availability of dividends from our insurance company subsidiaries, investing substantial amounts in our information systems and technology, the ability of our reinsurers to pay reinsurance recoverables owed to us, our entry into new markets, our acquisition of North East Insurance Company on September 24, 1999, our acquisition of Mountain Valley Indemnity Company on March 1, 2000, our successful integration of these acquisitions, potential future tax liabilities related to an insolvent subsidiary and state regulatory and legislative actions which can affect the profitability of certain lines of business and impede our ability to charge adequate rates, and other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission, including this Annual Report on Form 10-K. PART I Item 1. Business (a) General Development of Business Motor Club of America (the "Registrant") and a group of directly or indirectly wholly-owned subsidiaries of which the Registrant is parent are known as the "Motor Club of America Companies" (the "Motor Club of America Group") and provide property and casualty insurance services. The Registrant, incorporated in New Jersey in 1933 as "Automobile Association of New Jersey", is the successor to a New Jersey corporation organized in 1926. The present name was adopted in 1958. Unless otherwise indicated all references in this Form 10-K to "Motor Club of America", "we", "us", "our" "the Company" or similar terms refer to Motor Club of America together with its subsidiaries. We own and operate five regionally focused property and casualty insurance companies, including companies that specialize in small and mid-sized commercial insurance. The Preserver Insurance Group consists of Preserver Insurance Company ("Preserver"), which writes small commercial and homeowners insurance presently in New Jersey, and Mountain Valley Indemnity Company ("Mountain Valley"), which writes small and mid-sized commercial insurance presently in New England and New York. American Colonial Insurance Company ("American Colonial") plans to commence operations in New York in 2001, writing commercial lines in tandem with Mountain Valley. North East Insurance Company ("North East") writes personal automobile ("PPA") and small commercial lines insurance in the State of Maine. Motor Club of America Insurance Company ("Motor Club") writes PPA insurance in New Jersey. We are pursuing a strategy to: (1) increase our identification as a provider of small commercial lines insurance and have continued to expand our product lines in support of this objective; and (2) expand and diversify our insurance operations outside the State of New Jersey. We believe that both of these objectives can be attained through the acquisition of other insurance companies, which present opportunities to write these product lines in different geographic areas, and we expect to continue to follow this strategy. On September 24, 1999, we acquired North East and its subsidiaries, which include American Colonial. North East was incorporated in 1965 in the State of Maine. American Colonial was incorporated in 1982 and has not written any insurance coverage since March 1990. American Colonial is domiciled in New York. On March 1, 2000, we acquired Mountain Valley, which was incorporated in 1995 in the State of New Hampshire. We believe that these acquisitions fully establish us as a regional commercial lines company in New England and the Mid-Atlantic regions. Motor Club, Preserver, Mountain Valley, North East and American Colonial are collectively referred to as the "Insurance Companies" in this Form 10-K. The Company has restated certain financial information for prior periods, which is discussed in Note V of the Notes to Consolidated Financial Statements. (b) Financial Information About Segments We have four segments, which consist of the active insurance subsidiaries and a corporate segment. Financial information about these segments is set forth in Note T of the Notes to Consolidated Financial Statements. (c) Narrative Description of Business General The Insurance Companies underwrite a broad line of commercial and personal property and casualty coverages, including commercial multi-peril, automobile and workers' compensation through approximately 300 independent producers in seven states. We anticipate continuing to grow our small commercial and ancillary coverages written by Preserver in the State of New Jersey, Mountain Valley in the States of New York, Massachusetts, New Hampshire, Vermont, Rhode Island and Maine and American Colonial in New York. We expect North East to increase its emphasis of small commercial coverages as well. To improve our competitiveness in the commercial lines market place, we plan to license Preserver and Mountain Valley in the same states where the other is conducting business. Motor Club and North East write PPA business in the States of New Jersey and Maine, respectively. Although PPA business is expected to increase as well, we anticipate that this business will continue to decrease as a percentage of the total consolidated revenues. On March 1, 2000, Preserver and Mountain Valley entered into an Insurance Pooling Agreement (discussed on page 15) and formed the Preserver Insurance Group. In March 2000, the Preserver Insurance Group was rated B++ (Very Good) by A.M. Best. At December 31, 2000, Motor Club is separately rated B+ (Very Good) by Best; North East is rated B (Fair). American Colonial plans to commence insurance operations in New York in 2001. Best ratings are based upon factors relevant to policyholders and are not directed toward the protection of investors. We believe that the Best rating is an important factor in marketing the Insurance Companies' products. Effective July 1, 1998, Motor Club began converting its existing policies from six month terms to twelve month policy terms ( the "Policy Term Conversion"). While the Policy Term Conversion temporarily increased the amount of premiums written by Motor Club in 1998, it did not affect the amount of premiums earned. The Policy Term Conversion was implemented to reduce the frequency of renewal, thereby increasing operating efficiency and service levels and reducing expenses. Our results include the operations of North East since its acquisition on September 24, 1999, and Mountain Valley since its acquisition on March 1, 2000. The tables which follow set forth these direct premiums written and earned, by line of insurance, for the last five years: Direct Written Premiums (Amounts in Thousands - Exclusive of Service Charges)
2000 1999 1998 1997 1996 Direct Percent Direct Percent Direct Percent Direct Percent Direct Percent Program Premium of Total Premium of Total Premium of Total Premium of Total Premium of Total - ------- ----------------- ----------------- ----------------- ----------------- ----------------- Commercial: Preserver $13,827 13.9% $11,504 18.6% $ 9,672 13.7% $8,019 13.9% $6,744 12.5% Mountain Valley 20,367 20.5% -- -- -- -- -- -- -- -- North East 5,148 5.2% 900 1.5% -- -- -- -- -- -- ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Total Commercial $39,342 39.5% $12,404 20.1% $ 9,672 13.7% $8,019 13.9% $6,744 12.5% ======= ===== ======= ===== ======= ===== ======= ===== ======= ===== Personal Auto: Motor Club $40,334 40.5% $39,611 64.2% $54,254 76.7% $43,238 74.7% $41,055 76.0% North East 13,154 13.2% 2,877 4.7% -- -- -- -- -- -- ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Total Personal Auto $53,488 53.7% $42,488 68.9% $54,254 76.7% $43,238 74.7% $41,055 76.0% ======= ===== ======= ===== ======= ===== ======= ===== ======= ===== Other Personal: Preserver $ 6,702 6.7% $6,804 11.0% $ 6,833 9.7% $6,596 11.4% $6,216 11.5% ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Total Other Personal $ 6,702 6.7% $6,804 11.0% $6,833 9.7% $6,596 11.4% $6,216 11.5% ======= ===== ======= ===== ======= ===== ======= ===== ======= ===== Total Insurance Companies $99,532 100.0% $61,696 100.0% $70,759 100.0% $57,853 100.0% $54,015 100.0% ======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Direct Earned Premiums (Amounts in Thousands - Exclusive of Service Charges)
2000 1999 1998 1997 1996 Direct Percent Direct Percent Direct Percent Direct Percent Direct Percent Program Premium of Total Premium of Total Premium of Total Premium of Total Premium of Total - ------- ----------------- ----------------- ----------------- ----------------- ----------------- Commercial: Preserver $12,634 13.3% $10,508 16.6% $8,916 15.0% $7,698 13.4% $6,526 12.6% Mountain Valley 18,583 19.5% -- -- -- -- -- -- -- -- North East 4,613 4.8% 957 1.5% -- -- -- -- -- -- ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Total Commercial $35,830 37.6% $11,465 18.1% $8,916 15.0% $7,698 13.4% $6,526 12.6% ======= ===== ======= ===== ======= ===== ======= ===== ======= ===== Personal Auto: Motor Club $39,214 41.4% $41,781 65.9% $43,631 73.6% $43,381 75.4% $39,242 75.6% North East 13,459 14.1% 3,291 5.2% -- -- -- -- -- -- ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Total Personal Auto $52,673 55.3% $45,072 71.1% $43.631 73.6% $43,381 75.4% $39,242 75.6% ======= ===== ======= ===== ======= ===== ======= ===== ======= ===== Other Personal: Preserver $ 6,797 7.1% $6,843 10.8% $6,764 11.4% $6,422 11.2% $6,152 11.8% ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Total Other Personal $ 6,797 7.1% $6,843 10.8% $6,764 11.4% $6,422 11.2% $6,152 11.8% ======= ===== ======= ===== ======= ===== ======= ===== ======= ===== Total Insurance Companies $95,300 100.0% $63,380 100.0% $59,311 100.0% $57,501 100.0% $51,920 100.0% ======= ===== ======= ===== ======= ===== ======= ===== ======= =====
These tables exclude premiums written and earned by Mountain Valley in the State of Texas in 2000 (which are being transferred to another company not affiliated with us and are 100% reinsured) and any premiums written and earned by Mountain Valley and North East prior to their acquisition by us. The following table sets forth ratios for the Insurance Companies prepared in accordance with generally accepted accounting principles ("GAAP") and with statutory accounting practices ("SAP") prescribed or permitted by state insurance authorities. The SAP combined ratio, a standard measure of underwriting profitability, is the sum of: (i) the ratio of incurred losses and loss expenses to net earned premium ("loss ratio"); and (ii) the ratio of expenses incurred for commissions, premium taxes, administrative and other underwriting expenses to net written premium ("expense ratio"). The GAAP combined ratio is calculated in the same manner except that it is based on GAAP amounts and the denominator for each component is net earned premium.
December 31, 2000 1999 1998 ----------------------------- GAAP operating ratios: Loss ratio 66.7% 72.8% 68.6% Expense ratio 35.3% 36.4% 29.1% ----- ----- ---- Combined ratio 102.0% 109.2% 97.7% ===== ===== ==== Statutory operating ratios: Loss ratio 69.1% 74.7% 69.9% Expense ratio 36.2% 33.3% 28.8% ----- ----- ---- Combined ratio 105.3% 108.0% 98.7% ===== ===== ====
In general, when the combined ratio is under 100%, underwriting results are considered profitable. Conversely, when the combined ratio is over 100%, underwriting results are generally considered unprofitable. The combined ratio reflects underwriting results and not investment income, federal income taxes or other non-operating income or expense. Our operating income is generally a function of both underwriting results and investment income. Reinsurance The Insurance Companies follow the customary industry practice of reinsuring a portion of their risks and paying to reinsurers a portion of the premiums received on the policies. The Insurance Companies' reinsurance programs permit greater diversification of business and the ability to write larger policies while limiting maximum net losses; in addition, the reinsurance programs are designed to protect against catastrophic losses. Reinsurance does not legally discharge an insurer from its primary liability for the full amount of the policies, although it does make the reinsurer liable to the insurer to the extent of the reinsurance ceded. Therefore, the Insurance Companies are subject to credit risk with respect to their reinsurers. Reinsurance for property losses of Preserver is maintained under a per risk excess of loss treaty affording recovery to $2 million, in excess of a retention of $100,000. On January 1, 2001, this retention was increased to $250,000. Preserver also maintains a 100% quota share treaty for boiler and machinery coverage. Casualty reinsurance is currently maintained for Motor Club and Preserver under an excess of loss treaty affording recovery up to $3 million, in excess of a retention, $150,000 to December 31, 1999, $200,000 in 2000 and $250,000 commencing January 1, 2001. Preserver also maintains reinsurance coverage for personal and commercial umbrella policies up to $2 million for personal lines policies and up to $5 million for commercial lines policies. Effective March 1, 1998, Preserver entered into reinsurance contracts for the workers' compensation policies it commenced writing on that date. An 80% quota share reinsurance contract on the first $500,000 of workers' compensation coverage has been implemented; an excess of loss treaty affording coverage up to $10 million in excess of the retention of $500,000 has also been implemented. After March 1, 2001, we expect to increase our retentions under these contracts, not materially however. Effective January 1, 1999, Preserver purchased aggregate stop loss reinsurance for all of its lines of business which provides $3 million coverage in excess of a loss ratio of 67.5% after the application of all other reinsurance. The treaty is subject to experience adjustments over a three-year period. This treaty affords Preserver protection against elevated levels of frequency or severity of losses, which are not consistent with its historical experience, and includes, but is not limited to, weather-related events, which may not rise to the level of a catastrophe, subject to a dollar limit. To date Preserver's results have not triggered any recoveries under this agreement. North East's principal reinsurance protection is provided through a combined per risk excess of loss treaty. Prior to 2000, this reinsurance afforded recovery to $1 million in excess of a retention of $50,000. On January 1, 2000, this retention was increased to $150,000. In addition, the Insurance Companies' catastrophe reinsurance program presently covers substantially all catastrophe losses in excess of $500,000 up to $42.5 million. Prior to March 1, 2000, the date we acquired Mountain Valley, Mountain Valley ceded 100% of its premiums, losses and expenses under a quota share treaty to Trinity Universal Insurance Company ("Trinity"), a subsidiary of Unitrin, Inc., the seller ("Trinity Quota Share"). All cessions under the Trinity Quota Share are after the application of all third party reinsurance that Mountain Valley maintains. Effective March 1, 2000, under the terms of our Purchase Agreement, the Trinity Quota Share was terminated on a cut-off basis. Under the terms of the cut-off, Mountain Valley will continue to cede 100% of losses and expenses incurred before March 1, 2000, including subsequent development of those losses and expenses. In addition, Trinity retained the premiums, losses and expenses on 79 policies in the State of New York until we renewed, canceled or non-renewed those policies at (or prior to) their expiration dates. Accordingly, as of March 1, 2000, Mountain Valley had and will continue to have no net unpaid loss and loss expense reserves for losses incurred before March 1, 2000. We are subject to credit risk should Trinity not be able to pay its obligations under the Trinity Quota Share. However, Trinity is presently rated A+ (Superior) by A.M. Best and has $846 million in surplus as regards policyholders as of December 31, 2000. Thus, we believe that such credit risk is not material at this time. Third party reinsurance for property and casualty losses of Mountain Valley are maintained under a combined per risk excess of loss treaty affording recovery to $5 million in excess of a retention of $250,000. Mountain Valley also maintains a third party 100% quota share treaty for boiler and machinery coverage and reinsurance coverage for commercial umbrella policies up to $5 million. Third party reinsurance for workers' compensation losses of Mountain Valley are maintained under excess of loss treaties affording recovery to $10 million (effective July 1, 2000) in excess of a retention of $50,000. This coverage had a limit of $5 million prior to July 1, 2000. Mountain Valley also purchases catastrophe coverage for workers compensation losses affording recovery to $20 million. Mountain Valley has also utilized extensively third party facultative reinsurance for certain risks that it underwrites which it does not believe are appropriate for coverage by its third party treaty reinsurance. Treaty reinsurance is reinsurance placed on an aggregate or portfolio basis covering all risks written by the Company as specified in the contract. Facultative reinsurance is reinsurance placed on a per risk basis, covering a specific insurance policy. During 2000, Mountain Valley ceded $1.2 million in facultative reinsurance to third party reinsurers, generally employing a retention of $250,000. In 2001, we plan to review Mountain Valley's utilization of facultative reinsurance to ensure that it provides the proper cost-benefit relationship. The Insurance Companies consider numerous factors in selecting reinsurers, the most important of which is the financial stability of the reinsurer. All of the Insurance Companies' reinsurers are presently rated A-(Excellent) or higher by A.M. Best. The Insurance Companies have not experienced any material collectibility problems for their reinsurance recoverables. We continually review all of the Insurance Companies' reinsurance coverages for pricing, adequacy of coverage and security. The terms and charges for reinsurance coverage are typically negotiated annually. The reinsurance market is subject to conditions that are similar to those in the direct property and casualty insurance market, and there can be no assurance that reinsurance will remain available to the Insurance Companies to the same extent and at the same cost currently maintained. During 2000, we took numerous steps to consolidate reinsurance coverages for the Insurance Companies with the appropriate reinsurers to gain economies of scale and improved purchasing power in the reinsurance market place. We will continue to conduct these reviews and take similar actions during 2001. Insurance Pooling Agreement Effective March 1, 2000, Preserver and Mountain Valley entered into an intercompany pooling arrangement with each other and formed the Preserver Insurance Group ("Group"). The pooling is intended to permit a more uniform and stable underwriting result from year to year for both companies than they would experience individually and to spread the risk of loss among the pool participants. The Group therefore has at its disposal the underwriting capacity of the entire pool, rather than being limited to policy exposures of a size commensurate with its own capital and surplus. The additional capacity exists because such policy exposures are spread between both pool participants which each have its own capital and surplus. Regulation by state insurance departments is applied to the individual companies rather than to the pooling. The pooling enabled Mountain Valley to attain a Best rating as part of the Group it would not otherwise have been able to achieve, due to its insufficient operating experience, having commenced operations in 1995. Pursuant to the terms of the pooling agreement, Mountain Valley cedes 100% of its premiums and expenses on all of its business, and losses incurred after March 1, 2000 to Preserver. All of Preserver's premium and expenses on all of its business, and losses incurred after March 1, 2000 are included in the pooled business. Preserver then retrocedes to Mountain Valley 25% of the premiums, losses and expenses subject to the pooling. The pooling does not legally discharge either participant in the Group from its primary liability for the full amount of the policies ceded. We anticipate that American Colonial will join the pool when it recommences operations in 2001. Loss Reserves Reserves for unpaid losses and loss expenses at any report date reflect the estimate of the liabilities for the ultimate net loss of reported claims and estimated incurred but not reported claims. The liability for unpaid losses and loss expenses is determined using case-basis evaluations and statistical projections and represents estimates of the ultimate net cost of all unpaid losses and loss expenses through December 31 of each year. These estimates are continually reviewed and refined as historical experience develops, new information becomes known and the effects of trends in future claim severity and frequency are considered. The liabilities are adjusted accordingly with such adjustments being reflected in the current year operations. Apart from the emergence of PPA development for claims occurring in 1999 related to PPA legislation enacted in New Jersey (discussed below), no trends that are considered abnormal have been identified as of the most recent evaluation date, December 31, 2000. The following table presents a reconciliation of beginning and ending liability balances for 2000, 1999 and 1998, reported under GAAP: RECONCILIATION OF LIABILITY FOR LOSSES AND LOSS EXPENSES
2000 1999 1998 -------------------------------------- (Thousands of Dollars) Liability for losses and loss expenses, net of reinsurance recoverables, at January 1 $52,529 $39,814 $32,884 Liability for losses and loss expenses, net of reinsurance recoverables, North East Acquisition - 8,820 - Incurred losses and loss expenses Provision for current year claims 55,542 37,272 32,598 Increase in provision for prior years' claims 166 3,359 3,881 Total incurred and loss expenses 55,708 40,631 36,479 Payments for losses and loss expenses Payments on current year claims 24,501 16,448 12,038 Payments on prior years' claims 23,541 20,288 17,511 Total payments for losses and loss expenses 48,042 36,736 29,549 Liability for losses and loss expenses, net of reinsurance recoverables, at December 31 60,195 52,529 39,814 Reinsurance recoverables on unpaid losses and loss expenses, at December 31 30,197 18,454 18,521 Liability for losses and loss expenses, gross of reinsurance recoverables, at December 31 $90,392 $70,983 $58,335
