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, 1996 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
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 .
2,047,504 shares of Common Stock were outstanding as of
November 12, 1996.
1 of 16
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
MOTOR CLUB OF AMERICA
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
1996 1995
ASSETS
Investments $46,680,513 $45,597,277
Cash and cash equivalents 3,494,555 2,630,909
Premiums receivable 6,487,301 7,135,231
Reinsurance recoverable on
paid and unpaid losses and
loss expenses 23,801,951 17,638,854
Notes and accounts receivable
- net 172,580 209,953
Deferred policy acquisition costs 4,913,532 5,069,222
Fixed assets - at cost, less
accumulated depreciation 1,436,821 1,219,125
Federal income tax recoverable 29,871 13,680
Prepaid reinsurance premiums 684,743 1,193,098
Other assets 1,027,400 1,251,419
Total Assets $88,729,267 $81,958,768
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Losses and loss expenses $47,497,241 $39,823,552
Unearned premiums and membership
fees 16,327,598 17,363,031
Other liabilities 10,388,853 10,691,109
Total Liabilities 74,213,692 67,877,692
Shareholders' Equity:
Common Stock, par value $.50 per share:
Authorized - 10,000,000 shares;
issued - 1996 - 2,046,379, 1995 -
2,043,754 shares 1,023,189 1,021,876
Paid in additional capital 1,728,117 1,722,539
Unfunded accumulated benefit
obligation in excess of Plan assets (5,177,900) (5,177,900)
Net unrealized gains
on debt securities 47,192 1,392,415
Retained earnings 16,894,977 15,122,146
Total Shareholders' Equity 14,515,575 14,081,076
Total Liabilities and
Shareholders' Equity $88,729,267 $81,958,768
(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)
<S> <C> <C> <C> <C>
For the Nine Months Ended For the Three Months Ended
September 30,1996 September 30,1995 September 30,1996 September 30,1995
Revenues:
Insurance premiums (net of
premiums ceded totaling
$5,357,968, $3,627,221,
$2,040,890 and $1,410,837) $33,409,805 $25,999,251 $11,712,976 $9,054,124
Net investment income 2,265,322 2,099,106 778,855 730,410
Realized gains on sales
of investments 5,410 56,823 - 52,691
Motor Club membership fees 980,540 949,646 322,436 318,859
Other revenues 94,156 96,282 24,427 29,528
Total revenues 36,755,233 29,201,108 12,838,694 10,185,612
Losses and Expenses:
Insurance losses and
loss expenses incurred
(net of reinsurance recoveries
totaling $7,019,809, $583,020,
$552,765 and ($709,537)) 21,455,430 15,059,275 7,604,549 5,467,934
Amortization of deferred policy
acquisition costs 9,354,776 8,046,135 3,144,532 2,608,586
Other operating expenses 3,577,014 4,136,322 1,131,101 1,418,041
Lease termination charge 359,077 - - -
Motor Club benefits 213,835 199,328 67,284 30,880
Total losses and expenses 34,960,132 27,441,060 11,947,466 9,525,441
Income before Federal
income tax 1,795,101 1,760,048 891,228 660,171
Benefit (provision) for Federal
income taxes (22,271) (36,000) 771 (14,000)
Net income $ 1,772,830 $ 1,724,048 $ 891,999 $ 646,171
Per common share:
Net income $.87 $ .84 $.44 $.31
</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)
<S> <C> <C> <C> <C>
For the Nine Months Ended
September 30, 1996 September 30, 1995
Operating activities:
Net income $ 1,772,830 $ 1,724,048
Adjustments to reconcile net income
to net cash used in operating
activities:
Depreciation expense 235,680 219,941
Gain on sale of investments (5,410) (56,823)
Amortization on bond premium (net of
accrual of discount) 77,834 43,670
Write-off of leasehold improvement (net)
due to lease termination 227,077 -
Loss on disposal of fixed assets 13,400 -
Changes in:
Deferred policy
acquisition costs 155,690 213,261
Premiums receivable 647,930 642,758
Notes and accounts
receivable 37,373 84,684
Other assets 224,022 509,283
Losses and loss expenses 7,673,689 (2,883,475)
Unearned premiums and
membership fees (1,035,433) (940,582)
Federal income tax
recoverable (16,191) 8,445
Amount due to MCA Insurance Company
in Liquidation - (2,750,000)
Other liabilities (302,256) 202,647
Reinsurance recoverable on
paid and unpaid losses (6,163,097) 3,119,345
Prepaid reinsurance premiums 508,355 206,087
Net cash provided by
operating activities $4,051,493 $ 343,289
Investing activities:
Investments purchased (7,138,285) (8,609,817)
Fixed assets purchased (693,853) (242,980)
Proceeds from sales of investments 4,637,400 9,303,000
Net cash (used in) provided by
investing activities (3,194,738) 450,203
Financing activities:
Common stock issued 6,891 1,969
Repayment to Midlantic Bank, N.A. - (2,750,000)
Net cash provided by (used)
in financing activities 6,891 (2,748,031)
Net increase (decrease)in cash
and cash equivalents 863,646 (1,954,539)
Cash and cash equivalents at
beginning of period 2,630,909 4,826,610
Cash and cash equivalents at
end of period $3,494,555 $2,872,071
Supplemental Disclosures of Cash Flow Information
Note - Interest paid was $0 in 1996 and $33,432 in 1995.
