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, 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 .
2,091,429 shares of Common Stock were outstanding as of
August 12, 1997.
1 of 16
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
MOTOR CLUB OF AMERICA
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
1997 1996
ASSETS
Investments $54,064,215 $50,307,040
Cash and cash equivalents 3,748,245 3,476,948
Premiums receivable 7,678,718 7,801,583
Reinsurance recoverable on
paid & unpaid losses and
loss expenses 18,281,878 21,767,329
Notes and accounts receivable
- net 133,600 248,875
Deferred policy acquisition costs 5,531,812 5,761,496
Fixed assets - at cost, less
accumulated depreciation 1,690,189 1,826,753
Federal income tax
recoverable - current 10,290 -
Prepaid reinsurance premiums 893,495 1,145,944
Deferred tax asset 1,515,928 2,075,535
Other assets 1,059,049 1,121,599
Total Assets $94,607,419 $95,533,102
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Losses and loss expenses $46,375,658 $47,666,856
Unearned premiums 18,131,390 18,934,200
Other liabilities 9,509,348 10,120,426
Federal income taxes
payable - current - 25,969
Total Liabilities 74,016,396 76,747,451
Shareholders' Equity:
Common Stock, par value $.50 per share:
(Authorized - 10,000,000 shares;
issued and outstanding - 2,091,429
(1997) and 2,047,504 (1996)) 1,045,715 1,023,752
Paid in additional capital 1,943,829 1,730,508
Unfunded accumulated benefit
obligation in excess of Plan assets (4,690,900) (4,690,900)
Net unrealized gains
on debt securities, net of
deferred taxes 49,592 270,037
Retained earnings 22,242,787 20,452,254
Total Shareholders' Equity 20,591,023 18,785,651
Total Liabilities and
Shareholders' Equity $94,607,419 $95,533,102
(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, 1997 June 30,1996 June 30,1997 June 30,1996
Revenues:
Insurance premiums (net of
premiums ceded totaling
$3,553,484, $3,317,078
$1,879,521 and $1,714,725) $25,578,958 $21,696,829 $12,714,619 $11,122,295
Net investment income 1,706,920 1,486,467 856,275 734,018
Realized gains on sales
of investments - 5,410 - -
Motor Club membership fees - 658,104 - 325,986
Other revenues 119,082 69,729 53,740 43,405
Total revenues 27,404,960 23,916,539 13,624,634 12,225,704
Losses and Expenses:
Insurance losses and
loss expenses incurred
(net of reinsurance recoveries
totaling $794,461, $6,467,044,
$324,234 and $3,557,003) 16,498,307 13,850,881 8,178,794 7,064,936
Amortization of deferred policy
acquisition costs 7,601,640 6,210,244 4,030,499 3,182,759
Other operating expenses 928,023 2,445,913 248,483 937,369
Lease termination charge - 359,077 - -
Motor Club benefits - 146,551 - 70,415
Total losses and expenses 25,027,970 23,012,666 12,457,776 11,255,479
Income before Federal
income taxes 2,376,990 903,873 1,166,858 970,225
Provision for Federal
income taxes: current 52,441 23,042 25,104 19,567
deferred 534,016 - 273,214 -
Total provision for Federal
income taxes 586,457 23,042 298,318 19,567
Net income $ 1,790,533 $ 880,831 $ 868,540 $ 950,658
Per common share:
Net income $.87 $ .43 $.42 $.46
</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, 1997 June 30, 1996
Operating activities:
Net income $ 1,790,533 $ 880,831
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and net amortization 281,804 224,835
Gain on sale of investments - (5,410)
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 229,684 38,488
Premiums receivable 122,865 513,679
Notes and accounts
receivable 115,275 19,002
Other assets 62,109 89,423
Losses and loss expenses (1,291,198) 6,612,913
Unearned premiums and
membership fees (802,810) (471,623)
Federal income tax - current (36,259) (15,420)
Federal income tax - deferred 534,016 -
Other liabilities (611,078) (1,122,254)
Reinsurance recoverable on
paid and unpaid losses 3,485,451 (5,246,015)
Prepaid reinsurance premiums 252,449 337 416
Net cash provided by
operating activities $4,132,841 $2,096,342
Investing activities:
Investments purchased (42,799,465) (5,192,098)
Fixed assets purchased (83,328) (656,864)
Proceeds from sales of investments 38,785,965 3,650,699
Net cash (used in)
investing activities (4,096,828) (2,198,263)
Financing activities:
Common stock issued 235,284 6,891
Net cash provided by financing activities 235,284 6,891
Net increase (decrease) in cash and
cash equivalents 271,297 (95,030)
Cash and cash equivalents at
beginning of period 3,476,948 2,630,909
Cash and cash equivalents at
end of period $3,748,245 $2,535,879
</TABLE>
Supplemental Disclosures of Cash Flow Information
Note - Interest paid was $5,013 in 1997 and $0 in
1996.
Federal income tax paid was $88,700 in 1997
and $38,462 in 1996.
