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, 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 .
2,044,504 shares of Common Stock were outstanding as of
May 13, 1996.
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
MOTOR CLUB OF AMERICA
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
1996 1995
ASSETS
Investments $44,731,140 $45,597,277
Cash and cash equivalents 1,801,724 2,630,909
Premiums receivable 6,375,497 7,135,231
Reinsurance recoverable on
paid & unpaid losses and
loss expenses 20,286,928 17,638,854
Notes and accounts receivable
- net 242,989 209,953
Deferred policy acquisition costs 4,848,168 5,069,222
Fixed assets - at cost, less
accumulated depreciation 1,461,355 1,219,125
Federal income tax recoverable 10,205 13,680
Prepaid reinsurance premiums 984,745 1,193,098
Other assets 1,466,158 1,251,419
Total Assets $82,208,909 $81,958,768
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Losses and loss expenses $43,007,114 $39,823,552
Unearned premiums and membership
fees 16,564,085 17,363,031
Other liabilities 9,536,399 10,691,109
Total Liabilities 69,107,598 67,877,692
Shareholders' Equity:
Common Stock, par value $.50 per share:
(Authorized - 10,000,000 shares;
issued - 2,043,754) 1,021,876 1,021,876
Paid in additional capital 1,722,539 1,722,539
Unfunded accumulated benefit
obligation in excess of Plan assets (5,177,900) (5,177,900)
Net unrealized gains
on debt securities 482,477 1,392,415
Retained earnings 15,052,319 15,122,146
Total Shareholders' Equity 13,101,311 14,081,076
Total Liabilities and
Shareholders' Equity $82,208,909 $81,958,768
(Financial statements should be read in
conjunction with the accompanying notes)
MOTOR CLUB OF AMERICA
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended
March 31, 1996 March 31, 1995
Revenues:
Insurance premiums (net of
premiums ceded totaling
$1,602,353 (1996) and $977,941
(1995)) $10,574,534 $8,445,151
Net investment income 752,449 700,712
Realized gains on sales
of investments 5,410 4,132
Motor Club membership fees 332,118 313,360
Other revenues 26,324 34,535
Total revenues 11,690,835 9,497,890
Losses and Expenses:
Insurance losses and
loss expenses incurred
(net of reinsurance recoveries
totaling $2,910,041 (1996) and
$963,558 (1995)) 6,785,945 4,793,280
Amortization of deferred policy
acquisition costs 3,027,485 2,853,630
Other operating expenses 1,508,544 1,312,477
Lease termination charge 359,077 -
Motor Club benefits 76,136 88,237
Total losses and expenses 11,757,187 9,047,624
Income (loss) before Federal
income taxes (66,352) 450,266
Provision for Federal
income taxes 3,475 11,000
Net income (loss) $ (69,827) $ 439,266
Per common share:
Net income (loss) ($.03) $.22
(Financial statements should be read in
conjunction with the accompanying notes)
MOTOR CLUB OF AMERICA
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
For the Three Months Ended
March 31, 1996 March 31, 1995
Operating activities:
Net income (loss) ($ 69,827) $ 439,266
Adjustments to reconcile net income
to net cash used in operating
activities:
Depreciation expense 86,266 75,812
Gain on sale of investments (5,410) (4,132)
Amortization (accrual) on bond premium
(discount) 19,760 (8,170)
Write-off of leasehold improvement
(net) due to lease termination 227,077 -
Changes in:
Deferred policy
acquisition costs 221,054 233,241
Premiums receivable 759,734 593,645
Notes and accounts
receivable (33,036) 445
Other assets (214,738) 366,403
Losses and loss expenses 3,183,562 (227,519)
Unearned premiums and
membership fees (798,946) (714,591)
Federal income tax
recoverable 3,475 11,000
Amount due to MCA Insurance Company
in Liquidation - (2,750,000)
Other liabilities (1,154,710) (134,313)
Reinsurance recoverable on
paid and unpaid losses (2,648,074) 266,394
Prepaid reinsurance premiums 208,353 (23,645)
Net cash used in
operating activities ($ 215,460) ($1,876,164)
Investing activities:
Investments purchased (2,421,461) (2,856,779)
Fixed assets purchased (555,573) (119,364)
Proceeds from sales of investments 2,363,309 4,352,716
Net cash (used in) provided by
investing activities (613,725) 1,376,573
Financing activities:
Repayment to Midlantic Bank, N.A. - (2,750,000)
Net cash used in financing activities - (2,750,000)
Net decrease in cash and cash equivalents (829,185) (3,249,591)
Cash and cash equivalents at
beginning of period 2,630,909 4,826,610
Cash and cash equivalents at
end of period $1,801,724 $ 1,577,019
</TABLE>
Supplemental Disclosures of Cash Flow Information
Note - Interest paid was $0 in 1996 and $33,432 in 1995.
