SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year end Commission File Number
December 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
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (par value) $.50 per share
(Title of Class)
Indicate by check mark whether the registrant (l) 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 .
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [x]
The aggregate market value of the voting Common Stock (par value
$.50 per share) held by non-affiliates on March 25, 1997 was
$11,137,760 based on the closing selling price.
2,047,504 shares of Common Stock were outstanding as of March 25,
1997.
Documents Incorporated by Reference: Portions of the registrant's
definitive proxy statement issued in conjunction with the June 11,
1997 Annual Meeting of Shareholders (Part III).
PART I
Item 1. Description of Business
(a) The Registrant and a group of affiliated
corporations, of which the Registrant is parent, are known as the
"Motor Club of America Companies" (the "Motor Club of America
Group") and provide property and casualty insurance services. The
Registrant, incorporated in New Jersey in 1933 as "Automobile
Association of New Jersey", is the successor to a New Jersey
corporation organized in 1926. The present name was adopted in
1958.
The Registrant has two wholly-owned subsidiaries which
write property and casualty insurance, Motor Club of America
Insurance Company ("Motor Club") and Preserver Insurance Company
("Preserver"). Motor Club writes private passenger automobile
("PPA") business; Preserver writes small commercial, homeowners
and ancillary coverages. Motor Club and Preserver are collectively
referred to as the "Insurance Companies". The Insurance Companies
are domiciled in the State of New Jersey.
On December 2, 1996, the Registrant sold its wholly-owned
subsidiary, Motor Club of America Enterprises, Inc. ("Enterprises")
to JVL Holding Properties, Inc. ("JVL"), a non-affiliated Oklahoma
corporation. Enterprises had operated a motor club under agency
programs in 22 states. See "Motor Club Operations" for further
information.
(b) The Registrant does not have any reportable industry
segments for the three fiscal years reported in this Form 10-K.
(c) See Items 1 (a) and 7.
The Registrant and its subsidiaries distribute insurance
policies through independent producers.
Fire and Casualty Insurance Operations
The Insurance Companies generate premium revenue in New
Jersey through approximately 160 independent producers.
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.
Concurrently, the Registrant anticipates continuing its
emphasis of the small commercial and ancillary coverages written by
Preserver in the State of New Jersey. New PPA writings by Motor
Club are expected to continue as well.
New Jersey Private Passenger Automobile
PPA direct premiums written by Motor Club increased 28%
in 1996 as compared to 1995 and increased 16% in 1995 as compared
to 1994. The increases in 1996 and 1995 were attributable to Motor
Club writing new PPA insurance business, beginning in the first
quarter of 1995, for the first time since 1990. During 1996 and
1995, Motor Club wrote $16,276,000 and $6,011,000 in new business,
respectively.
Motor Club had received relief under certain of the
exemptive provisions of the New Jersey Fair Automobile Insurance
Reform Act of 1990 ("FAIRA"). See Item 7 - New Jersey Private
Passenger Automobile Insurance.
Small Commercial and Homeowners Insurance
Preserver writes small commercial and ancillary coverages
along with homeowners and related coverages. Direct premiums
written by Preserver increased 10% in 1996 as compared to 1995 and
24% in 1995 as compared to 1994.
The Registrant believes Preserver offers a competitive
variety of small commercial lines products and coverages which will
enable this class of business to grow steadily in the future. See
Item 7 - Results of Operations.
Motor Club Operations
As referred to previously, on December 2, 1996, the
Registrant sold Enterprises to JVL for $1,125,000, resulting in a
gain of $702,000.
Pursuant to an additional agreement entered into
concurrent with the sale of Enterprises, the Registrant will
provide certain services to Enterprises' members whose memberships
are written with PPA policies written by Motor Club. In exchange,
the Registrant will receive a servicing fee from JVL. The
Registrant will also receive certain fees for other memberships
written by Enterprises, as defined by this additional agreement.
The Registrant expects these fees to total approximately $125,000
in 1997.
Employees
At December 31, 1996, the Motor Club of America Group had
approximately 107 employees.
Item 2. Properties
Effective January 1, 1996, the Registrant entered into a
lease at 95 Route 17 South, Paramus, New Jersey. The Registrant's
home office is now located at this facility. The lease expires on
December 31, 2005. The Registrant has an option to terminate the
lease after six years, and an option to extend the lease for an
additional five years after the initial lease term expires.
Effective March 31, 1996, the Registrant entered into a
Mutual Release Agreement (the "Release") with Fairmount Central
Urban Renewal Corporation ("Fairmount"), Property-Casualty Company
of MCA ("PCCMCA") and MCA Insurance Company ("MCAIC").
Pursuant to the terms of the Release, the lease of the
office building in Newark, New Jersey in which the Registrant and
its subsidiaries formerly operated was terminated in exchange for
$132,000. The lease was to run to December 31, 2011 at an annual
rent of $324,000, plus expenses. The Release also enabled the
Registrant to terminate the Joint Service Agreement ("JSA"). See
Note Q to the Notes to Consolidated Financial Statements of Motor
Club of America and Subsidiaries ("Notes") for further information.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders in
the fourth quarter of the fiscal year covered by this Report.
Item Pursuant to Instruction 3 to Paragraph (b) of Item 401 of
Regulation S-K. Executive Officers of the Registrant.
At December 31, 1996, the executive officers of the
Registrant and their offices with the Registrant and principal
occupations were as follows:
Years in
Which Officer
Has Served
Office and Principal as
Name Age Occupation Such(3)
Archer McWhorter (1) 75 Chairman of the Board of
Directors of the Registrant
and Director of Companies
in the Motor Club of America
Group 1986-1996
Stephen A. Gilbert (2) 58 President, Chief Executive
Officer, General Counsel and
Director of the Registrant and
President of the Companies in
the Motor Club of America
Group 1975-1996
Patrick J. Haveron (2) 35 Executive Vice President, Chief
Financial Officer and
Director of the Registrant and
Companies in the Motor Club of
America Group; Treasurer of
Motor Club of America Insurance
Company and Preserver Insurance
Company 1988-1996
Peter K. Barbano 46 Secretary; Associate General
Counsel 1993-1996
Myron Rogow 53 Vice President 1987-1996
George B. Meyers 69 Vice President 1971-1996
G. Bruce Patterson 52 Vice President 1989-1996
Charles J. Pelosi 51 Vice President 1983-1996
Theodore Green 50 Vice President 1987-1996
Norma Rodriguez 47 Treasurer 1984-1996
(l) Member of Executive Committee: For the past five years,
Mr. McWhorter has been President (to January 1996) of
Acceptance, Inc., a finance company; from 1995 to March
1997, Director of National Car Rental Systems, Inc. and
affiliated corporations, a car rental enterprise ("NCR");
from 1995 to February 1997, one-third owner of Santa Ana
Holdings, Inc., which exchanged its 90% stock interest in
NCR for stock in Republic Industries, Inc.; from February
1997, consultant of NCR; consultant (to 1994) of Thrifty
Rent-A-Car System, Inc., a car rental company; Director
(to November 1992) of Baggage, Inc., an airline service
and security company.
(2) Member of Finance Committee.
(3) Includes years during any portion of which the officer
served as such. All terms of office are until the date
of the 1997 Annual Meetings of Stockholders and
Directors.
Except for Archer McWhorter, each of the officers devoted
substantially all of their business time to the affairs of the
Registrant or one or more other companies in the Motor Club of
America Group.
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
The Registrant's Common Stock trades on the NASDAQ Stock
Market under the symbol MOTR. The following are the high and the
low selling prices for each quarter of 1995 and 1996, as reported
by the NASDAQ:
1995
Quarter High Low
I .............................. 4 1/2 2 5/8
II .............................. 5 1/8 4
III .............................. 7 1/2 4 3/8
IV .............................. 7 1/8 6 5/8
1996
Quarter High Low
I .............................. 7 6 3/8
II .............................. 8 1/4 6 1/2
III .............................. 9 3/8 7 1/8
IV .............................. 9 5/8 7 3/4
There were approximately 630 holders of record of the
Common Stock of the Registrant as of December 31, 1996.
The Registrant paid no dividends in 1995 and 1996.
Item 6. Selected Financial Data
See Chart on Page 9.
Item 7. 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
Enterprises. The Insurance Companies form the largest segment of
operations, which accounted for 96% of 1996 revenues.
One hundred percent of the Registrant's insurance
operations are in the State of New Jersey. Please refer to the New
Jersey Private Passenger Automobile Insurance section for further
information on the Registrant's insurance operations 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 PPA writings
by Motor Club.
<TABLE>
<CAPTION>
Item 6. Selected Financial Data
<S> <C> <C> <C> <C> <C>
Years ended December 31,
1996 1995 1994 1993 1992
(in thousands, except as to per share data)
Operating Results:
Revenues from operations $46,525 $36,703 $29,471 $31,695 $36,402
Realized gains (losses) on sale
of investments 5 57 (43) 288 136
Realized gain on sale of
subsidiary 702 - - - -
Net investment income 3,087 2,764 2,730 2,784 2,853
Total revenues $50,319 $39,524 $32,158 $34,767 $39,391
Income (loss) before
federal income taxes $ 3,297 $ 2,455 $ 5,039 $ 3,827 ($21,882)
Net income (loss) $ 5,330 $ 2,417 $ 5,035 $ 3,260 ($21,352)
Financial Condition:
Total assets $95,533 $81,959 $79,172 $86,669 $90,544
Shareholders' equity $18,786 $14,081 $10,546 $ 7,168 $ 7,154
Per Common Share:
Net income (loss) $ 2.61 $ 1.18 $ 2.46 $ 1.60 ($ 10.45)
Cash dividends - - - - $ 0.225
Book Value $ 9.17 $ 6.89 $ 5.16 $ 3.51 $ 3.50
Weighted average number of
shares outstanding 2,045,590 2,043,197 2,043,004 2,043,004 2,043,004
Significant Insurance Indicators:
Net premiums written $47,337 $38,073 $31,797 $28,058 $26,714
Loss and loss expense ratio 64.5% 58.7% 54.8% 54.1% 77.3%
Expense ratio 37.9% 43.9% 39.3% 45.7% 45.2%
Combined ratio 102.4% 102.6% 94.1% 99.8% 122.5%
</TABLE>
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.
Insolvency of MCA Insurance Company
On August 24, 1992, Hurricane Andrew struck the South
Florida coast, causing losses to MCAIC which exceeded its surplus
as regards policyholders. MCAIC was placed in liquidation on
October 23, 1992 by the Oklahoma District Court, Oklahoma. The
Registrant in 1992 wrote off its investment in MCAIC and MCAIC's
subsidiaries, Property-Casualty Company of MCA ("PCCMCA") and
Fairmount Central Urban Renewal Corporation ("Fairmount").
On December 30, 1994, the Oklahoma District Court
approved a settlement between the MCAIC Receiver and its
subsidiaries and the Registrant and its subsidiaries (the
"Settlement"). Under the Settlement, the Registrant agreed to pay
MCAIC approximately $5.4 million, $2 million of which was paid on
December 30, 1994. The Settlement also dismissed with prejudice
the litigation previously brought (in August 1993) by the MCAIC
Receiver against the Registrant regarding the ownership of Motor
Club. The Settlement released all parties from all potential
claims against one another, and put in place agreements regarding
the handling of consolidated taxes, common cost sharing and service
agreements.
On February 15, 1995, pursuant to the Settlement
Agreement, MCAIC was paid in full.
The JSA entered into as part of the Settlement was
retroactive to May 1, 1994 and provided for the rendering of
certain services by the parties to the JSA and amounts due for
these services, as well as the sharing of certain common expenses.
Common expenses emanated from the parties' co-tenancy in the office
building in which the parties' principal offices resided. The JSA
was terminated effective March 31, 1996.
