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.
June 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 .
2,043,004 shares of Common Stock were outstanding as of
August 10, 1995.
1 of 14
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
MOTOR CLUB OF AMERICA
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
1995 1994
ASSETS
<S> <C> <C>
Cash and invested assets $43,116,649 $45,555,992
Premiums receivable 5,069,228 5,547,378
Reinsurance recoverable on
paid and unpaid losses and
loss expenses 19,431,629 20,766,271
Notes and accounts receivable
- net 238,659 284,099
Deferred policy acquisition costs 3,977,199 4,166,368
Fixed assets - at cost, less
accumulated depreciation 1,170,206 1,182,780
Federal income tax recoverable 29,650 33,280
Prepaid reinsurance premiums 603,623 682,065
Other assets 1,260,174 1,658,244
Total Assets $74,897,017 $79,876,477
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LIABILITIES AND SHAREHOLDERS' EQUITY
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Liabilities:
Losses and loss expenses $40,055,988 $41,665,101
Unearned premiums and membership
fees 13,488,332 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 7,681,143 7,981,161
Total Liabilities 61,225,463 69,330,292
Shareholders' Equity:
Common Stock, par value $.50 per share:
Authorized - 10,000,000 shares;
issued - 2,043,004 shares 1,021,501 1,021,501
Paid in additional capital 1,720,945 1,720,945
Net unrealized gains (losses)
on debt securities 778,862 (1,268,628)
Retained earnings 10,150,246 9,072,367
Total Shareholders' Equity 13,671,554 10,546,185
Total Liabilities and
Shareholders' Equity $74,897,017 $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 Six Months Ended For the Three Months Ended
June 30, 1995 June 30,1994 June 30,1995 June 30,1994
Revenues:
<S> <C> <C> <C> <C>
Insurance premiums (net of
premiums ceded totaling
$1,643,927, $4,236,341,
$952,373 and $2,808,380) $17,517,584 $14,322,321 $8,786,046 $7,100,364
Net investment income 1,368,696 1,334,715 667,984 666,979
Realized gains on sales
of investments 4,132 31,706 - 31,717
Motor Club membership fees 630,787 712,884 317,427 356,802
Other revenues 66,754 126,120 32,219 62,440
Total revenues 19,587,953 16,527,746 9,803,676 8,218,302
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Losses and Expenses:
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Insurance losses and
loss expenses incurred
(net of reinsurance
recoveries totaling
$869,173, $2,037,910,
$3,403,509 and $1,167,424) 10,014,725 7,217,685 5,015,629 3,847,180
Amortization of deferred
policy acquisition costs 5,437,549 4,065,621 2,583,919 1,799,519
Other operating expenses 2,867,354 4,082,770 1,474,306 2,065,077
Reversal of prior year's
accrual of New Jersey
FAIR Act liabilities - (1,187,367) - (593,683)
Motor Club benefits 168,448 180,623 80,211 64,857
Total losses and
expenses 18,488,076 14,359,332 9,154,065 7,182,950
Income before Federal
income tax 1,099,877 2,168,414 649,611 1,035,352
Provision (benefit) for Federal
income taxes 22,000 - 11,000 (9,187)
Net income $ 1,077,877 $ 2,168,414 $ 638,611 $1,044,539
Per common share:
Net income $.53 $1.06 $.31 $.51
</TABLE>
(Financial statements should be read in
conjuction with the accompanying notes)
<TABLE>
<CAPTION>
MOTOR CLUB OF AMERICA
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended
June 30, 1995 June 30, 1994
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Operating activities:
Net income $ 1,077,877 $ 2,168,414
Adjustments to reconcile net
income to net cash used in
operating activities:
Depreciation expense 148,558 154,083
Gain on sale of investments (4,132) (31,706)
Amortization on bond premium -
net 9,168 135,566
Changes in:
Deferred policy
acquisition costs 189,169 (194,403)
Premiums receivable 478,150 624,351
Notes and accounts
receivable 45,440 268,937
Other assets 398,070 35,192
Losses and loss expenses (1,609,113) (2,149,816)
Unearned premiums and
membership fees (695,698) (1,760,674)
Federal income tax
recoverable 3,630 1,380,876
Amount due to MCA Insurance Company
in Liquidation (2,750,000) -
Other liabilities (300,018) (6,132,829)
Reinsurance recoverable on
paid and unpaid losses 1,334,642 750,734
Prepaid reinsurance premiums 78,442 2,370,987
Net cash used in
operating activities ($1,595,815) ($2,380,288)
Investing activities:
Investments purchased (22,592,266) (29,425,608)
Fixed assets purchased (135,983) (35,255)
Proceeds from sales of investments 27,330,177 32,441,141
Net cash provided by
investing activities 4,601,928 2,980,278
Financing activities:
Repayment to Midlantic Bank, N.A. (2,750,000) -
Net cash used in financing activities (2,750,000) -
Net increase in cash 256,113 599,990
Cash at beginning of period - -
Cash at end of period $ 256,113 $ 599,990
</TABLE>
Supplemental Disclosures of Cash Flow Information
Note - Interest paid was $33,432 in 1995 and $6 in 1994.
