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, 1997 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 .
2,049,429 shares of Common Stock were outstanding as of
May 9, 1997.
1 of 14
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
MOTOR CLUB OF AMERICA
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
1997 1996
ASSETS
Investments $54,076,531 $50,307,040
Cash and cash equivalents 1,407,129 3,476,948
Premiums receivable 7,609,165 7,801,583
Reinsurance recoverable on
paid & unpaid losses and
loss expenses 20,619,797 21,767,329
Notes and accounts receivable
- net 137,915 248,875
Deferred policy acquisition costs 5,634,220 5,761,496
Fixed assets - at cost, less
accumulated depreciation 1,739,187 1,826,753
Prepaid reinsurance premiums 1,003,602 1,145,944
Deferred tax asset 1,998,918 2,075,535
Other assets 1,063,946 1,121,599
Total Assets $95,290,410 $95,533,102
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Losses and loss expenses $48,768,340 $47,666,856
Unearned premiums 18,531,094 18,934,200
Other liabilities 8,893,784 10,120,426
Federal income taxes
payable - current 16,768 25,969
Total Liabilities 76,209,986 76,747,451
Shareholders' Equity:
Common Stock, par value $.50 per share:
(Authorized - 10,000,000 shares;
issued and outstanding - 2,047,504) 1,023,752 1,023,752
Paid in additional capital 1,730,508 1,730,508
Unfunded accumulated benefit
obligation in excess of Plan assets (4,690,900) (4,690,900)
Net unrealized (losses) gains
on debt securities, net of
deferred taxes (357,536) 270,037
Retained earnings 21,374,600 20,452,254
Total Shareholders' Equity 19,080,424 18,785,651
Total Liabilities and
Shareholders' Equity $95,290,410 $95,533,102
(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, 1997 March 31, 1996
Revenues:
Insurance premiums (net of
premiums ceded totaling
$1,673,963 (1997) and
$1,602,353 (1996)) $12,864,339 $10,574,534
Net investment income 850,645 752,449
Realized gains on sales
of investments - 5,410
Motor Club membership fees - 332,118
Other revenues 65,342 26,324
Total revenues 13,780,326 11,690,835
Losses and Expenses:
Insurance losses and
loss expenses incurred
(net of reinsurance recoveries
totaling $470,227 (1997) and
$2,910,041 (1996)) 8,319,513 6,785,945
Amortization of deferred policy
acquisition costs 3,823,685 3,027,485
Other operating expenses 426,996 1,508,544
Lease termination charge - 359,077
Motor Club benefits - 76,136
Total losses and expenses 12,570,194 11,757,187
Income (loss) before Federal
income taxes 1,210,132 (66,352)
Provision for Federal
income taxes: current 27,337 3,475
deferred 260,802 -
Total provision for Federal
income taxes 288,139 3,475
Net income (loss) $ 921,993 $ (69,827)
Per common share:
Net income (loss) $.45 ($.03)
(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 Three Months Ended
March 31, 1997 March 31, 1996
Operating activities:
Net income (loss) $ 921,993 ($ 69,827)
Adjustments to reconcile net income
to net cash used in operating
activities:
Depreciation and net amortization 125,048 106,026
Gain on sale of investments - (5,410)
Write-off of leasehold improvement
(net) due to lease termination - 227,077
Changes in:
Deferred policy
acquisition costs 127,276 221,054
Premiums receivable 192,418 759,734
Notes and accounts
receivable 110,960 (33,036)
Other assets 57,651 (214,738)
Losses and loss expenses 1,101,484 3,183,562
Unearned premiums and
membership fees (403,106) (798,946)
Federal income tax - current (9,201) 3,475
Federal income tax - deferred 260,802 -
Other liabilities (1,226,642) (1,154,710)
Reinsurance recoverable on
paid and unpaid losses 1,147,532 (2,648,074)
Prepaid reinsurance premiums 142,342 208 353
Net cash provided by (used in)
operating activities $2,548,557 ($ 215,460)
Investing activities:
Investments purchased (14,545,380) (2,421,461)
Fixed assets purchased (21,355) (555,573)
Proceeds from sales of investments 9,948,359 2,363,309
Net cash (used in)
investing activities (4,618,376) (613,725)
Net decrease in cash and cash equivalents (2,069,819) (829,185)
Cash and cash equivalents at
beginning of period 3,476,948 2,630,909
Cash and cash equivalents at
end of period $1,407,129 $ 1,801,724
</TABLE>
Supplemental Disclosures of Cash Flow Information
Note - Interest paid was $2,646 in 1997 and $0 in 1996.
Federal income tax paid was $36,538 in 1997 and $0 in 1996.
Non Cash Investing Activities:
Invested assets and shareholders' equity decreased by $627,573 and
by $909,938 in 1997 and 1996, 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 1996
Annual Report on Form 10-K.
