SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended Commission File No.
September 30, 1995 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.)
484 Central Avenue, Newark, New Jersey 07107
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code 201-733-1234
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes x . No .
2,043,754 shares of Common Stock were outstanding as of
November 10, 1995.
PART I
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements
MOTOR CLUB OF AMERICA
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
1995 1994
ASSETS
<S> <C> <C>
Cash and invested assets $44,328,124 $45,555,992
Premiums receivable 4,904,620 5,547,378
Reinsurance recoverable on
paid & unpaid losses and
loss expenses 17,646,926 20,766,271
Notes and accounts receivable
- net 199,415 284,099
Deferred policy acquisition costs 3,953,107 4,166,368
Fixed assets - at cost, less
accumulated depreciation 1,205,821 1,182,780
Federal income tax recoverable 24,835 33,280
Prepaid reinsurance premiums 475,978 682,065
Other assets 1,148,961 1,658,244
Total Assets $73,887,787 $79,876,477
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Liabilities:
Losses and loss expenses $38,781,626 $41,665,101
Unearned premiums and membership
fees 13,243,448 14,184,030
Note payable to Receiver of MCA
Insurance Company in Liquidation - 2,750,000
Note payable to Midlantic Bank, N.A. - 2,750,000
Other liabilities 7,571,000 7,981,161
Total Liabilities 59,596,074 69,330,292
Shareholders' Equity:
Common Stock, par value $.50 per share:
Authorized - 10,000,000 shares;
issued - 1995 - 2,043,754
1994 - 2,043,004 1,021,876 1,021,501
Paid in additional capital 1,722,539 1,720,945
Unfunded accumulated benefit
obligation in excess of Plan assets (3,633,000) (3,633,000)
Net unrealized gains (losses)
on debt securities 750,880 (1,268,628)
Retained earnings 14,429,418 12,705,367
Total Shareholders' Equity 14,291,713 10,546,185
Total Liabilities and
Shareholders' Equity $73,887,787 $79,876,477
</TABLE>
(Financial statements should be read in
conjunction with the accompanying notes)
<TABLE>
<CAPTION>
MOTOR CLUB OF AMERICA
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Nine Months Ended For the Three Months Ended
September 30, September 30,
1995 1994 1995 1994
Revenues:
<C> <S> <C> <C> <C> <C> <C>
Insurance premiums (net of
premiums ceded totaling
$2,653,650, $6,236,936,
$1,009,723 and $2,000,595) $26,972,822 $21,512,920 $ 9,455,238 $7,190,599
Net investment income 2,099,106 2,032,873 730,410 698,158
Realized gains on sales
of investments 56,823 38,387 52,691 6,681
Motor Club membership fees 949,646 1,059,682 318,859 346,798
Other revenues 96,282 169,033 29,528 42,913
Total revenues 30,174,679 24,812,895 10,586,726 8,285,149
</TABLE>
<TABLE>
<CAPTION>
Losses and Expenses:
<S> <C> <C> <C> <C>
Insurance losses and
loss expenses incurred
(net of reinsurance recoveries
totaling ($20,332), $2,746,614,
($889,505) and $708,704) 15,662,627 11,623,045 5,647,902 4,405,360
Amortization of deferred policy
acquisition costs 8,046,135 6,258,267 2,608,586 2,192,646
Other operating expenses 4,506,541 6,116,460 1,639,187 2,033,690
Reversal of prior year's accrual
of New Jersey FAIR Act liabilities - (3,656,127) - (2,468,760)
Motor Club benefits 199,328 259,751 30,880 79,128
Total losses and expenses 28,414,631 20,601,396 9,926,555 6,242,064
Income before Federal
income tax 1,760,048 4,211,499 660,171 2,043,085
Provision for Federal
income taxes 36,000 4,420 14,000 4,420
Net income $ 1,724,048 $ 4,207,079 $ 646,171 $2,038,665
Per common share:
Net income $.84 $2.06 $.31 $1.00
</TABLE>
(Financial statements should be read in
conjunction with the accompanying notes)
<TABLE>
<CAPTION>
MOTOR CLUB OF AMERICA
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended
September 30, 1995 September 30, 1994
<S> <C> <C> <C>
<C> <C>
Operating activities:
Net income $ 1,724,048 $ 4,207,079
Adjustments to reconcile net income
to net cash used in operating
activities:
Depreciation expense 219,941 216,949