The reconciliation shows a 2000 deficiency of $166,000 in the liability recorded at December 31, 1999. The small deficiency is primarily the result of generally neutral net development of reserves in all of the Insurance Companies during 2000; however, Motor Club did experience favorable development of losses occurring in 1999, offset by unfavorable development of losses occurring from 1996 to 1998. We believe that our book of business, particularly Motor Club's PPA book of business, has loss development characteristics which result in initial adverse development ("Initial Development") but ultimately develop closer to the reserves initially established. This Initial Development typically occurs during the first 24 to 36 months of a given year's reserves. Historically, the Initial Development has been offset by redundancies from older years approximating or greater than the Initial Development. However, as Motor Club's PPA book of business has grown, the Initial Development has been greater than the redundancies in older years. We believe that as the new PPA book of business written by Motor Club continues to stabilize and mature, the Net Cumulative Deficiency in the more recent years will decline and thus the deficiencies indicated will diminish, which did occur in 2000. We believe this pattern is supported by the generally sequential decline in the Net Cumulative Deficiency from the most recent year presented to the oldest year presented. We also believe that the Initial Development referred to is generally consistent and identifiable in the table on page 24. We also believe that the 1996, 1997 and 1998 adverse development is attributable principally to losses which occurred in those years, primarily in Motor Club's PPA book of business. During 1996, 1997 and 1998, Motor Club's new PPA book of business was in its Initial Development. As is consistent with applicable New Jersey statutes, no new business had yet been non-renewed, resulting in a book of PPA business that lacked historical experience. Thereafter, certain business was non-renewed and the performance of the book has modestly improved. Given the adverse development of these particular years, it is possible that the Net Cumulative Deficiency for 1996, 1997 and 1998 may not develop consistently with the other years described above, but we do not believe that this is indicative of prospective loss development for years after 1998. As noted, Motor Club's PPA book did experience favorable development for losses occurring in 1999 and during 2000. This may be attributable to aspects of New Jersey PPA reforms which are discussed in the section titled "New Jersey Private Passenger Automobile". During 1999, Motor Club's first party medical claims ("PIP") occurring in 1999 ("Accident Year 1999") were significantly higher as compared to prior years. These losses did not increase until after the rate rollback and other provisions of the reforms were implemented in 1999. We believe that claimants filing more severe claims on an accelerated basis than historical patterns dictated caused this increase. We further believe that this acceleration was caused by the implementation of regulations tightening the fee schedule, allowing pre-certification methodologies and permitting a revised arbitration system, all of which should serve to ultimately reduce PIP claim costs. While this acceleration increased the level of reported losses incurred by Motor Club in 1999, we reserved for its projected ultimate losses for Accident Year 1999 generally using historical loss development patterns which indicate longer development patterns than those which may occur in Accident Year 1999. We believe that this resulted in more favorable development of Accident Year 1999 PIP losses in 2000. We have also seen fewer third party liability claims in Accident Year 1999 and 2000 since the reforms were implemented, consistent with the stated objectives of the reforms. However, we believe it is premature to conclude that such favorable development will continue. The differences between the liability for unpaid losses and loss expenses reported in our consolidated financial statements prepared in accordance with GAAP and those reported in the annual statements filed by the Insurance Companies with State insurance departments in accordance with SAP are reconciled as follows:
December 31, 2000 1999 1998 ------------------------------------- (thousands of dollars) Liability for unpaid losses and loss expenses on a SAP basis (net of reinsurance recoverables on unpaid losses and loss expenses) $65,742 $56,759 $43,111 Reinsurance recoverables on unpaid losses and loss expenses 30,197 18,454 18,521 Anticipated salvage and subrogation recoveries (5,547) (4,230) (3,297) Liability for unpaid losses and loss expenses, as reported in the GAAP basis financial statements $90,392 $70,983 $58,335
The anticipated effect of inflation is implicitly considered when estimating liabilities for losses and loss expenses. While anticipated price increases due to inflation are considered in estimating the ultimate claim costs, the increase in the average severity of claims is caused by a number of factors that vary with the individual type of policy written. These anticipated trends are monitored based on actual development and are modified if necessary. The table on Page 24 presents the development of the GAAP balance sheet liabilities for 1991 through 2000; data is presented for those years in which the Insurance Companies had operations and were owned by us. The top line on the table shows the estimated liability for unpaid losses and loss expenses recorded at the balance sheet date for each of the indicated years. This liability represents the estimated amount of losses and loss expenses for claims arising in that and all prior years that are unpaid at the balance sheet date, including losses that had been incurred but not yet reported. The upper portion of the table shows the re-estimated amount of the previously recorded liability, based on experience as of the end of each succeeding year. The estimate is increased or decreased as more information becomes known about the frequency and severity of claims for development years. The Net Cumulative Deficiency represents the aggregate change in the estimates over all prior years. The lower section of the table shows the cumulative amounts paid with respect to previously recorded liabilities as of the end of each succeeding year. In evaluating this information, it should be noted that each amount includes the effects of all changes in amounts for prior periods. For example, the amount of deficiency relating to losses settled in 1998, but incurred in 1993, will be included in the cumulative deficiency for the 1998 year. This table does not present accident or policy year development data, which readers may be more accustomed to analyzing. Conditions and trends that have affected development of liabilities in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on this table. Prior to 1992, we conducted private passenger operations in New Jersey through Motor Club (which continues) and nationwide general insurance operations through a separate subsidiary, MCA Insurance Company("MCAIC") and its insurance subsidiary, Property Casualty Company of MCA ("PCCMCA"). The operations of Motor Club are included in our reserve disclosures. The operations of MCAIC and PCCMCA have not been included in the consolidated financial statements and loss reserve disclosures due to MCAIC's insolvency in 1992 as a result of Hurricane Andrew. Since we wrote-off our investment in MCAIC that year, and because the losses attributable to MCAIC are subject to the control of its Receiver, there is no additional loss development from those operations which impact our results since that time. Accordingly, the loss reserve disclosures were amended to include only those operations in which we are currently involved. LOSS AND LOSS EXPENSE DEVELOPMENT (In Thousands)
Year ended December 31 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Liability for unpaid losses and loss expenses, net of reinsurance recoverables $26,494 $28,469 $25,334 $22,356 $23,409 $28,114 $32,884 $39,814 $52,529 $60,195 Net Liability Re-estimated as of: One year later 30,173 27,145 26,253 23,468 24,313 31,887 36,765 43,173 52,695 - Two years later 28,954 28,563 26,766 23,813 25,759 33,848 38,422 44,842 - - Three years later 29,733 28,454 26,819 24,181 25,680 33,527 39,626 - - - Four years later 28,934 28,702 26,572 23,759 25,252 34,801 - - - - Five years later 29,071 28,662 26,066 23,221 26,090 - - - - - Six years later 28,954 28,516 25,330 24,001 - - - - - - Seven years later 28,920 27,719 25,932 - - - - - - - Eight years later 28,653 28,394 - - - - - - - - Nine years later 28,604 - - - - - - - - - Net Cumulative Redundancy (Deficiency) ($2,110) $ 75 $ (598) ($1,645) ($2,681) ($6,687) ($6,742) ($5,028) (166) - Cumulative Amount of Liability Paid Through: One year later 11,979 12,314 12,311 11,106 11,414 16,203 17,511 20,288 23,541 - Two years later 18,855 20,270 18,992 17,231 18,357 24,830 28,427 32,143 - - Three years later 24,161 24,546 23,032 20,821 22,164 30,685 35,086 - - - Four years later 26,365 26,878 24,882 22,488 24,586 33,743 - - - - Five years later 27,696 27,642 25,373 23,297 25,576 - - - - - Six years later 28,207 26,810 25,818 23,799 - - - - - - Seven years later 28,265 27,194 25,984 - - - - - - - Eight years later 28,394 28,335 - - - - - - - - Nine years later 28,312 - - - - - - - - - Net liability - December 31 $26,494 $28,469 $25,334 $22,356 $23,409 $28,114 $32,884 $39,814 $52,529 $60,195 Reinsurance recoverables 29,003 21,698 20,484 19,309 16,415 19,553 17,363 18,521 18,454 30,197 Gross liability - December 31 $55,497 $50,167 $45,818 $41,665 $39,824 $47,667 $50,247 $58,335 $70,983 $90,392
The reserve for net losses and loss expenses with respect to North East is only included in the consolidated net losses and expenses as of December 31, 2000 and 1999. No prior reserve development is presented herein as these operations were not owned prior to the fourth quarter of 1999. The reserve for net losses and expenses with respect to Mountain Valley is only included in the consolidated net losses and expenses as of December 31, 2000. No reserve development is presented herein as these operations were not owned prior to March 1, 2000. Competition The property and casualty insurance industry is generally highly competitive on the basis of both price and service. There are numerous companies competing for the coverages which the Insurance Companies write, many of which are substantially larger and have considerably greater resources than they have. In addition, because the Insurance Companies' insurance products are marketed exclusively through independent insurance agencies, most of which represent more than one insurance company, they face competition within each agency. The commercial lines markets that we engage in are highly competitive markets that are often subject to significant pressures, including but not limited to the pricing of individual risks. As we become more involved in the commercial lines markets, these competitive issues will become more widespread. While Motor Club distributes its personal auto policies similarly and thus faces the same issues as the other Insurance Companies in concept, the personal auto regulatory environment in New Jersey, particularly its "take-all-comers" requirements (see Regulation), has suppressed competition and effectively eliminated risk selection. In addition, the New Jersey market has historically been subject to regulatory and legislative volatility which has, at times, adversely affected the profitability of the PPA line of business, further suppressing competition. Finally, approximately 24% of Motor Club's appointed independent insurance agencies represent only Motor Club for PPA coverage and thus, Motor Club has no competition for this business in those agencies. New Jersey law presently also substantially restricts the ability of an insurer to terminate its agencies, limiting Motor Club's ability to manage its agency force for PPA. We believe this lack of competition in PPA presents a significant business risk which must be monitored very closely on an ongoing basis. Investments and Information about Market Risk We have maintained, in our opinion, a conservative investing philosophy. We manage our investment portfolio with the assistance of investment professionals based on guidelines established by management and approved by the Board of Directors. The overall goal of the portfolio is to enhance investment returns within the structure of limited credit risk assumption which management has utilized, with evaluations of portfolio duration made in relation to the current interest rate environment. During 1998, our investment guidelines were expanded to allow for a higher percentage of investments in investment grade corporate bonds and mortgage-backed securities and to include certain investment grade asset-backed securities, which provide more structured cash flows. The objectives of these changes to our investment policy were: (1) to reduce the amount of interest risk in the portfolio; and (2) enhance portfolio yield without unreasonably increasing credit risk. We believe these objectives have been accomplished. We do not invest in or hold any derivative financial instruments. Tax exempt securities have not been acquired. We believe that our current tax position, which includes net operating loss carryforwards, dictates the exclusion of tax exempt securities from the portfolio, which historically provide substantially lower yields on a before tax basis than taxable securities. Market risk represents the potential for loss due to adverse changes in the fair value of financial instruments. The market risks related to our financial instruments relate to the investment portfolio, which exposes us to risks related to interest rates, and to a lesser extent, credit quality and prepayment. We do not have exposure to foreign currency exchange rates or equity prices. Interest rate risk is the price sensitivity of a fixed income security to changes in interest rates. We view these potential changes in price within the overall context of asset and liability management. The payout pattern of insurance liabilities are actuarially determined, to determine their duration, which is the present value of the weighted average payments expressed in years. Duration targets are then set for our fixed income investment portfolio after consideration of these liabilities and other factors, which we believe mitigates the overall effect of its exposure to interest rate risk. At December 31, 2000 and 1999, our investment portfolio was comprised of the following types of securities (all amounts in thousands):
December 31, 2000 December 31, 1999 -------------------- ------------------- Market Market Value Percent Value Percent -------------------- ------------------- Taxable Fixed Maturities $98,074 93.4% $78,242 89.9% Equity Securities 48 0.1% 57 0.1% Short Term Investments 6,760 6.4% 8,529 9.8% Mortgage Loans 110 0.1% 154 0.2% -------- ----- ------- ----- Total Investment Portfolio $104,992 100.0% $86,982 100.0% ======== ===== ======= =====
At December 31, 2000 and 1999, our taxable fixed maturity portfolio consisted of the following types of securities (all amounts in thousands):
December 31, 2000 December 31, 1999 -------------------- ------------------- Market Market Value Percent Value Percent -------------------- ------------------- United States Treasuries $20,602 21.0% $16,248 20.8% United States Government Agencies 5,622 5.7% 3,674 4.7% Mortgage-Backed Securities 22,921 23.4% 10,406 13.3% Asset-Backed Securities 12,315 12.6% 10,239 13.1% Corporate Bonds 36,614 37.3% 37,675 48.1% -------- ----- ------- ----- Total $98,074 100.0% $78,242 100.0% ======== ===== ======= =====
Mortgage-backed securities ("MBS") consist primarily of Government National Mortgage Association issues, along with other MBS issues of the United States Government. Asset-backed securities ("ABS") issues are all rated "Aaa" by Moody's and "AAA" by Standard & Poor's. The underlying collateral of ABS issues at December 31, 2000 consists primarily of home equity loans. The taxable fixed maturity portfolio duration at December 31, 2000 and 1999 was 3.46 and 3.60 years, respectively. United States Treasuries are weighted towards maturities of five years or less, to reduce interest rate risk and match the Insurance Companies' claims payout ratios; corporate obligations are generally weighted towards five to ten year maturities, to take advantage of the yield curve; the average life of the GNMA portfolio has been maintained at approximately 10 years to reduce interest rate risk. Please refer to Note D in the Notes to Consolidated Financial Statements ("Notes") for statistics regarding portfolio maturity composition. We have not acquired, nor are there plans to acquire, below investment grade or "junk" bonds. Ninety-four percent of the fixed maturity portfolio as of December 31, 2000 was graded Class 1 according to the National Association of Insurance Commissioners' valuation system. This classification is reserved for only the highest quality securities, generally rated A or better by two major rating services. At December 31, 2000 and 1999, our taxable fixed maturity investment portfolio at market value by Moody's rating was (all amounts in thousands):
December 31, 2000 December 31, 1999 ------------------- ------------------- Market Market Value Percent Value Percent ------------------- ------------------- United States Government Securities $49,145 50.1% $29,807 38.1% Aaa 12,315 12.6% 10,239 13.1% Aa 10,888 11.1% 10,243 13.1% A 20,926 21.3% 23,062 29.4% Baa 4,800 4.9% 4,891 6.3% ------- ----- ------- ----- Total $98,074 100.0% $78,242 100.0% ======= ===== ======= =====
The following table provides information about our taxable fixed maturity portfolio at December 31, 2000 that are sensitive to changes in interest rates. The table presents cash flows of principal amounts and related weighted average interest rates by expected maturity dates. The cash flows are based on the earlier of the call date or the maturity date or, for mortgage and asset- backed securities, expected payments patterns. Actual cash flows could differ from the expected amounts. EXPECTED CASH FLOWS OF PRINCIPAL AMOUNTS (all amounts in thousands)
ESTIMATED AMORTIZED MARKET 2001 2002 2003 2004 2005 Thereafter COST VALUE ------- ------ ------ ------ ------- ---------- --------- --------- Taxable-- Other than mortgage- backed securities $7,596 $5,447 $2,923 $5,671 $11,915 $28,874 $62,426 $62,838 Average interest rate 7.0% 6.6% 5.7% 6.9% 6.4% 6.5% 6.5% Mortgage- backed securities 192 1,086 187 2,008 876 18,493 22,842 22,921 Average interest rate 6.3% 6.3% 7.4% 7.1% 6.7% 7.0% 7.0% Asset-backed securities 3,940 1,409 3,511 991 1,117 1,335 12,303 12,315 Average interest rate 6.4% 6.7% 6.4% 7.1% 6.8% 6.7% 6.6% ------- ------ ------ ------ ------- ------- ------- ------- Total $11,728 $7,942 $6,621 $8,670 $13,908 $48,702 $97,571 $98,074 ======= ====== ====== ====== ======= ======= ======= =======
We anticipate continuing this minimum risk approach to investing for the foreseeable future. We believe that the mix of investments in both type and maturity length is appropriate in order to preserve capital, take advantage of investment opportunities as they are presented, and provide us with sufficient liquidity to react to economic and business circumstances as they evolve. Investment results were as follows:
2000 1999 1998 ----------------------------------- (thousands of dollars) Average investments, at amortized cost $99,430 $78,018 $68,815 Investment income, after expenses $ 6,413 $ 5,081 $ 4,305 Percent earned on average investments 6.5% 6.5% 6.3% Realized gains $ 83 $ 36 $ 29
Regulation General Insurance companies are subject to supervision and regulation in the states in which they transact business. Such supervision and regulation relate to numerous aspects of an insurance company's business and financial condition. The primary purpose of such supervision and regulation is the protection of policyholders. The extent of such regulation varies, but generally derives from state statutes which delegate regulatory, supervisory and administrative authority to state insurance departments. Accordingly, the authority of the state insurance departments includes the establishment of standards of solvency which must be met and maintained by insurers; the licensing to do business of insurers and agents; the nature of and limitations on investments; premium rates for property and casualty insurance; the provisions which insurers must make for current losses and future liabilities; the deposit of securities for the benefit of policyholders; and the approval of policy forms. Insurance departments also conduct periodic examinations of the affairs of insurance companies and require the filing of annual and other reports relating to the financial condition of insurance companies. State law requires the Insurance Companies to participate in involuntary insurance programs for automobile insurance, as well as other property and casualty lines. These programs include joint underwriting associations, assigned risk plans, fair access to insurance requirements plans and reinsurance facilities. These laws generally require all companies that write lines covered by these programs to provide coverage (either directly, via a servicing carrier or through reinsurance) for insureds who cannot obtain insurance in the voluntary market. The legislation creating these programs usually allocates a pro rata portion of risks attributable to such insureds to each company on the basis of direct written premiums or the number of automobiles insured. Generally, state law requires participation in such programs as a condition to doing business. The loss ratio on insurance written under involuntary programs generally has been greater than the loss ratio on insurance in the voluntary market. During 1997, Motor Club began to participate in the New Jersey Personal Automobile Insurance Plan; fees totaling $266,000, $153,000 and $254,000 were paid in 2000, 1999 and 1998, respectively, to a servicing carrier rather than process these policies and take a risk of further loss. State insurance holding company acts regulate insurance holding company systems. Each insurance company in the holding company system is required to register with the insurance supervisory agency of its state of domicile and furnish certain information concerning the operations of companies within the holding company system that may materially affect the operations, management or financial condition of the insurers within the system. Such laws further require disclosure of material transactions including the payment of "extraordinary dividends" from the insurance subsidiaries. Insurance holding company acts require that all transactions within the holding company system affecting the insurance subsidiaries must be fair and equitable. Further, approval of the insurance commissioner is required prior to the consummation of transactions affecting the control of an insurer. The Insurance Companies are restricted by the insurance laws of their respective states of domicile as to the amounts of dividends they may pay without prior approval by the appropriate regulatory authority. Applying current regulatory restrictions, as of December 31, 2000, and to the extent that statutorily defined surplus is available, $3,329,000 would be available for distribution without prior approval during 2001. The Insurance Companies paid dividends of $750,000 (another $453,000 is declared but not yet paid) in 2000, $749,000 in 1999 and $1 million in 1998. National Association of Insurance Commissioners ("NAIC") The Insurance Companies are subject to the general statutory accounting practices and reporting formats established by the NAIC as well as accounting practices prescribed or permitted by the respective Departments of Insurance in the states in which they are domiciled. The NAIC has adopted the Codification of Statutory Accounting Principles with an effective date of January 1, 2001. The codified principles are intended to provide a basis of accounting recognized and adhered to in the absence of conflict with, or silence of, state statutes and regulations. The impact of the codified principles on the statutory capital and surplus of the Insurance Companies is still being determined and is currently not expected to decrease statutory capital and surplus as of January 1, 2001. The NAIC also promulgates model insurance laws and regulations relating to the financial and operational regulation of insurance companies, which includes the Insurance Regulating Information System ("IRIS"). IRIS identifies eleven industry ratios and specifies "usual values" for each ratio. Departure from the usual values on four or more of the ratios can lead to inquiries from individual state insurance commissioners as to certain aspects of an insurer's business. The Insurance Companies' have, in recent years, met substantially all of the IRIS test ratios. During 2000 however, Preserver and Mountain Valley failed to meet certain tests by virtue of the Pooling they entered into with each other and in Mountain Valley's instance, the termination of the Trinity Quota Share. We expect that both companies will meet these tests in 2001 when these non-recurring events are eliminated from the test ratio computations. Also in 2000, Motor Club failed the IRIS ratio test for premiums to surplus. The threshold for this test is a ratio of less than 3.0 to 1 and Motor Club's was 3.18 to 1. This is the direct result of automobile reforms in New Jersey, which are discussed in greater detail in the section that follows titled "New Jersey Private Passenger Automobile". NAIC model rules and regulations generally are not directly applicable to an insurance company until they are adopted by applicable state legislatures and departments of insurance. However, NAIC model laws and regulations have become increasingly important in recent years, due primarily to the NAIC's Financial Regulations Standards and Accreditation Program. Under this program, states which have adopted certain required model laws and regulations and meet various staffing and other requirements are "accredited" by the NAIC. Such accreditation reflects an eventual nationwide regulatory network of accredited