In relation to the insolvency of MCAIC, there are no
additional liabilities, contingent or otherwise, which require
accrual or disclosure in the accompanying financial statements.
New Jersey Private Passenger Automobile Insurance
Motor Club received relief from the New Jersey Department
of Banking and Insurance ("NJ DOBI") from certain provisions of the
FAIRA. Such relief included the following: (1) exemption from its
obligation to pay surtaxes and assessments on business written
until December 31, 1992. These exemptions allowed Motor Club to
reverse previously accrued surtaxes and assessments of $2,003,000
as a reduction of expense in 1994; (2) exemption (until January
1995) from the take-all-comers provisions of FAIRA, which requires
the writing of new PPA insurance; (3) payment in 1994 of only
$2,275,000 of the Market Transition Facility ("MTF") deficit
(legislation retired the entire MTF deficit, enabling Motor Club to
eliminate its remaining $1,653,445 MTF liability in 1994 as a
reduction of expense); and (4) non-participation in the Personal
Automobile Insurance ("Assigned Risk") Plan, through December 1996.
The NJ DOBI may grant an insurer relief, by written
notification, from writing new PPA pursuant to the take-all-comers
provisions of FAIRA described previously, 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 December 31, 1996 is 3.31 to 1. Motor Club has not
received any notifications from the NJ DOBI nor made any requests
of the NJ DOBI in this regard.
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. The
State of New Jersey also maintains an excess profits law which
provides that PPA insurers whose profits exceed a statutorily
computed maximum over a period of years will be required to pay
such excess to its policyholders. It would appear that Motor Club
does not have such excess profits.
Results of Operations
Net income increased $2,913,000 or $1.43 per share in
1996 as compared to 1995, after decreasing $2,618,000 or $1.28 per
share in 1995 as compared to 1994.
The table below reconciles operating net income to
reported net income for 1996, 1995 and 1994 with adjustments for
certain unusual and non-recurring items:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1996 1995 1994
Amount Per Share Amount Per Share Amount Per Share
Operating net income $3,436,343 $1.69 $2,416,779 $1.18 $ 753,670 $0.37
Lease termination charge (1) (359,077) (0.18) - - - -
Non-recurring tenancy and
relocation charges (2) (327,916) (0.16) - - - -
Reinsurance settlement (3) (197,196) (0.10) - - - -
Sale of Enterprises (4) 702,419 0.34 - - - -
Deferred tax asset
recognition (5) 2,075,535 1.02 - - - -
Reversal of MTF liability (6) - - - - 1,653,445 0.81
Reversal of FAIRA surtaxes
and assessments (6) - - - - 2,002,682 0.98
Discounted Note due MCAIC
Receiver (7) - - - - 624,850 0.30
Net income $5,330,108 $2.61 $2,416,779 $1.18 $5,034,647 $2.46
</TABLE>
(1) These non-recurring charges were incurred in connection with
the termination of the lease of the office building in which
the Registrant and its subsidiaries formerly operated.
(2) These non-recurring charges were incurred in connection with
the Registrant's tenancy at its former office building and its
subsequent relocation.
(3) These non-recurring charges were incurred in connection with
the settlement of a previously reported dispute with a
reinsurer of Motor Club.
(4) This is a non-recurring gain.
(5) The Registrant believes that it is more likely than not that
it will generate future taxable income to realize the benefits
of the net deferred tax asset, which consists primarily of net
operating loss carryforwards. The Registrant has accordingly
eliminated the valuation allowance on its net deferred tax
asset in 1996, resulting in a benefit to net income. The
ultimate amounts realized, however, could be reduced if actual
amounts of future taxable income differ from projected future
taxable income.
(6) See the New Jersey Private Passenger Automobile Insurance
section for further information.
(7) See the Insolvency of MCA Insurance Company section for
further information.
The increases in operating net income in 1996 and 1995
are attributable to higher revenues overall, improved expense and
combined ratios and reduced expenses from operations, primarily
salaries and related benefits, and in 1996, the Registrant's
relocation.
Operating net income was decreased by $529,000 or $.26
per share in 1996 as compared to 1995 and increased by $1,039,000
or $.51 per share in 1995 as compared to 1994, due to changes in
the rate assessed for 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. The premium rates assessed were approximately
4.5%, 1.4% and 6.4% in 1996, 1995 and 1994, respectively.
Revenues
Insurance Premiums
Insurance premiums increased $9,893,000 or 28% in 1996 as
compared to 1995, primarily as a result of increases in new
business written in 1996, particularly PPA.
The following table depicts increases in net earned
premiums for 1996 as compared to 1995:
Increase in
Net
Program Premium Percent
Private Passenger
Automobile $8,532,000 32%
Commercial Lines 1,185,000 27%
Personal Property 176,000 4%
Total $9,893,000 28%
Insurance premiums increased $7,409,000 or 27% in 1995 as
compared to 1994, primarily as a result of:(1) the termination in
February 1994 of Preserver's 80% quota share reinsurance treaty;
(2) the reduction in the UCJF assessment rate; and (3) increases in
new business written in 1995, particularly PPA.
In 1995, Motor Club began to write new PPA business for
the first time since March 1990.
The following table depicts the composition of direct
premiums written for the five years through 1996:
<TABLE>
<CAPTION>
Direct Written Premiums
(Amounts in Thousands - Exclusive of Service Charges)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
Direct Percent Direct Percent Direct Percent Direct Percent Direct Percent
Program Premium of Total Premium ofTotal Premium of Total Premium of Total Premium of Total
Private Passenger
Automobile $41,055 76.0% $32,100 73.1% $27,636 74.4% $30,473 87.2% $26,360 81.4%
Commercial Lines 6,744 12.5% 5,828 13.3% 4,431 12.0% 2,219 6.3% 2,331 7.2%
Personal Property 6,216 11.5% 5,972 13.6% 5,056 13.6% 2,285 6.5% 3,703 11.4%
Total $54,015 100.0% $43,900 100.0% $37,123 100.0% $34,977 100.0% $32,394 100.0%
</TABLE>
Net Investment Income
Net investment income increased $323,000 or 12% in 1996
as compared to 1995. Average invested assets were $46,296,000 in
1996 as compared to $41,806,000 in 1995. The growth in average
invested assets and cash from operations is the result of the
growth in revenues previously described. The investment portfolio,
including short-term investments, yielded 6.25% in 1996 as compared
to 6.23% in 1995. The Registrant's investment philosophy is to
hold fixed maturity investments until maturity.
Net investment income increased $34,000 or 1% in 1995 as
compared to 1994. Average invested assets were $41,806,000 in 1995
as compared to $42,272,000 in 1994. The investment portfolio,
including short-term investments, yielded 6.23% in 1995 as compared
to 6.21% in 1994. Although interest rate levels declined
significantly during 1995, the increase in the Registrant's
investment yield reflects investments made at higher interest rate
levels in 1994.
Realized Gains on Sales of Investments
The Registrant does not actively trade its investment
portfolio. Securities have been occasionally sold to reflect
operating requirements or business circumstances, which have
resulted in realized gains and losses.
Other Revenues
Other revenues decreased $11,000 or 9% in 1996 as
compared to 1995, and $72,000 or 37% in 1995 as compared to 1994.
The decreases were due to reduced mortgage loan revenue and other
miscellaneous income reductions.
Losses and Expenses
Losses and Loss Expenses Incurred
Losses and loss expenses incurred increased $8,411,000 or
41% in 1996 as compared to 1995 and increased $5,451,000 or 36% in
1995 as compared to 1994.
The combined loss and loss expense ratios were 64.5% in
1996, 58.7% in 1995 and 54.8% in 1994.
Motor Club's loss and loss expense ratio was 61.4% for
1996 as compared to 57.3% for 1995, while the Preserver loss and
loss expense ratio was 75.5% for 1996 as compared to 63.1% for
1995. Despite the higher loss and loss expense ratio on a
comparative basis, no significant adverse trends were experienced
or identified during 1996.
The increase in PPA loss and loss expense ratio in 1996
as compared to 1995 is largely due to the new business written by
Motor Club since January 1995. The Registrant has reserved the
ultimate development of this new business at a loss and loss
expense ratio of 78%; however it will be approximately twelve to
eighteen months before the underlying loss development experience
on this new business fully emerges.
Excluding the loss and loss expense ratio on the new PPA
business, the PPA loss and loss expense ratio was 52.2% in 1996,
which compares with the loss and loss expense ratios of 55.1% in
1995 and 52.9% in 1994 on the same business. The Registrant
believes that it has reserved for the new business conservatively,
particularly as compared to its other PPA business.
As the Registrant continues to write additional new PPA
business, PPA loss and loss expense ratios should generally
continue to trend higher, although within levels that should remain
profitable. Concurrently, as was the case in 1996, the Registrant
also will continue to experience continued reductions in its
expense ratio, which should result in lower overall combined ratios
for the Registrant.
The increase in Preserver's loss and loss expense ratio
in 1996 as compared to 1995 is primarily attributable to: (1)
winter storm losses of $635,000; and (2) poor liability experience
caused by a limited number of large losses greater than $35,000.
Frequency of losses has generally been at acceptable levels. This
increase has been partially offset by the improved experience
(excluding winter storm losses) in the homeowners line of business.
This improvement is largely attributable to the
Registrant implementing certain measures in 1995 in this homeowner
book aimed at improving its profitability prospectively. These
measures included: (1) redefining what risks constitute "standard"
risks and "preferred" risks. The Registrant now defines a standard
risk as any home constructed before 1960 and a preferred risk is
any home constructed after 1960. Previously, this definition was
based on the value of a home; and (2) in November 1995, a 7.3% rate
increase on standard risks (as now defined).
Amortization of Deferred Policy Acquisition Costs
Acquisition costs incurred increased $2,856,000 or 25% in
1996 as compared to 1995 and increased $788,000 or 7% in 1995 as
compared to 1994. The increase in acquisition related costs
generally corresponds to the premium growth previously described.
Other Operating Expenses
Other operating expenses in 1996 included the following:
(1) 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 (2) a $197,000 or $.10
per share charge incurred associated with the settlement of a
previously reported dispute with a reinsurer of Motor Club.
Excluding these non-recurring items, other operating
expenses decreased $2,035,000 or 37% in 1996 as compared to 1995.
In February 1996, the Registrant relocated its
headquarters to a smaller facility commensurate with the scope of
its operations. This relocation will reduce the Registrant's
expenses over $500,000 annually.
The decrease in other operating expenses in 1996 as
compared to 1995 resulted from lower operating expenses in general,
including lower salaries and the savings realized from the
aforementioned relocation.
The decrease in expenses has allowed for a decrease in
the expense ratio (as adjusted for the non-recurring charges
described above) to 36.8% for 1996 as compared to 43.9% for 1995.
This decrease is the realization of the Registrant's previously
stated strategy to increase its revenue while decreasing its
overhead expenditures.
The Registrant expects to reduce its expenses and expense
ratio 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.
During 1995 these expenditures decreased $990,000 or 15%
as compared to 1994. The cause of the decrease in 1995 as compared
to 1994 was reduced salaries, benefits and professional services.
Prior to 1995, the Registrant's expense ratio had
increased because the reduction of overhead expenditures had not
kept pace with the reduction in the Registrant's insurance
premiums. With the commencement of new PPA writings in 1995, the
Registrant began to realize economies of scale which enhanced the
reduction of expenses and consequently expense ratio.
See the New Jersey Private Passenger Automobile section
for an extended discussion of the New Jersey expenses mandated by
FAIRA.
Lease Termination Charge
In 1996, the Registrant recorded $359,000 in lease
termination charges on its former headquarters location in Newark,
New Jersey, which consists of: (1) $132,000 for the termination of
the lease; and (2) $227,000 for the charge-off of leasehold
improvements on this facility. See Item 2 - Properties and Note P
in the Notes for further information.
