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, 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 .
2,046,379 shares of Common Stock were outstanding as of
August 12, 1996.
1 of 15
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
MOTOR CLUB OF AMERICA
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
1996 1995
ASSETS
Investments $45,774,649 $45,597,277
Cash and cash equivalents 2,535,879 2,630,909
Premiums receivable 6,621,552 7,135,231
Reinsurance recoverable on
paid and unpaid losses and
loss expenses 22,884,869 17,638,854
Notes and accounts receivable
- net 190,951 209,953
Deferred policy acquisition costs 5,030,734 5,069,222
Fixed assets - at cost, less
accumulated depreciation 1,467,808 1,219,125
Federal income tax recoverable 29,100 13,680
Prepaid reinsurance premiums 855,682 1,193,098
Other assets 1,160,556 1,251,419
Total Assets $86,551,780 $81,958,768
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Losses and loss expenses $46,436,465 $39,823,552
Unearned premiums and membership
fees 16,891,408 17,363,031
Other liabilities 9,568,855 10,691,109
Total Liabilities 72,896,728 67,877,692
Shareholders' Equity:
Common Stock, par value $.50 per share:
Authorized - 10,000,000 shares;
issued - 1996 - 2,046,379, 1995 -
2,043,004 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 80,110 1,392,415
Retained earnings 16,001,536 15,122,146
Total Shareholders' Equity 13,655,052 14,081,076
Total Liabilities and
Shareholders' Equity $86,551,780 $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 Six Months Ended For the Three Months Ended
June 30, 1996 June 30,1995 June 30,1996 June 30,1995
Revenues:
Insurance premiums (net of
premiums ceded totaling
$3,317,078, $2,216,384,
$1,714,725 and $1,238,443) $21,696,829 $16,945,127 $11,122,295 $8,499,976
Net investment income 1,486,467 1,368,696 734,018 667,984
Realized gains on sales
of investments 5,410 4,132 - -
Motor Club membership fees 658,104 630,787 325,986 317,427
Other revenues 69,729 66,754 43,405 32,219
Total revenues 23,916,539 19,015,496 12,225,704 9,517,606
Losses and Expenses:
Insurance losses and
loss expenses incurred
(net of reinsurance recoveries
totaling $6,467,044, $1,292,557,
$3,557,003 and $328,999) 13,850,881 9,591,341 7,064,936 4,798,061
Amortization of deferred policy
acquisition costs 6,210,244 5,437,549 3,182,759 2,583,919
Other operating expenses 2,445,913 2,718,281 937,369 1,405,804
Lease termination charge 359,077 - - -
Motor Club benefits 146,551 168,448 70,415 80,211
Total losses and expenses 23,012,666 17,915,619 11,255,479 8,867,995
Income before Federal
income tax 903,873 1,099,877 970,225 649,611
Provision for Federal
income taxes 23,042 22,000 19,567 11,000
Net income $ 880,831 $ 1,077,877 $ 950,658 $ 638,611
Per common share:
Net income $.43 $ .53 $.46 $.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 Six Months Ended
June 30, 1996 June 30, 1995
Operating activities:
Net income $ 880,831 $ 1,077,877
Adjustments to reconcile net income
to net cash used in operating
activities:
Depreciation expense 167,704 148,558
Gain on sale of investments (5,410) (4,132)
Amortization on bond premium (net of
accrual of discount) 57,131 9,168
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 38,488 189,169
Premiums receivable 513,679 478,150
Notes and accounts
receivable 19,002 45,440
Other assets 89,423 398,070
Losses and loss expenses 6,612,913 (1,609,113)
Unearned premiums and
membership fees (471,623) (695,698)
Federal income tax
recoverable (15,420) 3,630
Amount due to MCA Insurance Company
in Liquidation - (2,750,000)
Other liabilities (1,122,254) 404,165
Reinsurance recoverable on
paid and unpaid losses (5,246,015) 1,334,642
Prepaid reinsurance premiums 337,416 78,442
Net cash provided by (used in)
operating activities $2,096,342 ($ 891,632)
Investing activities:
Investments purchased (5,192,098) (5,109,315)
Fixed assets purchased (656,864) (135,983)
Proceeds from sales of investments 3,650,699 6,043,192
Net cash (used in) provided by
investing activities (2,198,263) 797,894
Financing activities:
Common stock issued 6,891 -
Repayment to Midlantic Bank, N.A. - (2,750,000)
Net cash provided by (used)
in financing activities 6,891 (2,750,000)
Net decrease in cash and cash equivalents (95,030) (2,843,738)
Cash and cash equivalents at
beginning of period 2,630,909 4,826,610
Cash and cash equivalents at
end of period $2,535,879 $1,982,872
</TABLE>
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 $18,370 in 1995.
Non Cash Investing Activities:
Invested assets and shareholders' equity decreased by $1,312,305 and increased
by $2,047,490 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 June 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 2,044,255 and
2,044,755 weighted average number of shares of common stock
outstanding for the six and three month periods, respectively.
Per share data for 1995 are computed based upon 2,043,004
weighted average number of shares outstanding for the six and three
month periods.
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, 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 June 30, 1996
is approximately $9.7 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.
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
Six Months
Net income for the six months ended June 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; and (3) a $228,000 or
$.12 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 six months ended
June 30, 1996 increased $718,000 or $.35 per share as compared to
the same period in 1995, primarily due to a 28% growth in premium
revenue coupled with a lower combined ratio. The combined ratio (as
adjusted for the non-recurring charges described above) for the six
months ended June 30, 1996 was 100.8% as compared to 105.9% for the
same period in 1995.
Three Months
Net income for the three months ended June 30, 1996 was
reduced by $117,000 or $.06 per share for increased reinsurance
costs relating to the increase in the 1996 rate assessed by the
UCJF.