2. Shareholders' Equity
Shareholders' equity at March 31, 1997 and December 31, 1996
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 the three month periods 1997 and 1996 are
computed based upon 2,047,504 and 2,043,754 weighted average number
of shares of common stock outstanding, respectively.
4. Federal Income Taxes
The Registrant and its subsidiaries file a consolidated
Federal income tax return. In the three month periods ended March
31, 1997 and 1996, 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 March 31, 1997
is approximately $6.1 million.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview of Business Operations
The Registrant provides property and casualty insurance
related services through the Insurance Companies. The Registrant
also operated until December 1, 1996 a motor club through Motor
Club of America Enterprises, Inc. ("Enterprises"). The Insurance
Companies form the largest segment of operations, which accounted
for 99% of 1997 revenues. The Insurance Companies provide coverage
only in the State of New Jersey.
The Registrant anticipates continuing revenue growth in the
State of New Jersey through small commercial and ancillary
coverages written by Preserver as well as through new private
passenger automobile ("PPA") writings by Motor Club.
The Registrant seeks to increase its identification as a
provider of small commercial lines insurance. The Registrant also
seeks to expand and diversify its insurance operations outside the
State of New Jersey. The Registrant believes that both of these
objectives can be attained through the acquisition of other
insurance companies which present opportunities to write these
product lines in different geographic areas. The Registrant
expects to pursue these objectives during 1997 and beyond.
The Registrant also anticipates continued reductions in its
operating expenses, namely through the implementation of operating
efficiencies which should reduce other overhead expenditures.
New Jersey Private Passenger Automobile ("PPA") Insurance
The New Jersey Department of Banking and Insurance ("NJ DOBI")
may grant an insurer relief, by written notification, from writing
new PPA pursuant to the take-all-comers provisions of FAIRA, if a
showing finds that the insurer's premium to surplus ("leverage")
ratio exceeds 3 to 1. Motor Club's present applicable leverage
ratio for the twelve months ended March 31, 1997 is 3.27 to 1.
Motor Club has not received any notifications from the NJ DOBI nor
made any requests of the NJ DOBI in this regard.
In April 1997, the Governor of the State of New Jersey
proposed to introduce PPA legislation, which principally would: (1)
repeal the annual "flex" rate increase available to insurers, which
is required by law to be no less than 3%; (2) restrict the ability
of insurers to non-renew at their discretion up to 2% of their
policies; (3) repeal the ability of insurers to non-renew one
policy for every two new policies written in each rating territory;
and (4) replace the current rating system which assesses surcharges
to insureds' policies for specific driving violations and accidents
with a broader-based "multi-tiered" rating system. The Governor
and Legislative leaders have indicated their intention to enact
this legislation, which at this date has not yet been introduced.
Enactment of this legislation as proposed could adversely affect
the Registrant's profitability of this line of business.
Earnings
Net income for the three months ended March 31, 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; and (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
to the office building in which it now operates.
Excluding these items, net income for the three months ended
March 31, 1997 increased $305,000 or $.14 per share as compared to
the same period in 1996, primarily due to a 22% growth in premium
revenue coupled with a lower combined ratio. This was offset by a
$285,000 increase in the provision for Federal income taxes in 1997
as compared to 1996. The combined ratio for the three months ended
March 31, 1997 was 97.7% as compared to 102.8% for the same period
in 1996 (as adjusted for the non-recurring charges described
above).
Revenues
Insurance Premiums
Insurance premiums increased $2,290,000 or 22% in the three
months ended March 31, 1997, as compared to the same period in
1996, the result of increases in new business written, primarily
new PPA.
PPA direct premiums written in the three months ended March
31, 1997 increased $1,863,000 or 20%, as compared to the same
period in 1996; Preserver's direct premiums written increased
$961,000 or 56% ($814,000 or 85% of which emanated from its
commercial lines products).
Net Investment Income
Net investment income increased $98,000 or 13% in 1997 as
compared to 1996. Average invested assets for the three month
period ended March 31, 1997 were $51,577,000 as compared to
$43,479,000 for the same period in 1996. The investment portfolio
(including short-term investments and excluding realized capital
gains) yielded 6.19% for the three months ended March 31, 1997 as
compared to 6.60% for the same period in 1996.
Losses and Expenses
Losses and Loss Expenses Incurred
Losses and loss expenses incurred increased $1,534,000 or 23%
in the three months ended March 31, 1997 as compared to the same
period in 1996.
The Insurance Companies' combined loss and loss expense ratio
was 64.7% for the three months ended March 31, 1997, as compared to
64.2% for the same period in 1996. During the 1996 first quarter,
losses and loss expenses incurred were increased by $650,000 due to
winter storm losses, which increased the loss and loss expense
ratio by 6.1 points. Excluding these winter storms, the loss and
loss expense ratio was 58.1% in 1996.