Gain on sale of investments (56,823) (38,387)
Amortization on bond premium - net 43,670 205,858
Changes in:
Deferred policy
acquisition costs 213,261 (289,074)
Premiums receivable 642,758 1,131,763
Notes and accounts
receivable 84,684 307,996
Other assets 509,283 199,291
Losses and loss expenses (2,883,475) (3,438,149)
Unearned premiums and
membership fees (940,582) (2,684,844)
Federal income tax
recoverable 8,445 1,385,296
Amount due to MCA Insurance Company
in Liquidation (2,750,000) -
Other liabilities (410,161) (9,284,887)
Reinsurance recoverable on
paid and unpaid losses 3,119,345 1,548,614
Prepaid reinsurance premiums 206,087 3,513,017
Net cash used in
operating activities ($ 269,519) ($3,019,478)
Investing activities:
Investments purchased (37,322,043) (40,989,805)
Fixed assets purchased (242,980) (35,255)
Proceeds from sales of investments 40,582,573 44,078,640
Net cash provided by
investing activities 3,017,550 3,053,580
Financing activities:
Common stock issued 1,969 -
Repayment to Midlantic Bank, N.A. (2,750,000) -
Net cash used in financing activities (2,748,031) -
Net increase in cash - 34,102
Cash at beginning of period - -
Cash at end of period $ - $ 34,102
</TABLE>
Supplemental Disclosures of Cash Flow Information
Note - Interest paid was $33,432 in 1995 and $6 in 1994.
Federal income tax paid was $27,555 in 1995 and $54,227 in 1994.
Non Cash Investing Activities:
Invested assets and shareholders' equity increased by $2,019,508 and
decreased by $687,616 in 1995 and 1994, respectively, as a result of
changes in market value pertaining to the Registrant's application of
SFAS No. 115 - Accounting for Certain Investments in Debt and Equity
Securities.
(Financial statements should be read in
conjunction with the accompanying notes)
MOTOR CLUB OF AMERICA
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Preparation and Presentation
The accompanying condensed consolidated financial statements
of Motor Club of America (the "Registrant") include its accounts
and those of its subsidiary companies and, in the opinion of
management, contain all adjustments necessary to present fairly the
Registrant's consolidated financial position, results of operations
and cash flows.
These statements should be read in conjunction with the
Summary of Significant Accounting Policies and other notes included
in the Notes to Financial Statements in the Registrant's 1994
Annual Report on Form 10-K.
2. Shareholders' Equity
Shareholders' equity at September 30, 1995 and December 31,
1994 includes the undistributed GAAP net income of Motor Club of
America Insurance Company ("Motor Club") and Preserver Insurance
Company ("Preserver") (collectively referred to as the "Insurance
Companies"), the net assets of which exceed the consolidated net
assets of the Registrant.
3. Per Share Data
Per share data are computed based upon 2,043,009 and 2,043,020
weighted average number of shares of common stock outstanding for
the nine and three month periods respectively, for 1995. Per share
data for 1994 are computed based upon 2,043,004 weighted average
number of shares outstanding for the nine and three month periods.
4. Federal Income Taxes
The Registrant and its subsidiaries file a consolidated
Federal income tax return. In the nine and three month periods
ended September 30, 1995 and 1994, the provision for Federal
income taxes resulted in effective tax rates different from the
expected statutory Federal income tax rates, principally as a
result of (i) certain adjustments, principally those enacted under
the Tax Reform Act of 1986; and (ii) utilization of Net Operating
Loss ("NOL") carryforwards. The Registrant's NOL carryforward at
September 30, 1995 is approximately $8.2 million.
5. Adoption of Recent Accounting Pronouncements
In October 1994, the Financial Accounting Standards Board
adopted SFAS No. 119, Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments. This
Statement prescribes new disclosures about derivatives and other
financial instruments.