Non Cash Investing Activities:
Invested assets and shareholders' equity decreased by $220,445 and
by $1,312,305 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 June 30, 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 1997 are computed based upon 2,056,111 and
2,064,719 weighted average number of shares of common stock
outstanding for the six and three month periods, respectively.
Per share data for 1996 are computed based upon 2,044,255 and
2,044,755 weighted average number of shares outstanding for the six
and three months periods, respectively.
4. Federal Income Taxes
The Registrant and its subsidiaries file a consolidated
Federal income tax return. In the six month periods ended June 30,
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 June 30, 1997
is approximately $4.8 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, on a more limited basis,
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. The Registrant expects to pursue these
objectives during 1997 and beyond.
New Jersey Private Passenger Automobile 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 June 30, 1997 is 3.12 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 June 1997, the State of New Jersey enacted PPA legislation,
which principally: (1) repeals the annual "flex" rate increase
available to insurers, which was required by law to be no less than
3%, and replaces it with an expedited prior approval rate filing
process for rate increase requests up to 3% on an overall basis.
Subsequent to the enactment of this legislation, the Commissioner
of the NJ DOBI froze all personal auto insurance rates until March
1998; (2) restricts the ability of insurers to non-renew at their
discretion up to 2% of their policies; (3) repeals the ability of
insurers to non-renew one policy for every two new policies written
in each rating territory; and (4) replaces 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 New Jersey PPA market has historically been subject to
regulatory and legislative volatility which has, at times,
adversely affected the profitability of this line of business.
Consistent with this history, the enacted legislation, current rate
freeze and ongoing volatility could adversely affect the
Registrant's long-term profitability in this line of business.
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; 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. In addition,
the provision for deferred Federal income taxes increased by
$534,000 in 1997 as compared to 1996, the result of the
Registrant's recognition (at December 31, 1996) and subsequent
realization of deferred tax assets, which consist primarily of NOL
carryforwards.
Excluding these items, net income for the six months ended
June 30, 1997 increased $757,000 or $.36 per share as compared to
the same period in 1996, primarily due to a 18% growth in premium
revenue coupled with a lower combined ratio. The combined ratio
(as adjusted for the non-recurring charges in 1996 described above)
for the six months ended June 30, 1997 was 97.8% as compared to
99.5% for the same period in 1996.
Three Months
Net income for the three months ended June 30, 1997 was
decreased $82,000 or $.04 per share compared to the same period in
1996, primarily due to a $273,000 increase in the provision for
deferred Federal income taxes in 1997 as compared to 1996, as
described above.
Excluding the provision for deferred Federal income taxes, net
income for the three months ended June 30, 1997 increased $197,000
or $.09 per share as compared to the same period in 1996, primarily
due to a 14% growth in premium revenue coupled with a lower
combined ratio. The combined ratio for the three months ended June
30, 1997 was 98.0% as compared to 99.5% for the same period in
1996.
Revenues
Insurance Premiums
Insurance premiums increased $3,882,000 or 18% in the six
months ended June 30, 1997 and $1,592,000 or 14% in the three
months ended June 30, 1997, as compared to the same period in 1996,
the result of increases in new business written, primarily new PPA.
However, insurance premiums decreased by $150,000 or 1% in the
three months ended June 30, 1997 as compared to the three months
ended March 31, 1997, the results of decreases in new PPA business
written.
In the six months ended June 30, 1997 as compared to the same
period in 1996, direct premium written increased $3,771,000 or 16%;
Motor Club's increased by $2,210,000 or 11%, while Preserver's
direct premiums written increased $1,561,000 or 36% ($1,303,000 or
83% of which emanated from its commercial lines products).
In the second quarter of 1997 as compared to the same period
in 1996, direct premium written increased $948,000 or 7%; Motor
Club's increased by $348,000 or 3%, while Preserver's increased by
$600,000 or 23% ($489,000 or 82% of which emanated from its
commercial lines products).
In the second quarter of 1997 as compared to the first quarter
of 1997, direct premium written increased by $56,000 or less than
1%; Motor Club's decreased by $522,000 or 5%, while Preserver's
increased by $578,000 or 22% ($430,000 or 74% of which emanated
from its commercial lines products).
Net Investment Income
Net investment income increased $220,000 or 15% and $122,000
or 17% for the six and three months ended June 30, 1997 as compared
to the same periods in 1996, respectively. Average invested assets
for the six month period ended June 30, 1997 were $51,297,000 as
compared to $44,234,000 for the same period in 1996. The
investment portfolio (including short-term investments and
excluding realized capital gains) yielded 6.25% for the six months
ended June 30, 1997 as compared to 6.39% for the same period in
1996.