State Mandated Assessments
The Registrant is subject to certain assessments and
required participations in mandated pools, associations and funds
in the State of New Jersey. The most substantial assessments have
been the FAIRA surtaxes and assessments. The surtaxes expired in
1992; the assessments are schedule to expire after 1997. FAIRA
assessments totaled $962,000, $843,000 and $620,000 in 1996, 1995
and 1994, respectively.
During 1997, Motor Club will participate in the Assigned
Risk Plan. Motor Club will pay a fee of approximately $300,000 to
a servicing carrier rather than processing these policies. See the
section on New Jersey Private Passenger Automobile for further
information on these items.
Motor Club of America Membership Program
Motor Club membership fees written through Enterprises
decreased $30,000 or 3% in 1996 as compared to 1995, and decreased
$124,000 or 10% in 1995 as compared to 1994. As previously
described, the Registrant operated Enterprises through November 30,
1996; the writings for 1996 are therefore only included through
that date.
Loss Reserve Disclosures
Reserves for unpaid losses and loss expenses at any
report date reflect the estimate of the liabilities for the
ultimate net loss of reported claims and estimated incurred but not
reported claims.
The liability for unpaid losses and loss expenses are
determined using case-basis evaluations and statistical projections
and represent estimates of the ultimate net cost of all unpaid
losses and loss expenses through December 31 of each year. These
estimates are continually reviewed and refined as historical
experience develops, new information becomes known and the effects
of trends in future claim severity and frequency are considered.
The liabilities are adjusted accordingly with such
adjustments being reflected in the current year operations. No
trends that are considered abnormal have been identified as of the
most recent evaluation date, December 31, 1996.
The Registrant's insurance subsidiaries generally
reinsure all risks in excess of $150,000 for casualty lines and
$75,000 for property lines.
The following table presents a reconciliation of
beginning and ending liability balances for 1996, 1995 and 1994
reported under generally accepted accounting principles ("GAAP"):
<TABLE>
<CAPTION>
RECONCILIATION OF LIABILITY FOR LOSSES AND LOSS EXPENSES
<S> <C> <C> <C>
1996 1995 1994
(Thousands of Dollars)
Liability for losses and loss expenses, net of
reinsurance recoverables at January 1 $23,409 $22,356 $25,334
Incurred losses and loss expenses
Provision for current year claims 28,244 19,625 14,367
Increase in provision for prior years'
claims 904 1,112 919
Total incurred losses and loss expenses 29,148 20,737 15,286
Payments for losses and loss expenses
Payments on current year claims 13,029 8,577 5,953
Payments on prior years' claims 11,414 11,107 12,311
Total payments for losses and loss expenses 24,443 19,684 18,264
Liability for losses and loss expenses, net
of reinsurance recoverables at December 31 28,114 23,409 22,356
Reinsurance recoverables, on unpaid losses
and loss expenses at December 31 19,553 16,415 19,309
Liability for losses and loss expenses,
gross of reinsurance recoverables,
at December 31 $47,667 $39,824 $41,665
</TABLE>
The reconciliation shows a 1996 deficiency of $904,000 in
the liability recorded at December 31, 1995. The deficiency is
primarily the result of the latent development of a limited number
of large losses incurred in 1995 and prior. Management believes
this development does not indicate any adverse trends in the
Registrant's loss development.
The difference between the reserves for unpaid losses and
loss expenses reported in the Registrant's consolidated financial
statements prepared in accordance with GAAP and those reported in
the annual statements filed by the Insurance Companies with State
insurance departments in accordance with Statutory Accounting
Practices ("SAP") are reconciled as follows:
December 31,
1996 1995 1994
(thousands of dollars)
Reserves for unpaid losses and
loss expenses on a SAP basis
(net of reinsurance recoverables
on unpaid losses) $30,686 $25,519 $24,473
Reinsurance recoverables on unpaid
losses and loss expenses 19,553 16,415 19,309
Anticipated salvage and subrogation
recoveries (2,572) (2,110) (2,117)
Reserves for unpaid losses and loss
expenses, as reported in the
Registrant's GAAP basis financial
statements $47,667 $39,824 $41,665
The anticipated effect of inflation is implicitly
considered when estimating liabilities for losses and loss
expenses. While anticipated price increases due to inflation are
considered in estimating the ultimate claim costs, the increase in
average severities of claims is caused by a number of factors that
vary with the individual type of policy written. These anticipated
trends are monitored based on actual development and are modified
if necessary.
The table on Page 25 presents the development of the GAAP
balance sheet liabilities for 1992 through 1996; data is presented
for those years in which the Insurance Companies had operations.
The top line on the table shows the estimated liability
for unpaid losses and loss expenses recorded at the balance sheet
date for each of the indicated years. This liability represents
the estimated amount of losses and loss expenses for claims arising
in that and all prior years that are unpaid at the balance sheet
date, including losses that had been incurred but not yet reported.
The upper portion of the table shows the re-estimated amount of the
previously recorded liability, based on experience as of the end of
each succeeding year. The estimate is increased or decreased as
more information becomes known about the frequency and severity of
claims for development years. The "cumulative redundancy
(deficiency)" represents the aggregate change in the estimates over
all prior years. The lower section of the table shows the
cumulative amount paid with respect to the previously recorded
liability as of the end of each succeeding year.
In evaluating this information, it should be noted that
each amount includes the effects of all changes in amounts for
prior periods. For example, the amount of deficiency relating to
losses settled in 1996, but incurred in 1993, will be included in
the cumulative deficiency for the 1996 year.
This table does not present accident or policy year
development data, which readers may be more accustomed to
analyzing. Conditions and trends that have affected development of
the liability in the past may not necessarily occur in the future.
Accordingly, it may not be appropriate to extrapolate future
redundancies or deficiencies based on this table.
<TABLE>
<CAPTION>
LOSS AND LOSS EXPENSE DEVELOPMENT (In Thousands)
<S> <C> <C> <C> <C> <S>
Year ended December 31 1992 1993 1994 1995 1996
Liability for unpaid
losses and loss expenses, net
of reinsurance recoverables $28,469 $25,334 $22,356 $23,409 $28,114
Net Liability Re-estimated as of:
One year later 27,145 26,253 23,468 24,313 -
Two years later 28,563 26,766 23,813 - -
Three years later 28,454 26,819 - - -
Four years later 28,702 - - - -
Net Cumulative Deficiency ($ 233) ($ 1,485) ($ 1,457)($ 904) $-
Cumulative Amount of Liability Paid Through:
One year later 12,314 12,311 11,106 11,414 -
Two years later 20,270 18,992 17,231 - -
Three years later 24,546 23,032 - - -
Four years later 26,878 - - - -
Net liability - December 31 $28,469 $25,334 $22,356 $23,409 $28,114
Reinsurance recoverables 21,698 20,484 19,309 16,415 19,553
Gross liability - December 31 $50,167 $45,818 $41,665 $39,824 $47,667
</TABLE>
Financial Condition, Liquidity and Capital Resources
The Registrant's book value increased to $9.17 per share
at December 31, 1996 from $6.89 per share at December 31, 1995.
The principal sources of the net increase are: (1) net income of
$5,330,000 or $2.61 per share described previously; plus (2) an
increase in shareholders' equity of $487,000 or $.24 per share due
to the reduction of the minimum required pension liability for the
defined benefit pension plan sponsored by the Registrant; offset by
(3) a reduction in shareholders' equity of $1,122,000 or $.55 per
share due to the decrease in the fair value of the fixed maturity
investments accounted for as available-for-sale securities under
SFAS No. 115 ("Accounting for Certain Investments in Debt and
Equity Securities").
The reduction in the minimum pension liability was the
result of: (1) an increase in the discount rate used to compute
pension plan liabilities to 7.50% at December 31, 1996, from 7.25%
at December 31, 1995; and (2) the performance of the Plan assets
was in excess of the expected return on these assets. See Note K
of the Notes for additional information regarding the Registrant's
minimum pension liability.
The Registrant's book value increased to $6.89 per share
at December 31, 1995 from $5.16 per share at December 31, 1994.
The principal sources of the net increase are: (1) net income of
$2,417,000 or $1.18 per share; plus (2) an increase of $2,661,000
or $1.30 per share in the fair value of the fixed maturity
investments accounted for as available-for-sale securities under
SFAS No. 115; offset by (3) a reduction in shareholders' equity of
$1,545,000 or $.75 per share for recognition of additional minimum
required pension liability. The additional minimum required
liability was the result of a reduction in the discount rate used
to compute pension plan liabilities to 7.25% at December 31, 1995
from 8.25% at December 31, 1994.
On July 1, 1996, the Insurance Companies obtained
catastrophe reinsurance coverage in the increased amount of $29.5
million in excess of $500,000 with only a modest increase in
premium.
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 (except as noted in Loss Reserve
Disclosures) 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 operating activities was $6,851,000
in 1996 and $3,807,000 in 1995. Net cash utilized by operating
activities was $3,060,000 in 1994. The higher amounts in both 1996
and 1995 as compared to 1995 and 1994, respectively, are
attributable to the growth in premium revenue combined with the
reduction in overhead expenses described previously.
Net cash utilized in investing activities was $6,015,000
in 1996 and $3,255,000 in 1995. Net cash provided by investing
activities was $3,458,000 in 1994. The amounts used in both 1996
and 1995 reflect the investment of cash provided by operating
activities; the amounts used in 1996 were offset by the $1,125,000
proceeds from the sale of Enterprises described previously. The
amount provided in 1994 reflects the liquidation of investments
required for the cash utilized by operating activities.
Aside from the changes in operating expenditures noted
previously, particularly the State mandated assessments related to
FAIRA, no unusual or nonrecurring operating expenditures have been
incurred over this period.
The Registrant's cash and cash equivalents at year end
1996 were enhanced by the proceeds of the sale of Enterprises. As
part of its strategy to expand and diversify its insurance
operations, the Registrant seeks to increase the level of cash and
cash equivalents available to enable the execution of this
strategy.
The payout ratio of losses has not fluctuated
substantially over this period. Cash flow from operations is
expected to continue to increase as the Registrant increases its
revenue through additional premium writings, specifically
commercial lines and PPA and continues to reduce its expenses and
expense ratio. This will be offset somewhat by the development and
payment of losses on the new PPA which Motor Club is writing.
Management has maintained, in its opinion, a conservative
investing philosophy. At December 31, 1996 and 1995, the
Registrant's investment portfolio was comprised of the following
types of securities:
December 31, 1996 December 31,1995
Carrying Carrying
Amount Percent Amount Percent
Taxable Fixed Maturities $47,927,093 95.3% $44,630,457 97.9%
Short Term Investments 1,745,455 3.5% 200,719 0.4%
Mortgage Loans 634,492 1.2% 766,101 1.7%
Total Investment Portfolio $50,307,040 100.0% $45,597,277 100.0%
Tax exempt securities have not been acquired. Management
believes that the current tax position of the Registrant, which
includes substantial net operating loss carryforwards, dictates the
exclusion of tax exempt securities from the portfolio, which
historically provide substantially lower yields on a before tax
basis than taxable securities.
Taxable fixed maturities consist of direct obligations of
the United States Government, obligations of United States
Government agencies, Government National Mortgage Association
mortgage-backed securities ("GNMA's") and high quality corporate
fixed maturity issues. The goal of the portfolio is to enhance
investment returns within the structure of limited credit risk
assumption which management has utilized, with evaluations of
portfolio duration made in relation to the current interest rate
environment.