The Registrant is required to adopt this Statement for 1995.
The additional disclosures will be limited as the Registrant has
not used derivatives or derivative securities for purposes of
trading or risk management in its investment portfolio or
operations.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview of Business Operations
The Registrant provides a broad range of property and casualty
insurance related services through the Insurance Companies. The
Registrant also operates a motor club through Motor Club of America
Enterprises, Inc. ("Enterprises"). The property and casualty
insurance subsidiaries form the largest segment of operations,
which accounted for 97% of 1995 revenues. The Insurance Companies
provide coverage only in the State of New Jersey.
The Registrant anticipates continuing its expansion program in
small commercial and ancillary coverages written by Preserver in
the State of New Jersey as well as through new private passenger
automobile ("PPA") writings by Motor Club.
The Registrant expects to continue to improve its financial
condition through these new premium writings and stringent expense
reduction and controls.
Earnings
Nine Months
Net income for the nine months ended September 30, 1995
included $750,000 or $.37 per share for reduced reinsurance costs
relating to a decrease in the 1995 rate assessed by the New Jersey
Unsatisfied Claim and Judgment Fund ("UCJF"), which pertains to New
Jersey Personal Injury Protection claims in excess of Motor Club's
retention limit of $75,000.
Net income for the nine months ended September 30, 1994
included $3,656,000 or $1.79 per share for the reversal of FAIRA
surtaxes and assessments, as well as the Registrant's liability for
the New Jersey Market Transition Facility ("MTF"), previously
accrued.
Excluding these items, net income for the nine months ended
September 30, 1995 increased $437,000 or $.21 per share as compared
to the same period in 1994, primarily due to a lower combined
ratio, the result of an expense ratio which decreased in 1995 as
compared to the ratio in 1994, offset by slightly higher loss and
loss expense ratios. Combined ratio for 1995 is 103.1% as compared
to 108.8% in 1994.
Three Months
Net income for the three months ended September 30, 1995
included $273,000 or $.13 per share for reduced reinsurance costs
relating to the aforementioned decrease in the 1995 rate assessed
by the UCJF.
Net income for the three months ended September 30, 1994
included $2,469,000 or $1.21 per share for the reversal of FAIRA
surtaxes and assessments, as well as the Registrant's liability for
the New Jersey MTF, previously accrued.
Excluding these items, net income for the three months ended
September 30, 1995 increased $803,000 or $.39 per share as compared
to the same period in 1994, primarily due to a lower combined ratio
from the Registrant's insurance operations as a result of reduced
expenses and expense ratio. These gains were offset by decreases
in Motor Club membership fees and other revenues. Combined ratio
for the three months ended September 30, 1995 is 103.2% as compared
to 117.4% for the same period in 1994.
Revenues
Insurance Premiums
Insurance premiums earned increased $5,460,000 or 25% in the
nine months ended September 30, 1995 and $2,265,000 or 31% in the
three months ended September 30, 1995, as compared to the same
periods in 1994, primarily as a result of: (1) the termination in
February 1994 of Preserver's 80% quota share reinsurance treaty;
(2) the aforementioned reduction in UCJF costs of $750,000 and
$273,000, respectively; and (3) increases in new business written
in 1995, particularly new PPA.
In the nine months ended September 30, 1995, as compared to
the same period in 1994, direct premium written increased
$3,724,000 or 15%; Preserver's increased by $1,938,000 or 58%,
while Motor Club's increased by $1,786,000 or 8%.
In the third quarter of 1995 as compared to the same period in
1994, direct premium written increased $1,927,000 or 23%;
Preserver's increased by $498,000 or 39%, while Motor Club's
increased by $1,429,000 or 21%.
Motor Club began to write new personal automobile insurance
business in the first quarter of 1995. New PPA direct premium
written in the first nine months of 1995 totaled $2,978,000, of
which $1,883,000 was written in the third quarter of 1995. During
the nine and three month periods ended September 30, 1995, new PPA
premiums earned were $1,147,000 and $912,000, respectively.