Excluding this item, net income for the three months ended
June 30, 1996 increased $429,000 or $.21 per share as compared to
the same period in 1995, primarily due to a 31% 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 June 30, 1996 was 100.7% as compared to 104.7%
for the same period in 1995.
Revenues
Insurance Premiums
Insurance premiums increased $4,752,000 or 28% in the six
months ended June 30, 1996 and $2,622,000 or 31% in the three
months ended June 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 six months of 1996
totaled $7,165,000, as compared to $1,095,000 in the same period in
1995. New PPA net premiums earned were $5,482,000 and $245,000,
respectively.
In the six months ended June 30, 1996, as compared to the same
period in 1995, direct premium written increased $5,987,000 or 33%;
Motor Club's increased by $5,093,000 or 34%, while Preserver's
increased by $894,000 or 26% ($670,000 or 75% of which emanated
from its commercial lines products).
In the second quarter of 1996 as compared to the same period
in 1995, direct premium written increased $3,442,000 or 36%; Motor
Club's increased by $2,772,000 or 36%, while Preserver's increased
by $670,000 or 34% ($545,000 or 81% of which emanated from its
commercial lines products).
Net Investment Income
Net investment income increased $118,000 or 9% in 1996 as
compared to 1995. Average invested assets for the six month
period ended June 30, 1996 were $44,234,000 as compared to
$43,601,000 for the same period in 1995. The investment portfolio
(including short-term investments and excluding realized capital
gains) yielded 6.39% for the six months ended June 30, 1996 as
compared to 6.28% for the same period in 1995.
Losses and Expenses
Losses and Loss Expenses Incurred
Losses and loss expenses incurred increased $4,260,000 or 44%
in the six months ended June 30, 1996 as compared to 1995. The
Insurance Companies' combined loss and loss expense ratios were
63.8% and 63.5% for the six and three months ended June 30, 1996,
as compared to 56.6% and 56.4% 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) poor 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 six months or second quarter of 1996.
Amortization of Deferred Policy Acquisition Costs
Acquisition costs incurred increased $764,000 or 20% in the
six months ended June 30, 1996 as compared to 1995. Acquisition
costs incurred increased $571,000 or 33% in the three months ended
June 30, 1996 as compared to 1995. The increase in acquisition
related costs generally corresponds to the premium growth
previously described.
Other Operating Expenses
During the first quarter 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; and d) $108,000 in relocation charges in 1996.
Excluding these non-recurring charges, other operating
expenses decreased $600,000 or 22% in the six months ended June 30,
1996 as compared to the same period in 1995. This decrease in
expenses allowed for a decrease in the expense ratio (as adjusted
for the non-recurring charges described above) to 37.3% for the six
months ended June 30, 1996 as compared to 46.4% in 1995.
Other operating expenses decreased $441,000 or 19% in the
three months ended June 30, 1996 as compared to the same period in
1995.
The Registrant remains committed to reducing its expense ratio
by increasing revenues without increasing overhead expenditures.
Toward this end, the Registrant has continued to reduce the number
of its employees through June 30, 1996 resulting in savings in both
salaries and employee benefits. The Registrant has 107 employees
as of June 30, 1996 as compared to 115 as of December 31, 1995,
resulting in a net savings of approximately $125,000. The
aforementioned headquarters relocation has also enabled the
Registrant to realize expense savings in overhead expenditures
related to its facilities in both the six and three month periods
ended June 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 $54,000 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 June 30, 1996 is $6.68 per
share, as compared to $6.41 per share at March 31, 1996 and $6.89
per share at December 31, 1995. The increase in book value from
March 31, 1996 is due to the three month earnings described
previously, offset by a decrease of $402,000 or $.20 per share in
the market value of fixed maturity investments accounted for as
available-for-sale securities under SFAS No. 115. The six month
decrease in book value from December 31, 1995 is due to a decrease
of $1,312,000 or $.64 per share in the market value of fixed
maturity investments, offset by the six month earnings described
previously.
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 provided by and used in operating activities were
$2,096,000 and $892,000 in the six months ended June 30, 1996 and
1995, respectively. Cash flow provided by the six months ended June
30, 1996 reflect the growth in the Insurance Companies' premium. In
1995, 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 June 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
<PAGE>
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: August 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 June 30,1 996 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-31-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 45,109,619
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 665,030
<REAL-ESTATE> 0
<TOTAL-INVEST> 45,774,649
<CASH> 2,535,879
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 5,030,734
<TOTAL-ASSETS> 86,551,780
<POLICY-LOSSES> 46,436,465
<UNEARNED-PREMIUMS> 16,891,408
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 1,023,189
<OTHER-SE> 12,631,863
<TOTAL-LIABILITY-AND-EQUITY> 86,551,780
21,696,829
<INVESTMENT-INCOME> 1,486,467
<INVESTMENT-GAINS> 5,410
<OTHER-INCOME> 727,833
<BENEFITS> 13,850,881
<UNDERWRITING-AMORTIZATION> 6,210,244
<UNDERWRITING-OTHER> 2,445,913
<INCOME-PRETAX> 903,873
<INCOME-TAX> 23,042
<INCOME-CONTINUING> 880,831
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 880,831
<EPS-PRIMARY> .43
<EPS-DILUTED> .43
<RESERVE-OPEN> 39,823,552
<PROVISION-CURRENT> 17,129,659
<PROVISION-PRIOR> 3,188,266
<PAYMENTS-CURRENT> 5,415,990
<PAYMENTS-PRIOR> 8,289,022
<RESERVE-CLOSE> 46,436,465
<CUMULATIVE-DEFICIENCY> 3,188,266
</TABLE>