states. The States in which the Insurance Companies are domiciled are accredited by the NAIC. The NAIC has adopted Risk-Based Capital ("RBC") requirements for property/casualty insurance companies, to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks such as asset quality, credit risk, loss reserve adequacy and other business factors. The RBC formula is used by State insurance regulators as an early warning tool to identify, for the purpose of initiating regulatory action, insurance companies that potentially are inadequately capitalized. Regulatory compliance is determined by a ratio of the insurer's regulatory total adjusted capital to its authorized control level RBC, as defined by the NAIC. Insurers below specific trigger points or ratios are classified within certain levels, each of which requires specific corrective action. The ratios of the Insurance Companies are in excess of that required, therefore requiring no action. However, the continuing impact of automobile reforms in New Jersey on Motor Club raises some uncertainty as to whether its ratio will remain above the level required. This is discussed in greater detail in the section that follows titled "New Jersey Private Passenger Automobile". The Gramm-Leach-Bliley Act, or Financial Services Modernization Act of 1999 (the "Act"), was enacted in 1999 and significantly affects the financial services industry, including insurance companies, banks and securities firms. The Act modifies federal law to permit the creation of financial holding companies ("FHCs"), which, as regulated by the Act, can maintain cross-holdings in insurance companies, banks and securities firms to an extent not previously allowed. The Act also permits or facilitates certain types of combinations or affiliations for FHCs. The Act establishes a functional regulatory scheme under which state insurance departments will maintain primary regulation over insurance activities, subject to provisions for certain federal preemptions. Important provisions of the Act involve requirements for adoption of (i) multi-state agents' licensing reforms and uniformity requirements and (ii) privacy protections, giving the states the ability to enact these laws in the first instance or be preempted. The NAIC adopted a model regulation on privacy, and a model law on agents' licensing, which have been enacted or are currently being considered by various state legislatures and insurance departments. It is presently not anticipated that the insurance regulatory aspects of the Act will have a material effect on our operations. New Jersey Private Passenger Automobile The New Jersey PPA market has historically been subject to regulatory and legislative volatility which has, at times, adversely affected the profitability of this line of business, despite New Jersey having among the highest average premium rates in the United States. New Jersey insurance law presently requires insurers to write all eligible PPA coverage presented to them from drivers with eight points or less on their driving record. This is commonly referred to as "take-all-comers". The New Jersey Department of Banking and Insurance ("NJ DOBI") may grant an insurer relief, by written notification, from writing new PPA business pursuant to the take-all-comers provisions of New Jersey law if a showing finds that the insurer's premium to surplus ("leverage") ratio exceeds 3 to 1. Motor Club's present applicable leverage ratio for the year ended December 31, 2000 is 3.18 to 1. The impact of Motor Club's PPA results on this and other key ratios is discussed further below. In June 1997, the State of New Jersey enacted PPA legislation, which principally: (1) repealed the annual "flex" rate increase available to insurers, which was required by law to be no less than 3%, and replaced it with an expedited prior approval rate filing process for rate increase requests up to 3% on an overall basis. Subsequent to the enactment of this legislation, the Commissioner of the NJ DOBI froze all PPA insurance rates until March 1998, but still has not yet promulgated the regulations required for insurers to file for an expedited rate increase and thus has denied all such requests; (2) restricted the ability of insurers to non-renew at their discretion up to 2% of their policies; (3) repealed the ability of insurers to non-renew one policy for every two new policies written in each rating territory; and (4) replaced the rating system which assessed surcharges to insureds' policies for specific driving violations and accidents with a broader-based tiered rating system. Motor Club's tier rating system was approved by the NJ DOBI and was implemented on all PPA policies with effective dates on and after November 1, 1998. Additional PPA legislation (the Automobile Insurance Cost Reduction Act or "AICRA") was enacted in 1998 which: 1) allows insureds to reduce levels of compulsory coverages, including the option to reduce their coverage for PIP to as low as $15,000, from the presently required $250,000; 2) revises the PIP policy form to set forth the medical treatments and services, valid diagnostic tests and appropriate health care protocols which are eligible to be paid; 3) seeks to limit lawsuits by claimants by redefining the type of injury which would be grounds for litigation; 4) replaces the present PIP arbitration system which utilizes part-time arbitrators who render only oral decisions without consulting medical professionals with one using full-time dispute resolution professionals who may refer questions of medical necessity or diagnosis to medical review organizations and who must render written decisions; 5) appoints a special fraud prosecutor to increase enforcement of fraudulent acts committed against insurance companies; 6) removes the system of territorial rating caps which have been in place since 1983, enabling insurers to modify (as appropriate) rates charged in various rating territories, which will be redefined; and 7) requires up to a 15% reduction in rates on all PPA policies. Implementation of most of the provisions of AICRA (with one exception) commenced with new policies issued on March 22, 1999. The only exception is the redefinition of the territories and removal of the territorial rating caps, which was scheduled to be implemented by January 1, 2000. It now appears that it will be sometime in 2002 before those regulations become effective. To date, we have believed that AICRA ultimately will have only a modest net negative effect on Motor Club's PPA operations and profitability, because the mandated rate reductions do not appear to be completely cost justified (based on information presently available) by the cost savings in the legislation. While we have not changed our ultimate outlook for the effect of AICRA, it is clear based on the impact to date, combined with the inaction of the NJ DOBI as to implementing several key provisions of AICRA and the 1997 reform legislation, that this may take longer to occur and that the near-term effects of AICRA may continue to be more negative than originally forecast before improvement begins. Presently, as previously indicated, as a result of AICRA, Motor Club's premium to surplus ratio is in excess of 3 to 1. In addition, Motor Club's liabilities in relation to its statutory surplus are at a level whereby adverse development of claims, particularly as a result of the impact of AICRA, could further reduce its surplus, thus decreasing its RBC ratios, possibly to a level which would require action as prescribed by law. To date, the NJ DOBI has generally not been responsive to requests for rate increases or other regulatory relief based upon the impact of AICRA to companies, nor as noted has it implemented certain key aspects of the recent reforms which would provide relief to insurers such as Motor Club. Accordingly, considering these elements, combined with New Jersey's regulatory and legislative history, the enacted legislation, current judicial decisions, current rate freeze and ongoing volatility, we believe there are significant uncertainties with regard to our ongoing NJ PPA operations which could adversely affect us. Consistent with our long-stated goal to increase our identification as a provider of small commercial lines insurance and expand and diversify our operations outside the State of New Jersey, we continue to review strategies to improve the profitability of our PPA business and to otherwise add more value to our shareholders. The State of New Jersey also maintains an excess profits law which provides that PPA insurers whose profits exceed a statutorily computed maximum over a three year period will be required to pay such excess to its policyholders. Motor Club has never reported any excess profits under this law and we believe that in 2001 none will be reported. Employees At December 31, 2000, the Motor Club of America Group had approximately 185 employees. Item 2. Properties Motor Club of America and its subsidiaries lease office space suitable to conduct its operations, including its home office in Paramus, New Jersey. In addition, office facilities in Albany, New York, Bedford, New Hampshire and Scarborough, Maine are leased under varying terms and expiration dates. Item 3. Legal Proceedings The Insurance Companies are a party to numerous lawsuits arising in the ordinary course of their insurance business. We believe that the resolution of these lawsuits will not have a material adverse effect on its results of operations, financial condition, or cash flows. Item 4. Submission of Matters to a Vote of Security Holders No matter was submitted to a vote of security holders in the fourth quarter of 2000. Item Pursuant to Instruction 3 to Paragraph (b) of Item 401 of Regulation S-K. Executive Officers of the Registrant. At December 31, 2000, the executive officers of the Registrant and their offices with the Registrant and principal occupations were as follows:
Years in Which Officer Has Served Office and Principal as Name Age Occupation Such(3) - ---------------------- --- ---------------------------- ------------- Archer McWhorter (1) 79 Chairman of the Board of Directors and Director of the Registrant and Companies in the Motor Club of America Group 1986-2000 Stephen A. Gilbert (2) 61 President, Chief Executive Officer, General Counsel and Director of the Registrant and Companies in the Motor Club of America Group; Chairman of the Board, Chief Executive Officer and Director of North East Insurance Company 1975-2000 Patrick J. Haveron (2) 39 Executive Vice President, Chief Executive Officer, Chief Financial Officer and Director of the Registrant and Companies in the Motor Club of America Group; Treasurer of the Insurance Companies 1988-2000 Peter K. Barbano 50 Vice President, Secretary and Associate General Counsel 1993-2000 Myron Rogow 57 Vice President 1987-2000 G. Bruce Patterson 56 Vice President 1989-2000 Charles J. Pelosi 55 Vice President 1983-2000 Norma Rodriguez 51 Treasurer 1984-2000
(1) Chairman of the Board of Directors of Companies in the Motor Club of America Group; from 1996 to March 1997, Director of National Car Rental Systems, Inc. and affiliated corporations, a car rental enterprise ("NCR"); from 1996 to February 1997, one-third owner of Santa Ana Holdings, Inc., which exchanged its 90% stock interest in NCR for stock in Republic Industries, Inc.; from February 1997 to February 1998, consultant to NCR; President (to January 1996) of Acceptance Inc., a finance company. (2) Member of Finance Committee. (3) Includes years during any portion of which the officer served as such. All terms of office are until the date of the 2001 Annual Meetings of Stockholders and Directors. Except for Archer McWhorter, each of the officers devoted substantially all of their business time to the affairs of the Registrant or one or more other companies in the Motor Club of America Group. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters The Registrant's Common Stock trades on the NASDAQ Stock Market under the symbol MOTR. The following are the high and the low selling prices for each quarter of 2000 and 1999, as reported by the NASDAQ:
2000 Quarter High Low ------- ------ --------- I .............................. 8 3/4 6 II .............................. 8 1/2 6 15/16 III .............................. 9 1/4 7 1/4 IV .............................. 10 7 1/2 1999 Quarter High Low ------- ------ -------- I .............................. 14 7/8 13 II .............................. 14 12 III .............................. 13 1/2 10 IV .............................. 10 7/8 7 1/2
There were approximately 437 holders of record of the Common Stock of the Registrant as of December 31, 2000. The Registrant paid no dividends in 1999 and 2000. Item 6. Selected Financial Data
Years ended December 31, 2000(1) 1999(2)(3) 1998(3) 1997(3) 1996(3) ---------- ---------- -------- -------- ------- (in thousands, except as to per share data) Operating Results: Revenues from operations $ 83,631 $ 55,951 $ 53,347 $51,102 $46,525 Realized gains on sale of investments 83 36 28 - 5 Realized gain on sale of subsidiary - - - - 702 Net investment income 6,413 5,081 4,305 3,595 3,087 ---------- -------- -------- ------- ------- Total revenues $ 90,127 $ 61,068 $ 57,680 $54,697 $50,319 ========== ======== ======== ======= ======= Income before federal income taxes $ 3,000 $ 102 $ 5,719 $ 4,630 $ 3,297 ---------- -------- -------- ------- ------- Net income $ 1,960 $ 91 $ 3,778 $ 3,357 $ 5,330 ========== ======== ======== ======= ======= Financial Condition: Total assets $ 208,889 $156,588 $130,999 $102,761 $97,128 Convertible subordinated debentures $ 10,000 $ 10,000 - - - Note payable $ 11,500 - 3,000 - - Shareholders' equity $ 29,992 $ 26,909 $ 28,814 $24,415 $20,381 Per Common Share: Net income - Basic $ .92 $ .04 $ 1.79 $ 1.62 $ 2.61 Net income - Diluted $ .91 $ .04 $ 1.78 $ 1.60 $ 2.56 Book Value $ 14.12 $ 12.67 $ 13.56 $ 11.66 $ 9.95 Weighted average number of shares outstanding: Basic 2,124,387 2,117,912 2,108,722 2,074,473 2,045,590 Diluted 2,770,075 2,121,697 2,121,366 2,102,395 2,081,080 Significant Insurance Indicators: Net premiums written $89,204 $ 54,508 $64,303 $51,680 $47,337 Loss and loss expense ratio 66.7% 72.8% 68.6% 65.1% 64.5% Expense ratio 35.3% 36.4% 29.1% 33.3% 37.9% ---------- -------- -------- ------- ------- Combined ratio 102.0% 109.2% 97.7% 98.4% 102.4% ========== ======== ======== ====== =======
(1) Includes Mountain Valley's balance sheet as of December 31, 2000 and results of operations for the ten months ended December 31, 2000. (2) Includes North East's balance sheet as of December 31, 1999 and results of operations for the three months ended December 31, 1999. (3) The financial data as of and for the years ended December 31, 1996, 1997, 1998 and 1999 have been restated as described in Note V in the Notes to the Consolidated Financial Statements. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview of Business Operations We own and operate 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 2001, 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 PPA and small commercial lines insurance in the State of Maine and is rated B (Fair) by Best. We are pursuing a strategy to: (1) increase our identification as a provider of small and mid-sized commercial lines insurance and have continued to expand our product lines in support of this objective; and (2) expand and diversify our insurance operations outside the State of New Jersey. We believe 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. We expect to continue to follow this strategy although we do not anticipate any additional acquisition activity in 2001. Mountain Valley was acquired on March 1, 2000; North East was acquired on September 24, 1999. We believe that these acquisitions fully establish us as a regional commercial lines company in the New England and Mid-Atlantic regions. As evidence of this, only 44% of our consolidated revenues emanated from NJ PPA in 2000, the lowest in our history. This percentage is expected to continue to decline in the future. Historically, the Insurance Companies' results of operations have been influenced by factors affecting the property and casualty insurance industry in general and the NJ PPA market in particular. The operating results of the U.S. property and casualty insurance industry have generally 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 In March 2001, the Company's management determined that certain tax benefits should not have been recognized and that certain deferred tax liabilities had not been recorded. These tax matters, relate to the tax effects of temporary differences arising from MCAIC, which was de-consolidated for financial reporting purposes due to its insolvency in 1992(see Note J in the Notes to the Consolidated Financial Statements). These tax matters have no impact on the operations, cash flow or capital and surplus of the Company's active insurance subsidiaries or on consolidated income before Federal income taxes for the periods presented, nor is the Company subject to penalties and interest on the recording of the deferred tax liabilities. As a result, the 1998 and 1999 Consolidated Financial Statements have been restated from amounts previously reported. The principal effects of these items on the accompanying financial statements are presented in Note V in the Notes to Consolidated Financial Statements. In addition, retained earnings and thus shareholders' equity at December 31, 1997 was reduced by $126,303, representing the cumulative effect from revising the tax accrual on prior periods' results of operations after Federal income taxes. Finally, deferred tax assets were not recorded for the tax effects of the minimum pension liability that is presented as a component of other comprehensive income. Shareholders' equity at December 31, 1997 increased by $1,539,894, representing the cumulative effect on prior periods' results of revising the tax accrual. The net effect of these prior period adjustments increased shareholders' equity by $1,413,591 at December 31, 1997. The consolidated results of operations include, using the purchase method of accounting, the results of operations of North East and Mountain Valley, from their respective dates of acquisition. Net income in 2000 improved as a result of improved income before Federal income taxes from the Insurance Companies. The Insurance Companies improvement of $3,748,000 in 2000 was the result of improved loss ratios at our Preserver segment, economies of scale gained from our acquisitions that enabled Motor Club to improve its expense ratio and sharply lower expenses at North East. Mountain Valley's results were largely as anticipated. In 1999, Motor Club and Preserver had incurred $638,000 in losses and expenses related to Hurricane Floyd, which struck New Jersey in September 1999. These improved underwriting results also offset a $1,419,000 increase in interest expense related to the Convertible Subordinated Debentures and Promissory Notes issued in 1999 and 2000, respectively, related to our acquisitions. Non-recurring expenses related to our acquisitions declined, from $800,000 in 1999 to $354,000 in 2000. Significantly higher NJ PPA losses occurring in 1999, specifically PIP first party medical claims, had caused 1999 net income to decline. Income before federal income taxes declined $3,813,000 as compared to 1998. This was due to the impact of AICRA on Motor Club. AICRA had been designed to reduce both premiums and losses in NJ PPA. Our book value increased to $14.12 per share at December 31, 2000 from $12.67 per share at December 31, 1999. The principal sources of the net increase were: (1) net income of $1,960,000 or $.92 per share; (2) $1,993,000 or $.94 per share (net of applicable deferred taxes) due to an increase in the fair value of fixed maturity investments accounted for as available-for-sale securities under SFAS No. 115 ("Accounting for Certain Investments in Debt and Equity Securities"); offset by (3) $870,000 or $.41 per share (net of applicable deferred taxes) due to an increase in the minimum required pension liability for the Company sponsored defined benefit pension plan ("Pension Plan") as a result of asset losses and lower interest rates. Our book value decreased to $12.67 per share at December 31, 1999 from $13.56 per share at December 31, 1998. The principal sources of the net decrease were: (1) net income of $91,000 or $.04 per share; (2) $938,000 or $.44 per share (net of applicable deferred taxes) due to a decrease in the minimum required pension liability for the Pension Plan as a result of asset gains and higher interest rates; offset by (3) a decrease of $3,007,000 or $1.42 per share (net of applicable deferred taxes) in the fair value of fixed maturity investments accounted for as available-for-sale securities under SFAS No. 115. Book value in 1999 was also reduced by the dilutive effects ($.09 per share) of the issuance of 7,958 shares of common stock upon the acquisition of North East. Segments We are organized into four segments - Preserver, Motor Club, North East and Mountain Valley, along with a corporate segment. See Note T to the Notes to Consolidated Financial Statements for further details. Preserver The following table summarizes the income before Federal income taxes for this segment before the effects of the intercompany pooling agreement with Mountain Valley:
%Change % Change 2000 2000 vs. 1999 1999 1999 vs 1998 1998 ----------- ------------- ----------- ------------ ----------- Insurance premiums $15,601,866 12.9% $13,819,638 3.9% $13,303,402 Net investment income 1,808,893 16.4% 1,554,266 24.4% 1,249,505 Realized investment gains 10,781 NM 4,917 NM 12,635 Total revenues 17,421,540 13.3% 15,378,821 5.6% 14,565,542 Losses and loss expenses incurred 8,025,885 -12.9% 9,214,764 16.3% 7,923,218 Acquisitions costs and other operating expenses 4,694,870 15.4% 4,066,894 -9.0% 4,468,622 Total expenses 12,720,755 -4.2% 13,281,658 7.2% 12,391,840 Income before Federal income taxes $ 4,700,785 124.1% $ 2,097,163 -3.5% $ 2,173,702
NM= Not Meaningful Preserver continues to produce superior results, driven by excellent growth, lower loss ratios and stable underwriting expenses. The following table presents the underwriting ratios for this segment for each of the three years ended December 31:
2000 1999 1998 ---- ---- ---- Loss ratio 51.4% 66.7% 59.6% Expense ratio 30.1% 29.4% 33.6% Combined ratio 81.5% 96.1% 93.2%
The 13% growth in insurance premiums was led by Preserver's Commercial Lines business, which grew 20% in 2000, consistent with our overall growth strategy. Commercial lines policy count grew 10%, and the average premium continued to increase as Preserver wrote larger accounts by virtue of its higher Best rating, complete product line offering and competitive pricing. In addition, Preserver was able to increase premiums on certain renewed accounts, as market circumstances were more favorable to do so. We anticipate that such premium increases will continue to be available to Preserver on a selective basis in 2001, without adversely impacting retention. The 3% growth in Preserver's Personal Property insurance premiums continues to reflect modest amounts of new business written, along with adjustments in the values of properties insured, offset by a continuing slightly higher attrition rate on existing policies in 2000 as compared to 1999. Personal property policy count declined 4% in 2000 as compared 1999. In 1999, the increase in Commercial Lines insurance premiums of 7% was reflective of the increased number of policies that Preserver wrote during 1999 as compared to 1998. The unchanged amount of Personal Property insurance premiums written by Preserver reflects modest amounts of new business written offset by a slightly higher attrition rate on existing policies in 1999 as compared to 1998; policy count declined by 2%. Net investment income in 2000 reflects the strong operations and $3 million surplus contributions we made in March 2000. Invested assets continued to grow strongly in all years. Overall losses and LAE incurred for Preserver declined $1,189,000 or 13% in 2000 as compared to 1999. This combined with the 13% increase in insurance premiums reduced the net loss ratio by 23%. Most of the changes in Preserver's net loss ratios in recent years were caused by fluctuations in recoveries from its reinsurance coverage. Preserver's direct loss ratios have steadily improved in recent years as its book matures, retentions improve and pricing in Commercial Lines becomes more favorable, as the following table shows.