Motor Club's inforce business has now begun to increase, with
new writings exceeding PPA attrition. Motor Club took the PPA rate
increase allowed by New Jersey law during the third quarter, as it
has each year since 1990.
Net Investment Income
Net investment income increased $66,000 or 3% in 1995 as
compared to 1994. Average invested assets for the nine month
period ended September 30, 1995 were $44,358,000 as compared to
$43,159,000 for the same period in 1994. The increase in average
invested assets is primarily due to the increase in premium growth
described previously. The investment portfolio (including short-
term investments but excluding realized capital gains) yielded
6.31% for the nine months ended September 30, 1995 as compared to
6.07% for the same period in 1994.
Losses and Expenses
Losses and Loss Expenses Incurred
Losses and loss expenses incurred increased $4,040,000 or 35%
in the nine months ended September 30, 1995 as compared to 1994.
The increase in losses incurred is primarily due to the termination
of Preserver's 80% quota share reinsurance treaty, described
previously.
The Insurance Companies' combined loss and loss expense ratios
were 58.1% and 59.7% for the nine and three months ended September
30, 1995, as compared to 54.0% and 61.3% for the same periods in
1994. The higher year to date loss ratio in 1995 as compared to
1994 is primarily attributable to a higher personal automobile loss
ratio, which increased to 57.3% in 1995 from 52.1% in 1994. The
increase in loss and loss expense ratio attributable to personal
auto was partially offset by a decrease in the corresponding ratio
for Preserver's book of business, which decreased from 74.0% in
1994 to 61.0% in 1995.
Despite the higher loss ratio on a comparative basis, no
significant adverse trends were experienced or identified during
the nine months of 1995, and the loss ratios returned were within
recent experience. The Registrant believes that the 1994 PPA loss
ratios were historically low, and the 1995 results are a return to
more representative experience which remains profitable. In
addition, the new PPA business which Motor Club is writing
historically produces a higher loss ratio when it is first written.
Amortization of Deferred Policy Acquisition Expenses and Other
Operating Expenses
These expenses increased $178,000 or 1% in the nine months
ended September 30, 1995 as compared to 1994; for the three month
period ended September 30, 1995, these expenses increased $21,000
or less than 1% as compared to 1994.
Excluding acquisition related expenses, which increased
commensurately with the aforementioned 25% increase in insurance
premiums, other operating expenses decreased $1,119,000 or 15% in
the nine months ended September 30, 1995 as compared to 1994. This
decrease in expenses allowed for a decrease in the expense ratio to
45.0% for the nine months ended September 30, 1995 as compared to
54.8% in 1994. The Registrant is committed to reducing its expense
ratio by increasing revenues without increasing overhead
expenditures.
The Registrant expects to reduce its expenses further by
relocating from its existing office building, converting its
information systems to a smaller, more contemporary computing
platform which will allow for more efficient operations and by re-
doubling the efforts made previously to reduce all unnecessary
overhead expenditures.
Motor Club of America Membership Program
Motor Club membership fees written through Enterprises
decreased $195,000 or 18% in 1995 as compared to 1994. Motor Club
memberships written through AVCO Financial Services ("AVCO")
offices nationwide were discontinued effective December 31, 1994.
Motor Club membership fees written through AVCO offices accounted
for 16% of all membership fees written by Enterprises in 1994.
Financial Condition, Liquidity and Capital Resources
The Registrant's book value at September 30, 1995 is $6.99 per
share, as compared to $6.69 per share at June 30, 1995 and $5.16
per share at December 31, 1994. The increase in book value is due
to the earnings described previously, plus an increase during 1995
of $2,020,000 or $.99 per share in the market value of fixed
maturity investments accounted for as available-for-sale securities
under SFAS No. 115.
The Registrant anticipates that the strengthening of its
financial condition will continue via the application of stringent
expense controls and new writings in selected lines of business.
The New Jersey Insurance Department requires that insurers
maintain a premium to surplus ("leverage") ratio of 3 to 1 or less
in order to write new PPA. Motor Club's present applicable
leverage ratio for the twelve months ended September 30, 1995 is
2.91 to 1.
