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.
March 31, 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
May 10, 1995.
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
MOTOR CLUB OF AMERICA
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
1995 1994
ASSETS
<S> <C> <C>
Invested assets $41,065,665 $45,555,992
Premiums receivable 4,953,733 5,547,378
Reinsurance recoverable on
paid and unpaid losses and
loss expenses 20,499,877 20,766,271
Notes and accounts receivable-net 283,654 284,099
Deferred policy acquisition costs 3,933,127 4,166,368
Fixed assets - at cost, less
accumulated depreciation 1,226,333 1,182,780
Federal income tax recoverable 22,280 33,280
Prepaid reinsurance premiums 705,710 682,065
Other assets 1,291,841 1,658,244
Total Assets $73,982,220 $79,876,477
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Liabilities:
Losses and loss expenses $41,437,582 $41,665,101
Unearned premiums and membership
fees 13,469,439 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 7,151,794 7,981,161
Total Liabilities 62,058,815 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 losses on
debt securities (330,674) (1,268,628)
Retained earnings 9,511,633 9,072,367
Total Shareholders' Equity 11,923,405 10,546,185
Total Liabilities and
Shareholders' Equity $73,982,220 $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 Three Months
Ended
March 31, 1995 March 31, 1994
<S> <C> <C>
Revenues:
Insurance premiums (net of
premiums ceded totaling
$691,554 (1995) and $1,427,961
(1994)) $8,731,538 $7,221,957
Net investment income 700,712 667,736
Realized gains (losses)
on sales of investments 4,132 (11)
Motor Club membership fees 313,360 356,082
Other revenues 34,535 63,680
Total revenues 9,784,277 8,309,444
</TABLE>
<TABLE>
<CAPTION>
Losses and Expenses:
<S> <C> <C>
Insurance losses and
loss expenses incurred
(net of reinsurance recoveries
totaling $757,742 (1995) and
$870,486 (1994)) 4,999,096 3,370,505
Amortization of deferred policy
acquisition costs 2,853,630 2,266,102
Other operating expenses 1,393,048 2,017,693
Reversal of prior year's accrual
of New Jersey FAIR Act liabilities - (593,684)
Motor Club benefits 88,237 115,766
Total losses and expenses 9,334,011 7,176,382
Income before Federal
income tax 450,266 1,133,062
Provision for Federal
income taxes (11,000) (9,187)
Net income $ 439,266 $1,123,875
Per common share:
Net income $.22 $.55
</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 Three Months Ended
March 31, 1995 March 31, 1994
Operating activities:
<S> <C> <C> <C> <C>
Net income $ 439,266 $1,123,875
Adjustments to reconcile
net income to net cash
used in operating
activities:
Depreciation expense 75,812 74,405
Loss (gain) on sale of
investments (4,132) 11
Amortization (accrual) on
bond premium (discount) (8,170) 75,716
Changes in:
Deferred policy
acquisition costs 233,241 31,135
Premiums receivable 593,645 817,418
Notes and accounts
receivable 445 (26,512)
Other assets 366,403 82,026
Losses and loss expenses (227,519) 1,046,483)
Unearned premiums and
membership fees (714,591) (1,111,530)
Federal income tax
recoverable 11,000 1,413,343
Amount due to MCA Insurance
Company in Liquidation (2,750,000) -
Other liabilities (829,367) (3,682,471)
Reinsurance recoverable on
paid and unpaid losses 266,394 346,363
Prepaid reinsurance premiums (23,645) 1,055,420
Net cash used in
operating activities ($2,571,218) ($847,284)
Investing activities:
Investments purchased (11,532,439) (16,987,157)
Fixed assets purchased (119,364) -
Proceeds from sales of
investments 16,973,021 17,834,441
Net cash provided by
investing activities 5,321,218 847,284
Financing activities:
Repayment to Midlantic Bank, N.A. (2,750,000) -
Net cash used in financing
activities (2,750,000) -
Net (decrease) in cash - -
Cash at beginning of period - -
Cash at end of period $ - $ -
</TABLE>
Supplemental Disclosures of Cash Flow Information
Note - Interest paid was $33,432 in 1995 and $131 in 1994.
Federal income tax paid was $0 in 1995 and $30,947 in 1994.
Non Cash Investing Activities:
Invested assets and shareholders' equity increased by $937,954 and
decreased by $623,648 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 March 31, 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 each of
the three month periods presented.
4. Federal Income Taxes
The Registrant and its subsidiaries file a consolidated
Federal income tax return. In the three month periods ended March
31, 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
deductions, principally the amortization of fresh start benefit
allowed for under the Tax Reform Act of 1986; and (ii) utilization
of Net Operating Loss ("NOL") carryforwards. The Registrant's NOL
carryforward at March 31, 1995 is approximately $9.5 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 limited new private
passenger automobile ("PPA") writings by Motor Club.
The Registrant is seeking to improve its financial condition
through limited new writings and stringent expense reduction and
controls.