Federal income tax paid was $38,462 in 1996 and $27,555 in 1995.
Non Cash Investing Activities:
Invested assets and shareholders' equity decreased by $1,345,223 and increased
by $2,019,508 in 1996 and 1995, 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.
</TABLE>
(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. Certain reclassifications have been made to prior
year financial information to conform to 1996 classification.
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 1995
Annual Report on Form 10-K.
2. Shareholders' Equity
Shareholders' equity at September 30, 1996 and December 31,
1995 include 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 for 1996 are computed based upon 2,044,968 and
2,046,379 weighted average number of shares of common stock
outstanding for the nine and three month periods, respectively.
Per share data for 1995 are computed based upon 2,043,009 and
2,043,020 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, 1996 and 1995, 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, 1996 is approximately $8.7 million.
5. Lease Obligations
The Registrant relocated its headquarters during the first
quarter of 1996 from Newark to Paramus, New Jersey. The Registrant
and its subsidiaries were parties to an agreement with Fairmount
Central Urban Renewal Corporation ("Fairmount") for the lease of
the office building in Newark, which was scheduled to expire on
December 31, 2011. Effective March 31, 1996, the Registrant and
its subsidiaries mutually agreed with Fairmount to terminate the
lease in exchange for a payment of $132,000 by the Registrant to
Fairmount. At that date, the Registrant also wrote-off certain
leasehold improvements on the Newark property in the amount of
$227,000.
6. Reinsurance
Please refer to Note G in the Registrant's 1995 Annual Report
on Form 10-K for further information on the dispute between Motor
Club and American Reinsurance Corporation ("ARC"). On November 6,
1996, Motor Club entered into a settlement with ARC regarding this
dispute ("Settlement"). Motor Club has agreed to pay ARC
$1,950,000. Motor Club will pay ARC the Settlement amount in three
installments prior to December 31, 1996. In return, ARC has agreed
to: (1) pay Motor Club all past amounts due under the reinsurance
agreement applicable to accident years 1973 to 1975, totaling
$712,000 as of September 30, 1996; and (2) to pay Motor Club future
amounts which may be recoverable from ARC under the terms of the
same reinsurance agreement.
The Registrant had established liabilities totaling $1,753,000
through June 30, 1996, for potential setoffs by ARC against
reinsurance recoverables due to Motor Club. As a result of the
Settlement, the Registrant has increased the accrued expense at
September 30, 1996 to the agreed upon $1,950,000. The Settlement
resulted in a net expense for the three and nine month periods
ended September 30, 1996 reported on herein of $197,000.
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 1996 revenues. The Insurance Companies
provide coverage only in the State of New Jersey.
The Registrant anticipates continuing its expansion program
through small commercial and ancillary coverages written by
Preserver in the State of New Jersey as well as new private
passenger automobile ("PPA") writings by Motor Club.
The Registrant expects to continue to improve its financial
condition by increasing revenue through the aforementioned new
premium writings and concurrently lowering its expense ratio by
applying stringent expense reduction and controls.
Earnings
Nine Months
Net income for the nine months ended September 30, 1996 was
reduced by: (1) a $359,000 or $.18 per share non-recurring charge
incurred in conjunction with the termination of the lease of the
office building in which the Registrant and its subsidiaries
formerly operated; (2) certain non-recurring operational expenses
(totaling $328,000 or $.16 per share) relating to the Registrant's
tenancy at its former office building and relocation; (3) a
$197,000 or $.10 per share charge incurred associated with the
settlement of a previously reported dispute with a reinsurer of
Motor Club; and (4) a $372,000 or $.18 per share increase in
reinsurance costs as compared to 1995, relating to an increase in
the 1996 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 statutory
retention limit of $75,000.