During this period, the Insurance Companies' ability to
control their reinsurance costs while maintaining the present
quality of the reinsurance program will be a key factor in the
Registrant's ability to attain this objective. On July 1, 1995,
the Insurance Companies obtained catastrophe reinsurance coverage
in the increased amount of $24.5 million in excess of $500,000 with
only a modest increase in premium.
The Insurance Companies' need for liquidity arises primarily
from the obligation to pay claims. The primary sources of
liquidity are premiums received, collections from reinsurers and
proceeds from investments.
Reserving assumptions and payment patterns of the Insurance
Companies did not materially change from the prior year and there
were no unusually large retained losses resulting from claim
activity. Unpaid losses are not discounted.
Operating and Investing Activities
The Insurance Companies' operations and cash flow are
relatively stable in light of the new business they are writing.
Cash from operations declined in the first nine months of
1995, the result of the $2.75 million payment of the Note due the
MCAIC Receiver, who is now paid in full. This has been offset by
increased cash flow from the new premium the Insurance Companies
have written.
These events also contributed to the reduction in total assets
as of September 30, 1995 compared to December 31, 1994.
Cash from operations declined in the first nine months of
1994, the result of Motor Club's $2,275,000 payment to the MTF. In
1994, this negative cash flow was offset by positive cash flow from
reinsurance recoveries from the UCJF and the receipt of Federal
income taxes recoverable at December 31, 1993.
No unusual or nonrecurring operating expenditures have been
incurred over this period. Additionally, the payout ratio of
losses has not fluctuated substantially over this period.
The Registrant has maintained an investing philosophy during
1995 consistent with past practices and described in detail in its
1994 Annual Report on Form 10-K. Investment mix and portfolio
duration as of September 30, 1995 have remained stable as compared
to December 31, 1994. Management anticipates maintaining this
approach to investing for the foreseeable future.
Financing Activities
The Registrant paid no dividend on its common stock in 1995 or
1994.
The Registrant has no material outstanding capital commitments
which would require additional financing.
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
None
b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized.
MOTOR CLUB OF AMERICA
/s/Stephen A. Gilbert
By: Stephen A. Gilbert
Executive Vice President
/s/Patrick J. Haveron
By: Patrick J. Haveron
Vice President - Chief Financial
Officer and Chief Accounting
Officer
Dated: November 13, 1995
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
These schedules contain summary financial information extracted from Motor Club
of Ameica's Consolidated Balance Sheets for the period ended September 30, 1995
and the Consolidated Statements of Operations for the nine months then ended and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<DEBT-HELD-FOR-SALE> 43,514,484
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 813,640
<REAL-ESTATE> 0
<TOTAL-INVEST> 44,328,124
<CASH> 0
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 3,953,107
<TOTAL-ASSETS> 73,887,787
<POLICY-LOSSES> 38,781,626
<UNEARNED-PREMIUMS> 13,243,448
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 1,021,876
0
0
<OTHER-SE> 13,269,837
<TOTAL-LIABILITY-AND-EQUITY> 73,887,787
26,972,822
<INVESTMENT-INCOME> 2,099,106
<INVESTMENT-GAINS> 56,823
<OTHER-INCOME> 1,045,928
<BENEFITS> 15,662,627
<UNDERWRITING-AMORTIZATION> 8,046,135
<UNDERWRITING-OTHER> 4,506,541
<INCOME-PRETAX> 1,760,048
<INCOME-TAX> 36,000
<INCOME-CONTINUING> 1,724,048
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,724,048
<EPS-PRIMARY> .84
<EPS-DILUTED> .84
<RESERVE-OPEN> 41,665,101
<PROVISION-CURRENT> 18,074,905
<PROVISION-PRIOR> (2,432,610)
<PAYMENTS-CURRENT> 6,358,310
<PAYMENTS-PRIOR> 12,167,460
<RESERVE-CLOSE> 38,781,626
<CUMULATIVE-DEFICIENCY> (2,432,610)
</TABLE>