At December 31, 1996 and 1995, the taxable fixed maturity
portfolio consisted of the following types of securities:
December 31, 1996 December 31, 1995
Carrying Carrying
Amount Percent Amount Percent
United States Treasuries $27,758,603 57.9% $25,924,344 58.1%
United States Government
Agencies 6,637,485 13.9% 5,864,485 13.1%
GNMA Mortgage-Backed Securities 8,363,964 17.4% 7,798,432 17.5%
Corporate Bonds 5,167,041 10.8% 5,043,196 11.3%
Total $47,927,093 100.0% $44,630,457 100.0%
The fixed maturity portfolio duration at December 31,
1996 and 1995 is 3.35 and 3.32 years, respectively.
United States Treasuries are weighted towards maturities
of five years or less, to reduce interest rate risk and match the
Insurance Companies claims payout ratio; corporate obligations are
generally weighted towards five to ten year maturities, to take
advantage of the yield curve; the average life of the GNMA
portfolio has been maintained at approximately 10 years to reduce
interest rate risk.
Please refer to Note D in the Notes for statistics
regarding portfolio maturity composition.
The Registrant has not acquired, nor are there plans to
acquire, below investment grade or "junk" bonds. Ninety-seven
percent of the fixed maturity portfolio as of December 31, 1996 is
graded Class 1 according to the National Association of Insurance
Commissioners' valuation system. This classification is reserved
for only the highest quality securities, generally rated A or
better by two major rating services.
Management anticipates continuing this minimum risk
approach to investing for the foreseeable future.
Management believes that the mix of investments in both
type and maturity length is appropriate in order to preserve
capital, take advantage of investment opportunities as they are
presented, and provide the Registrant and its subsidiaries with
sufficient liquidity to react to economic and business
circumstances as they evolve.
As noted previously, the investment portfolio yielded
6.25% in 1996 as compared to 6.23% in 1995.
Including realized gains and losses, the investment
portfolio yielded 6.26% in 1996 as compared to 6.36% in 1995.
Financing Activities
The Registrant paid no dividend on its common stock in
1996, 1995 and 1994.
The Registrant has no material outstanding capital
commitments which would require additional financing. In 1995 the
Registrant repaid the $2,750,000 borrowed from Midlantic Bank, N.A.
in conjunction with the Settlement with the MCAIC Receiver.
Risk-Based Capital
The National Association of Insurance Commissioners
("NAIC") has adopted Risk-Based Capital ("RBC") requirements for
property/casualty insurance companies, to evaluate the adequacy of
statutory capital and surplus in relation to investment and
insurance risks such as asset quality, credit risk, loss reserve
adequacy, and other business factors. The RBC formula is used by
State insurance regulators as an early warning tool to identify,
for the purpose of initiating regulatory action, insurance
companies that potentially are inadequately capitalized.
Regulatory compliance is determined by a ratio of the insurer's
regulatory total adjusted capital to its authorized control level
RBC, as defined by the NAIC. Insurers below specific trigger
points or ratios are classified within certain levels, each of
which requires specific corrective action. The Insurance
Companies' ratios are in excess of that required, therefore
requiring no action.
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 129 - Disclosure of Information
About Capital Structure. This Statement becomes effective for
financial statements for periods ending after December 15, 1997.
This Statement establishes standards for disclosing information
about an entity's capital structure. The Registrant does not
believe that this Statement will materially change its disclosures
regarding its capital structure.
In February 1997, FASB issued SFAS No. 128 - Earnings per
Share. This Statement becomes effective for financial statements
issued for periods ending after December 15, 1997. This Statement
establishes standards for computing and presenting earnings per
share ("EPS"). This Statement simplifies the standards for
computing EPS previously found in APB Opinion No. 15, Earnings per
Share, and makes them comparable to international EPS standards.
It replaces the presentation of primary EPS with a presentation of
basic EPS. It also requires dual presentation of basic and diluted
EPS on the face of the income statement for all entities with
complex capital structures, which the Registrant is considered to
have, and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. This Statement
requires restatement of all prior-period EPS data presented. The
Registrant anticipates presenting its EPS in compliance with the
dual presentation standards mandated by this Statement at December
31, 1997.
In October 1995, FASB issued SFAS No. 123 - Accounting
for Stock-Based Compensation. This Statement became effective
beginning in the first quarter of 1996 and applies to options
granted in 1995 and subsequent years. No options were granted in
1995 and 1996 and therefore the adoption of this Statement does not
have any effect on the Registrant's financial position or results
of operations. The Registrant will continue to measure
compensation expense for its stock-based employee compensation
plans using the intrinsic value method prescribed by APB Opinion
No. 25, Accounting for Stock Issued to Employees and will provide
pro forma disclosures of net income and earnings per share as if
the fair value-based method prescribed by SFAS No. 123 had been
applied in measuring compensation expense.
Item 8. Financial Statements and Supplementary Data
See Item 14 (a).
Item 9. Disagreements with Accountants on Accounting and
Financial Disclosures
None
PART III
Items 10, 11, 12 and 13 are omitted from this Report on
Form 10-K; the Registrant shall file a definitive proxy statement
pursuant to Regulation 14A not later than April 30, 1997, which is
120 days after the close of the fiscal year of the Registrant.
PART IV
Item 14. Exhibits, Financial Statements Schedules
and Reports on Form 8-K
(a) (1) The following financial statements are
included in Part II, Item 8:
Page (s)
Report of Independent Accountants F-1
Consolidated Balance Sheets at December 31,
1996 and 1995 F-2
Consolidated Statements of Operations for
the years ended December 31, 1996, 1995
and 1994 F-3
Consolidated Statements of Shareholders'
Equity for the years ended December 31,
1996, 1995 and 1994 F-4
Consolidated Statements of Cash Flows
for the years ended December 31, 1996,
1995 and 1994 F-5 to F-6
Notes to Consolidated Financial Statements F-7 to F-30
(2) The following financial statement schedules
for the years 1996, 1995 and 1994 (pursuant
to Rule 5-04 of Regulation S-X) are presented
herewith:
Schedule I - Summary of Investments -
Other than Investments
in Related Parties* F-31
Schedule II - Condensed Financial
Information of Registrant F-32 to F-34
Schedule IV - Reinsurance* F-35
Schedule V - Valuation and Qualifying
Accounts and Reserves F-36
Schedule VI - Supplemental Information
Concerning Property/
Casualty Insurance
Operations* F-37
*Presented pursuant to Rule 7-05 of Regulation S-X.
Schedules other than those mentioned above are omitted because the
conditions requiring their filing do not exist, or because the
information is given in the financial statements filed herewith,
including the notes thereto.
(b) Exhibits:
Exhibit No. Description Reference
3-a Restated and Amended Certificate Exhibit 1(i) to Motor
of Incorporation of Motor Club of Club of America's
America, dated June 12, 1972 Annual Report on Form
10-K for fiscal year
ended December 31, 1972
3-l By-Laws of Motor Club of America, Exhibit 3-l to Motor
effective March 15, 1989 Club of America's
Annual Report on Form
10-K for fiscal year
ended December 31, 1988
3-m By-law Amendment of Motor Club Exhibit 3-m to Motor
of America, effective Club of America's
August 3, 1994 Form 8-K dated
July 21, 1994
4-a Specimen Certificate Exhibit 4 to File
representing Common Stock, No. 2-39996 on
$.50 par value Form S-1
10-o Motor Club of America 1987 Stock Exhibit 10-o to Motor
Option Plan Club of America's
Annual Report on Form
10-K for fiscal year
ended December 31, 1987
10-p Specimen copy of Motor Club of Exhibit 10-p to Motor
America 1987 Stock Option Club of America's
Agreement Annual Report on Form
10-K for fiscal year
ended December 31, 1987
10-q Motor Club of America 1992 Exhibit A to Motor
Stock Option Plan Club of America's
Proxy Statement for
fiscal year ended
December 31, 1991
10-r Specimen copy Motor Club of Exhibit 10-r to
America 1992 Stock Option Motor Club of
Plan Agreement America's Annual
Report on Form 10-K
for fiscal year
ended December 31, 1992
10-s Settlement Agreement between Exhibit 99 to Motor
Motor Club of America et als. Club of America's
and Receiver of MCA Insurance Form 8-K dated
Company in Liquidation et als. December 20, 1994
and related documents
10-t Term Note between Motor Club Exhibit 99-B to Motor
of America and Midlantic Bank, Club of America's
N.A., and related documents Form 8-K dated
December 20, 1994
10-u Order dated December 30, 1994 Exhibit 99-C to Motor
Approving Settlement between Club of America's
Motor Club of America et als and Form 8-K dated
Receiver of MCA Insurance December 30, 1994
Company in Liquidation et als
and related conformed documents
10-v Cash Collateral Agreement between Exhibit 99-D to Motor
between Motor Club of America Club of America's
and Principal Shareholders Form 8-K dated
December 30, 1994
10-w Term Note between Motor Club Exhibit 99-E to Motor
of America and Midlantic Bank, Club of America's
N.A., and related documents Form 8-K dated
December 30, 1994
10-x Stock Purchase Agreement Exhibit 99-F to Motor
between Motor Club of America Club of America's
and JVL Holding Properties, Inc. Form 8-K dated
December 2, 1996
10-y Agreement dated December 2, 1996 Exhibit 99-G to Motor
between Motor Club of America Club of America's
and Motor Club of America Form 8-K dated
Enterprises, Inc. December 2, 1996
22 Subsidiaries of Motor Club of
America Page 38
Pursuant to the requirements of Section 13 or 15(d) 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
(Registrant)
Dated: March 27, 1997 By /s/ Stephen A. Gilbert
Stephen A. Gilbert
President, General Counsel
and Director
Dated: March 27, 1997 By /s/ Patrick J. Haveron
Patrick J. Haveron
Executive Vice President,
Chief Financial Officer and
Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated.
Dated: March 27, 1997 By /s/ Archer McWhorter
Archer McWhorter
Chairman of the Board
and Director
Dated: March 27, 1997 By /s/ Alvin E. Swanner
Alvin E. Swanner
Director
Dated: March 27, 1997 By /s/ Robert S. Fried
Robert S. Fried
Director
MOTOR CLUB OF AMERICA
Exhibit (22) Subsidiaries of the Registrant.
The following are the subsidiaries of the Registrant as
of March 27, 1997:
State of
Name Organization
Motor Club of America Finance Company New Jersey
Motor Club of America Insurance Company New Jersey
Preserver Insurance Company New Jersey
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Motor Club of America:
We have audited the consolidated financial statements and the
financial statement schedules of Motor Club of America and
Subsidiaries listed in Item 14(a) of this Form 10-K. These
financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and financial
statement schedules based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial
position of Motor Club of America and Subsidiaries as of December
31, 1996 and 1995, and the consolidated results of their operations
and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial
statement schedules referred to above, when considered in relation
to the basic financial statements taken as a whole, present fairly,
in all material respects, the information required to be included
therein.
COOPERS & LYBRAND L.L.P.