Federal income tax paid was $0 in 1996 and $0 in 1995.
Non Cash Investing Activities:
Invested assets and shareholders' equity decreased by $909,938 and increased by
$937,954 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.
(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 March 31, 1996 and December 31, 1995
includes the undistributed GAAP net loss and income, respectively,
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 the three month periods 1996 and 1995 are
computed based upon 2,043,754 and 2,043,004 shares, respectively,
the weighted average number of shares of common stock outstanding.
4. Federal Income Taxes
The Registrant and its subsidiaries file a consolidated
Federal income tax return. In the three month periods ended March
31, 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 (1) certain
adjustments, principally those enacted under the Tax Reform Act of
1986; and (2) utilization of Net Operating Loss ("NOL")
carryforwards. The Registrant's NOL carryforward at March 31, 1996
is approximately $10.6 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.
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 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
Net loss for the three months ended March 31, 1996 included
$359,000 or $.18 per share for a 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.
Net income in 1996 was also reduced by: (1) a $111,000
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, which pertains to New Jersey Personal
Injury Protection Claims in excess of Motor Club's statutory
retention limit of $75,000; and (2) certain non-recurring
operational expenses (totaling $328,000) relating to the
Registrant's tenancy at its former office building and relocation.
Excluding these items, net income for the three months ended
March 31, 1996 increased $290,000 or $.14 per share as compared to
the same period in 1995. The increase was caused by an improved
combined ratio by Motor Club offset by higher loss ratios on
Preserver's book of business.
Revenues
Insurance Premiums
Insurance premiums earned increased $2,129,000 or 25% in the
three months ended March 31, 1996 as compared to the same period in
1995, primarily as a result of increases in new business written in
1996, particularly new PPA.
In the three months ended March 31, 1996 as compared to the
same period in 1995, direct premium written by Motor Club increased
$2,321,000 or 33%, while Preserver's increased by $224,000 or 15%,
for a total increase of $2,545,000 or 30%.
Motor Club began to write new personal automobile insurance
business in the first quarter of 1995. New PPA direct premium
written in the three months ended March 31, 1996 totaled
$3,075,000, as compared to $109,000 in the same period in 1995.
New PPA premiums earned were $2,439,000 and $14,000, respectively.
Net Investment Income
Net investment income increased $52,000 or 7% in 1996 as
compared to 1995. Average invested assets for the three month
period ended March 31, 1996 were $43,479,000 as compared to
$43,246,000 for the same period in 1995. The investment portfolio
(including short-term investments but excluding realized capital
gains) yielded 6.60% for the three months ended March 31, 1996 as
compared to 6.48% for the same period in 1995.
Losses and Expenses
Losses and Loss Expenses Incurred
Losses and loss expenses incurred increased $1,993,000 or 42%
in the three months ended March 31, 1996 as compared to 1995. The
Insurance Companies' combined loss and loss expense ratio was 64.2%
for the three months ended March 31, 1996 as compared to 56.8% for
the same period in 1995. 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
$650,000; and (3) poor commercial automobile loss experience. The
latter two items increased the total loss and loss expense ratio by
nine points.
Despite the higher loss ratio on a comparative basis, no
significant adverse trends were experienced or identified during
the three months of 1996.