Federal income tax paid was $18,370 in 1995 and $54,227 in 1994.
Non Cash Investing Activities:
Invested assets and shareholders' equity increased by $2,047,490 and
decreased by $267,420 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 June 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 the 2,043,004 weighted
average number of shares of common stock outstanding for the six
and three month periods presented.
4. Federal Income Taxes
The Registrant and its subsidiaries file a consolidated
Federal income tax return. In the six and three month periods
ended June 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 June 30, 1995
is approximately $8.9 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 96% 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 limited new writings and stringent expense
reduction and controls.
Earnings
Six Months
Net income for the six months ended June 30, 1995 included
$477,000 or $.23 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 six months ended June 30, 1994 included
$1,187,000 or $.58 per share for the reversal of FAIRA surtaxes
accrued in 1992.
Excluding these items, net income for the six months ended
June 30, 1995 decreased $380,000 or $.19 per share as compared to
the same period in 1994, primarily due to a higher combined ratio,
the result of loss and loss expense ratios which increased in 1995
as compared to the record low loss and loss expense ratios in 1994,
offset by lower expense ratios.
Three Months
Net income for the three months ended June 30, 1995 included
$246,000 or $.12 per share for reduced reinsurance costs relating
to a decrease in the 1995 rate assessed by the UCJF.
Net income for the three months ended June 30, 1994 included
$594,000 or $.29 per share for the reversal of FAIRA surtaxes
previously accrued in 1992.
Excluding these items, net income for the three months ended
June 30, 1995 decreased $59,000 or $.03 per share as compared to
the same period in 1994, primarily due to decreases in Motor Club
membership fees, other revenues and realized gains from the sale of
investments, offset by a lower combined ratio from the Registrant's
insurance operations as a result of reduced expenses and expense
ratio.
Revenues
Insurance Premiums
Insurance premiums earned increased $3,195,000 or 22% in the
six months ended June 30, 1995 and $1,686,000 or 24% in the three
months ended June 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 $477,000 and $246,000,
respectively; and (3) increases in new business written in 1995.
Motor Club began to write new personal automobile insurance
business in the first quarter of 1995, for the first time since
March 1990. New PPA direct premium written in the first six months
of 1995 totaled $1,095,000, of which $986,000 was written in the
second quarter of 1995. Motor Club's inforce business has now
begun to increase, with new writings exceeding PPA attrition.
In the six months ended June 30, 1995, as compared to the same
period in 1994, direct premium written increased $1,797,000 or 11%;
Preserver's increased by $1,440,000 or 71%, while Motor Club's
increased by $357,000 or 3%.
In the second quarter of 1995 as compared to the same period
in 1994, direct premium written increased $1,280,000 or 15%;
Preserver's increased by $655,000 or 49%, while Motor Club's
increased by $625,000 or 9%.
Net Investment Income
Net investment income increased $34,000 or 3% in 1995 as
compared to 1994. Average invested assets for the six month
period ended June 30, 1995 was $43,601,000 as compared to
$44,689,000 for the same period in 1994. The investment portfolio
(including short-term investments and excluding realized capital
gains) yielded 6.28% for the six months ended June 30, 1995 as
compared to 5.97% for the same period in 1994. Despite the decline
in invested assets, interest rates have generally increased over
the last year, and the Registrant has been able to invest funds at
the higher interest rate levels experienced, increasing both
portfolio yield and investment income.