New York, New York
March 12, 1997
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
1996 1995
ASSETS
Investments:
Fixed maturity securities, available-
for-sale, at fair value (amortized
cost $47,657,056 - 1996 and
$43,238,185 - 1995) $47,927,093 $44,630,457
Mortgage loans on real estate - at the
unpaid principal amount 634,492 766,101
Short-term investments, at fair value
which approximates cost 1,745,455 200,719
Total investments 50,307,040 45,597,277
Cash and cash equivalents 3,476,948 2,630,909
Premiums receivable 7,801,583 7,135,231
Reinsurance recoverable on paid
and unpaid losses & loss expenses 21,767,329 17,638,854
Notes and accounts receivable 248,875 209,953
Deferred policy acquisition costs 5,761,496 5,069,222
Fixed assets - at cost, less accumulated
depreciation 1,826,753 1,219,125
Federal income tax recoverable - current - 13,680
Prepaid reinsurance premiums 1,145,944 1,193,098
Deferred tax asset 2,075,535 -
Other assets 1,121,599 1,251,419
Total assets $95,533,102 $81,958,768
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Losses and loss expenses $47,666,856 $39,823,552
Unearned premiums and
membership fees ($524,896 -1995) 18,934,200 17,363,031
Commissions payable 1,444,660 1,357,752
Accounts payable 595,785 302,791
Accrued expenses 6,770,544 7,673,251
Drafts outstanding 1,309,437 1,357,315
Federal income taxes payable - current 25,969 -
Total liabilities 76,747,451 67,877,692
Shareholders' Equity:
Common Stock, par value $.50 per share:
Authorized - 10,000,000 shares;
issued and outstanding - 1996
2,047,504, 1995 - 2,043,754 shares 1,023,752 1,021,876
Paid in additional capital 1,730,508 1,722,539
Unfunded accumulated benefit
obligation in excess of Plan assets (4,690,900) (5,177,900)
Net unrealized gains on debt securities 270,037 1,392,415
Retained earnings 20,452,254 15,122,146
Total Shareholders' Equity 18,785,651 14,081,076
Total Liabilities and
Shareholders' Equity $95,533,102 $81,958,768
The accompanying notes are an integral part of
these consolidated financial statements.
<TABLE>
<CAPTION>
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<S> <C> <C> <C>
For the years ended December 31,
1996 1995 1994
REVENUES
Insurance premiums (net of premiums
ceded totaling $7,273,083, $5,750,247
and $9,173,851) $45,194,073 $35,300,872 $27,891,943
Net investment income 3,087,112 2,764,188 2,730,211
Realized gains (losses) on
sales of investments (net) 5,485 56,823 (43,292)
Realized gain on sale of subsidiary 702,419 - -
Motor Club membership fees 1,215,039 1,276,324 1,381,591
Other revenues 114,512 125,613 197,917
Total revenues 50,318,640 39,523,820 32,158,370
LOSSES AND EXPENSES
Losses and loss expenses
incurred (net of reinsurance
recoveries totaling $6,840,459,
$1,153,901 and $4,892,994) 29,148,280 20,737,548 15,286,301
Amortization of deferred
policy acquisition costs 13,678,710 10,611,978 9,353,336
Other operating expenses 3,569,564 5,438,359 6,428,328
Lease termination charge 359,077 - -
Reversal of prior years' accrual
for New Jersey FAIR Act
liabilities - - (3,656,127)
Discount of note payable to
Receiver of MCA Insurance
Company in Liquidation - - (624,850)
Motor Club benefits 266,112 280,836 332,315
Total losses and expenses 47,021,743 37,068,721 27,119,303
Income before Federal income
taxes 3,296,897 2,455,099 5,039,067
Benefit (provision) for Federal
income taxes: current (42,324) (38,320) (4,420)
deferred 2,075,535 - -
Total Federal income tax 2,033,211 (38,320) (4,420)
Net income $ 5,330,108 $ 2,416,779 $ 5,034,647
Per share data:
Net income $ 2.61 $ 1.18 $ 2.46
Weighted average number of
common shares outstanding 2,045,590 2,043,197 2,043,004
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
[CAPTION]
<TABLE>
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Unrealized Unfunded
Appreciation Accumulated
(Depreciation) Benefit
Common Stock (a) Paid-In of Available- Obligation In
Shares Additional for-sale Excess of Retained
Issued Amount Capital Securities Plan Assets Earnings Total
Balance at December 31, 1993 2,043,004 $1,021,501 $1,720,945 $ - ($3,245,200) $ 7,670,720 $ 7,167,966
Unrealized depreciation on
available-for-sale securities (1,268,628) (1,268,628)
Adjustment to recognize
minimum required pension
liability (387,800) (387,800)
Net income 5,034,647 5,034,647
Balance at December 31, 1994 2,043,004 1,021,501 1,720,945 (1,268,628) (3,633,000) 12,705,367 10,546,185
Common stock issued 750 375 1,594 1,969
Unrealized appreciation on
available-for-sale securities 2,661,043 2,661,043
Adjustment to recognize
minimum required pension
liability (1,544,900) (1,544,900)
Net income 2,416,779 2,416,779
Balance at December 31, 1995 2,043,754 1,021,876 1,722,539 1,392,415 (5,177,900) 15,122,146 14,081,076
Common stock issued 3,750 1,876 7,969 9,845
Unrealized depreciation on
available-for-sale securities (1,122,378) (1,122,378)
Adjustment to recognize
minimum required pension
liability 487,000 487,000
Net income 5,330,108 5,330,108
Balance at December 31, 1996 2,047,504 $1,023,752 $1,730,508 $ 270,037 ($4,690,900) $20,452,254 $18,785,651
</TABLE>
(a) Par value $.50 per share; authorized - 10,000,000 shares.
The accompanying notes are an integral part
of these consolidated financial statements.
<TABLE>
<CAPTION>
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<S> <C> <C> <C>
For the years ended December 31,
1996 1995 1994
Net income $ 5,330,108 $2,416,779 $ 5,034,647
Adjustments to reconcile net income
to cash provided by
(utilized in) operating activities:
Discount of Note due Receiver of
MCA Insurance Company in Liquidation - - (624,850)
Depreciation expense 379,453 297,291 325,029
Amortization (accretion) of bond
premium (discount) - net 98,738 66,843 236,602
Gain on sale of subsidiary (702,419) - -
Loss (gain) on sale of investments (5,485) (56,823) 43,292
Write-off of leasehold improvement
(net) due to lease termination 227,077 - -
Deferred tax benefit (2,075,535) - -
Changes in:
Net assets of Motor Club of America
Enterprises, Inc. (422,581) - -
Premiums receivable (666,352) (1,587,853) (458,911)
Notes and accounts receivable (38,922) 74,146 336,444
Deferred policy acquisition costs (692,274) (902,854) (1,373,682)
Federal income tax - current 39,649 19,600 1,405,876
Reinsurance recoverable on paid and
unpaid losses (4,128,475) 3,127,417 1,747,075
Prepaid reinsurance premiums 47,154 (511,033) 3,415,982
Other assets 129,820 406,825 (108,468)
Losses and loss expenses 7,843,304 (1,841,549) (4,153,102)
Unearned premiums and membership fees 1,571,169 3,179,001 404,424
Commissions payable 86,908 230,872 (524,190)
Accounts payable 292,994 33,361 (17,776)
Accrued expenses (415,706) 1,406,751 (7,165,753)
Drafts outstanding (47,878) 198,247 125,286
Amount due to/from MCA Insurance
Company in Liquidation and
subsidiaries - (2,750,000) (1,707,760)
Total cash provided by (utilized in)
operating activities 6,850,747 3,807,021 (3,059,835)
</TABLE>
(Continued)
<TABLE>
<CAPTION>
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<S> <C> <C> <C>
For the years ended December 31,
1996 1995 1994
Investing activities:
Proceeds from:
Maturities of fixed maturities 4,442,716 4,128,756 6,708,618
Sales of fixed maturities 1,396,522 4,417,499 7,749,369
Sale of subsidiary 1,125,000 - -
Payments received on mortgage
loan principal 131,609 106,835 308,584
Sale or maturities of short-
term investments 200,000 1,916,411 5,093,063
Sale of fixed assets 13,400 - 1,751
Purchase of:
Fixed maturities (10,350,787) (13,289,423) (12,671,277)
Short-term investments (1,745,455) (201,134) (3,483,016)
Fixed assets (1,227,558) (333,635) (248,770)
Total cash (utilized in)
provided by
investing activities (6,014,553) (3,254,691) 3,458,322
Financing activities:
Common stock issued 9,845 1,969 -
(Repayment) Borrowing from
Midlantic Bank, N.A. - (2,750,000) 2,750,000
Total cash provided by (utilized
in) financing activities 9,845 (2,748,031) 2,750,000
Net increase (decrease) in cash 846,039 (2,195,701) 3,148,487
Cash and cash equivalents
at beginning of year 2,630,909 4,826,610 1,678,123
Cash and cash equivalents
at end of year $ 3,476,948 $ 2,630,909 $ 4,826,610
</TABLE>
Supplemental Disclosures of Cash Flow Information
(1) Total interest paid was $8,166 (1996), $33,934 (1995) and
$53 (1994).
(2) Total Federal income taxes paid was $38,462 (1996), $52,000
(1995) and $54,227 (1994).
The accompanying notes are an integral part of
these consolidated financial statements.
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies:
(a) Basis of Presentation and Principles of Consolidation:
The consolidated financial statements of Motor Club of
America (the "Company") include its accounts and those of
its wholly-owned subsidiary companies. The financial
statements have been prepared on the basis of generally
accepted accounting principles ("GAAP"). The preparation
of financial statements in conformity with these
practices requires management to make estimates and
assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the
period. Actual results could differ from those
estimates.
The Company's insurance subsidiaries, Motor Club of
America Insurance Company ("Motor Club") and Preserver
Insurance Company ("Preserver") are collectively referred
to as the "Insurance Companies". All material
intercompany items and transactions have been eliminated
in consolidation.
(b) Nature of Operations:
The Company is a New Jersey corporation which owns the
Insurance Companies and a finance company. The Company's
subsidiary, Motor Club of America Enterprises, Inc.,
("Enterprises") was sold on December 2, 1996 (See Note B,
Sale of Subsidiary for further details). Enterprises
operates a motor club. The Insurance Companies engage in
property and casualty insurance produced by independent
agents; one hundred percent of the Insurance Companies'
operations are conducted in the State of New Jersey. The
Company generates 96% of its revenues from insurance
revenues. There is one agent who individually produces
more than ten percent of the Company's insurance
premiums.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies (Continued):
(c) Insurance Premiums:
Insurance premiums are credited to income by the monthly
pro rata method over the terms of the contracts.
Contracts for private passenger automobile insurance are
for terms of six months. Insurance contracts for policies
other than private passenger automobile are for terms of
twelve months.
(d) Motor Club Operations:
Motor Club membership fees are credited to income by the
straight-line method over the terms of the contracts.
Commission expense is deferred and amortized in the same
manner as the related unearned membership fees. Other
related costs are charged to expense as incurred.
(e) Investments:
All of the Company's fixed maturity securities are
classified as available-for-sale securities, and are
therefore reported at fair value, with unrealized gains
and losses excluded from earnings and reported as a
separate component of shareholders' equity, net of
applicable deferred taxes.
The Company recognizes income for the mortgage-backed
bond portion of its fixed maturity securities portfolio
using the constant effective yield method. Premium and
discount amounts are amortized based on the stated
contractual life of the securities.
When actual prepayments differ from this assumption, the
effective yield is recalculated to reflect actual
payments to date. The net investment in the security is
adjusted to the amount that would have existed had the
new effective yield been applied since the acquisition of
the security. That adjustment is included in net
investment income.
Gains and losses on investments are recognized when
investments are sold or redeemed on a specific
certificate basis.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies (Continued):
(f) Other Revenues:
Other revenues consist principally of interest on
mortgage loans.
(g) Losses and Loss Expenses:
The estimated liability for losses is based on (i) the
accumulation of cost estimates for unpaid losses reported
prior to the close of the accounting period; and (ii)
estimates of incurred but unreported losses based upon
past experience; less (iii) estimates of anticipated
salvage and subrogation recoveries. In the normal course
of business, the Company seeks to reduce the loss that
may arise from catastrophes or other events that cause
unfavorable underwriting results by reinsuring certain
levels of risk in various areas of exposure with other
insurance enterprises or reinsurers.
Changes to the estimated liabilities are reflected in the
results of operations currently.
Amounts recoverable from reinsurers are estimated in a
manner consistent with the claim liability associated
with the reinsured policy. The liability for loss
expenses is based on estimates of expenses to be
incurred in the settlement of claims.