Earnings
Net income for the three months ended March 31, 1995 included
$230,000 or $.12 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 three months ended March 31, 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
March 31, 1995 decreased $321,000 or $.16 per share as compared to
the same period in 1994, primarily due to loss and loss expense
ratios which increased in 1995 as compared to the record low loss
and loss expense ratios in 1994.
Revenues
Insurance Premiums
Insurance premiums earned increased $1,510,000 or 21% in the
three months ended March 31, 1995 as compared to the same period in
1994, primarily as a result of: (1) the termination in February
1994 of Preserver's 80% quota share reinsurance treaty; and (2) the
aforementioned reduction in UCJF costs of $230,000.
Direct premium written increased $517,000 or 6% in the first
quarter of 1995 as compared to the same period in 1994. Preserver
direct premium written increased by $785,000 or 111% in the first
quarter of 1995 as compared to 1994; the growth in the Preserver
book was offset by a decline in the premiums written by Motor Club
of $267,000 or 4%.
Motor Club, pursuant to an Order received from the New Jersey
Department of Insurance, began to write new personal automobile
insurance business in the first quarter of 1995, for the first time
since March 1990. New PPA writings in the first quarter totaled
$109,000. Despite these new writings, Motor Club has continued to
experience PPA attrition which has exceeded both the level of new
writings and rate increases allowed by New Jersey insurance law.
Net Investment Income
Net investment income increased $33,000 or 5% in 1995 as
compared to 1994. Average invested assets for the three month
period ended March 31, 1995 was $43,246,000 as compared to
$45,754,000 for the same period in 1994. The investment portfolio
(including short-term investments and excluding realized capital
gains) yielded 6.48% for the three months ended March 31, 1995 as
compared to 5.84% 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 $1,629,000 or 48%
in the three months ended March 31, 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 ratio
was 57.3% for the three months ended March 31, 1995, as compared to
46.7% for the same period in 1994. The higher loss ratios in the
first quarter of 1995 as compared to 1994 are primarily
attributable to higher personal automobile loss ratios and a higher
level of severe losses in the Preserver book of business.
Despite the higher loss ratios on a comparative basis, no
significant adverse trends were experienced or identified during
the first quarter of 1995, and the loss ratio returned was within
historical averages. The Registrant believes that the 1994 first
quarter 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 decreased $37,000 or 1% in the three months
ended March 31, 1995 as compared to 1994. Excluding acquisition
related expenses, which increased commensurately with the
aforementioned 21% increase in insurance premiums, other operating
expenses decreased $595,000 or 22% in the first quarter of 1995 as
compared to 1994. This decrease in expenses allowed for a decrease
in the expense ratio (on a GAAP basis) to 47.0% for the first
quarter of 1995 as compared to 56.5% 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 $43,000 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,
causing the decrease. 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 March 31, 1995 is $5.84 per
share, as compared to $5.16 per share at December 31, 1994. The
increase in book value is due to the earnings described previously,
plus an increase in market value of $938,000 or $.46 per share in
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 the first quarter
of 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.
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 three 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 March 31, 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 March 31, 1995 have remained stable as compared to
December 31, 1994. For the three months ended March 31, 1995 and
1994, the investment portfolio (including short-term investments
and excluding realized capital gains) yielded 6.48% and 5.84%,
respectively. 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.
In the first quarter of 1995, the Registrant repaid Midlantic
Bank, N.A. the $2,750,000 Term Loan it had taken in December 1994.
This Term Loan is now paid in full.
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: May 12, 1995
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<ARTICLE> 7
<LEGEND>
These schedules contain summary financial information extracted from Motor Club
of America's Consolidated Balance Sheet for the period ending March 31, 1995 and
the Consolidated Statements of Income for the three months then ended and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1995
<DEBT-HELD-FOR-SALE> 40,210,419
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 855,246
<REAL-ESTATE> 0
<TOTAL-INVEST> 41,065,665
<CASH> 0
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 3,933,127
<TOTAL-ASSETS> 73,982,220
<POLICY-LOSSES> 41,437,582
<UNEARNED-PREMIUMS> 13,469,439
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 1,021,501
0
0
<OTHER-SE> 10,901,904
<TOTAL-LIABILITY-AND-EQUITY> 73,982,220
8,731,538
<INVESTMENT-INCOME> 700,712
<INVESTMENT-GAINS> 4,132
<OTHER-INCOME> 347,895
<BENEFITS> 4,999,096
<UNDERWRITING-AMORTIZATION> 2,853,630
<UNDERWRITING-OTHER> 1,393,048
<INCOME-PRETAX> 450,266
<INCOME-TAX> 11,000
<INCOME-CONTINUING> 439,266
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 439,266
<EPS-PRIMARY> .22
<EPS-DILUTED> .22
<RESERVE-OPEN> 41,665,101
<PROVISION-CURRENT> 5,465,918
<PROVISION-PRIOR> 290,920
<PAYMENTS-CURRENT> 1,075,287
<PAYMENTS-PRIOR> 4,909,070
<RESERVE-CLOSE> 41,437,582
<CUMULATIVE-DEFICIENCY> 290,920
</TABLE>