Losses and Expenses
Losses and Loss Expenses Incurred
Losses and loss expenses incurred increased $2,647,000 or 19%
and $1,114,000 or 16% in the six and three months ended June 30,
1997 as compared to 1996, respectively. The Insurance Companies'
combined loss and loss expense ratios were 64.5% and 64.3% for the
six and three months ended June 30, 1997, as compared to 63.8% and
63.5% for the same period in 1996, respectively. During the 1996
first quarter, losses and loss expenses incurred were increased by
$635,000 due to winter storm losses, which increased the loss and
loss expense ratio by 2.9 points. Excluding these winter storms,
the loss and loss expense ratio was 60.9% for the six months ended
June 30, 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
65.7% in 1997 as compared to 56.8% in 1996. The increase in the
PPA loss and loss expense ratio has been offset by improved loss
experience in the Preserver business. Excluding the 1996 winter
storm losses, the Preserver loss and loss expense ratio was 60.2%
in 1997 as compared to 75.6% in 1996.
Apart from the higher PPA loss ratios during the six months
and second quarter of 1997 as compared to the same periods in 1996
(which were expected), no significant adverse trends were
experienced or identified during the six months and second quarter
of 1997.
Amortization of Deferred Policy Acquisition Costs
Amortization of deferred policy acquisition costs increased
$1,391,000 or 22% and $847,000 or 27% in the six and three months
ended June 30, 1997 as compared to the same periods in 1996,
respectively, which generally correspond 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 $1,549,000 or 63% and $689,000 or 73% in the six
and three months ended June 30, 1997 as compared to the same
periods in 1996, respectively. This decrease in expenses allowed
for a decrease in the expense ratio to 33.3% and 33.7% for the six
and three months ended June 30, 1997 as compared to 35.6% (as
adjusted for the non-recurring charge described above and the
$359,000 non-recurring lease termination charge incurred by the
Registrant in 1996) and 36.0% for the same periods in 1996,
respectively.
The Registrant remains committed to reducing its expense ratio
by increasing revenues while limiting increases or reducing its
overhead expenditures, namely through the implementation of
technology and operating efficiencies.
In August 1997, the Registrant completed its information
technology conversion to a smaller, more contemporary computing
platform for its claims, billing and management reporting systems.
Completion of this conversion is expected to be the primary
catalyst to enable the Registrant to pursue these additional future
expense savings and expense ratio reductions in 1997 and beyond,
particularly through agency automation.
The aforementioned headquarters' relocation has also enabled
the Registrant to realize expense savings in overhead expenditures
related to its facilities in the six and three months ended June
30, 1997.
Financial Condition, Liquidity and Capital Resources
The Registrant's book value at June 30, 1997 is $9.85 per
share, as compared to $9.32 per share at March 31, 1997 and $9.17
per share at December 31, 1996. These increases in book value are
principally due to the six and three month earnings described
previously, and: 1) in the six months ended June 30, 1997, offset
by a decrease of $220,000 or $.11 per share (net of deferred taxes
of $25,000 or $.01 per share) in the market value of fixed maturity
investments accounted for as available-for-sale securities under
SFAS No. 115; and 2) in the three months ended June 30, 1997, an
increase of $407,000 (net of deferred taxes of $209,000 or $.10 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 operating activities were $4,133,000
and $2,096,000 in the six months ended June 30, 1997 and 1996,
respectively. Cash flow provided by operating activities in both
periods 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 $4,097,000 in
1997 and $2,198,000 in 1996. The amounts used in 1997 reflect the
investment of cash provided by operating activities in both the
current six and 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 June 30, 1997 have remained stable as compared to
December 31, 1996. Management anticipates maintaining this
approach to investing for the foreseeable future.
Financing Activities
Net cash provided by financing activities was $235,000 for the
six months ended June 30, 1997, reflecting the exercise of certain
employee stock options during that period.
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: August 13, 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 June 30, 1997 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-31-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 53,517,398
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 546,817
<REAL-ESTATE> 0
<TOTAL-INVEST> 54,064,215
<CASH> 3,748,245
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 5,531,812
<TOTAL-ASSETS> 94,607,419
<POLICY-LOSSES> 46,375,658
<UNEARNED-PREMIUMS> 18,131,390
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 1,045,715
<OTHER-SE> 19,545,308
<TOTAL-LIABILITY-AND-EQUITY> 94,607,419
25,578,958
<INVESTMENT-INCOME> 1,706,920
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 119,082
<BENEFITS> 16,498,307
<UNDERWRITING-AMORTIZATION> 7,601,640
<UNDERWRITING-OTHER> 928,023
<INCOME-PRETAX> 2,376,990
<INCOME-TAX> 586,457
<INCOME-CONTINUING> 1,790,533
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,790,533
<EPS-PRIMARY> .87
<EPS-DILUTED> .87
<RESERVE-OPEN> 47,666,856
<PROVISION-CURRENT> 17,178,727
<PROVISION-PRIOR> 114,041
<PAYMENTS-CURRENT> 5,182,676
<PAYMENTS-PRIOR> 13,401,290
<RESERVE-CLOSE> 46,375,658
<CUMULATIVE-DEFICIENCY> 114,041
</TABLE>