(h) Deferred Policy Acquisition Costs:
Deferred policy acquisition costs are costs that vary
with and are directly related to the production of new
and renewal business. Such costs include commissions,
premium taxes, certain State mandated assessments and
certain underwriting and policy issuance costs which are
deferred when incurred (subject to a maximum) and
amortized to income as the related written premiums are
earned. Investment income is anticipated in determining
whether a premium deficiency relating to these costs
exists.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Summary of Significant Accounting Policies (Continued):
(i) Fixed Assets:
Depreciation on leasehold improvements is computed by the
straight-line method over the remaining lease term.
Depreciation on furniture and fixtures, data processing
and other equipment, is computed by the straight-line
method over the estimated useful lives, ranging from
three to twenty years.
Expenditures for major renewals and betterments are
capitalized, and expenditures for maintenance and repairs
are charged to income as incurred. When property units
are retired, or otherwise disposed of, the cost thereof
and related accumulated depreciation are eliminated from
the accounts. Any gain or loss on disposal is credited
or charged to operations.
(j) Federal Income Taxes:
Deferred Federal income taxes are provided for temporary
differences between the financial statement and tax bases
of assets and liabilities using enacted tax rates
expected to apply in the years in which the differences
are expected to reverse.
(k) Statement of Cash Flows:
For purposes of the statement of cash flows, the Company
considers demand deposits held with financial
institutions and money market mutual fund holdings to be
cash equivalents.
(l) Per Share Data:
Earnings per share are computed based upon the weighted
average number of common shares outstanding during each
year.
Note B - Sale of Subsidiary:
On December 2, 1996, the Company sold Enterprises to JVL
Holding Properties, Inc., ("JVL") a non-affiliated
Oklahoma corporation, for $1,125,000. As a result of
this transaction, the Company recorded a gain of
$702,419.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note B - Sale of Subsidiary (Continued):
Pursuant to an additional agreement entered into
concurrent with the sale, the Company will provide
certain services to members whose memberships are written
with private passenger automobile ("PPA") policies
written by Motor Club. In exchange the Company will
receive a servicing fee from JVL. The Company will also
receive certain fees for other memberships written by
Enterprises, as defined by this additional agreement.
During 1996, these fees collectively totaled $11,000.
Note C - PPA Business:
Motor Club received relief from the New Jersey Department
of Banking and Insurance ("NJ DOBI") from certain
provisions of the New Jersey Fair Automobile Insurance
Reform Act of 1990 ("FAIRA"). Such relief included the
following: (1) exemption from its obligation to pay
surtaxes and assessments on business written until
December 31, 1992 (these exemptions allowed Motor Club to
reverse previously accrued surtaxes and assessments of
$2,003,000, as a reduction of expense in 1994); (2)
exemption (until January 1995) from the take-all-comers
provisions of FAIRA, which requires the writing of new
PPA insurance; (3) payment in 1994 of only $2,275,000 of
the Market Transition Facility ("MTF") deficit
(legislation retired the entire MTF deficit, enabling
Motor Club to eliminate its remaining $1,653,000 MTF
liability in 1994 as a reduction of expense); and (4)
non-participation in the Personal Automobile Insurance
("Assigned Risk") Plan, through December 1996.
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. The State of New Jersey also maintains an
excess profits law which provides that PPA insurers whose
profits exceed a statutorily computed maximum over a
period of years will be required to pay such excess to
its policyholders. It would appear that Motor Club does
not have such excess profits.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note D - Investments:
(a) The amortized cost and estimated fair value of
investments in fixed maturity securities at December 31,
1996 were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Government
securities $34,036,186 $543,591 ($183,689) $34,396,088
GNMA Mortgage-
backed
securities 8,409,509 63,883 (109,428) 8,363,964
Corporate
securities 5,211,361 37,865 (82,185) 5,167,041
Total $47,657,056 $645,339 ($375,302) $47,927,093
The amortized cost and estimated fair value of
investments in fixed maturities at December 31, 1995 were
as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Government
securities $30,583,393 $1,221,968 ($16,532) $31,788,829
GNMA Mortgage-
backed
securities 7,684,299 150,474 ( 36,341) 7,798,432
Corporate
securities 4,970,493 82,902 ( 10,199) 5,043,196
Total $43,238,185 $1,455,344 ($63,072) $44,630,457
The amortized cost and fair value of investments in
fixed maturities at December 31, 1996, by contractual
maturity, are as follows:
Amortized Fair
Cost Value
Due in one year or less $ 7,035,350 $ 7,038,256
Due after one year through
five years 23,064,172 23,376,093
Due after five years through
ten years 7,833,142 7,914,145
Due after ten years 9,724,392 9,598,599
$47,657,056 $47,927,093
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note D - Investments (Continued):
The above maturity tables includes $8,363,964 (at fair
value) of Government National Mortgage Association
mortgage-backed securities, which are classified as due
after ten years based on the contractual life of the
securities.
Expected maturities may differ from contractual
maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment
penalties. Gross gains of $5,485, $53,851 and $44,783,
were realized in 1996, 1995 and 1994, respectively, on
those sales and calls. Gross losses of $88,064 were
realized in 1994 on those sales and calls.
(b) Investment income (including net realized gains and
losses) by category of investments consists of the
following:
Category 1996 1995 1994
Fixed maturities $3,093,534 $2,837,597 $2,741,045
Other, principally
short-term
investments 196,457 168,335 126,268
Total investment
income 3,289,991 3,005,932 2,867,313
Investment
expenses 197,394 184,921 180,394
Net investment
income $3,092,597 $2,821,011 $2,686,919
(c) At December 31, 1996 and 1995, fixed maturity investments
deposited with various state insurance departments (at
fair value) amounted to $220,275 and $439,821,
respectively.
(d) There were no investments in any persons and its
affiliates in excess of ten percent of shareholders'
equity.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note D - Investments (Continued):
(e) The change in net unrealized gains (losses) on
investments are as follows:
Years Ended December 31,
1996 1995 1994
Fixed
maturities ($1,122,378) $2,661,043 ($3,416,148)
(f) In the opinion of management there has been no permanent
impairment in the carrying amount of investments.
Note E - Unpaid Losses and Loss Expenses:
(a) The following table provides a reconciliation of the
beginning and ending balances for unpaid losses and loss
expenses for 1996, 1995 and 1994:
1996 1995 1994
Balance at January 1 $39,823,552 $41,665,101 $45,818,203
Less: Reinsurance recover-
ables 16,414,610 19,311,132 20,485,582
Net balance at January 1 23,408,942 22,353,969 25,332,621
Incurred losses and loss
expenses:
Provision for current
year claims 28,244,599 19,625,070 14,367,183
Increase in provision for
prior years' claims 903,681 1,112,478 919,118
Total incurred losses and
loss expenses 29,148,280 20,737,548 15,286,301
Payment for losses and
loss expenses:
Payment on current
year claims 13,029,214 8,577,000 5,953,183
Payment on prior
years' claims 11,414,375 11,105,578 12,311,770
Total payments for losses
and loss expenses 24,443,589 19,682,578 18,264,953
Net balance at December 31 28,113,633 23,408,939 22,353,969
Plus: Reinsurance recover-
ables 19,553,223 16,414,613 19,311,132
Balance at December 31 $47,666,856 $39,823,552 $41,665,101
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note E - Unpaid Losses and Loss Expenses (Continued):
The reconciliation shows a 1996 deficiency of $904,000 in
the liability recorded at December 31, 1995. The
deficiency is primarily the result of the latent
development of a limited number of large losses incurred
in 1995 and prior. Management believes this development
does not indicate any adverse trends in the Company's
loss development.
(b) Losses incurred are reduced by salvage and subrogation
approximating $2,188,000, $1,661,000 and $1,495,000 for
the years ended December 31, 1996, 1995 and 1994,
respectively.
Note F - Fixed Assets:
Fixed assets consist of the following:
1996 1995
Leasehold improvements $ 191,142 $ 446,744
Office furniture, fixtures and
data processing equipment 2,934,793 2,375,989
3,125,935 2,822,733
Less accumulated depre-
ciation 1,299,182 1,603,608
$1,826,753 $1,219,125
Note G - Reinsurance:
(a) Unearned premiums and unpaid loss and loss expenses are
stated gross of the effects of reinsurance.
(b) Reinsurance contracts do not relieve the Insurance
Companies from their obligations to policyholders.
Failure of reinsurers to honor their obligations could
result in losses to the Insurance Companies. Generally,
all risks in excess of $150,000 for liability lines and
$75,000 for property lines are reinsured.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note G - Reinsurance (Continued):
The Insurance Companies also maintained an 80% quota
share reinsurance agreement for their non-automobile
business. The quota share reinsurance agreement was
terminated as of February 19, 1994, and covers policies
inforce as of the termination date through the policies'
respective expiration dates.
The Insurance Companies evaluate the financial condition
of their reinsurers and monitor concentrations of credit
risk arising from activities or economic characteristics
of the reinsurers to minimize their exposure to
significant losses from reinsurer insolvencies.
As referred to in Note A, one hundred percent of the
Company's insurance operations are located in the State
of New Jersey, the laws of which require participation in
certain reinsurance funds.
Reinsurance recoverable on paid and unpaid loss and loss
expenses are principally attributable to the amounts of
reinsurance recoverable from the Unsatisfied Claim and
Judgment Fund ("UCJF") of the State of New Jersey, which
pertains to New Jersey Personal Injury Protection claims
in excess of Motor Club's statutory retention limit of
$75,000. Reinsurance recoverable from the UCJF was
$12,955,544 and $11,717,543 as of December 31, 1996 and
1995, respectively.
Motor Club is required to participate in the New Jersey
Automobile Insurance Risk Exchange ("NJ AIRE"). NJ AIRE
is designed to balance differences between company bodily
injury exposures and loss payments as compared to
industry exposures and loss payments under New Jersey's
dual tort threshold system.
Assessments paid to NJ AIRE based on subject bodily
injury exposures are accounted for as ceded premiums
written and totaled $1,613,095, $1,541,875 and $1,578,064
in 1996, 1995 and 1994, respectively. Reimbursements
from NJ AIRE based on subject claim payment experience
are accounted for as ceded losses incurred and totaled
$482,105, $800,872 and $1,057,817 in 1996, 1995 and 1994,
respectively.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note G - Reinsurance (Continued):
Prepaid reinsurance premiums of $1,145,944 and $1,193,098
as of December 31, 1996 and 1995, respectively, are
attributable to the Insurance Companies' excess of loss
reinsurance treaties which are with one reinsurer.
The effect of reinsurance on premiums written and earned
is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1996 1995 1994
Written Earned Written Earned Written Earned
Direct $54,563,224 $52,467,156 $44,334,501 $41,051,119 $37,555,248 $37,065,794
Ceded (7,225,929) (7,273,083) (6,261,282) (5,750,247) (5,757,866) (9,173,851)
Net $47,337,295 $45,194,073 $38,073,219 $35,300,872 $31,797,382 $27,891,943
</TABLE>
(c) During 1993, Motor Club was notified by one of its
reinsurers of a dispute. The reinsurer did not deny the
validity of coverage; rather, the reinsurer indicated
that it believed that a right of set-off existed for the
reinsurance which Motor Club had ceded to the reinsurer
for accident years 1973 to 1975 against reinsurance which
MCA Insurance Company ("MCAIC") had assumed from the
reinsurer between 1968 and 1976. Motor Club assumed the
ceded reinsurance from MCAIC in 1991. The reinsurer had
indicated that payments to Motor Club would be held in
abeyance pending resolution of the dispute. Motor Club
had recorded a liability of $1,695,774 at December 31,
1995.
On November 6, 1996, Motor Club and the reinsurer settled
the dispute. Motor Club paid the reinsurer $1,950,000,
in three installments prior to December 31, 1996. In
return, the reinsurer agreed to: (1) pay Motor Club all
past amounts due under the reinsurance agreement
applicable to accident years 1973 to 1975, totaling
$640,698 as of June 30, 1996; and (2) to pay Motor Club
future amounts which may be recoverable from the
reinsurer under the terms of the same reinsurance
agreement.