Amortization of Deferred Policy Acquisition Expenses and Other
Operating Expenses
Excluding certain non-recurring charges and acquisition
related expenses (described below), other operating expenses
decreased $334,000 or 16% in the three months ended March 31, 1996
as compared to 1995. This decrease in expenses allowed for a
decrease in the expense ratio (as adjusted for the non-recurring
charges described below) to 38.6% for the three months ended March
31, 1996 as compared to 47.6% in 1995. The Registrant remains
committed to reducing its expense ratio by increasing revenues
without increasing overhead expenditures.
During the 1996 first quarter, the Registrant incurred
approximately $220,000 in expenses related to its tenancy at its
former location in Newark, New Jersey, while at the same time
having commenced the lease for its new headquarters in Paramus, New
Jersey. These redundant expenditures are now eliminated as of
March 31, 1996. In addition, the Registrant incurred $108,000 in
relocation charges in the 1996 first quarter.
Acquisition related expenses increased $376,000 or 19% in 1996
as compared to 1995, the result of the aforementioned increase in
insurance premiums.
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 $19,000 or 6% 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 March 31, 1996 is $6.41 per
share, as compared to $6.89 per share at December 31, 1995. The
decrease in book value is due to the net loss described previously,
plus a decrease during 1996 of $910,000 or $.45 per share in the
market value of fixed maturity investments accounted for as
available-for-sale securities under SFAS No. 115, the result of
increasing interest rates.
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 three months ended March 31, 1996 is 2.93 to
1.
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.
Net cash utilized in operating activities was $215,000 and
$1,876,000 in the first quarters of 1996 and 1995, respectively.
Cash flow used by the operating activities of the Insurance
Companies in the first quarter of the year normally reflects
certain annual payments, such as insurance premium taxes, licenses,
fees and other assessments. In both 1996 and 1995, these payments
were offset by growth in the Insurance Companies' premium. In 1995,
in addition to the annual payments made, cash flow used by
operating activities was increased 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 March 31, 1996 have remained stable as compared to
December 31, 1995. Management anticipates maintaining this
approach to investing for the foreseeable future.
Net cash used in and provided by operating activities was
$614,000 and $1,377,000 in 1996 and 1995, respectively. The amount
used in 1996 reflects the investment of cash provided by operating
activities and contributed to the increase in total assets as of
March 31, 1996, as compared to December 31, 1995. The amount
provided in 1995 reflects the sale of investments to provide cash
utilized in the operating activities described above.
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.
In the first quarter of 1995, the Registrant repaid, in full,
Midlantic Bank, N.A., the $2,750,000 Term Loan it had taken in
December 1994.
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: May 14, 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 ended March 31, 1996 and
the Consolidated Statements of Operations 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-31-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 44,001,941
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 729,199
<REAL-ESTATE> 0
<TOTAL-INVEST> 44,731,140
<CASH> 1,801,724
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 4,848,168
<TOTAL-ASSETS> 82,208,909
<POLICY-LOSSES> 43,007,114
<UNEARNED-PREMIUMS> 16,564,085
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 1,021,876
<OTHER-SE> 12,079,435
<TOTAL-LIABILITY-AND-EQUITY> 82,208,909
10,574,534
<INVESTMENT-INCOME> 752,449
<INVESTMENT-GAINS> 5,410
<OTHER-INCOME> 358,442
<BENEFITS> 6,785,945
<UNDERWRITING-AMORTIZATION> 3,027,485
<UNDERWRITING-OTHER> 1,508,554
<INCOME-PRETAX> (66,352)
<INCOME-TAX> 3,475
<INCOME-CONTINUING> (69,827)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (69,827)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
<RESERVE-OPEN> 39,823,552
<PROVISION-CURRENT> 9,637,846
<PROVISION-PRIOR> 58,139
<PAYMENTS-CURRENT> 1,448,567
<PAYMENTS-PRIOR> 5,063,856
<RESERVE-CLOSE> 43,007,114
<CUMULATIVE-DEFICIENCY> 58,139
</TABLE>