Excluding these items, net income for the nine months ended
September 30, 1996 increased $1,305,000 or $.64 per share as
compared to the same period in 1995, primarily due to a 29% growth
in premium revenue coupled with a lower combined ratio. The
combined ratio (as adjusted for the non-recurring charges described
above) for the nine months ended September 30, 1996 was 102.4% as
compared to 106.1% for the same period in 1995.
Three Months
Net income for the three months ended September 30, 1996 was
reduced by: (1) a $197,000 or $.10 per share charge incurred
associated with the settlement of a previously reported dispute
with a reinsurer of Motor Club; and (2) $144,000 or $.07 per share
for increased reinsurance costs relating to the increase in the
1996 rate assessed by the UCJF.
Excluding these items, net income for the three months ended
September 30, 1996 increased $587,000 or $.29 per share as compared
to the same period in 1995, primarily due to a 29% growth in
premium revenue coupled with a lower combined ratio. The combined
ratio (as adjusted for the non-recurring charges described above)
for the three months ended September 30, 1996 was 99.9% as compared
to 106.5% for the same period in 1995.
Revenues
Insurance Premiums
Insurance premiums increased $7,411,000 or 29% in the nine
months ended September 30, 1996 and $2,659,000 or 29% in the three
months ended September 30, 1996, as compared to the same periods in
1995, the result of increases in new business written in the latter
half of 1995 and to date in 1996, primarily new PPA.
New PPA direct premium written in the first nine months of
1996 totaled $11,403,000, as compared to $2,978,000 in the same
period in 1995. New PPA net premiums earned were $8,576,000 and
$1,147,000, respectively.
In the nine months ended September 30, 1996, as compared to
the same period in 1995, direct premium written increased
$8,665,000 or 30%; Motor Club's increase was $7,191,000 or 31%,
while Preserver's increase was $1,474,000 or 28% ($1,128,000 or 77%
of which emanated from its commercial lines products).
In the third quarter of 1996 as compared to the same period in
1995, direct premium written increased $2,678,000 or 26%; Motor
Club's increase was $2,098,000 or 25%, while Preserver's increase
was $580,000 or 33% ($458,000 or 79% of which emanated from its
commercial lines products).
Net Investment Income
Net investment income increased $166,000 or 8% in 1996 as
compared to 1995. Average invested assets for the nine month
period ended September 30, 1996 were $44,711,000 as compared to
$44,358,000 for the same period in 1995. The investment portfolio
(including short-term investments and excluding realized capital
gains) yielded 6.38% for the nine months ended September 30, 1996
as compared to 6.31% for the same period in 1995.
Losses and Expenses
Losses and Loss Expenses Incurred
Losses and loss expenses incurred increased $6,396,000 or 42%
in the nine months ended September 30, 1996 and $2,137,000 or 39%
in the three months ended September 30, 1996, as compared to the
same periods in 1995.
The Insurance Companies' combined loss and loss expense ratios
were 64.2% and 64.9% for the nine and three months ended September
30, 1996, as compared to 57.9% and 60.4% for the same periods in
1995, respectively. The increase in losses and loss expenses
incurred and loss and loss expense ratio is primarily due to: (1)
the increased amounts of new PPA business which Motor Club is
writing; (2) 1996 winter storm related losses of approximately
$635,000; and (3) commercial lines loss experience, primarily
commercial automobile.
Despite the higher loss ratios on a comparative basis, no
significant adverse trends were experienced or identified during
the nine months or third quarter of 1996.
Amortization of Deferred Policy Acquisition Costs
Acquisition costs incurred increased $1,366,000 or 17% in the
nine months ended September 30, 1996 and $443,000 or 17% in the
three months ended September 30, 1996 as compared to the same
periods in 1995. The increase in acquisition related costs
generally corresponds to the premium growth previously described.
Other Operating Expenses
During the first nine months of 1996 the Registrant incurred
various non-recurring charges which affected other operating
expenses. These charges included: a) the write-off of $227,000 for
certain leasehold improvements on its former location in Newark,
New Jersey; b) a payment of $132,000 to terminate the lease at its
former location; c) approximately $220,000 in expenses related to
its tenancy at its former location, while at the same time having
commenced the lease for its new headquarters in Paramus, New
Jersey; d) $108,000 in relocation charges in 1996; and e) $197,000
for the settlement of a previously reported dispute with a
reinsurer of Motor Club.