Losses and Expenses
Losses and Loss Expenses Incurred
Losses and loss expenses incurred increased $2,797,000 or 39%
in the six months ended June 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 57.2% and 57.1% for the six and three months ended June 30,
1995, as compared to 50.4% and 54.2% for the same periods in 1994.
The higher loss ratios in 1995 as compared to 1994 are primarily
attributable to higher personal automobile loss ratios.
Despite the higher loss ratios on a comparative basis, no
significant adverse trends were experienced or identified during
the six months or second quarter of 1995, and the loss ratios
returned were within recent experience. The Registrant believes
that the 1994 loss ratios were historically low, and the 1995
results are a return to more representative experience which
remains profitable.
Amortization of Deferred Policy Acquisition Expenses and Other
Operating Expenses
These expenses increased $157,000 or 2% in the six months
ended June 30, 1995 as compared to 1994. Excluding acquisition
related expenses, which increased commensurately with the
aforementioned 22% increase in insurance premiums, other operating
expenses decreased $1,044,000 or 20% in the six months ended June
30, 1995 as compared to 1994. This decrease in expenses allowed
for a decrease in the expense ratio to 45.8% for the six months
ended June 30, 1995 as compared to 54.2% 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 $82,000 or 12% 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 June 30, 1995 is $6.69 per
share, as compared to $5.84 per share at March 31, 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 of
$2,047,000 or $1.00 per share in the market value of fixed maturity
investments accounted for as available-for-sale securities under
SFAS No. 115. This increase in market value was caused by the
rapid decline in interest rates in 1995.
The Registrant anticipates that the strengthening of its
financial condition will continue via the application of stringent
expense controls and limited new writings in selected lines of
business.
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 new catastrophe reinsurance
coverage in the amount of $24.5 million in excess of $500,000 with
only a modest increase in premium. This new coverage is a
substantial increase over the expiring coverage of $9.5 million in
excess of $1.5 million.
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 limited amount of new business
they are writing.
Cash from operations declined in the first six months of 1995
and 1994, the result of: 1) in 1995, the payment of the Note due
the MCAIC Receiver, who is now paid in full; 2) the Insurance
Companies' payment of annual insurance premium taxes, licenses,
fees and other assessments, which are historically paid in the
first quarter of the year; and 3) in the first quarter of 1994,
Motor Club's $2,275,000 payment to the New Jersey Market Transition
Facility. 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.
These events also contributed to the reduction in total assets
as of June 30, 1995 compared to December 31, 1994.
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 June 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: August 11, 1995
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<LEGEND>
These schedules contain summary financial information extracted from Motor Club
of America's Consolidated Balance Sheets for the period ending June 30, 1995 and
the Consolidated Statements of Operations for the six months then ended and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<DEBT-HELD-FOR-SALE> 42,029,219
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 831,317
<REAL-ESTATE> 0
<TOTAL-INVEST> 42,860,536
<CASH> 256,113
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 3,977,199
<TOTAL-ASSETS> 74,897,017
<POLICY-LOSSES> 40,055,988
<UNEARNED-PREMIUMS> 13,488,332
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 1,021,501
0
0
<OTHER-SE> 12,650,053
<TOTAL-LIABILITY-AND-EQUITY> 74,897,017
17,517,584
<INVESTMENT-INCOME> 1,368,696
<INVESTMENT-GAINS> 4,132
<OTHER-INCOME> 697,541
<BENEFITS> 10,014,725
<UNDERWRITING-AMORTIZATION> 5,437,549
<UNDERWRITING-OTHER> 2,867,354
<INCOME-PRETAX> 1,099,877
<INCOME-TAX> 22,000
<INCOME-CONTINUING> 1,077,877
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,077,877
<EPS-PRIMARY> .53
<EPS-DILUTED> .53
<RESERVE-OPEN> 41,665,101
<PROVISION-CURRENT> 12,210,635
<PROVISION-PRIOR> (1,326,737)
<PAYMENTS-CURRENT> 3,425,433
<PAYMENTS-PRIOR> 9,067,578
<RESERVE-CLOSE> 40,055,988
<CUMULATIVE-DEFICIENCY> (1,326,737)
</TABLE>