The increase in losses and loss expenses incurred and loss and
loss expense ratio in 1997 as compared to 1996 (as adjusted) is
primarily due to the increased amounts of new PPA business which
Motor Club is writing. The PPA loss and loss expense ratio was
66.5% in 1997 as compared to 54.7% in 1996. These increases in
loss and loss expense ratio have been offset by improved loss
experience in the Preserver business. Excluding the 1996 winter
storm losses, the Preserver loss and loss expense ratio was 58.9%
in 1997 as compared to 69.1% in 1996.
Despite the higher loss and loss expense ratios on a
comparative basis, no significant adverse trends were experienced
or identified during the three months of 1997.
Amortization of Deferred Policy Acquisition Costs
Amortization of deferred policy acquisition costs increased
$796,000 or 26% in the three months ended March 31, 1997 as
compared to the same period in 1996, which generally corresponds to
the premium growth previously described.
Other Operating Expenses
Other operating expenses in 1996 included 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.
Excluding these non-recurring charges, other operating
expenses decreased $754,000 or 64% in the three months ended March
31, 1997 as compared to the same period in 1996. This decrease in
expenses allowed for a decrease in the expense ratio to 33.1% for
the three months ended March 31, 1997 as compared to 38.6% (as
adjusted for the non-recurring charge described above and the
$359,000 non-recurring lease termination charge incurred by the
Registrant in 1996) for the same period in 1996.
The Registrant remains committed to reducing its expense ratio
by increasing revenues while limiting increases in its overhead
expenditures. The aforementioned headquarters relocation has also
enabled the Registrant to realize expense savings in overhead
expenditures related to its facilities in the three months ended
March 31, 1997.
Financial Condition, Liquidity and Capital Resources
The Registrant's book value at March 31, 1997 is $9.32 per
share, as compared to $9.17 per share at December 31, 1996. The
increase in book value from December 31, 1996 is due to the three
month earnings described previously, offset by a decrease of
$628,000 or $.31 per share (net of deferred taxes of $184,000 or
$.09 per share) in the market value of fixed maturity investments
accounted for as available-for-sale securities under SFAS No. 115.
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
Net cash provided by and used in operating activities were
$2,549,000 and $215,000 in the three months ended March 31, 1997
and 1996, respectively. Cash flow provided by operating activities
in the three months ended March 31, 1997 reflects the growth in the
Insurance Companies' premium revenue, combined with the reduction
in overhead expenses described previously.
Net cash utilized in investing activities was $4,618,000 in
1997 and $614,000 in 1996. The amounts used in 1997 reflect the
investment of cash provided by operating activities in both the
current three month and prior periods.
No 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
1997 consistent with past practices and described in detail in its
1996 Annual Report on Form 10-K. Investment mix and portfolio
duration as of March 31, 1997 have remained stable as compared to
December 31, 1996. Management anticipates maintaining this
approach to investing for the foreseeable future.
Financing Activities
The Registrant paid no dividend on its common stock in 1997 or
1996.
The Registrant has no material outstanding capital commitments
which would require additional financing.
Recent Accounting Pronouncements
The Registrant has calculated basic and diluted earnings per
share ("EPS"), as defined in SFAS No. 128 - Earnings per Share. The
Registrant has determined, based on its interpretation of
information currently available, that such amounts do not differ
materially from primary EPS, which is reflected in the Registrant's
Statement of Operations for the years presented. SFAS No. 128 is
effective for financial statements issued for periods ending after
December 15, 1997 and requires restatement of all prior period EPS
data presented.
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, 1997
<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 March 31, 1997
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-31-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 53,458,576
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 617,955
<REAL-ESTATE> 0
<TOTAL-INVEST> 54,076,531
<CASH> 1,407,129
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 5,634,220
<TOTAL-ASSETS> 95,290,410
<POLICY-LOSSES> 48,768,340
<UNEARNED-PREMIUMS> 18,531,094
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 1,023,752
<OTHER-SE> 18,056,672
<TOTAL-LIABILITY-AND-EQUITY> 95,290,410
12,864,339
<INVESTMENT-INCOME> 850,645
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 65,342
<BENEFITS> 8,319,513
<UNDERWRITING-AMORTIZATION> 3,571,141
<UNDERWRITING-OTHER> 679,540
<INCOME-PRETAX> 1,210,132
<INCOME-TAX> 288,139
<INCOME-CONTINUING> 921,993
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 921,993
<EPS-PRIMARY> .45
<EPS-DILUTED> .45
<RESERVE-OPEN> 47,666,856
<PROVISION-CURRENT> 8,545,545
<PROVISION-PRIOR> 244,195
<PAYMENTS-CURRENT> 1,815,340
<PAYMENTS-PRIOR> 5,872,916
<RESERVE-CLOSE> 48,768,340
<CUMULATIVE-DEFICIENCY> 244,195
</TABLE>