The Consolidated Statement of Operations includes in
other operating expenses $254,226, $239,357 and $100,084
for this matter in 1996, 1995 and 1994, respectively.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note H - Taxes:
(a) The Company and its subsidiaries (including MCAIC and its
subsidiaries - see Note Q) file a consolidated Federal
income tax return. The benefit (provision) for Federal
income taxes consists of the following:
1996 1995 1994
Current provision ($ 42,324) ($38,320) ($4,420)
Deferred benefit 2,075,535 - -
Total benefit (provision) $2,033,211 ($38,320) ($4,420)
(b) The tax effects of temporary differences that give rise
to significant portions of the deferred tax assets and
liabilities were as follows:
December 31,
1996 1995
Deferred tax assets:
Net operating loss carryforward $2,549,738 $3,645,058
Unpaid losses and loss expenses 1,137,478 1,006,482
Unearned premium 1,209,601 1,063,862
Other deferred tax assets - 189,068
Alternative minimum tax and
general business credit carry-
forwards 128,701 64,270
Total deferred tax assets 5,025,518 5,968,740
Deferred tax liabilities:
Deferred acquisition costs (1,958,909) (1,723,535)
Unrealized gain on debt securities (91,693) (473,421)
Prepaid pension cost (753,512) (665,338)
Other deferred tax liabilities (145,869) (132,038)
Total deferred tax liabilities (2,949,983) (2,994,332)
Less: valuation allowance for
deferred tax assets - (2,974,408)
Net deferred tax asset $2,075,535 $ -
The Company believes it is more likely than not that it
will generate future taxable income to realize the
benefits of the net deferred tax asset. Accordingly, the
Company has not provided a valuation allowance at
December 31, 1996. The ultimate amounts realized,
however, could be reduced if actual amounts of future
taxable income differ from projected future taxable
income.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note H - Taxes (Continued):
The net operating loss carryforward of $7,499,229 expires
beginning in 2007.
(c) The provision for Federal income taxes resulted in
effective tax rates lower than the statutory Federal
income tax rates, as follows:
1996 1995 1994
Tax provision
computed at statutory
federal income tax rates ($1,120,945 ($ 834,734) ($1,713,283)
Change in valuation allowance 2,075,535 1,191,781 1,713,283
Impact of alternative
minimum tax ("AMT")
calculation (36,298) (38,320) -
Effect of net operating
loss carryforward 1,095,320 - -
Other-net 19,599 (357,047) ( 4,420)
Benefit (provision) $2,033,211 ($ 38,320) ($ 4,420)
(d) The Consolidated Statements of operations for the years
ended December 31, 1996, 1995 and 1994 include state
taxes based on insurance premiums of $143,262, $116,410
and $98,625 and state income tax expense (benefit) of
$8,244, ($19,928) and $9,255, respectively.
Note I - Shareholders' Equity:
(a) The Insurance Companies are domiciled in the State of New
Jersey and therefore prepare their statutory financial
statements in accordance with accounting practices
prescribed or permitted by the NJ DOBI.
Prescribed statutory accounting practices include a
variety of publications of the National Association of
Insurance Commissioners, as well as state laws,
regulations and general administrative rules. Permitted
statutory accounting practices encompass all accounting
practices not so prescribed.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note I - Shareholders' Equity (Continued):
The maximum amount of dividends which the Insurance
Companies can pay to shareholders without approval of the
Insurance Commissioner is subject to restrictions. The
maximum amount distributable is limited to the greater
of: (1) ten percent of statutory surplus as regards
policyholders; or (2) net income, excluding realized
capital gains. Accordingly, the maximum dividend which
the Insurance Companies may pay without prior approval in
1997 is $1,721,000.
(b) The consolidated financial statements of the Company's
insurance subsidiaries have been prepared in accordance
with GAAP, which differ in certain respects from
accounting practices prescribed or permitted by insurance
regulatory authorities (statutory basis).
The principal differences relate to (1) acquisition costs
incurred in connection with acquiring new business which
are charged to expense under statutory practices but
under GAAP are deferred and amortized as the related
premiums are earned; (2) anticipated salvage and
subrogation recoveries which have not been credited to
losses incurred for statutory purposes; (3) net deferred
tax assets created by the tax effects of temporary
differences; (4) unpaid losses, unpaid loss adjustment
expenses and unearned premium reserves are presented
gross of reinsurance with a corresponding asset recorded;
and (5) fixed maturity portfolios that qualify as
available for sale are carried at fair value and changes
in fair value are reflected directly in unassigned
surplus, net of related deferred taxes.
The consolidated capital and surplus, shareholders'
equity and income (loss) of Motor Club and Preserver on
a statutory and GAAP basis were as follows:
December 31,
1996 1995
Capital and surplus -
Statutory basis $14,753,760 $13,877,312
Shareholders' equity -
GAAP basis $24,704,123 $23,323,722
Years ended December 31,
1996 1995 1994
Net income (loss):
Statutory basis $ 212,807 $1,811,612 ($ 905,394)
GAAP basis $2,737,318 $2,808,466 $5,076,289
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note I - Shareholders' Equity (Continued):
Distribution by the Insurance Companies of the excess of
GAAP shareholders' equity over statutory capital and
surplus to the Company is prohibited by law.
Note J - Contingencies:
The Company and its subsidiaries are parties to various
legal actions and administrative proceedings and subject
to various claims arising in the ordinary course of
business. The Company believes that the disposition of
these matters will not have a material adverse effect on
the financial position, the results of operations or cash
flows of the Company.
Note K - Pensions:
(a) The Company has a non-contributory defined benefit plan
(the "Plan"). Eligible salaried and hourly employees of
the Company participate in the Plan after twelve months
of continuous employment with the Company when age 21 has
been attained. Retirement benefits are based on each
participant's average compensation and years of service.
Vesting of benefits begins after five years of service
commencing from the minimum age of 21 or date of hire, if
later.
The Company's contributions are designed to fund the
Plan's normal costs on a current basis and to fund the
unfunded prior service costs, including accrued benefits
arising from qualifying employee service occurring prior
to the establishment of the Plan, over 40 years.
On January 15, 1992, the Company suspended the accrual of
benefits arising from participant service. The Company
continues to fund the Plan for benefits earned through
January 31, 1992.
The Plan maintains a significant amount of assets in
group annuity contracts with Mutual Benefit Life
Insurance Company ("Mutual"), which was placed in
rehabilitation by the NJ DOBI on July 16, 1991. The Plan
has not received payment on the group annuity contracts
that matured on July 15, 1991 and thereafter.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note K - Pensions (Continued):
On November 10, 1993, a Plan of Rehabilitation for Mutual
was confirmed by the Superior Court of New Jersey. As a
result, certain amendments were made to the Plan's
contracts ("the restructured contract"), which is now
transferred to the MBL Life Assurance Corporation
("MBLLAC"), the successor corporation of Mutual, where
the restructured contract continues.
Under the Plan of Rehabilitation, as amended, payment of
all maturities and interest will be held subject to
payout which will not begin until December 31, 1999, the
end of the Rehabilitation period.
In October 1994, MBLLAC approved and subsequently paid a
"hardship withdrawal" of $2,666,204 (net of an
administrative charge of $470,507) to the Plan.
The Plan also received $177,517, $167,368 and $61,449 in
distributions from MBLLAC and Mutual in 1996, 1995 and
1994, respectively, under provisions of the Plan of
Rehabilitation.
(b) Pension expense for 1996, 1995 and 1994 included the
following components:
1996 1995 1994
Interest cost on projected
benefit obligation $ 831,800 $862,600 $818,400
Actual return on assets (1,027,700) (809,900) (371,600)
Net amortization and deferral 542,800 214,400 (295,800)
Net periodic pension cost $ 346,900 $267,100 $151,000
Net amortization and deferral consists of amortization of
net assets at transition, amortization of unrecognized
prior service cost and deferral of subsequent net gains
and losses. The assumptions used included a discount
rate of 7.25% (1996), 8.25% (1995) and 7.5% (1994) and an
expected long-term rate of return on assets of 10.0%.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note K - Pensions (Continued):
(c) The following table sets forth the funded status of the
Plan and amounts recognized in the Company's balance
sheet at December 31, 1996 and 1995. The discount rate
assumed as of December 31, 1996 and 1995 is 7.50% and
7.25%, respectively.
1996 1995
Actuarial present value of
benefit obligations:
Vested benefit obligation $11,591,100 $11,856,000
Accumulated benefit obli-
gation $11,591,100 $11,856,000
Projected benefit obli-
gation $11,591,100 $11,856,000
Plan assets at fair value,
including guaranteed insurance
contracts with MBL Life Assurance
Corporation, in rehabil-
itation, $3,088,000 (1996) and
$3,080,000 (1995) 8,791,900 8,462,000
Projected benefit obligation
in excess of plan assets 2,799,200 3,394,000
Unrecognized net loss (4,690,000) (5,177,900)
Adjustment required to recognize
minimum liability 4,690,000 5,177,900
Pension liability recognized
in the statement
of financial position $ 2,799,200 $ 3,394,900
The adjustment required to recognize the minimum
liability is reflected as a reduction of shareholders'
equity as of December 31, 1996 and 1995, respectively.
(d) The Company maintains a defined contribution plan for
substantially all employees (including those of MCAIC).
Employer contributions of a discretionary amount are made
by the Company and its subsidiaries. MCAIC and its
subsidiaries provide similar employer contributions.
Employer contributions in the amount of $116,938,
$134,987 and $110,458 were made by the Company in 1996,
1995 and 1994, respectively, for its employees and
charged to expense.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note L - Post-retirement Benefits:
The Company currently provides certain life and health
benefits to retired employees with twenty-five or more
years of service, subject to certain eligibility
restrictions. These benefits consist of the payment of
medical, life and dental premiums for the retired
employees. The Company's funding policy is to pay for
the premiums currently; any future increases in the cost
of these benefits will be borne by the retirees and not
the Company. The following table sets forth the funded
status and amounts recognized in the Company's balance
sheet:
December 31,
1996 1995
Accumulated postretirement
benefit obligation:
Retirees $266,000 $362,000
Fully eligible active
plan participants 186,000 194,000
Other active plan
participants 75,000 56,000
Total 527,000 612,000
Plan assets at fair value - -
Accumulated postretirement
benefit obligation in excess
of plan assets 527,000 612,000
Unrecognized net (gain)
from past experience different
from that assumed and from
changes in assumptions (189,000) (219,000)
Unrecognized transition obli-
gation (445,000) (473,000)
Prepaid postretirement benefit
cost recognized in the state-
ment of financial position ($107,000) ($80,000)
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note L - Post-retirement Benefits (Continued):
Net periodic postretirement benefit cost for 1996 and
1995, respectively, included the following components:
1996 1995
Service cost of benefits attributed
to service during the period $ 2,000 $ 2,000
Interest cost on accumulated post-
retirement benefit obligation 40,000 45,000
Net amortization and deferral 45,000 37,000
Net periodic postretirement
benefit cost $87,000 $84,000
It is the policy of the Company that any future increase
in life and health care benefits will be borne by the
retirees and not the Company; as a result, there will be
no increase in either the accumulated postretirement
benefit obligation or the service and interest cost
components of net periodic postretirement benefit cost
related to a 1% increase in the health care trend rate.
The weighted average discount rate used in determining
the accumulated postretirement benefit obligation was
7.50% in 1996 and 7.25% in 1995.