2000 1999 1998 ---- ---- ---- Direct Loss Ratio 54.0% 56.7% 69.2% Ceded Loss Ratio 62.7% 16.7% 117.2% Net Loss Ratio 51.4% 66.7% 59.6%
In 1999, Hurricane Floyd increased Preserver's net losses by approximately $228,000 or 1.6 loss ratio points. Thus the direct loss ratio declined slightly in 2000 as compared to 1999 (as adjusted). In addition, with Preserver's reinsurance rates essentially unchanged over the last three years, the remainder of the decrease in the 2000 net loss ratio was attributable to an increased number of severe losses that had reinsurance recoveries, as compared to 1999. This also contributed to the lower loss ratio in 1998. Given the relatively small size of the Preserver book of business, a limited number of severe losses can cause relatively wide fluctuations in Preserver's net loss ratio results, depending on whether these losses were severe enough to generate a reinsurance recovery. There have been no trends or indications in the last three years that Preserver's reinsurance programs have been ineffective or that loss experience was adverse. We believe the continuing stability and profitable levels of Preserver's direct loss ratio remains a positive indicator of the quality of its book of business. Expenses reflect the continuing growth of Preserver's business and are discussed in more detail in the Corporate segment. Motor Club The following table summarizes the income (loss) before Federal income taxes for this segment:
%Change % Change 2000 2000 vs. 1999 1999 1999 vs 1998 1998 ----------- ------------- ----------- ------------ ----------- Insurance premiums $36,574,189 -3.3% $37,802,937 -5.2% $39,872,261 Net investment income 2,934,494 -5.9% 3,119,752 9.4% 2,852,673 Realized investment gains 13,764 NM (260) NM 15,988 Other income 32,454 NM - NM - Total revenues 39,554,901 -3.3% 40,922,429 -4.3% 42,740,922 Losses and loss expenses incurred 27,085,861 -6.7% 29,043,044 1.7% 28,556,373 Acquisitions costs and other operating expenses 12,200,930 -5.3% 12,882,192 15.0% 11,200,514 Total expenses 39,286,791 -6.3% 41,925,236 5.5% 39,756,887 Income (loss) before Federal income taxes $ 268,110 NM $(1,002,807) NM $ 2,984,035
NM= Not Meaningful Motor Club results improved in 1999, largely due to economies of scale it gained in expenses as a result of the acquisition of Mountain Valley and North East. Higher loss ratios largely due to the impact of AICRA continued to make profitability in this segment difficult in 2000. The following table presents the underwriting ratios for each of the three years ended December 31:
2000 1999 1998 ---- ---- ---- Loss Ratio 74.1% 76.8% 71.6% Expense Ratio 33.4% 34.1% 28.1% Combined Ratio 107.4% 110.9% 99.7%
Despite a small increase in policy count due to increased submissions of PPA business, Motor Club's PPA insurance premiums declined due to the residual effect of the statutorily mandated 1999 rate rollback. No rate increases were received in 2000 and none is presently anticipated in 2001. The decline in insurance premiums in 1999 as compared to 1998 was also due principally to the rate rollback provisions of AICRA which were implemented commencing in 1999, and not a significant change in the number of policies written during the year. Net investment income declined due to lower invested assets as a result of AICRA's impact on the segment, both in the form of higher paid losses and lower premiums. It had continued to increase in 1999 before AICRA's impact was felt. Overall losses and LAE incurred for Motor Club declined $1,957,000 or 7% in 2000 as compared to 1999. This contributed to the lower loss ratio but was offset by declines in insurance premiums discussed previously. In 1999, Hurricane Floyd increased Motor Club's net losses by $294,000 or 0.8 loss ratio points. The slight improvement in the Motor Club calendar year 2000 loss ratio was due to lower Bodily Injury ("BI") liability loss ratios, primarily in Accident Year 2000, including reduced litigation. We believe this is due to the impact of the AICRA reforms on this coverage and this is consistent with the stated objectives of the AICRA reforms. However, we do think it remains premature to conclude that such favorable BI development will continue in future Accident Years, or that Accident Year 2000 may not adversely develop. This is due to the volatile nature of New Jersey PPA, including the regulatory, judicial and legislative environments. First party medical or PIP claims continued to produce poorer results in Accident Year 2000, consistent with those experienced in Accident Year 1999 after the AICRA rate rollback and related reforms were implemented. The provision for Accident Year PPA claims was $1,723,000 higher in 1999 as compared to 1998, accounting for 75% of the consolidated increase that year. These losses did not increase until after the rate rollback and other provisions of AICRA were implemented and were discussed previously. As stated, we believe that claimants filing more severe PIP claims on an accelerated basis than previously continues to cause this increase. We further believe that this acceleration is being caused by the implementation of regulations tightening the fee schedule, allowing pre-certification methodologies and permitting a revised arbitration system, all of which should serve ultimately to reduce PIP claim costs. While this acceleration increased the level of reported PIP losses incurred by Motor Club in Accident Years 2000 and 1999, we have reserved for their projected ultimate losses for Accident Years 2000 and 1999, generally using historical loss development patterns which indicate longer development patterns than those that may occur in Accident Years 2000 and 1999. We will continue to monitor loss development patterns in 2001 and beyond closely, to ensure that the level of reserves carried for PPA is adequate and appropriate as dictated by actual loss development. To date, we have believed that AICRA ultimately will have only a modest net negative effect on Motor Club's PPA operations and profitability, because the mandated rate reductions do not appear to be completely cost justified (based on information presently available) by the cost savings in the legislation. While we have not changed our ultimate outlook for the effect of AICRA, it is clear based on the impact to date, combined with the inaction of the NJ DOBI in implementing several key legislative provisions of AICRA and other legislative reforms, that this may take longer to occur and that the near-term effects of AICRA may continue to be more negative than originally forecast before improvement begins. As a result, Motor Club's premium to surplus ratio is in excess of 3 to 1. In addition, Motor Club's liabilities in relation to its statutory surplus are at a level whereby adverse development of claims, particularly as a result of the impact of AICRA, could further reduce its surplus, thus decreasing its RBC ratios, possibly to a level which would require action as prescribed by law. To date, the NJ DOBI has generally not been responsive to requests for rate increases or other regulatory relief based upon the impact of AICRA to companies, nor as noted has it implemented certain key aspects of AICRA which would provide relief to insurers such as Motor Club. Accordingly, considering these elements, combined with New Jersey's regulatory and legislative history, the enacted legislation, current judicial decisions, current rate freeze and ongoing volatility, we believe there are significant uncertainties with regard to our ongoing NJ PPA operations, which could adversely affect the Company. Consistent with our long-stated goal to increase our identification as a provider of small commercial lines insurance and expand and diversify our operations outside the State of New Jersey, we continue to review strategies to improve the profitability of our NJ PPA business and otherwise to add more value to our shareholders. Motor Club's expense ratio declined in 2000 as compared to 1999 as a result of lower expenses. In large part the decline in expenses is due to the economies of scale gained from the acquisition of Mountain Valley and North East. We allocated approximately $1.3 million in costs previously attributable to Motor Club to Mountain Valley and North East in 2000 without any significant increase in overall expenditures other than those noted below. This accounts for most of the improvement. North East Since its acquisition, the following table summarizes the income (loss) before Federal income taxes for this segment:
%Change Pro Forma Actual 2000 2000 vs. 1999 1999(1) 1999(2) ----------- ------------- --------- ---------- Insurance premiums $18,310,615 27.3% $14,380,072 $4,184,755 Net investment income 1,016,148 18.9% 854,630 246,204 Realized investment gains 14,849 -72.4% 53,880 31,382 Total revenues 19,341,612 26.5% 15,288,582 4,462,341 Losses and loss expenses incurred 11,761,626 28.7% 9,140,615 2,373,245 Acquisitions costs and other operating expenses 6,684,225 -13.6% 7,735,258 1,838,804 Total expenses 18,445,851 9.3% 16,875,873 4,212,049 Income (loss) before Federal income taxes $ 895,761 NM ($1,587,291) $ 250,292
(1) Pro Forma results for the twelve months ended December 31, 1999 (2) For the three months ended December 31, 1999 NM = Not Meaningful The following table presents North East's underwriting ratios for 2000 and 1999:
Pro Forma Actual 2000 1999(1) 1999(2) ----- --------- ----- Loss ratio 64.2% 63.6% 56.7% Expense ratio 36.5% 53.8% 43.9% Combined ratio 100.7% 117.4% 100.6%
(1) Pro Forma results for the twelve months ended December 31, 1999 (2) For the three months ended December 31, 1999. Because North East was only included from September 24, 1999, its date of acquisition, for purposes of comparability, the following discussion of this segment is compared with North East's full year of operation in 1999. North East's income before Federal income taxes represents a significant improvement from the $1,587,000 which North East lost in 1999. The loss ratio in 2000 was 64.2% as compared to 63.6% in 1999. Significantly lower reinsurance costs were offset by an increase in a limited number of severe losses that occurred in 2000. The expense ratio declined to 36.5% in 2000 from 53.8% in 1999 and 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 our acquisition of North East. Despite a $1,163,000 or 7% growth in direct premiums written in 2000 as compared to 1999, reinsurance costs declined $1.3 million or 72% over the same period, as we renegotiated North East's reinsurance programs. An additional contributing factor to the improved ratios is insurance premiums growth of $3,931,000 or 27%, which in part is affected by the aforementioned reductions in reinsurance costs, combined with premium growth, primarily in North East's commercial lines products. In the third quarter of 2000, North East introduced a commercial package product in the State of Maine similar to that offered by Preserver. Mountain Valley Since its acquisition, the following table summarizes the loss before Federal income taxes for this segment before the effects of the intercompany pooling agreement with Preserver:
2000(1) ----------- Insurance premiums $12,980,811 Net investment income 542,760 Realized investment gains 43,354 Total revenues 13,566,925 Losses and loss expenses incurred 8,834,681 Acquisitions costs and other operating expenses 5,503,983 Total expenses 14,338,664 Loss before Federal income taxes $ (771,739)
(1) For the ten months ending December 31, 2000 Mountain Valley is included from March 1, 2000, its date of acquisition. Because Mountain Valley had no net operations prior to our acquisition of it, other than net investment income, no comparison is made with prior years. The following table presents Mountain Valley's underwriting ratios for 2000:
2000(1) ------- Loss ratio 68.1% Expense ratio 42.4% Combined ratio 110.5%
(1) For the ten months ended December 31, 2000 The bulk of Mountain Valley's loss before income taxes of $772,000 in 2000 is the result of investment income being generated from positive cash flow, offset by approximately $1,167,000 in expenses allocated from us for technology and home office support during 2000. These results were in line with our expectations and reflect significant expense ratio improvement from prior to the acquisition, which we expect to continue in 2001. As described previously, Mountain Valley has terminated the 100% quota share it maintained. As noted: 1) there is no loss development, adverse or favorable, net of third party reinsurance, that we 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 us. Based on the short period of time that we have owned Mountain Valley, no meaningful loss trends on Accident Year 2000 have been discerned. Because Mountain Valley has a limited amount of loss experience, ultimate losses and reserves are being provided for based upon reviews of Mountain Valley's historical loss development patterns, prior to application of the quota share, combined with reviews of Preserver's and general industry loss development patterns. 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 positive cash flow, with $1,544,000 in cash flow from operations in the period from acquisition through December 31, 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 our other insurance units. For comparison purposes, Mountain Valley's recurring direct premiums written have grown $7,233,000 or 44% in 2000 as compared to 1999. Approximately $1,955,000 of that growth is attributable to premium with policy terms greater than twelve months, which we believe will help improve Mountain Valley's retention. The majority of Mountain Valley's premium written growth is being experienced in the States of New York, Massachusetts and Maine. Growth has been fairly uniform in its distribution among the various commercial package, commercial auto and supporting commercial lines products that Mountain Valley offers. As Accident Year 2000 and subsequent years' 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 described in the Liquidity and Capital Resources section. Other Revenues and Expenses The following table sets forth other revenues and expenses of the Company for each of the three years ended December 31:
%Change % Change 2000 2000 vs. 1999 1999 1999 vs 1998 1998 ---------- ------------- ---------- ------------ ---------- Merger-related expenses $ 354,097 -55.7% $ 800,000 NM $ - Interest expense 1,867,085 316.7% 448,117 727.4% 54,146 Amortization of goodwill 84,695 300.0% 21,174 NM - Federal income tax 1,039,758 NM 10,810 NM 1,941,022
NM = Not Meaningful The merger expenses are for Mountain Valley in 2000 and North East in 1999. While we do not rule out the possibility of additional acquisitions, another transaction is unlikely in 2001, and thus these expenditures should decline further in 2001. The increase in interest expense reflects the issuance of $11.5 million in Debt in February 2000 and $10 million in Convertible Subordinated Debentures issued in September 1999. Both are related to our acquisitions of Mountain Valley and North East, respectively, and are discussed in further detail in the section entitled "Financing Activities". The increase in the amortization of goodwill in 2000 compared to 1999 is due to a full year's charge for North East, acquired on September 24, 1999. The increase in 1999 was for a partial charge of the same item. Our income tax expense is largely a function of the Company's income before federal taxes. However, the Company and its subsidiaries (including MCA Insurance Company in Liquidation and its subsidiaries ("MCAIC"), former affiliates) file a consolidated Federal income tax return, and participate in a Tax Sharing Agreement. Despite being declared insolvent in 1992, MCAIC is required to continue to be included in the Company's consolidated tax return filed with the Internal Revenue Service. Since that time, MCAIC has generally continued to generate taxable losses included in the consolidated tax return. Under the applicable rules, the Company is entitled to, and has taken current tax benefits for net operating losses that MCAIC and its subsidiaries have generated since 1992. However, to the extent that the Company does not have positive basis (as defined by the Internal Revenue Code), it may also be required to pay future tax liabilities (which may offset the current tax benefit) subject to certain events which may trigger such payments. Accordingly, when such current tax benefits are recognized, a corresponding deferred tax liability is recorded. As noted previously, in March 2001, the Company's management determined that certain tax benefits should not have been recognized and that and that certain deferred tax liabilities had not been recorded. As a result, the 1998 and 1999 Consolidated Financial Statements have been restated from amounts previously reported and are discussed in Note V in the Notes to Consolidated Financial Statements. At the time of its insolvency, MCAIC realized approximately $150 million in losses, which generated a net operating loss ("NOL") that could not be utilized at that time by either the Company or MCAIC under applicable IRS regulations and which expire in 2006. Additional net operating losses have been experienced by MCAIC since 1992, some of which were utilized by the Company at a time when it had no tax basis in MCAIC, thus creating a deferred tax liability represented by the $1,917,405 "Excess Loss Account" item (for the year ended December 31, 2000) as shown in Note J of the Notes to the Consolidated Financial Statements. The $150 million of NOL's generated in 1992 will likely increase the Company's excess loss account at the time they expire in 2006. An excess loss account in a subsidiary generally creates taxable income at the time of the sale, liquidation or other disposition of the subsidiary. Management expects that the liquidation or other disposition of MCAIC will take place prior to the expiration of these NOL's in 2006 and prior to the corresponding increase in the Company's excess loss account. As the control of the liquidation process rests with the Insurance Department of the State of Oklahoma (the "Receiver") and not with management, there is a potential risk that such tax liability could be incurred by the Company after 2006 when the 1992 generated NOLs will have been converted into the Company's excess loss account. Management believes it is unlikely that such risk will occur, as the liquidation of MCAIC is probable before the expiration of the NOL. However, the tax effects of these transactions are subject to the circumstances of the liquidation process itself and tax-planning strategies exist which could mitigate the impact of such a tax exposure. With respect to the Company's excess loss account created by the Company's utilization of MCAIC's post 1992 NOL's, these excess losses will likely result in the Company recognizing taxable income in the year MCAIC is liquidated or otherwise disposed of. The effect of the deferred taxes attributable to such income has been reflected on Consolidated Financial Statements accompanying this Report. Liquidity and Capital Resources Liquidity is a measure of the ability to generate sufficient cash to meet cash obligations as they come due. Cash outflows can be variable because of uncertainties regarding settlement dates for liabilities for unpaid losses and because of the potential for large losses either individually or in the aggregate. As a holding company, the Company derives cash from its subsidiaries in the form of dividends, tax payments and management fees. The Company uses cash to pay debt service, Federal income taxes and operating expenses. We also may provide capital to our subsidiaries. Maximum amounts of dividends that can be taken without regulatory approval are prescribed by statute (See Note K of Notes to Consolidated Financial Statements). Deferred tax liabilities related to MCAIC (captioned as "Excess Loss Account" in the schedule of net deferred tax assets in Note J in the Notes to Consolidated Financial Statements) will likely be payable on the final liquidation of MCAIC by its Receiver, which the Company does not control. It is not presently known when MCAIC's final liquidation will occur, although the Company does anticipate that it will have approximately one year notice before this event occurs and that this should occur prior to 2006. Accordingly, the Company may be required to seek financing depending on the timing and magnitude of this liability. Tax payments and management fees from the insurance subsidiaries are made under agreements that generally are subject to approval by state insurance departments. The Insurance Companies are highly liquid, receiving substantial cash from premiums, investment income, service fees and proceeds from sales and maturities of portfolio investments. The principal outflows of cash are payments of claims, taxes, interest, operating expenses and dividends. Accordingly, the Insurance Companies maintain investment and reinsurance programs generally intended to provide adequate funds to pay claims without forced sales of investments. The Insurance Companies model their exposure to catastrophes and generally have the ability to pay claims without selling securities. Even in years of greater catastrophe frequency, the Insurance Companies have been able to pay claims without liquidating any investments. The Insurance Companies' policy with respect to fixed maturity investments is to purchase only those that are of investment grade quality. See Note K of the Notes to Consolidated Financial Statements for additional discussion of the NAIC risk-based capital standards and Codification of Statutory Accounting Principles with an effective date of January 1, 2001. As a company with insurance subsidiaries that invests substantial sums in fixed income securities, we are accustomed to fluctuations in the value of our fixed income investments. We have identified one hundred percent of those investments as available for sale pursuant to SFAS 115. Accordingly, changes in the value of those investments are recorded as other comprehensive income. Because our investment portfolios are composed completely of securities which are generally highly liquid (i.e., U.S. government securities and investment grade corporate bonds), and that our credit reviews have not indicated any downgrades, there are no grounds to believe that the unrealized gains (in 2000) or losses incurred (in 1999) are other than temporary. In addition, the combination of the duration of the portfolio being sufficiently short (approximately 3.46 and 3.60 years at December 31, 2000 and 1999, respectively), combined with the highly liquid nature of those securities and our proclivity to hold those bonds to maturity (although they are classified as available-for-sale), the par value of those bonds should be fully realized at maturity, resulting in those unrealized gains and losses being temporary. In addition, we generally believe that the longer-term trend for future movements in interest rates is toward lower interest rates, which has occurred and has positively affected the value of fixed income investments and has converted those unrealized losses to unrealized gains. We believe the combination of economic circumstances, which is resulting in slower overall economic growth, modest inflation and real long-term interest rates that remain historically high, all combines to result in lower longer-term interest rate trends. Operating and Investing Activities Net cash provided by operating activities was $7,580,000, $910,000 and $10,547,000 in 2000, 1999 and 1998, respectively. The increased amount in 2000 is due to the premium growth and profitable operations of the Insurance Companies. The lower amount for 1999 is attributable to the reduction in insurance premiums in 1999 as a result of the statutorily mandated NJ PPA rate rollback and increased payment of PIP losses for the 1999 Accident Year. Net cash utilized in investing activities was $15,917,000, $10,239,000 and $11,054,000 in 2000, 1999 and 1998, respectively. The amounts used in each year reflect the investment of cash provided by operating and finance activities. To date, we have only increased staffing nominally to provide home office support to our acquisitions. In 2001, we expect to increase staffing further to support our expanded enterprise and this may increase the expense ratio. We are also making certain capital improvements, particularly with regard to technology platforms at Mountain Valley and Preserver. These capital outlays are anticipated to total at least $1 million in 2001, with additional similar investments also anticipated in 2002 and beyond. The depreciation expense for these improvements, along with associated implementation and conversion costs, are expected to cause additional increases in our expenses and expense ratio in future periods. We do expect however, 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 and expense ratio is expected to be temporary, and should result in a lower expense ratio in the future. Aside from the changes in operating expenditures noted previously, particularly the investments in technology and expenditures associated with the acquisition of Mountain Valley and North East, no unusual or nonrecurring operating expenditures have been incurred over this period. The payout ratio of losses, other than PIP in NJ PPA, has not fluctuated substantially over this period. Our cash flow from operations is expected to increase as we increase our revenue through additional premium writings, specifically commercial lines and continue to reduce our expenses and expense ratio. This will be offset somewhat by the development and payment of losses on the new PPA which Motor Club is writing. Financing Activities We did not pay dividends on our common stock in 2000, 1999 and 1998. In connection with our acquisition of Mountain Valley, on February 29, 2000 we borrowed $11.5 million ("Debt") from our three Executive Committee members. For more information on the Debt, please refer to Note H in the Notes to Consolidated Financial Statements. In connection with our acquisition of North East, we issued $10 million of Convertible Subordinated Debentures ("Debentures"), on September 23, 1999, in one series, under a plan previously approved by our shareholders. For more information on the Debentures, please refer to Note I in the Notes to Consolidated Financial Statements. On December 27, 1999, we repaid the $3 million borrowed from Dresdner Bank, AG in September 1998. Recent Accounting Pronouncements During 1999, the Financial Accounting Standards Board ("FASB") issued FASB 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB 133, and Amendment of FASB 133" which extended the effective date of FASB 133 to January 1, 2001. FASB 133, "Accounting for Derivative Instruments and Hedging Activities," establishes accounting and reporting standards for derivative instruments. This statement will not have a material impact on the Company's results of operations or financial condition. In September 2000, the FASB issued Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of FASB Statement No. 125". This statement will not have a material impact on the Company's results of operations or financial condition. Item 8. Financial Statements and Supplementary Data See Item 14 (a). Item 9. Disagreements With Accountants On Accounting and Financial Disclosures None PART III Items 10, 11, 12 and 13 are omitted from this Report on Form 10-K; the Registrant shall file a definitive proxy statement pursuant to Regulation 14A not later than April 30, 2001, which is 120 days after the close of the fiscal year of the Registrant. PART IV Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K (a) (1) The following financial statements are included in Part II, Item 8:
Page(s) ------- Report of Independent Accountants F-1 Consolidated Balance Sheets at December 31, 2000 and 1999 F-2 Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998 F-3 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2000, 1999 and 1998 F-4 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 F-5 to F-6 Notes to Consolidated Financial Statements F-7 to F-48 (2) The following financial statement schedules for the years 2000, 1999 and 1998 (pursuant Rule 5-04 of Regulation S-X) are presented herewith: Schedule I - Summary of Investments- Other than Investments in Related Parties* F-49 Schedule II - Condensed Financial Information of Registrant F-50 to F-52 Schedule IV - Reinsurance* F-53 Schedule V - Valuation and Qualifying Accounts and Reserves F-54 Schedule VI - Supplemental Information Concerning Property/Casualty Insurance Operations* F-55
*Presented pursuant to Rule 7-05 of Regulation S-X. Schedules other than those mentioned above are omitted because the conditions requiring their filing do not exist, or because the information is given in the financial statements filed herewith, including the notes thereto. (b) Exhibits:
Exhibit No. Description Reference - ----------- ---------------------------------- ---------------------------- 2-a Agreement and Plan of Merger Exhibit 2 to Motor Club between Motor Club of America and of America's Form 8-K North East Insurance Company, dated March 17, 1999 dated as of March 16, 1999 3-a Restated and Amended Certificate Exhibit 1(i) to Motor of Incorporation of Motor Club of Club of America's America, dated June 12, 1972 Annual Report on Form 10-K for fiscal year ended December 31, 1972 3-b By-Laws of Motor Club of America, Exhibit 3-l to Motor effective March 15, 1989 Club of America's Annual Report on Form 10-K for fiscal year ended December 31, 1988 3-c By-law Amendment of Motor Exhibit 3-m to Motor Club of America, effective Club of America's August 3, 1994 Form 8-K dated July 21, 1994 4-a Specimen Certificate Exhibit 4 to File representing Common Stock, No. 2-39996 on $.50 par value Form S-1 10-a Motor Club of America 1987 Stock Exhibit 10-o to Motor Option Plan Club of America's Annual Report on Form 10-K for fiscal year ended December 31, 1987 10-b Specimen copy of Motor Club of Exhibit 10-p to Motor America 1987 Stock Option Club of America's Agreement Annual Report on Form 10-K for fiscal year ended December 31, 1987 10-c Motor Club of America 1992 Exhibit A to Motor Stock Option Plan Club of America's Proxy Statement for fiscal year ended December 31, 1991 10-d Motor Club of America 1999 Exhibit A to Motor Stock Option Plan Club of America's Proxy Statement for the fiscal year ended December 31, 1998 10-e Specimen copy Motor Club of Exhibit 10-r to America 1992 Stock Option Motor Club of Plan Agreement America's Annual Report on Form 10-K for fiscal year ended December 31, 1992 10-f Settlement Agreement between Exhibit 99 to Motor Motor Club of America et als. Club of America's and Receiver of MCA Insurance Form 8-K dated Company in Liquidation et als. December 20, 1994 and related documents 10-g Order dated December 30, 1994 Exhibit 99-C to Motor Approving Settlement between Club of America's Motor Club of America et als and Form 8-K dated Receiver of MCA Insurance December 30, 1994 Company in Liquidation et als and related conformed documents 10-h Stock Purchase Agreement Exhibit 99-F to Motor between Motor Club of America Club of America's and JVL Holding Properties, Inc Form 8-K dated December 2, 1996 10-i Agreement dated December 2, 1996 Exhibit 99-G to Motor between Motor Club of America Club of America's and Motor Club of America Form 8-K dated Enterprises, Inc December 2, 1996 10-j $3 Million Senior Unsecured Exhibit 10-i to Motor Revolving Credit Facility between Club of America's Annual Motor Club of America and Dresdner Report on Form 10-K Bank, AG and related documents for fiscal year ended December 31, 1998 10-k Purchase Agreement dated as of Exhibit 10.1 to Motor December 16, 1999 between Valley Club of America's Form Insurance Company and Motor Club 8-K dated December 16, of America 1999 10-l Specimen copy of Form of Exhibit 1 to Form 13D of Convertible Subordinated Archer McWhorter dated Debentures September 23, 1999 10-m Specimen copy of Promissory Note Exhibit 10-m to Motor Club of America's Annual Report on Form 10-K for fiscal year ended December 31, 1999 22 Subsidiaries of Motor Club of America Page 78
Pursuant to the requirements of Section 13 or 15(d) 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 (Registrant) Dated: April 16, 2001 By s/Stephen A. Gilbert ------------------------------- Stephen A. Gilbert President, Chief Executive Officer, General Counsel and Director Dated: April 16, 2001 By s/Patrick J. Haveron ------------------------------- Patrick J. Haveron Executive Vice President, Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Dated: April 16, 2001 By s/Archer McWhorter ------------------------------- Archer McWhorter Chairman of the Board and Director Dated: April 16, 2001 By s/Alvin E. Swanner ------------------------------- Alvin E. Swanner Director Dated: April 16, 2001 By s/William E. Lobeck, Jr. ------------------------------- William E. Lobeck, Jr. Director Dated: April 16, 2001 By s/Robert S. Fried ------------------------------- Robert S. Fried Director Dated: April 16, 2001 By s/Malcolm Galatin ------------------------------- Malcolm Galatin Director REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF MOTOR CLUB OF AMERICA: In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) present fairly, in all material respects, the financial position of Motor Club of America and its subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 14 (a)(2) present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note V, the Company has restated its December 31, 1999 and 1998 financial statements for certain tax matters. PricewaterhouseCoopers LLP New York, New York April 16, 2001 F-1 MOTOR CLUB OF AMERICA AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ----------
DECEMBER 31, -------------------- 2000 1999 ---- ---- (Restated) ASSETS Investments: Fixed maturity securities, available- for-sale, at fair value (amortized cost $97,571,094 -2000 and $80,854,764 -1999) $ 98,074,324 $ 78,242,322 Equity securities, at fair value (cost $34,659-2000 and $43,346-1999) 47,604 57,053 Mortgage loans on real estate - at the unpaid principal amount 110,160 153,616 Short-term investments, at fair value which approximates cost 6,760,341 8,528,858 ------------ ----------- Total investments 104,992,429 86,981,849 Cash and cash equivalents 3,607,076 443,733 Premiums receivable 39,749,090 27,132,246 Reinsurance recoverable on paid and unpaid losses and loss expenses 32,883,564 21,163,574 Notes and accounts receivable 124,111 212,598 Deferred policy acquisition costs 14,505,569 10,560,763 Fixed assets - at cost, less accumulated depreciation 2,993,229 1,858,621 Federal income tax recoverable 12,413 47,100 Prepaid reinsurance premiums 4,324,915 1,485,450 Deferred tax asset 1,828,706 3,637,551 Goodwill, less accumulated amortization 1,509,152 1,593,801 Other assets 2,080,821 1,470,744 ------------ ------------ Total Assets $208,889,242 $156,588,030 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Losses and loss expenses $ 90,392,486 $ 70,983,383 Unearned premiums 53,409,659 38,698,028 Commissions payable 4,573,912 2,802,516 Accounts payable 2,246,702 1,397,263 Accrued expenses 4,032,807 3,112,157 Drafts outstanding 2,741,249 2,685,423 Note payable 11,500,000 - Convertible subordinated debentures 10,000,000 10,000,000 ------------ ------------ Total liabilities 178,896,815 129,678,770 ------------ ------------ Shareholders' Equity: Common Stock, par value $.50 per share: Authorized - 10,000,000 shares; issued and outstanding shares 2,124,387 1,062,194 1,062,194 Paid in additional capital 2,066,089 2,066,089 Accumulated other comprehensive loss (2,774,148) (3,897,396) Retained earnings 29,638,292 27,678,373 ------------ ------------ Total Shareholders' Equity 29,992,427 26,909,260 ------------ ------------ Total Liabilities and Shareholders' Equity $208,889,242 $156,588,030 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-2 MOTOR CLUB OF AMERICA AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS ----------
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 2000 1999 1998 ---- ---- ---- (Restated) (Restated) REVENUES Insurance premiums (net of premiums ceded totaling $13,161,053, $8,358,946 and $6,776,174) $83,467,481 $55,807,330 $53,175,663 Net investment income 6,412,884 5,080,939 4,304,507 Realized gains on sales of investments (net) 82,949 36,040 28,545 Other revenues 163,833 143,410 171,171 ----------- ------------ ------------ Total revenues 90,127,147 61,067,719 57,679,886 ----------- ------------ ------------ LOSSES AND EXPENSES Losses and loss expenses incurred (net of reinsurance recoveries totaling $11,428,275, $1,544,026 and $4,736,671) 55,708,052 40,631,053 36,479,591 Amortization of deferred policy acquisition costs 25,135,714 14,305,501 13,375,221 Other operating expenses 3,977,827 4,759,728 2,051,522 Merger-related expenses 354,097 800,000 - Amortization of goodwill 84,695 21,174 - Interest expense 1,867,085 448,117 54,146 ----------- ------------ ------------ Total losses and expenses 87,127,470 60,965,573 51,960,480 ----------- ------------ ------------ Income before Federal income taxes 2,999,677 102,146 5,719,406 Benefit (provision) for Federal income taxes: current (44,797) 28,331 (179,661) deferred (994,961) (39,141) (1,761,361) ------------ ------------ ------------ Total Federal income tax (1,039,758) (10,810) (1,941,022) ----------- ------------ ------------ Net income $ 1,959,919 $ 91,336 $ 3,778,384 =========== ============ ============ NET INCOME PER COMMON SHARE: Basic $ .92 $ .04 $1.79 ===== ===== ===== Diluted $ .91 $ .04 $1.78 ===== ===== ===== WEIGHTED AVERAGE COMMON AND POTENTIAL COMMON SHARES OUTSTANDING: Basic 2,124,387 2,117,912 2,108,722 =========== ============ ============ Diluted 2,770,075 2,121,697 2,121,366 =========== ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-3 MOTOR CLUB OF AMERICA AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY --------
Common Stock (a) -------------------- Paid-In Accumulated Other Shares Additional Comprehensive Retained Issued Amount Capital Income (Loss)(b) Earnings Total ------ ------ ---------------------------------- --------- ----- (Restated) (Restated) (Restated) Balance at December 31, 1997 2,094,429 $1,047,215 $1,950,204 $(3,931,342) $23,934,956 $23,001,033 Prior period adjustment 1,539,894 (126,303) 1,413,591 Net income 3,778,384 3,778,384 Other comprehensive income, net of tax: Unrealized investment gains, net of reclassification adjustment 668,309 668,309 Minimum pension liability adjustment (105,204) (105,204) ----------- Comprehensive income 4,341,489 ----------- Common stock issued 22,000 11,000 46,750 57,750 --------- --------- --------- --------- ----------- ----------- Balance at December 31, 1998 2,116,429 1,058,215 1,996,954 (1,828,343) 27,587,037 28,813,863 Net income 91,336 91,336 Other comprehensive income, net of tax: Unrealized investment losses, net of reclassification adjustment (3,006,583) (3,006,583) Minimum pension liability adjustment 937,530 937,530 ------------ Comprehensive loss (1,977,717) ------------ Common stock issued 7,958 3,979 69,135 73,114 --------- --------- --------- --------- ----------- ----------- Balance at December 31, 1999 2,124,387 1,062,194 2,066,089 (3,897,396) 27,678,373 26,909,260 Net income 1,959,919 1,959,919 Other comprehensive income, net of tax: Unrealized investment gains, net of reclassification adjustment 1,992,930 1,992,930 Minimum pension liability adjustment (869,682) (869,682) ----------- Comprehensive income 3,083,167 --------- --------- --------- --------- ----------- ----------- Balance at Decembe 31, 2000 2,124,387 $1,062,194 $2,066,089 $(2,774,148) $29,638,292 $29,992,427 ========= ========== ========== =========== =========== ===========
(a) PAR VALUE $.50 PER SHARE; AUTHORIZED - 10,000,000 SHARES. (b) NET OF DEFERRED TAXES. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-4 MOTOR CLUB OF AMERICA AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS ----------
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------ 2000 1999 1998 ---- ---- ----- (Restated) (Restated) Net income $ 1,959,919 $ 91,336 $ 3,778,384 Adjustments to reconcile net income to cash provided by operating activities: Depreciation expense 924,900 639,119 527,644 Amortization of bond premium and discount 122,655 50,336 35,375 Amortization of goodwill 84,695 21,174 - Gain on sale of investments (82,949) (36,040) (28,545) Deferred tax provision 994,961 39,141 1,761,361 Changes in assets and liabilities excluding effects of acquisitions: Premiums receivable (6,583,131) 575,790 (12,591,502) Notes and accounts receivable 88,487 (87,154) (775) Deferred policy acquisition costs (2,521,953) 434,040 (2,849,679) Federal income tax - current (259,787) (24,526) (53,035) Reinsurance recoverable on paid and unpaid losses and loss expenses 980,120 1,071,741 (568,211) Prepaid reinsurance premiums 1,535,665 353,015 (320,336) Other assets (358,537) 57,273 116,941 Losses and loss expenses 6,663,991 1,435,399 8,088,365 Unearned premiums 4,201,301 (1,652,130) 11,447,387 Commissions payable 1,708,996 (32,892) 1,512,739 Accounts payable 680,438 521,936 312,874 Accrued expenses (2,615,424) (3,544,396) (914,385) Drafts outstanding 55,826 996,588 292,620 ----------- ----------- ------------ Total cash provided by operating activities 7,580,173 909,750 10,547,222 ----------- ----------- ------------
The accompanying notes are an integral part of these consolidated financial statements. F-5 MOTOR CLUB OF AMERICA AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) ----------
FOR THE YEARS ENDED DECEMBER 31, --------------------------------------- 2000 1999 1998 ---- ---- ---- (Restated) (Restated) Investing activities: Proceeds from: Maturities of fixed maturities 14,551,267 8,074,333 17,444,834 Sales of fixed maturities 7,689,638 1,205,824 2,000,000 Sale of equity securities 8,687 630,612 - Payments received on mortgage loan principal 43,455 207,422 161,517 Sale or maturities of short- term investments 126,600,687 89,390,755 245,390,264 Purchase of: Fixed maturities (34,191,912) (9,343,352) (31,304,235) Short-term investments (124,698,557) (89,656,130) (244,133,789) Mountain Valley (2000) and North East (1999), net of cash acquired (3,962,753) (10,127,839) - Fixed assets (1,957,342) (621,069) (612,897) ----------- ------------ ------------ Total cash utilized in investing activities (15,916,830) (10,239,444) (11,054,306) ----------- ------------ ------------ Financing activities: Convertible subordinated debentures - 10,000,000 - Note payable 11,500,000 (3,000,000) 3,000,000 Common stock issued - - 57,750 ----------- ------------ ------------ Total cash provided by financing activities 11,500,000 7,000,000 3,057,750 ----------- ------------ ------------ Net increase (decrease) in cash 3,163,343 (2,329,694) 2,550,666 Cash and cash equivalents at beginning of year 443,733 2,773,427 222,761 ----------- ------------ ------------ Cash and cash equivalents at end of year $ 3,607,076 $ 443,733 $ 2,773,427 =========== ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (1) Total interest paid was $1,774,808 (2000), $448,782 (1999) and $60,389 (1998). (2) Total Federal income taxes paid was $0 (2000 and 1999) and $212,738 (1998). (3) The Company purchased all of the common stock of Mountain Valley (2000) and North East (1999). Cash acquired in connection with the purchase of Mountain Valley (2000) and North East (1999) was $3,537,247 and $208,725, respectively. In conjunction with the acquisition, liabilities were assumed as follows:
2000 1999 ----------- ----------- Fair value of assets acquired $14,944,762 $32,858,750 Cash paid for the capital stock 7,500,000 10,409,682 Equity paid for the capital stock - 73,114 ----------- ----------- Liabilities assumed $ 7,444,762 $23,375,954 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-6 MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- Note A - Summary of Significant Accounting Policies: (a) Basis of Presentation and Principles of Consolidation: The consolidated financial statements of Motor Club of America (the "Company") include its accounts and those of its directly or indirectly wholly-owned subsidiary companies. The financial statements have been prepared on the basis of generally accepted accounting principles ("GAAP"). The preparation of financial statements in conformity with these practices requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. The Company's insurance subsidiaries, Motor Club of America Insurance Company ("Motor Club"), Preserver Insurance Company ("Preserver"), Mountain Valley Indemnity Company ("Mountain Valley"), North East Insurance Company ("North East") and its subsidiary American Colonial Insurance Company ("American Colonial") are collectively referred to as the "Insurance Companies". All material intercompany items and transactions have been eliminated in consolidation. Certain amounts in prior years have been reclassified to conform to the current presentation. (b) Nature of Operations: The Company is a New Jersey corporation which owns the Insurance Companies. The Company acquired North East and its subsidiaries on September 24, 1999 and Mountain Valley on March 1, 2000; see Note B and C for more information on these transactions, respectively. The Insurance Companies engage in (Continued) F-7 MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- Note A - Summary of Significant Accounting Policies (Continued): property and casualty insurance, principally small commercial, private passenger automobile and homeowners insurance, produced by independent agents. The Company generates substantially all of its revenues from its insurance operations. Motor Club and Preserver's operations are in the State of New Jersey. Mountain Valley's operations are in New England (except for Connecticut) and New York. North East's operations are in the State of Maine. American Colonial, which has not written any business since March 1990, plans to recommence operations in the State of New York in 2001. (c) Insurance Premiums: Insurance premiums are credited to income by the monthly pro rata method over the terms of the contracts. Beginning July 1, 1998, Motor Club began converting its contracts for private passenger automobile insurance from six month to twelve month policies ("Policy Term Conversion"). While the Policy Term Conversion temporarily increased, for a one year period commencing July 1, 1998, the amount of premiums written by Motor Club, it did not affect the amount of premiums earned. Insurance contracts for policies are for terms of one to three years. (d) Investments: All of the Company's fixed maturity and equity securities are classified as available-for-sale securities, and are therefore reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity, net of applicable deferred taxes. (Continued) F-8 MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- Note A - Summary of Significant Accounting Policies (Continued): The Company does not invest in, hold or issue any derivative financial instruments. Premium and discount amounts are amortized into income based on the stated contractual life of the securities. The Company recognizes income for the mortgage-backed and asset-backed bond portion of its fixed maturity securities portfolio using the constant effective yield method. When actual prepayments differ from this assumption, the effective yield is recalculated to reflect actual payments to date. The net investment in the security is adjusted to the amount that would have existed had the new effective yield been applied since the acquisition of the security. That adjustment is included in net investment income. Gains and losses on investments are recognized when investments are sold or redeemed on a specific identification basis. (e) Other Revenues: Other revenues consist principally of interest on mortgage loans and servicing fees from motor club membership fees, which are earned when services are fulfilled. (f) Losses and Loss Expenses: The estimated liability for losses is based on (1) the accumulation of cost estimates for unpaid losses reported prior to the close of the accounting period; and (2) estimates of incurred but not reported losses based upon past experience; less (3) estimates of anticipated salvage and subrogation recoveries. In the normal course of business, the Company seeks to reduce the loss that (Continued) F-9 MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- Note A - Summary of Significant Accounting Policies (Continued): may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. Changes to the estimated liabilities are reflected in the results of operations currently. The liability for loss expenses is based on estimates of expenses to be incurred in the settlement of claims. (g) Deferred Policy Acquisition Costs: Deferred policy acquisition costs are costs that vary with and are primarily related to the production of new and renewal business. Such costs include commissions, premium taxes and certain underwriting and policy issuance costs which are deferred when incurred and amortized to income as the related written premiums are earned. Investment income