Excluding these non-recurring charges, other operating
expenses decreased $1,084,000 or 26% in the nine months ended
September 30, 1996 and $484,000 or 34% in the three months ended
September 30, 1996 as compared to the same periods in 1995. This
decrease in expenses allowed for a decrease in the expense ratio
(as adjusted for the non-recurring charges described above) to
36.1% and 33.9% for the nine and three months ended September 30,
1996 as compared to 45.2% and 43.0% in the same periods in 1995.
The Registrant remains committed to reducing its expense ratio
by increasing revenues while limiting increases in its overhead
expenditures. Toward this end, the Registrant has continued to
reduce the number of its employees through September 30, 1996
resulting in savings in both salaries and employee benefits. The
Registrant has 107 employees as of September 30, 1996 as compared
to 115 as of December 31, 1995. The aforementioned headquarters
relocation has also enabled the Registrant to realize expense
savings in overhead expenditures related to its facilities in both
the nine and three month periods ended September 30, 1996.
The Registrant expects to reduce its expenses further by
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
increased $79,000 or 9% in 1996 as compared to 1995. The increase
in memberships written is due to various programs which were
implemented during 1995, including incentives provided to producers
to write motor club memberships with the new PPA business Motor
Club is writing.
Financial Condition, Liquidity and Capital Resources
The Registrant's book value at September 30, 1996 is $7.10 per
share, as compared to $6.68 per share at June 30, 1996 and $6.89
per share at December 31, 1995. The increase in book value from
June 30, 1996 is due to the three month earnings described
previously, offset by a decrease of $33,000 or $.02 per share in
the market value of fixed maturity investments accounted for as
available-for-sale securities under SFAS No. 115. The nine month
increase in book value from December 31, 1995 is due to the nine
month earnings described previously, offset by a decrease of
$1,345,000 or $.66 per share in the market value of fixed maturity
investments.
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.
As a result of the aforementioned settlement of the previously
reported dispute with a reinsurer of Motor Club, the Registrant
will be making installment payments totaling $1,309,000 during the
fourth quarter of 1996. These payments will be net of $641,000
which is owed to Motor Club by the reinsurer.
Net cash provided by operating activities was $4,051,000 and
$343,000 in the nine months ended September 30, 1996 and 1995,
respectively. Cash flow provided by operating activities in the
nine months ended September 30, 1996 reflects the growth in the
Insurance Companies' premium. In 1995, cash flow provided by
operating activities was decreased by the payment of the Note due
the MCAIC Receiver.
No other unusual or nonrecurring operating expenditures have
been incurred over these periods. Additionally, the payout ratio
of losses has not fluctuated substantially over these periods.
The Registrant has maintained an investing philosophy during
1996 consistent with past practices and described in detail in its
1995 Annual Report on Form 10-K. Investment mix and portfolio
duration as of September 30, 1996 have remained stable as compared
to December 31, 1995. Management anticipates maintaining this
approach to investing for the foreseeable future.
Financing Activities
The Registrant paid no dividend on its common stock in 1996 or
1995.
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
President
s/Patrick J. Haveron
By: Patrick J. Haveron
Executive Vice President -
Chief Financial Officer
and Chief Accounting
Officer
Dated: November 13, 1996
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
These schedules contain summary financial information extracted from Motor Club
of America's Consolidated Balance Sheets for the period ending September 30,
1996 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-31-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 46,030,199
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 650,314
<REAL-ESTATE> 0
<TOTAL-INVEST> 46,680,513
<CASH> 3,494,555
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 4,913,532
<TOTAL-ASSETS> 88,729,267
<POLICY-LOSSES> 47,497,241
<UNEARNED-PREMIUMS> 16,327,598
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 1,023,189
<OTHER-SE> 13,492,386
<TOTAL-LIABILITY-AND-EQUITY> 88,729,267
33,409,805
<INVESTMENT-INCOME> 2,265,322
<INVESTMENT-GAINS> 5,410
<OTHER-INCOME> 1,074,696
<BENEFITS> 21,455,430
<UNDERWRITING-AMORTIZATION> 9,354,776
<UNDERWRITING-OTHER> 3,577,014
<INCOME-PRETAX> 1,795,101
<INCOME-TAX> 22,271
<INCOME-CONTINUING> 1,772,830
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,772,830
<EPS-PRIMARY> .87
<EPS-DILUTED> .87
<RESERVE-OPEN> 39,823,552
<PROVISION-CURRENT> 24,662,447
<PROVISION-PRIOR> 3,812,792
<PAYMENTS-CURRENT> 9,353,052
<PAYMENTS-PRIOR> 11,448,498
<RESERVE-CLOSE> 47,497,241
<CUMULATIVE-DEFICIENCY> 3,812,792
</TABLE>
