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.
(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.
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.
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.
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.
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)
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.
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
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.
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.
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.
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.
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
Since its acquisition, the following table summarizes the income (loss) before Federal income taxes for this segment:
(1) Pro Forma results for the twelve months ended December 31, 1999 (2) For the three months ended December 31, 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 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.
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:
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.
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.
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.
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.
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.
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.
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
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.
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.
On December 27, 1999, we repaid the $3 million borrowed from Dresdner Bank, AG in September 1998.
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.