is anticipated in determining the recoverability of deferred policy acquisition costs. (h) Fixed Assets: Depreciation on leasehold improvements is computed by the straight-line method over the remaining lease term. Depreciation on furniture and fixtures, technology investments and other equipment, is computed by the straight-line method over the estimated useful lives, ranging from three to twenty years. (Continued) F-10 MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- Note A - Summary of Significant Accounting Policies (Continued): Expenditures for major renewals and betterments are capitalized, and expenditures for maintenance and repairs are charged to income as incurred. When fixed assets are retired, or otherwise disposed of, the cost thereof and related accumulated depreciation are eliminated from the accounts. Any gain or loss on disposal is credited or charged to operations. (i) Federal Income Taxes: Deferred Federal income taxes are provided for temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates expected to apply in the years in which the differences are expected to reverse. (j) Goodwill: Under the purchase method of accounting for business combinations, the total purchase price is allocated to the acquired assets and liabilities based on their fair values. Any differences between the excess of the cost of the transaction and the fair value of net assets acquired is recorded as goodwill, which will be amortized on a straight-line basis over twenty years. (k) Statement of Cash Flows: For purposes of the statement of cash flows, the Company considers demand deposits held with financial institutions and money market mutual fund holdings to be cash equivalents. (Continued) F-11 MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- Note A - Summary of Significant Accounting Policies (Continued): (l) 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. See Note Q for more information on outstanding stock options and Note S for more information on the computation of Earnings per Share. (m) Comprehensive Income (Loss): Comprehensive income (loss) consists of net income, the unfunded accumulated benefit obligation in excess of plan assets ("minimum pension liability") and net unrealized investment gains or losses on available-for-sale securities and is presented separately in Note P. These amounts are reported net of deferred Federal income taxes. (n) Fair Value of Financial Instruments The carrying amounts reported in the Consolidated Balance Sheets for cash and cash equivalents, premium receivables, accounts payable and notes payable approximate those assets and liabilities fair values due to the short term nature of the instruments. The fair value of investments and convertible subordinated debentures are addressed in the related footnotes. Note B - Acquisition of North East: On September 24, 1999, the Company acquired North East, headquartered in Scarborough, Maine, through a merger of a wholly-owned subsidiary of the Company with and into North East. Under the terms of the merger, certain North East shareholders elected and received 7,958 shares of the Company's common stock representing 41,781 shares of North East common stock; the remaining shareholders and holders of North East stock options were paid $10,409,682 in cash. The aggregate purchase price for the transaction was $10,482,796. (Continued) F-12 MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- Note B - Acquisition of North East (Continued): The acquisition has been accounted for using the purchase method of accounting and, the excess purchase price over the fair value of the net assets acquired of $1,614,957 was allocated to goodwill. The goodwill is being amortized on a straight-line basis over twenty years. The 1999 consolidated results of operations include the results of operations of North East for the three months ended December 31, 1999. The amount of goodwill amortization expense recorded in 2000 and 1999 was $84,695 and $21,174, respectively. The following unaudited pro forma consolidated results of operation for the years ended December 31, 1999 and 1998 assume the North East acquisition occurred as of January 1, 1998:
1999 1998 ---- ---- (Restated) (Restated) Insurance premiums $66,002,646 $65,756,095 Net investment income 5,695,332 5,175,055 Realized gains on sales of investments (net) 3,102 82,817 Other revenue 143,410 171,171 ----------- ----------- Total revenues 71,844,490 71,185,138 ----------- ----------- Losses and loss expenses incurred 47,398,423 44,837,264 Other operating expenses 25,860,049 21,339,295 ----------- ----------- Total losses and expenses 73,258,472 66,176,559 ----------- ----------- Income (loss) before federal income taxes (1,413,982) 5,008,579 Benefit (provision) for federal income taxes 488,475 (1,687,859) ----------- ----------- Net income (loss) $ (925,507) $ 3,320,720 =========== =========== Per share: Basic $ (.44) $ 1.57 =========== =========== Diluted $ (.44) $ 1.40 =========== ===========
(Continued) F-13 MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- Note C - Acquisition of Mountain Valley: On March 1, 2000 the Company completed its acquisition of Mountain Valley, formerly known as White Mountains Insurance Company, from Unitrin, Inc. for $7.5 million in cash. Mountain Valley is based in Bedford, New Hampshire. The fair value of Mountain Valley's net assets at March 1, 2000 was $7,775,687. The acquisition has been accounted for using the purchase method of accounting and thus based on the fair value of the net assets acquired at March 1, 2000, the Company recorded $275,687 of the difference between the excess which represented the fair value of net assets acquired and the cost of the transaction as a reduction of deferred policy acquisition costs, which is being amortized on a straight-line basis over the terms of the underlying insurance contracts associated with those costs. Under the terms of the purchase, Mountain Valley terminated its former 100% intercompany quota share reinsurance agreement; at closing there were no net loss and loss expense reserves for claims occurring prior to closing, including those which develop subsequently. Mountain Valley assumed $6,135,200 of unearned premium and other liabilities of $1,309,562 at closing (subject to certain adjustments). Because of the 100% quota share, Mountain Valley had no net underwriting operations prior to March 1, 2000 and thus no pro forma effects of the acquisition are presented. Note D - Investments: (a) The amortized cost and estimated fair value of investments in fixed maturity securities at December 31, 2000 were as follows: (Continued) F-14 MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- Note D - Investments (Continued):
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------- ---------- ----------- ---------- U.S. Government securities $25,283,857 $ 969,621 $ (29,541) $26,223,937 Mortgage-backed securities 22,842,939 115,961 (38,022) 22,920,878 Asset-backed securities 12,303,741 32,086 (20,351) 12,315,476 Corporate securities 37,140,557 202,337 (728,861) 36,614,033 ----------- ---------- --------- ----------- Total $97,571,094 $1,320,005 $(816,775) $98,074,324 =========== ========== ========= ===========
The amortized cost and estimated fair value of investments in fixed maturity securities at December 31, 1999 were as follows:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------- ---------- ----------- ---------- U.S. Government securities $20,031,827 $128,984 $ (239,128) $19,921,683 Mortgage-backed securities 10,678,363 29,476 (301,482) 10,406,357 Asset-backed securities 10,454,886 - (216,034) 10,238,852 Corporate securities 39,689,688 9,436 (2,023,694) 37,675,430 ----------- -------- ----------- ----------- Total $80,854,764 $167,896 $(2,780,338) $78,242,322 =========== ======== =========== ===========
The amortized cost and fair value of investments in fixed maturity securities at December 31, 2000, by contractual maturity, were as follows:
Amortized Fair Cost Value ----------- ----------- Due in one year or less $ 6,095,794 $ 6,124,940 Due after one year through five years 26,531,826 26,873,336 Due after five years through ten years 30,311,345 30,272,020 Due after ten years 34,632,129 34,804,028 ----------- ----------- $97,571,094 $98,074,324 =========== ===========
(Continued) F-15 MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- Note D - Investments (Continued): The above maturity tables include $35,236,354 (at fair value) of mortgage-backed and asset-backed securities, which were classified based on the contractual life of the securities. Expected maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Gross gains of $157,992, $6,213 and $50,099 were realized on proceeds of $9,304,811, $546,789 and $10,434,411 in 2000, 1999 and 1998, respectively, on those sales and calls. Gross losses of $75,243, $595 and $21,554 were realized on proceeds of $4,738,160, $250,000 and $5,391,130 in 2000, 1999 and 1998, respectively, on those sales and calls. (b) Net investment income by category of investments consisted of the following:
CATEGORY 2000 1999 1998 -------- ---- ---- ---- Fixed maturities $5,664,918 $4,665,066 $3,950,500 Other, principally short-term investments 1,021,032 593,366 498,253 ---------- ---------- ---------- Total investment income 6,685,950 5,258,432 4,448,753 Investment expenses 273,066 177,493 144,246 ---------- ---------- ---------- Net investment income $6,412,884 $5,080,939 $4,304,507 ========== ========== ==========
(c) At December 31, 2000 and 1999, fixed maturity investments (at fair value) deposited with the various states where the Insurance Companies conduct business amounted to $7,407,918 and $2,986,560, respectively. (d) There were no investments in any persons and its affiliates in excess of ten percent of shareholders' equity. (Continued) F-16 MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- Note D - Investments (Continued): (e) The change in net unrealized gains (losses) on investments are as follows:
YEARS ENDED DECEMBER 31, ------------------------------------ 2000 1999 1998 ---- ---- ---- Fixed maturities $3,115,672 $(4,517,228) $1,012,666 ========== ============ ==========
(f) In the opinion of management there has been no other than temporary impairments in the carrying amount of investments. Note E - Unpaid Losses and Loss Expenses: (a) The following table provides a reconciliation of the beginning and ending balances for unpaid losses and loss expenses for 2000, 1999 and 1998:
2000 1999 1998 ---- ---- ---- Balance at January 1 $70,983,383 $58,335,143 $50,246,778 Less: Reinsurance recoverables 18,453,650 18,520,866 17,363,319 ----------- ----------- ----------- Net balance at January 1 52,529,733 39,814,277 32,883,459 Acquired in 1999 - 8,820,265 - Incurred losses and loss expenses: Provision for current year claims 55,542,028 37,271,781 32,598,287 Increase in provision for prior years' claims 166,024 3,359,272 3,881,304 ----------- ----------- ----------- Total incurred losses and loss expenses 55,708,052 40,631,053 36,479,591 ----------- ----------- ----------- Payment for losses and loss expenses: Payment on current year claims 24,501,115 16,447,458 12,038,000 Payment on prior years' claims 23,540,843 20,288,404 17,510,773 ----------- ----------- -----------
(Continued) F-17 MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- Note E - Unpaid Losses and Loss Expenses (Continued):
2000 1999 1998 ---- ---- ---- Total payments for losses and loss expenses 48,041,958 36,735,862 29,548,773 ----------- ----------- ----------- Net balance at December 31 60,195,827 52,529,733 39,814,277 Plus: Reinsurance recoverables 30,196,659 18,453,650 18,520,866 ----------- ----------- ----------- Balance at December 31 $90,392,486 $70,983,383 $58,335,143 =========== =========== ===========
The Company recognized unfavorable development in the provision for insured events of prior years of $166,024, $3,359,272 and $3,881,304 in 2000, 1999 and 1998, respectively. The small 2000 development reflects generally neutral net development in each of the Insurance Companies. Motor Club did experience favorable development of private passenger automobile ("PPA") losses occurring in 1999 offset by unfavorable development of losses occurring from 1996 to 1998. The 1999 and 1998 development reflects the initial adverse development of Motor Club's reserves for PPA losses occurring in those years. In establishing the liability for unpaid losses and loss settlement expenses, management considers facts currently known and the current state of the law and coverage litigation. Liabilities are recognized for known losses (including the cost of related litigation) when sufficient information has been developed to indicate the involvement of a specific insurance policy, and management can reasonably estimate its liability. In addition, liabilities have been established to cover additional exposures on both known and unasserted losses. Estimates of the liabilities are reviewed and updated continually. (Continued) F-18 MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- Note E - Unpaid Losses and Loss Expenses (Continued): (b) Losses incurred are reduced by salvage and subrogation approximating $4,249,190, $3,144,175 and $2,661,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Note F - Fixed Assets: Fixed assets consist of the following:
2000 1999 ---- ---- Leasehold improvements $ 266,041 $ 202,275 Office furniture, fixtures and data processing equipment 6,300,978 3,984,231 ---------- ---------- 6,567,019 4,186,506 Less accumulated depre- ciation 3,573,790 2,327,885 ---------- ---------- Balance at December 31 $2,993,229 $1,858,621 ========== ==========
Note G - Reinsurance: (a) Unearned premiums and unpaid loss and loss expenses are stated gross of the effects of reinsurance. (b) Ceded premiums are recognized in a manner consistent with the coverage provided. Amounts recoverable from reinsurers are estimated in a manner consistent with the claims liabilities associated with the reinsurance. (c) Reinsurance contracts do not relieve the Insurance Companies from their obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Insurance Companies. Generally, for Motor Club and Preserver all risks in excess of $200,000 for 2000 and $150,000 for 1999 and prior for liability lines and $100,000 for property lines are reinsured. North East's principal reinsurance protection is provided through a combined per risk excess of loss treaty. Prior to 2000, this reinsurance afforded recovery to $1 million in excess of a retention of $50,000. On January 1, 2000, this retention was increased to $150,000. (Continued) F-19 MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- Note G - Reinsurance (Continued): Prior to March 1, 2000, the date the Company acquired Mountain Valley, Mountain Valley ceded 100% of its premiums, losses and expenses under a quota share treaty to Trinity Universal Insurance Company ("Trinity"), a subsidiary of Unitrin, Inc., ("Trinity Quota Share"). All cessions under the Trinity Quota Share are after the application of all third party reinsurance that Mountain Valley maintains. Effective March 1, 2000, the Trinity Quota Share was terminated on a cut-off basis. Under the terms of the cut-off, Mountain Valley will continue to cede 100% of losses and expenses incurred before March 1, 2000, including subsequent development of those losses and expenses. In addition, Trinity retained the premiums, losses and expenses on certain policies in the State of New York until Mountain Valley renewed, canceled or non-renewed those policies at (or prior to) their expiration dates. Accordingly, as of March 1, 2000, Mountain Valley had and will continue to have no net unpaid loss and loss expense reserves for losses incurred before March 1, 2000. Reinsurance recoverables on unpaid loss and loss expenses due under the Trinity Quote Share were $10,723,263 at December 31, 2000. Mountain Valley is subject to credit risk should Trinity not be able to pay its obligations under the Trinity Quota Share. However, Trinity is presently rated A+ (Superior) by A.M. Best and has $846 million in statutory surplus as regards policyholders as of December 31, 2000. Thus, management believes that such credit risk is not material at this time. Third party reinsurance for property and casualty losses of Mountain Valley are principally maintained under a combined per risk excess of loss treaty affording recovery to $5 million in excess of a retention of $250,000. (Continued) F-20 MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- Note G - Reinsurance (Continued): The Insurance Companies also maintain additional reinsurance contracts for boiler and machinery coverages, commercial umbrella and workers' compensation policies, catastrophe events and for certain risks that it underwrites which it does not believe are appropriate for coverage by its third party treaty reinsurance. The Insurance Companies evaluate the financial condition of their reinsurers and monitor concentrations of credit risk arising from activities or economic characteristics of the reinsurers to minimize their exposure to significant losses from reinsurer insolvencies. As referred to in Note A, Motor Club and Preserver's operations are presently located in the State of New Jersey, the laws of which require participation in certain reinsurance funds. Reinsurance recoverable on paid and unpaid loss and loss expenses include amounts recoverable from the Unsatisfied Claim and Judgment Fund ("UCJF") of the State of New Jersey, which pertains to New Jersey Personal Injury Protection claims in excess of Motor Club's statutory retention limit of $75,000. Reinsurance recoverable from the UCJF was $7,858,373 and $8,672,127 as of December 31, 2000 and 1999, respectively. Motor Club is required to participate in the New Jersey Automobile Insurance Risk Exchange ("NJ AIRE"). NJ AIRE is designed to balance differences between Motor Club's bodily injury exposures and loss payments as compared to industry exposures and loss payments under New Jersey's dual tort threshold system. (Continued) F-21 MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- Note G - Reinsurance (Continued): Assessments paid to NJ AIRE based on subject bodily injury exposures are accounted for as ceded premiums written and totaled $723,851, $1,805,185 and $1,113,756 in 2000, 1999 and 1998, respectively. Reimbursements from NJ AIRE based on subject claim payment experience are accounted for as ceded losses incurred and totaled $1,027,146, $1,347,565 and $548,415 in 2000, 1999 and 1998, respectively. Prepaid reinsurance premiums of $4,324,915 and $1,485,450 as of December 31, 2000 and 1999, respectively, are mainly attributable to Preserver's and Mountain Valley's workers' compensation program and excess of loss reinsurance treaties. The effect of reinsurance on premiums written and earned is as follows:
2000 1999 1998 ----- ---- ---- WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED --------------------- --------------------- --------------------- Direct $100,846,838 $96,615,156 $62,467,203 $64,151,936 $71,399,224 $59,951,837 Assumed (17,003) 13,380 46,946 14,340 - - Ceded (11,625,394) (13,161,055) (8,005,934) (8,358,946) (7,096,511) (6,776,174) ------------ ----------- ----------- ----------- ----------- ----------- Net $ 89,204,441 $83,467,481 $54,508,215 $55,807,330 $64,302,713 $53,175,663 ============ =========== =========== =========== =========== ===========
Note H - Note Payable: On September 14, 1998, the Company entered into a $3 million revolving credit facility with Dresdner Bank (the "Loan") and drew on the entire amount of the Loan on September 30, 1998. The Loan was repaid in full on December 27, 1999. The weighted-average effective rate of interest on the Loan was 7.28% and 7.0625% in 1999 and 1998, respectively. Interest paid on the loan in 1999 and 1998 was $216,017 and $54,146, respectively. In connection with the acquisition of Mountain Valley, three of the Company's directors ("Ownership Group") extended unsecured debt financing ("Notes") in the amount of $11.5 million to finance the transaction and to provide additional working capital to the Company. The Notes mature on February 28, 2002 and pays interest quarterly at a rate of 10.605%. The Company is pursuing longer-term financing options to replace the Notes. At the Company's election, if acceptable financing is not identified by Motor Club during the two-year period, the Notes can be extended for up to five years utilizing successive one-year renewals, in exchange for an increased interest rate on the Notes. Interest paid on the Notes was $914,681 in 2000. Note I - Convertible Subordinated Debentures: In connection with its acquisition of North East, on September 23, 1999, the Company issued $10 million of Convertible Subordinated Debentures ("Debentures"), in one series, under a plan previously approved by its shareholders. (Continued) F-22 MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- Note I - Convertible Subordinated Debentures (Continued): The Debentures are due on September 23, 2009 and bear an interest rate of 8.44%, which was 2.5% over the London Interbank Offered Rate, fixed as of September 23, 1999, the date the series was issued. At each holder's option, the Debentures are convertible at any time, in whole or in part, into 645,578 of the Company's common shares ($10 million divided by 130% of the average trading price of the Company's common stock over the twenty day period immediately prior to September 23, 1999 ("Conversion Price")). The applicable Conversion Price is $15.49. The Ownership Group purchased $9,253,785 of the $10 million in Debentures issued. If the members of the Ownership Group convert those Debentures, their percentage ownership in the Company's common stock will substantially increase. Based on the Company's common shares outstanding as of December 31, 2000, the Ownership Group could increase its collective percentage stock ownership from the current 47.1% to 57.7%. Interest paid on the Debentures was $844,000 and $232,100 in 2000 and 1999, respectively. The fair value of the Debentures was estimated to be $11,950,282 and $12,648,876 at December 31, 2000 and 1999, respectively. Fair value for the Debentures are estimated using a model that considers both the debt and equity components of the security. As to the debt component, fair value was estimated by considering the Debentures estimated credit quality, similar instruments and its remaining average life. As to the equity component, fair value was estimated using the Black-Scholes option pricing model based on the following assumptions for 2000 and 1999: risk-free interest rate of 5.19% and 6.44%; volatility of 47.6% and 50.5%; and expected life of 9.75 years and 8.75 years. The Company does not pay a dividend on its common stock. (Continued) F-23 MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- Note J - Taxes: (a) The Company and its subsidiaries (including MCA Insurance Company in Liquidation and its subsidiaries ("MCAIC"), former affiliates) file a consolidated Federal income tax return, and participate in a Tax Sharing Agreement. Despite being declared insolvent in 1992, MCAIC is required to continue to be included in the Company's consolidated tax return filed with the Internal Revenue Service. Since that time, MCAIC has generally continued to generate taxable losses included in the consolidated tax return. Under the applicable rules, the Company is entitled to, and has taken current tax benefits for net operating losses that MCAIC and its subsidiaries have generated since 1992. However, to the extent that the Company does not have positive basis (as defined by the Internal Revenue Code), it may also be required to pay future tax liabilities (which may offset the current tax benefit) subject to certain events which may trigger such payments. Accordingly, when such current tax benefits are recognized, a corresponding deferred tax liability is recorded. (Continued) F-24 MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- Note J - Taxes (Continued): In March 2001, the Company's management determined that certain tax benefits should not have been recognized and that certain deferred tax liabilities had not been recorded. In addition, deferred tax assets were not recorded that should have been for the tax effects of the minimum pension liability that is presented as a component of other comprehensive income. As a result, the 1998 and 1999 Consolidated Financial Statements have been restated from amounts previously reported and are discussed in Note V. At the time of its insolvency, MCAIC realized approximately $150 million in losses, which generated a net operating loss ("NOL") that could not be utilized at that time by either the Company or MCAIC under applicable IRS regulations and which expire in 2006. Additional net operating losses have been experienced by MCAIC since 1992, some of which were utilized by the Company at a time when it had no tax basis in MCAIC, thus creating a deferred tax liability represented by the $1,917,405 "Excess Loss Account" item (for the year ended December 31, 2000) as shown in the deferred tax reconciliation of this Note. The $150 million of NOL's generated in 1992 will likely increase the Company's excess loss account at the time they expire in 2006. An excess loss account in a subsidiary generally creates taxable income at the time of the sale, liquidation or other disposition of the subsidiary. Management expects that the liquidation or other disposition of MCAIC will take place prior to the expiration of these NOL's in 2006 and prior to the corresponding increase in the Company's excess loss account. As the control of the liquidation process rests with the Insurance Department of the State of Oklahoma (the "Receiver") and not with management, there is a potential risk that such tax liability could be incurred by the Company after 2006 when the 1992 generated NOLs will have been converted into the Company's excess loss account. Management believes it is unlikely that such risk will occur, as the liquidation of MCAIC is probable before the expiration of the NOL. However, the tax effects of these transactions are subject to the circumstances of the liquidation process itself and tax-planning strategies exist which could mitigate the impact of such a tax exposure. With respect to the Company's excess loss account created by the Company's utilization of MCAIC's post 1992 NOL's, these excess losses will likely result in the Company recognizing taxable income in the year MCAIC is liquidated or otherwise disposed of. The effect of the deferred taxes attributable to such income has been reflected in the Consolidated Financial Statements. (b) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities were as follows:
December 31, 2000 1999 ---------- --------- (Restated) Deferred tax assets: Net operating loss ("NOL") carryforward $2,997,500 $2,969,144 Unpaid losses and loss expenses 2,448,971 2,046,251 Unearned premium 3,337,694 2,530,457 Unrealized loss on securities - 888,230 Minimum pension liability 1,559,138 1,111,120 Alternative minimum tax and general business credit carry- forwards 345,408 300,611 Other deferred tax assets 227,349 313,353 ---------- ---------- Total deferred tax assets 10,916,060 10,159,166 ---------- ---------- Deferred tax liabilities: Deferred acquisition costs (4,931,893) (3,590,659) Excess loss account (1,917,405) (910,664) Unrealized gain on securities (171,098) - Prepaid pension cost (1,313,026) (1,181,989) Other deferred tax liabilities (169,490) (223,447) ---------- ---------- Total deferred tax liabilities (8,502,912) (5,906,759) ---------- ---------- Less: valuation allowance for deferred tax assets (584,442) (614,856) ---------- ---------- Net deferred tax asset $1,828,706 $3,637,551 ========== ===========
(Continued) F-25 MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- Note J - Taxes (Continued): The NOL carryforward of $8,816,176 expires beginning in 2009. The NOL carryforward includes $6,327,667 of NOL's attributable to North East, which expire in 2014. Under the prevailing tax laws, these losses must be used to offset taxable income of North East only, are not available to offset taxable income of other operations and are subject to an 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. The ultimate amounts realized, however, could be reduced if actual amounts of future taxable income differ from projected future taxable income. A valuation allowance has been provided for NOL's relating to MCAIC that have not been utilized as well as for capital loss carryforwards generated from North East that management believes may not be utilized within the carryforward period. (c) The provision for Federal income taxes resulted in effective tax rates that differ from the statutory Federal income tax rates, as follows:
2000 1999 1998 ---- ---- ---- (Restated) (Restated) Tax provision computed at statutory federal income tax rates ($1,019,890) ($ 34,730) ($1,944,598) Goodwill (28,798) (7,199) - Other 8,930 31,119 3,576 ----------- ----------- ----------- Provision $(1,039,758) $ (10,810) $(1,941,022) =========== =========== ===========
(d) The Consolidated Statements of operations for the years ended December 31, 2000, 1999 and 1998 include state taxes based on insurance premiums of $884,052, $230,606, and $189,346, respectively. (Continued) F-26 MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- Note K - Shareholders' Equity: (a) The Insurance Companies prepare their statutory financial statements in accordance with accounting practices prescribed or permitted by the respective Departments of Insurance in which they are domiciled ("SAP"). Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners ("NAIC"), as well as state laws, regulations and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. The Insurance Companies are required by law to maintain certain minimum surplus on a statutory basis, and are subject to risk-based capital requirements and to regulations under which payment of a dividend from statutory surplus is restricted and may require prior approval of regulatory authorities. Applying the current regulatory restrictions as of December 31, 2000, and to the extent that statutorily defined surplus is available, $3,329,000 would be available for distribution during 2001 without prior approval. As a result of PPA reforms in New Jersey, which include a reduction of premium due to a rate rollback, Motor Club's liabilities for unpaid losses and loss expenses in relation to its statutory surplus are at a level whereby adverse development of claims, particularly as a result of the impact of these reforms, could further reduce its surplus, thus decreasing its risk-based capital ratios, possibly to a level which would require action as prescribed by law. To date, the New Jersey Department of Banking and Insurance has generally not been responsive to request for rate increases or other regulatory relief based upon the impact of these reforms to companies, nor as noted has it implemented certain key aspects of these reforms which would provide relief to insurers such as Motor Club. (Continued) F-27 MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- Note K - Shareholders' Equity (Continued): The NAIC has adopted the Codification of Statutory Accounting Principles with an effective date of January 1, 2001. The codified principles are intended to provide a basis of accounting recognized and adhered to in the absence of conflict with, or silence of, state statutes and regulations. The impact of the codified principles on the statutory capital and surplus of the Insurance Companies is still being determined and is currently not expected to decrease statutory capital and surplus as of January 1, 2001. (b) The consolidated financial statements of the Company's insurance subsidiaries have been prepared in accordance with GAAP, which differ in certain respects from SAP. The principal differences relate to (1) acquisition costs incurred in connection with acquiring new business which are charged to expense under SAP but under GAAP are deferred and amortized as the related premiums are earned; (2) anticipated salvage and subrogation recoveries which have not been credited to losses incurred for SAP; (3) net deferred tax assets created by the tax effects of temporary differences; (4) unpaid losses, unpaid loss adjustment expenses and unearned premium reserves are presented gross of reinsurance with a corresponding asset recorded; and (5) fixed maturity portfolios that qualify as available for sale are carried at fair value and changes in fair value are reflected directly in unassigned surplus, net of related deferred taxes. The consolidated capital and surplus, shareholders' equity and income of the Insurance Companies on a statutory and GAAP basis were as follows:
DECEMBER 31, ----------------- 2000 1999 ---- ---- Capital and surplus - Statutory basis $39,423,591 $30,211,579 Shareholders' equity - GAAP basis $65,415,583 $47,647,953
(Continued) F-28 MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- Note K - Shareholders' Equity (Continued):
YEARS ENDED DECEMBER 31, ----------------------------- 2000 1999 1998 ---- ---- ------ Net income (loss): Statutory basis $ (125,807) $ 204,073 $ (762,471) GAAP basis $4,896,742 $1,265,286 $5,157,732
Distribution by the Insurance Companies of the excess of GAAP shareholders' equity over statutory capital and surplus to the Company is prohibited by law. Note L - Contingencies: The Company and its subsidiaries are parties to various legal actions and administrative proceedings and subject to various claims arising in the ordinary course of business. The Company believes that the disposition of these matters will not have a material adverse effect on the financial position, the results of operations or cash flows of the Company. Note M - Pensions: (a) The Company has a non-contributory defined benefit plan (the "Plan"). Eligible salaried and hourly employees of the Company participate in the Plan after twelve months of continuous employment with the Company when age 21 has been attained. Retirement benefits are based on each participant's average compensation and years of service. Vesting of benefits begins after five years of service commencing from the minimum age of 21 or date of hire, if later. The Company's contributions are designed to fund the Plan's normal costs on a current basis and to fund the unfunded prior service costs, including accrued benefits arising from qualifying employee service occurring prior to the establishment of the Plan, over 40 years. On January 15, 1992, the Company suspended the accrual of benefits arising from participant service. The Company continues to fund the Plan for benefits earned through January 31, 1992. (Continued) F-29 MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- Note M - Pensions (Continued): The Plan maintained a significant amount of assets in group annuity contracts with Mutual Benefit Life Insurance Company ("Mutual"), which was placed in rehabilitation by the NJ DOBI on July 16, 1991. In October 1994, MBL Life Assurance Corporation ("MBLLAC") approved and subsequently paid a "hardship withdrawal" of $2,666,204 (net of an administrative charge of $470,507) to the Plan. The Plan also received $91,938 and $183,876 in distributions from MBLLAC and Mutual in 1999 and 1998, respectively, under provisions of the Plan of Rehabilitation. On June 1, 1999, $3,424,869 was received from MBLLAC and an additional $14,670 was received on August 27, 1999. The restructured contract has how been paid in full and the Plan no longer has any assets with MBLLAC. (b) Net periodic pension cost for 2000, 1999 and 1998 included the following components:
2000 1999 1998 ---- ---- ---- Interest cost $ 815,300 $ 784,400 $813,900 Expected return on plan assets (1,076,700) (1,032,700) (946,800) Recognized loss 268,700 342,100 312,500 --------- ---------- -------- Net periodic cost $ 7,300 $ 93,800 $179,600 ========= ========== ========
Measurement of the Company's benefit obligation and pension expense as of December 31 of each year used the following assumptions:
2000 1999 1998 ---- ---- ---- Discount rate 7.50% 7.75% 6.75% Expected return on plan assets 10.00% 10.00% 10.00% Rate of compensation increase N/A N/A N/A
(Continued) F-30 MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- Note M - Pensions (Continued): (c) A reconciliation of the changes in the Plan's benefit obligations and fair value of assets during 2000 and 1999 and a statement of the funded status of the Plan as of December 31 of each year is as follows:
2000 1999 ---- ---- Change in benefit obligation: Benefit obligation at January 1 $10,844,900 $11,968,900 Service cost - - Interest Cost 815,300 784,400 Actuarial (gain)/loss 378,300 (886,400) Benefits paid (1,033,200) (1,022,000) ----------- ----------- Benefit obligation at December 31 $11,005,300 $10,844,900 =========== =========== Change in plan assets: Fair value of plan assets at January 1 $11,061,300 $10,618,700 Actual return on plan assets (19,100) 1,325,700 Employer contribution 384,800 239,900 Benefits paid (1,033,200) (1,022,000) Other (112,300) (101,000) ----------- ------------ Fair value of plan assets at December 31 $10,281,500 $11,061,300 ============ ============ Funded Status at December 31 $ (723,800) $ 216,400 Unrecognized loss 4,585,700 3,268,000 ------------ ------------ Net amount recognized at December 31 $ 3,861,900 $ 3,484,400 ============ ============
Following are the amounts recognized in the statement of financial position as of December 31 of each year: Prepaid benefit cost $3,861,900 $ 3,484,400 Accrued benefit liability (4,585,700) (3,268,000) Accumulated other comprehensive income 3,026,600 2,156,900 Deferred tax benefit, as restated 1,559,100 1,111,100 ----------- ----------- Net amount recognized $3,861,900 $3,484,400 =========== ===========
The adjustment required to recognize the minimum liability is reflected as a component of accumulated comprehensive income (loss) as of December 31, 2000 and 1999, respectively. (Continued) F-31 MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- Note M - Pensions (Continued): (d) The Company maintains a defined contribution plan for substantially all employees. Employer contributions of a discretionary amount are made by the Company and its subsidiaries. Employer contributions in the amount of $169,554, $124,458 and $116,329 were made by the Company in 2000, 1999 and 1998, respectively, for its employees and charged to expense. (e) In 1997, the Company established a non-qualified deferred compensation plan for certain executive employees. Employer contributions of a discretionary amount are made by the Company. Contributions during 2000 and 1999 were immaterial. Note N - Post-retirement Benefits: (a) The Company currently provides certain life and health benefits to retired employees who had twenty-five or more years of service, subject to certain eligibility restrictions. These benefits consist of the payment of medical, life and dental premiums for the retired employees. The Company's funding policy is to pay for the premiums currently; any future increases in the cost of these benefits will be borne by the retirees and not the Company. (b) Net periodic post-retirement benefit cost for 2000, 1999 and 1998 included the following components:
2000 1999 1998 ---- ---- ---- Service cost $ 900 $ 2,700 $ 2,500 Interest cost 77,600 30,100 36,000 Amortization of transition obligation 28,000 28,000 28,000 Amortization of net loss 97,100 22,600 21,800 -------- ------- ------- Net postretirement expense $203,600 $83,400 $88,300 ======== ======= =======
(Continued) F-32 MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- Note N - Post-retirement Benefits (Continued): Measurement of the Company's benefit obligation and post-retirement benefit expense as of December 31 of each year used the following assumptions:
2000 1999 1998 ---- ---- ---- Discount Rate 7.50% 7.75% 6.75% Expected return on assets N/A N/A N/A Average rate of increase in compensation N/A N/A N/A
(c) A reconciliation of the changes in the benefit obligations and fair value of assets during 2000 and 1999 and a statement of the funded status as of December 31 of each year is as follows:
2000 1999 ---- ---- Change in Accumulated Postretirement Benefit Obligation Benefit Obligation at January 1 $ 375,300 $502,600 Service Cost 900 2,700 Interest Cost 77,600 30,100 Employee Contributions 52,400 45,700 Benefit Paid (162,400) (157,900) Actuarial (gain) loss 696,900 (47,900) ---------- --------- Benefit Obligation at December 31 $1,040,700 $375,300 ========== ========= Change in Plan Assets Fair Value of Plan Assets at January 1 $ - $ - Company Contributions 110,000 112,200 Employee Contributions 52,400 45,700 Benefits Paid (162,400) (157,900) ----------- --------- Fair Value of Plan Assets at December 31 $ - $ - =========== ========= Funded Status of the Plan Benefit obligation less than plan assets ($1,040,700) ($375,300) Unamortized transition obligation 333,000 361,000 Unamortized net loss 786,900 187,100 ---------- --------- Net prepaid asset $ 79,200 $172,800 ========== =========
(Continued) F-33 MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- Note N - Post-retirement Benefits (Continued): The following are the amounts recognized in the statement of financial position as of December 31 of each year:
2000 1999 ---- ---- Prepaid benefit cost $79,200 $172,800 Accumulated other comprehensive income - - -------- -------- Net amount recognized $79,200 $172,800 ======= ========
(d) It is the policy of the Company that any future increase in life and health care benefits will be borne by the retirees and not the Company; as a result, there will be no increase in either the accumulated post-retirement benefit obligation or the service and interest cost components of net periodic post-retirement benefit cost related to a 1% increase in the health care trend rate. Note O - Selected Quarterly Financial Data (Unaudited): (a) The Company is restating its tax provision (benefit) and net income for the three month periods in 2000 and 1999. Please refer to Note V for further information. (b) Year ended December 31, 2000:
1st 2nd 3rd 4th Quarter* Quarter Quarter Quarter Revenues $19,698,432 $22,453,506 $24,645,495 $23,329,714 =========== =========== =========== =========== Losses and expenses $19,420,712 $21,460,858 $23,562,625 $22,683,275 =========== =========== =========== =========== Net income (loss) $ 181,546 $ 648,573 $ 707,522 $ 422,368 =========== =========== =========== ===========
* Includes Mountain Valley for one month Net income (loss) per common share: Basic $ .09 $ .31 $ .33 $ .20 =========== =========== =========== =========== Diluted $ .09 $ .28 $ .31 $ .20 =========== =========== =========== ===========
Reconciliation of previously reported to restated net income and per share information:
1st 2nd 3rd Quarter* Quarter Quarter Net income: Previously reported $249,512 $639,511 $1,544,397 Effect of tax adjustment (68,056) 9,062 (836,875) -------- -------- ---------- As restated $181,456 $648,573 $ 707,522 ======== ======== ========== Per share information: Basic: Previously reported $ 0.12 $ 0.30 $ 0.73 Effect of tax adjustment (0.03) 0.01 (0.40) -------- -------- ---------- As restated $ 0.09 $ 0.31 $ 0.33 ======== ======== ========== Diluted: Previously reported $ 0.12 $ 0.28 $ 0.71 Effect of tax adjustment (0.03) 0.00 (0.40) -------- -------- ---------- As restated $ 0.09 $ 0.28 $ 0.31 ======== ======== ==========
* Includes Mountain Valley for one month (Continued) F-34 MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- Note O - Selected Quarterly Financial Data (Unaudited) (Continued): (c) Year ended December 31, 1999:
1st 2nd 3rd 4th Quarter Quarter Quarter Quarter* Revenues $14,314,773 $14,417,053 $14,627,084 $17,708,809 =========== =========== =========== ============ Losses and expenses $13,106,674 $13,173,443 $15,465,552 $19,219,904 =========== =========== =========== ============ Net income (loss) $ 1,080,247 $ 1,112,000 $ (749,734) $(1,351,177) =========== =========== =========== ===========
* Includes North East and subsidiaries Net income (loss) per common share: Basic $ .51 $ .53 $ (.35) $ (.64) =========== =========== =========== =========== Diluted $ .51 $ .52 $ (.35) $ (.64) =========== =========== =========== ===========
Reconciliation of previously reported to restated net income and per share information:
1st 2nd 3rd 4th Quarter Quarter Quarter Quarter* Net income (loss): Previously reported $ 985,621 $ 1,011,433 $ 129,745 $ (849,866) Effect of tax adjustment 94,626 100,567 (879,479) (501,311) ----------- ----------- ----------- ----------- As restated $ 1,080,247 $ 1,112,000 $ (749,734) $(1,351,177) =========== =========== =========== =========== Per share information: Basic: Previously reported $ 0.47 $ 0.48 $ 0.06 $ (0.40) Effect of tax adjustment 0.04 0.05 (0.41) (0.24) ----------- ----------- ----------- ----------- As restated $ 0.51 $ 0.53 $ (0.35) $ (0.64) =========== =========== =========== =========== Diluted: Previously reported $ 0.46 $ 0.48 $ 0.06 $ (0.40) Effect of tax adjustment 0.05 0.04 (0.41) (0.24) ----------- ----------- ----------- ----------- As restated $ 0.51 $ 0.52 $ (0.35) $ (0.64) =========== =========== =========== ===========
* Includes North East and subsidiaries Note P - Comprehensive Income: Comprehensive income consisted of the following:
2000 1999 1998 ---- ---- ---- (Restated) (Restated) Net income $ 1,959,919 $ 91,336 $3,778,384 Other comprehensive income (loss): Unrealized gains (losses) on securities: Unrealized gains (losses) during period (net of taxes of ($1,122,747), $1,536,862 and ($354,012)) 2,047,676 (2,982,797) 687,149 Less: Reclassification adjustment for gains included in net income (net of taxes of $28,203, $12,254 and $9,705) (54,746) (23,786) (18,840) ----------- ----------- ---------- Net unrealized gains (losses) 1,992,930 (3,006,583) 668,309 ----------- ----------- ---------- Minimum pension liability adjustment (net of taxes $(448,018), $482,970 and ($54,196)) (869,682) 937,530 (105,204) ----------- ----------- ---------- Other comprehensive income (loss) 1,123,248 (2,069,053) 563,105 ----------- ----------- ---------- Comprehensive income (loss) $ 3,083,167 $(1,977,717) $4,341,489 =========== =========== ==========
(Continued) F-35 MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- Note Q - Stock Option Plans: The Motor Club of America 1987, 1992 and 1999 Stock Option Plans ("1987 Option Plan", "1992 Option Plan" and "1999 Option Plan", respectively) provide for the issuance of options to purchase 100,000 common shares, respectively, by key executives at the market price at date of grant. Options under all Option Plans are exercisable for a five year period in twenty-five percent increments each year, commencing one year from the date of grant. As of December 31, 2000: (1) 5,125 shares under the 1987 Option Plan are available for grant; 57,000 shares were exercisable and 37,875 shares had been exercised; (2) 1,950 shares under the 1992 Option Plan are available for grant; 62,500 shares were exercisable and 35,550 shares had been exercised; and (3) 64,000 shares under the 1999 Option Plan are available for grant, and 36,000 shares were exercisable as of that date. Transactions during 1998, 1999 and 2000 relating to the 1987 Option Plan are as follows:
Weighted Exercise Average Number of Price per Aggregate Shares Share Amount ------ ----- ------ Options outstanding at December 31, 1997 84,000 $10.098 848,250 Options exercised in 1998 (22,000) $ 2.625 (57,750) Options lapsed in 1998 (5,000) $12.75 (63,750) ------- ------- -------- Options outstanding at December 31, 1998, 1999 and 2000 57,000 $12.75 $726,750 ======= ======= ========
(Continued) F-36 MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- Note Q - Stock Option Plans (Continued): Transactions during 1998, 1999 and 2000 relating to the 1992 Option Plan are as follows:
Weighted Exercise Average Number of Price per Aggregate Shares Share Amount --------- --------- --------- Options outstanding at December 31, 1997 3,000 $12.75 $ 38,250 Options granted in 1998 28,500 $11.75 334,875 ------- ------ -------- Options outstanding at December 31, 1998 31,500 $11.845 373,125 Options granted in 1999 31,000 $12.875 399,125 ------- ------- -------- Options outstanding at December 31, 1999 and 2000 62,500 $12.36 $772,250 ======= ======= ========
There were no transactions during 1999 relating to the 1999 Option Plan. Transactions during 2000 related to the 1999 Option Plan are as follows:
Weighted Exercise Average Number of Price per Aggregate Shares Share Amount ------ ----- ------ Options outstanding at December 31, 1999 - $ - $ - Options granted in 2000 36,000 $ 8.125 292,500 ------- ------- -------- Options outstanding at December 31, 2000 36,000 $ 8.125 $292,500 ======= ======= ========
(Continued) F-37 MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- Note Q - Stock Option Plans (Continued): The Company has adopted the provision of SFAS No. 123 ("Accounting for Stock-Based Compensation"), which calls for companies to measure employee stock compensation expense based on the fair value method of accounting. However, as allowed by SFAS No. 123, the Company has elected the continued use of APB Opinion No. 25 ("Accounting for Stock Issued to Employees"), with pro forma disclosures of net income and earnings per share determined as if the fair value method had been applied in measuring compensation cost. These calculations only take into consideration options issued since January 1, 1995. In 2000, 1999 and 1998, had the fair value method been applied, net income would have been reduced by $126,300, $70,900 and $21,100, $.06, $.03 and $.01 basic net earnings per share, respectively. The average fair value of options granted during 2000, 1999 and 1998 was $3.69, $6.34 and $5.79, respectively. The fair value was estimated using the Black-Scholes option pricing model based on the following assumptions for 2000, 1999 and 1998: risk-free interest rate of 4.99%, 6.55% and 4.66%; volatility of 47.6%, 50.5% and 52.3%; and expected life of 4.5 years (in 2000 and 1999) and 4.75 years (in 1998). The Company does not pay a dividend on its common stock. The following table summarizes options outstanding and exercisable at December 31, 2000:
Options Outstanding Options Exercisable ------------------- ------------------- Average Exercise Average Exercise Exercise Price Options Life(a) Price Options Price -------- ------- ------- -------- ------- --------- $ 8.125 36,000 4.50 $ 8.125 0 - $11.750 28,500 2.75 $11.750 14,250 $11.750 $12.750 60,000 1.25 $12.750 45,000 12.750 $12.875 31,000 3.50 $12.875 7,750 12.875 ------- ---- ------- ------ ------- Total 155,500 2.73 $11.520 67,000 $12.550 ======= ==== ======= ====== =======
(a) Average contractual life remaining years. (Continued) F-38 MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------- Note R - Lease Obligations: The Company and its subsidiaries lease office space suitable to conduct its operations, including its home office in Paramus, New Jersey. In addition, office facilities in Albany, New York, Bedford, New Hampshire and Scarborough, Maine are leased under varying terms and expiration dates. These leases are considered operating leases for financial reporting purposes. Some of these leases have options to extend the length of the leases and contain clauses for cost of living, operating expense and real estate tax adjustments. Rental expense was $599,927 in 2000 and $410,000 in 1999 and 1998, respectively. Future minimum lease payments (without provisions for sublease income) are $714,112 in 2001; $716,147 in 2002; $716,147 in 2003; $716,147 in 2004; and $1,431,227 thereafter. Note S - Earnings per Share ("EPS"): Basic earnings per share are based on weighted average basic shares outstanding. Diluted earnings per share are based on weighted average diluted shares outstanding, which is calculated by adding shares contingently issuable under stock options and shares contingently issuable under the Debentures (if dilutive) to the average basic shares outstanding. In 2000 and 1999, the Debentures were not dilutive. The calculations of average basic and diluted common shares outstanding and net income per common share are as follows: (Continued) F-39 MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------- Note S - Earnings per Share ("EPS") (Continued):
2000 1999 1998 ---- ---- ---- (Restated) (Restated) Numerator for basic earnings per share - net income $1,959,919 $ 91,336 $3,778,384 Plus: Interest expense on Debentures, net of tax 557,040 - - ----------- ---------- ---------- Numerator for diluted earnings per share $2,516,959 $ 91,336 $3,778,384 ========== ========== ========== Weighted average basic common shares outstanding (denominator) 2,124,387 2,117,912 2,108,722 Shares contingently issuable under stock option plans 110 3,785 12,644 Shares contingently issuable under Debentures 645,578 - - ---------- ---------- ---------- Average diluted common shares outstanding (denominator) 2,770,075 2,121,697 2,121,366 ========== ========== ========== Net income per common share: Basic $0.92 $0.04 $1.79 ===== ===== ===== Diluted $0.91 $0.04 $1.78 ===== ===== =====
Note T - Reportable Segments: The Company's operations are presently conducted through four basic segments using independent agents: Motor Club; Preserver; Mountain Valley; and North East. The Motor Club segment consists of New Jersey private passenger automobile. The Preserver segment consists of small commercial insurance featuring package, automobile and workers' compensation coverage, along with personal property and liability coverage in the State of New Jersey. Mountain Valley provides small and medium sized commercial insurance in New England and New York. The North East segment consists of private passenger automobile and small commercial insurance in the State of Maine and the results of its inactive subsidiary, American Colonial. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Summary financial information about (Continued) F-40 MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------- Note T - Reportable Segments (Continued): the Company's operating segments is presented in the following table. Income before income taxes by segment consists of revenues less expense related to the respective segment's operations. These amounts include realized gains (losses) where applicable. Assets are not allocated to the individual segments, and are reviewed in total by management for purposes of decision making. The Company operates only in the United States, and no single customer or agent provides ten percent or more of revenues. Financial data by segment is as follows:
MOTOR NORTH MOUNTAIN YEAR ENDED DECEMBER 31, 2000 PRESERVER CLUB EAST VALLEY TOTAL - ----------------------------- ----------- ----------- ----------- ----------- ----------- Insurance premiums $15,601,866 $36,574,189 $18,310,615 $12,980,811 $83,467,481 Net investment income 1,808,893 2,934,494 1,016,148 542,760 6,302,295 Realized investment gains 10,781 13,764 14,849 43,354 82,748 Other income - 32,454 - - 32,454 ----------- ----------- ----------- ----------- ----------- Total revenues 17,421,540 39,554,901 19,341,612 13,566,925 89,884,978 ----------- ----------- ----------- ----------- ----------- Loss and loss expenses incurred 8,025,885 27,085,861 11,761,626 8,834,681 55,708,053 Acquisitions costs and other operating expenses 4,694,870 12,200,930 6,684,225 5,503,983 29,084,008 ----------- ----------- ----------- ----------- ----------- Total expenses 12,720,755 39,286,791 18,445,851 14,338,664 84,792,061 ----------- ----------- ----------- ----------- ----------- Income (loss) before Federal income taxes $ 4,700,785 $ 268,110 $ 895,761 $ (771,739) $ 5,092,917 Other corporate, net 212,637 Interest expense (1,867,085) Merger-related expenses (354,097) Amortization of goodwill (84,695) Income tax expense (1,039,758) ----------- Net income $ 1,959,919 ===========
MOTOR NORTH MOUNTAIN YEAR ENDED DECEMBER 31, 1999 PRESERVER CLUB EAST VALLEY TOTAL - ----------------------------- ----------- ----------- ----------- ----------- ----------- Insurance premiums $13,819,638 $37,802,937 $ 4,184,755 $ - $55,807,330 Net investment income 1,554,266 3,119,752 246,204 - 4,920,222 Realized investment gains 4,917 (260) 31,382 - 36,039 ----------- ----------- ----------- ----------- ----------- Total revenues 15,378,821 40,922,429 4,462,341 - 60,763,591 ----------- ----------- ----------- ----------- ----------- Loss and loss expenses incurred 9,214,764 29,043,044 2,373,245 - 40,631,053 Acquisitions costs and other operating expenses 4,066,894 12,882,192 1,838,804 - 18,787,890 ----------- ----------- ----------- ----------- ----------- Total expenses 13,281,658 41,925,236 4,212,049 - 59,418,943 ----------- ----------- ----------- ----------- ----------- Income (loss) before Federal income taxes $ 2,097,163 $(1,002,807) $ 250,292 $ - $ 1,344,648 Other corporate, net 26,789 Interest expense (448,117) Merger-related expenses (800,000) Amortization of goodwill (21,174) Income tax expense (10,810) ----------- Net income $ 91,336 ===========
(Continued) F-41 MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------- Note T - Reportable Segments (Continued):
MOTOR NORTH MOUNTAIN YEAR ENDED DECEMBER 31, 1998 PRESERVER CLUB EAST VALLEY TOTAL - ----------------------------- ----------- ----------- ----------- ----------- ----------- Insurance premiums $13,303,402 $39,872,261 $ - $ - $53,175,663 Net investment income 1,249,505 2,852,673 - - 4,102,178 Realized investment gains 12,635 15,988 - - 28,623 ----------- ----------- ----------- ----------- ------------ Total revenues 14,565,542 42,740,922 - - 57,306,464 ----------- ----------- ----------- ----------- ------------ Loss and loss expenses incurred 7,923,218 28,556,373 - - 36,479,591 Acquisitions costs and operating other expenses 4,468,622 11,200,514 - - 15,669,136 ----------- ----------- ----------- ----------- ------------ Total expenses 12,391,840 39,756,887 - - 52,148,727 ----------- ----------- ----------- ----------- ------------ Income before Federal income taxes $ 2,173,702 $ 2,984,035 $ - $ - $ 5,157,737 Other corporate, net 615,815 Interest expense (54,146) Income tax expense (1,941,022) ----------- Net income $ 3,778,384 ============
Note U - Related Party Transactions: The Ownership Group owns 47.1% of the outstanding common stock of the Company at December 31, 2000. The Company paid directors fees' of $192,500 in 2000 and $180,000 during 1999 and 1998 to the Ownership Group. As noted, the Ownership Group's participation in the Debentures could potentially increase their share ownership of the Company from its present 47.1% to 57.7%. During 2000 and 1999, the Ownership Group received $776,680 and $214,780 in interest payments on the Debentures, respectively, and $914,681 in interest payments on the Notes in 2000. See Notes H and I for further information on the Notes and Debentures, respectively. Note V - Restatement: In March 2001, the Company's management determined that certain tax benefits should not have been recognized and that certain deferred tax liabilities had not been recorded. These tax matters, which are discussed in Note J, relate to the tax effects of temporary differences arising from a subsidiary that was de-consolidated for financial reporting purposes due to its insolvency in 1992. As a result, the 1998 and 1999 Consolidated Financial Statements have been restated from amounts previously reported. In addition, retained earnings and thus shareholders' equity at December 31, 1997 was reduced by $126,303, representing the cumulative effect from revising the tax accrual on prior periods' results of operations after Federal income taxes. In connection with this adjustment, goodwill arising from the acquisition of North East in 1999 was increased by $152,047. Finally, deferred tax assets were not recorded that should have been for the tax effects of the minimum pension liability that is presented as a component of other comprehensive income. Shareholders' equity at December 31, 1997 increased by $1,539,894, representing the cumulative effect on prior periods' results of revising the tax accrual. The net effect of these prior period adjustments increased shareholders' equity by $1,413,591 at December 31, 1997. These tax matters have no impact on the operations, cash flow or capital and surplus of the Company's active insurance subsidiaries or on consolidated income before Federal income taxes for the periods presented, nor is the Company subject to penalties and interest on the recording of the deferred tax liabilities. The effects of these tax items on the accompanying financial statements are set forth below: (continued) F-42 MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note V - Restatement (continued):
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999 ---------------------------- AS PREVIOUSLY AS REPORTED RESTATED ------------- -------- ASSETS Investments: Fixed maturity securities $ 78,242,322 $ 78,242,322 Equity securities 57,053 57,053 Mortgage loans on real estate 153,616 153,616 Short term investments 8,528,858 8,528,858 ------------ ----------- Total investments 86,981,849 86,981,849 Cash & cash equivalents 443,733 443,733 Premiums receivable 27,132,246 27,132,246 Reinsurance recoverable 21,163,574 21,163,574 Notes & accounts receivable 212,598 212,598 Deferred policy acquisition costs 10,560,763 10,560,763 Fixed assets 1,858,621 1,858,621 Federal income tax recoverable 54,026 47,100 Prepaid Reinsurance Premiums 1,485,450 1,485,450 Deferred tax asset 4,128,766 3,637,551 Goodwill 1,745,848 1,593,801 Other assets 1,470,744 1,470,744 ------------ ------------ Total Assets $157,238,218 $156,588,030 ============ ============ LIABILITIES & SHAREHOLDERS' EQUITY Liabilities & Shareholders' Equity: Losses and loss expenses $ 70,983,383 $ 70,983,383 Unearned premiums 38,698,028 38,698,028 Commissions payable 2,802,516 2,802,516 Accounts payable 1,397,263 1,397,263 Accrued expenses 3,112,157 3,112,157 Drafts outstanding 2,685,423 2,685,423 Convertible subordinated debentures 10,000,000 10,000,000 ------------ ------------ Total Liabilities 129,678,770 129,678,770 ------------ ------------ Shareholders' Equity: Common Stock 1,062,194 1,062,194 Paid in Capital 2,066,089 2,066,089 Accumulated other comprehensive income (5,036,515) (3,897,396) Retained earnings 29,467,680 27,678,373 ------------ ------------ Total Shareholders' Equity 27,559,448 26,909,260 ------------ ------------ Total Liabilities & Shareholders' Equity $157,238,218 $156,588,030 ============ ============
CONSOLIDATED INCOME STATEMENTS FOR THE YEARS ENDED DECEMBER 31, --------------------------------------------------------------- 1999 1998 ---------------------------- -------------------------------- AS PREVIOUSLY AS AS PREVIOUSLY AS REPORTED RESTATED REPORTED RESTATED ------------- -------- ------------- -------- Income before Federal income taxes $ 102,146 $ 102,146 $ 5,719,406 $ 5,719,406 Benefit (provision) for Federal income taxes: current 21,865 28,331 (193,121) (179,661) deferred 1,152,922 (39,141) (1,270,494) (1,761,361) ----------- ------------ ------------ ------------ Total Federal income tax 1,174,787 (10,810) (1,463,615) (1,941,022) ----------- ------------ ------------ ------------ Net income $ 1,276,933 $ 91,336 $ 4,255,791 $ 3,778,384 =========== ============ ============ ============ Net income per common share: Basic $ .60 $ .04 $ 2.02 $ 1.79 =========== ============ ============ ============ Diluted $ .60 $ .04 $ 2.01 $ 1.78 =========== ============ ============ ============
F-43 MOTOR CLUB OF AMERICA AND SUBSIDIARIES SCHEDULE I. SUMMARY OF INVESTMENTS- OTHER THAN INVESTMENTS IN RELATED PARTIES AT DECEMBER 31, 2000 ----------
Column A Column B Column C Column D -------- -------- -------- -------- Amount at which shown in the Cost(a) Market balance sheet ------- ------ ------------- Type of Investment - ------------------ Fixed maturity securities available-for-sale: United States Government and government agencies and authorities $48,126,796 $49,144,815 $49,144,815 Industrial and miscellaneous 45,201,651 44,812,674 44,812,674 Public utilities 4,242,647 4,116,835 4,116,835 ------------ ----------- Total fixed maturities 97,571,084 98,074,324 Equity securities: Common stock 34,659 47,604 47,604 Mortgage loans on real estate 110,160 110,160 Short-term investments, available-for-sale 6,760,341 6,760,341 6,760,341 ------------ ----------- ----------- Total investments $104,476,254 $104,992,429 ============ ============
Note: (a) Represents original cost of investments reduced by repayment and as to fixed maturities, adjusted for amortization of premiums or accrual of discounts. (Continued) F-44 MOTOR CLUB OF AMERICA AND SUBSIDIARIES SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY) ---------- BALANCE SHEETS
DECEMBER 31, ----------------------- 2000 1999 ---- ---- (Restated) ASSETS: Investments in subsidiaries $62,642,578 $46,399,026 Insurance premiums receivable 24,608,881 18,896,067 Deferred tax asset 354,887 1,274,804 Other assets 4,865,594 3,506,906 ----------- ----------- Total assets $92,471,940 $70,076,803 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY: Payable to subsidiaries $32,651,439 $28,276,495 Convertible subordinated debentures 10,000,000 10,000,000 Note payable 11,500,000 - Other liabilities 8,264,570 4,891,048 ----------- ----------- Total liabilities 62,416,009 43,167,543 Shareholders' equity 30,055,931 26,909,260 ----------- ----------- Total liabilities and shareholders' equity $92,471,940 $70,076,803 =========== ===========
NOTES TO SCHEDULE ----------------- The Notes to Consolidated Financial Statements of Motor Club of America and Subsidiaries are incorporated by reference to this schedule. The Statements of Shareholders' Equity are the same as those presented for Motor Club of America and Subsidiaries. (Continued) F-45 MOTOR CLUB OF AMERICA AND SUBSIDIARIES SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY) ---------- STATEMENTS OF OPERATIONS
For the years ended December 31, -------------------------------- 2000 1999 1998 ---- ---- ---- (Restated) (Restated) REVENUES: Membership servicing fees $ 112,905 $ 118,924 $ 133,531 Interest on mortgage loans 12,255 16,974 35,251 Other income 117,009 168,222 204,640 ---------- ---------- ---------- Total revenues 242,169 304,120 373,422 ---------- ---------- ---------- EXPENSES: Merger expenses 354,097 800,000 - Interest expense 1,867,085 448,117 60,389 Amortization of goodwill 84,695 21,174 - General and administrative, expenses (1) 17,383 277,340 (248,636) ---------- ---------- ---------- Total expenses 2,323,260 1,546,631 (188,247) ---------- ---------- ---------- Income (loss) before Federal income taxes (2,081,091) (1,242,511) 561,669 Benefit (provision) for Federal income taxes: current (44,797) 28,331 1,384,611 deferred (994,961) 40,230 (1,761,361) --------- ---------- ---------- Total Federal income tax (1,039,758) 68,561 (376,750) --------- ---------- ---------- Income (loss) before item shown below (3,120,849) (1,173,950) 184,919 Equity in net income of subsidiaries 5,080,768 1,265,286 3,593,465 ---------- ---------- ---------- Net income $1,959,919 $ 91,336 $3,778,384 ========== ========== ==========
(1) Amount is net of $316,814 (2000), $285,762 (1999) and $296,810 (1998) of management fees charged to subsidiaries. (Continued) F-46 MOTOR CLUB OF AMERICA AND SUBSIDIARIES SCHEDULE II. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY) ---------- STATEMENTS OF CASH FLOWS
For the years ended December 31, ---------------------------------------------- 2000 1999 1998 ----------- ------------- ----------- Net income $1,959,919 $91,336 $3,778,384 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense 645,963 499,503 426,703 Deferred tax provision (benefit) 994,961 (40,230) 1,761,361 Changes in assets and liabilities excluding effects of acquisitions: Premiums receivable (5,712,814) 691,841 (12,221,216) Investments in subsidiaries (6,602,421) 340,204 (10,818,776) Other assets (148,204) (7,716) 125,831 Other liabilities 2,044,745 1,065,629 451,011 Payable to subsidiaries 4,374,944 1,778,038 11,857,053 ---------- ----------- ---------- Net cash provided by (utilized in) operating activities (2,442,907) 4,418,605 (4,639,649) ---------- ----------- ---------- Investing activities: Proceeds from: Disposal of short-term investments 14,935,000 - 28,900,000 Payments received on mortgage loan principal 43,456 207,422 161,517 Purchase of: Short-term investments (14,935,000) - (25,750,000) Fixed assets (1,600,549) (454,875) (491,088) Acquisition of Mountain Valley (2000) and North East (1999) (7,500,000) (10,409,682) - ----------- ---------- ------------ Net cash provided by (utilized in) investing activities (9,057,093) (10,657,135) 2,820,429 ---------- ----------- ------------ Financing activities: Convertible subordinated debentures - 10,000,000 - Note payable 11,500,000 (3,000,000) 3,000,000 Capital contribution to subsidiary - 2,000,000 - Common stock issued - - 57,750 ----------- ----------- ----------- Net cash provided by financing activities 11,500,000 5,000,000 3,057,750 ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents - (1,238,530) 1,238,530 Cash and cash equivalents at beginning of year - 1,238,530 - ----------- ----------- ----------- Cash and cash equivalent at end of year $ - $ - $ 1,238,530 =========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION - ------------------------------------------------- (1) Total interest paid was $1,753,604 (2000), $448,782 (1999) and $60,389 (1998) (2) Total federal income taxes paid was $0 (2000 and 1999) and $212,738 (1998). (Continued) F-47 MOTOR CLUB OF AMERICA AND SUBSIDIARIES SCHEDULE IV. REINSURANCE FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 ----------
Column A Column B Column C Column D Column E Column F -------- -------- -------- -------- -------- -------- % of Ceded to Assumed from Amount other other Assumed Gross Amount Companies Companies Net Amount to Net ------------ --------- ------------ ---------- ------- December 31, 2000: Total property and casualty insurance premiums earned $96,615,156 $13,161,055 $ 13,380 $83,467,481 0.02% =========== =========== ========== =========== ===== December 31, 1999: Total property and casualty insurance premiums earned $64,151,936 $ 8,358,946 $ 14,340 $55,807,330 0.03% =========== =========== ========== =========== ===== December 31, 1998: Total property and casualty insurance premiums earned $59,951,837 $ 6,776,174 $ - $53,175,663 0.00% =========== =========== ========== =========== =====
(Continued) F-48 MOTOR CLUB OF AMERICA AND SUBSIDIARIES SCHEDULE V. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 ----------
Column A Column B Column C Column D Column E -------- -------- -------- -------- --------- Additions Balance at Charged to Charged to Balance Beginning Cost and Other at end Description of Period Expenses Accounts Deductions of Period - ------------- ----------- ---------- ---------- ------------ ----------- Allowance for doubtful receivables: December 31, 2000 $ 68,091 $ - $ - $ - $ 68,091 ========== ========== ========== ========== ========= December 31, 1999 $ 68,091 $ - $ - $ - $ 68,091 ========== ========== ========== ========== ========= December 31, 1998 $ 68,091 $ - $ - $ - $ 68,091 ========== ========== ========== ========== ========= Valuation allowance for deferred taxes: December 31, 2000 $ 267,032 $ - $ - $ 117,116 $ 149,916 ========== ========== ========== ========== ========= December 31, 1999 $ 95,230 $ 171,802 $ - $ - $ 267,032 ========== ========== ========== ========== ========= December 31, 1998 $1,916,202 $ - $ - $1,820,972 $ 95,230 ========== ========== ========== ========== =========
(Continued) F-49 MOTOR CLUB OF AMERICA AND SUBSIDIARIES SCHEDULE VI. SUPPLEMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS ---------- For the years ended December 31, 2000, 1999 and 1998
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G - ------------ ------------ ------------ ------------ ----------- ----------- ----------- CLAIMS AND CLAIM RESERVES FOR ADJUSTMENT EXPENSES DEFERRED UNPAID CLAIMS DISCOUNT, INCURRED RELATED TO POLICY AND CLAIM IF ANY, NET (1) (2) ACQUISITION ADJUSTMENT DEDUCTED IN UNEARNED EARNED INVESTMENT CURRENT PRIOR COSTS EXPENSES COLUMN C PREMIUMS PREMIUMS INCOME (A) YEAR YEARS ------------ ------------- ------------ ---------- -------- ----------- ---------------------- Year ended December 31, 2000 $14,505,569 $90,392,486 - $53,409,659 $83,467,481 $6,302,094 $55,542,028 $166,024 Year ended December 31, 1999 $10,560,763 $70,983,383 - $38,698,028 $55,807,330 $4,920,229 $37,271,781 $3,359,272 Year ended December 31, 1998 $ 8,708,329 $58,335,143 - $30,733,144 $53,175,663 $4,102,255 $32,598,287 $3,881,304 COLUMN H COLUMN I COLUMN J COLUMN K ----------- ----------- ----------- ----------- AMORTIZATION PAID OF DEFERRED CLAIMS POLICY AND CLAIM ACQUISITION ADJUSTMENT PREMIUM COSTS EXPENSES WRITTEN ------------ ---------- ------- Year ended December 31, 2000 $25,135,714 $48,041,958 $89,204,441 Year ended December 31, 1999 $14,305,501 $36,735,862 $54,508,215 Year ended December 31, 1998 $13,375,221 $29,548,773 $64,302,713
Note: (a) Excludes non-insurance subsidiaries' investment income and realized investment gains. F-50 EX-22 2 j0246_ex22.txt MOTOR CLUB OF AMERICA Exhibit (22) Subsidiaries of the Registrant. The following are the subsidiaries of the Registrant as of March 23, 2001: State of Name Organization ---- ------------ Motor Club of America Insurance Company New Jersey Preserver Insurance Company New Jersey North East Insurance Company Maine American Colonial Insurance Company New York Mountain Valley Indemnity Company New Hampshire -----END PRIVACY-ENHANCED MESSAGE-----