Note M - Selected Quarterly Financial Data (Unaudited):
(a) Year ended December 31, 1996:
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
Revenues $11,690,835 $12,225,704 $12,838,694 $13,563,407
Losses and
expenses $11,757,187 $11,255,479 $11,947,466 $12,061,611
Net income
(loss) $ (69,827) $ 950,658 $ 891,999 $3,557,278
Net income
(loss) per
common
share $ (.03) $ .46 $ .44 $ 1.74
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note M - Selected Quarterly Financial Data (Unaudited) (Continued):
During the 1996 fourth quarter, the Company
determined that it was more likely than not that
sufficient future taxable income will be generated
to realize the benefits of the net deferred tax
assets; therefore, the deferred tax asset valuation
allowance was reversed during the fourth quarter.
(b) Year ended December 31, 1995:
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
Revenues $9,497,890 $9,517,606 $10,185,612 $10,322,712
Losses and
expenses $9,047,624 $8,867,995 $ 9,525,441 $9,627,661
Net income $ 439,266 $ 638,611 $ 646,171 $ 692,731
Net income
per common
share $ .22 $ .31 $ .31 $ .34
Note N - Stock Option Plans:
The Motor Club of America 1987 and 1992 Stock Option
Plans ("the 1987 Option Plan" and "the 1992 Option Plan",
respectively) provide for the issuance of options to
purchase 100,000 common shares, respectively, by key
executives at the market price at date of grant.
Options under the 1987 Option Plan are exercisable for a
five year period in twenty-five percent increments each
year, commencing one year from the date of grant. As of
December 31, 1996, 61,000 shares under the 1987 Option
Plan are available for grant; 25,875 shares were
exercisable and 4,500 shares had been exercised as as of
that date.
Options under the 1992 Option Plan are exercisable for a
five year period in twenty-five percent increments each
year, commencing one year from the date of grant. As of
December 31, 1996, 49,000 shares under the 1992 Option
Plan are available for grant and 51,000 shares were
exercisable as of that date.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note N - Stock Option Plans (Continued):
Transactions during 1994, 1995 and 1996 relating to the
1987 Option Plan are as follows:
Exercise
Number of Price per Aggregate
Shares Share Amount
Options outstanding at
December 31, 1993 70,000 $2.625 to $356,407
Options lapsed in 1994 (28,750) $10.75 (248,126)
Options outstanding at
December 31, 1994 41,250 108,281
Options exercised in 1995 (750) $2.625 (1,969)
Options lapsed in 1995 (2,250) $2.625 (5,906)
Options outstanding at
December 31, 1995 38,250 $2.625 100,406
Options exercised in 1996 (3,750) $2.625 (9,844)
Options outstanding at
December 31, 1996 34,500 $2.625 $ 90,562
Transactions during 1994, 1995 and 1996 relating to the
1992 Option Plan are as follows:
Exercise
Number of Price per Aggregate
Shares Share Amount
Options outstanding
at December 31, 1993 65,000 $390,000
Options lapsed in 1994 (10,000) $6.00 (60,000)
Options outstanding at
December 31, 1994 55,000 330,000
Options lapsed in 1995 (4,000) $6.00 (24,000)
Options outstanding at
December 31, 1996 and 1995 51,000 $6.00 $306,000
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note N - Stock Option Plans (Continued):
The Financial Accounting Standards Board has issued SFAS
No. 123 - Accounting for Stock-Based Compensation. This
Statement became effective beginning in the first quarter
of 1996 and applies to options granted in 1995 and
subsequent years. No options were granted in 1995 and
1996 and therefore the adoption of this Statement does
not have any effect on the Company's financial position
or results of operations. The Company will continue to
measure compensation expense for its stock-based employee
compensation plans using the intrinsic value method
prescribed by APB Opinion No. 25, Accounting for Stock
Issued to Employees and will provide, when necessary, pro
forma disclosures of net income and earnings per share as
if the fair value-based method prescribed by SFAS No. 123
had been applied in measuring compensation expense.
Note O - Related Party Transactions:
Thrifty Rent-A-Car System, Inc. ("Thrifty") owned 39.2%
of the outstanding common stock of the Company through
July 25, 1994.
On July 25, 1994, Thrifty sold all of its shares to three
of the Company's directors ("Acquisition Group"). The
Acquisition Group owns 43.5% of the outstanding common
stock of the Company at December 31, 1996. The Company
paid directors fees and certain expenses to the
Acquisition Group of $180,000, $180,000 and $256,530
during 1996, 1995 and 1994, respectively.
At December 31, 1996 and 1995, mortgage loans receivable
from directors, officers and employees amounted to
$336,101 and $462,068, respectively, all of which are
collateralized by real property.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note P - Lease Obligations:
Effective January 1, 1996, the Company entered into a
lease ("the Paramus Lease") at 95 Route 17 South,
Paramus, New Jersey. The Paramus Lease expires on
December 31, 2005. The Company has an option to
terminate the Paramus Lease after six years, and an
option to extend the Paramus Lease for an additional five
years after the initial lease term expires. The Company
will pay a base annual rental of $371,745 through
December 31, 2000 and $416,805 thereafter until the
Paramus Lease expires. Additional charges for
electricity and escalation of certain operating costs
apply. In 1996, rent expense paid by the Company on the
Paramus Lease was $310,000.
Through March 31, 1996, the Company was party to a lease
("the Newark Lease") with Fairmount Central Urban Renewal
Corporation ("Fairmount"), a subsidiary of MCAIC, for the
lease of the office building in which the Company and its
subsidiaries formerly operated. Rent of $324,000 per
year, subject to adjustment for property taxes in excess
of $200,000, was paid by the Company, along with other
costs as defined in the Newark Lease.
Effective March 31, 1996, the Company entered into a
Mutual Release Agreement (the "Release") with Fairmount,
Property-Casualty Company of MCA and MCAIC. Pursuant to
the terms of the Release, the Newark Lease was terminated
in exchange for $132,000.
The Newark Lease was to run to December 31, 2011. The
Release also enabled the Company to terminate the Joint
Service Agreement ("JSA") (See Note Q "Insolvency of MCA
Insurance Company"). Concurrent with the execution of the
Release in 1996, the Company charged off $227,000 in
leasehold improvements at that facility.
In 1996, 1995 and 1994, rent expense paid by the Company
(net of amounts paid by MCAIC) on the Newark Lease was
$75,000, $252,000 and $261,000, respectively.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note Q - Insolvency of MCA Insurance Company:
On August 24, 1992, Hurricane Andrew struck the South
Florida coast, causing losses to MCAIC which exceeded its
surplus as regards policyholders. MCAIC was placed in
liquidation on October 23, 1992 by the Oklahoma District
Court, Oklahoma.
On December 30, 1994, the Oklahoma District Court
approved a settlement between the MCAIC Receiver and its
subsidiaries and the Company and its subsidiaries (the
"Settlement"). Under the Settlement, the Company agreed
to pay MCAIC approximately $5.4 million, $2 million of
which was paid on December 30, 1994. The Settlement also
dismissed with prejudice the litigation previously
brought (in August 1993) by the MCAIC Receiver against
the Company regarding the ownership of Motor Club. The
Settlement released all parties from all potential claims
against one another, and put in place agreements
regarding the handling of consolidated taxes, common cost
sharing and service agreements.
On February 15, 1995, pursuant to the Settlement
Agreement, MCAIC was paid in full.
The JSA entered into as part of the Settlement was
retroactive to May 1, 1994 and provided for the rendering
of certain services by the parties to the JSA and amounts
due for these services, as well as the sharing of certain
common expenses. Common expenses emanate from the
parties' co-tenancy in the office building in which the
parties' principal offices resided. The JSA was
terminated effective March 31, 1996 as part of the
Release for the Newark Lease.
In relation to the insolvency of MCAIC, there are no
additional liabilities, contingent or otherwise, which
require accrual or disclosure in the accompanying
financial statements.
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
SCHEDULE I. SUMMARY OF INVESTMENTS-
OTHER THAN INVESTMENTS IN RELATED PARTIES
at December 31, 1996
Column A Column B Column C Column D
Amount at
which shown
in the
Cost(a) Market balance sheet
Type of investment
Fixed maturity securities
available-for-sale:
United States Government
and government agencies
and authorities $42,445,695 $42,760,052 $42,760,052
Industrial and
miscellaneous 4,668,881 4,617,591 4,617,591
Public utilities 542,480 549,450 549,450
Total fixed maturities 47,657,056 47,927,093
Mortgage loans on real
estate 634,492 634,492
Short-term investments,
available-for-sale 1,745,455 1,745,455 1,745,455
Total investments $50,037,003 $50,307,040
Note: (a) Represents original cost of investments reduced by
repayment and as to fixed maturities, adjusted for
amortization of premiums or accrual of discounts.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
SCHEDULE II. CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (PARENT COMPANY)
BALANCE SHEETS
December 31,
1996 1995
Assets:
Cash and cash equivalents $ 354,465 $ -
Investments in subsidiaries 25,614,714 25,072,857
Insurance premiums receivable 7,538,716 7,018,662
Deferred tax asset 2,075,535 -
Other assets 3,868,956 1,444,902
Total assets $39,452,386 $33,536,421
Liabilities and shareholders' equity:
Indebtedness to subsidiaries $15,563,850 $13,968,869
Other liabilities 5,102,885 5,486,476
Total liabilities 20,666,735 19,455,345
Shareholders' equity 18,785,651 14,081,076
Total liabilities and
shareholders' equity $39,452,386 $33,536,421
Notes to Schedule
The Notes to Consolidated Financial Statements of Motor Club
of America and Subsidiaries are incorporated by reference to
this schedule.
The Statements of Shareholders' Equity are the same as those
presented for Motor Club of America and Subsidiaries.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
SCHEDULE II. CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (PARENT COMPANY)
STATEMENTS OF OPERATIONS
For the years ended December 31,
1996 1995 1994
Revenues:
Motor Club membership fees $ 21,481 $ 113 $ 35,566
Commission income 9,960 10,093 8,425
Realized gain on sale of
subsidiary 702,419 - -
Other income (1) 135,704 157,012 160,576
Total revenues 869,564 167,218 204,567
Expenses:
General and administrative
expenses (2) (32,945) 52,759 806,473
Discount of Note Payable to
Receiver of MCA Insurance
Insurance Company in
Liquidation - - (624,850)
Total expenses (32,945) 52,759 181,623
Income before
Federal income taxes 902,509 114,459 22,944
Benefit (provision) for
Federal income taxes: current (42,324) (38,320) (4,420)
deferred 2,075,535 - -
Total Federal income tax 2,033,211 (38,320) (4,420)
Income before item
shown below 2,935,720 76,139 18,524
Equity in net income
of subsidiaries 2,394,388 2,340,640 5,016,123
Net income $5,330,108 $2,416,779 $5,034,647
(1) Amount includes $31,559 (1996), $67,117 (1995)
and $94,676 (1994) of interest due from Motor
Club.
(2) Amount is net of $520,579 (1996), $223,691
(1995) and $335,590 (1994) of management fees
charged to subsidiaries.
(Continued)
<TABLE>
<CAPTION>
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
SCHEDULE II. CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (PARENT COMPANY)
STATEMENTS OF CASH FLOWS
<S> <C> <C> <C>
For the years ended December 31,
1996 1995 1994
Net income $5,330,108 $2,416,779 $5,034,647
Adjustments to reconcile net
income to net cash provided by
(utilized in) operating
activities:
Discount of Note due Receiver of
MCA Insurance Company in
Liquidation - - (624,850)
Write-off of leasehold improvement
(net) due to lease termination 227,077 - -
Depreciation expense 309,875 248,540 286,305
Gain on sale of subsidiary (702,419) - -
Accretion of bond discount 10 (16,368) (3,823)
Deferred tax benefit (2,075,535) - -
Changes in:
Net assets of Motor Club of America
Enterprises, Inc. (422,581) - -
Premiums receivable (520,054) (1,487,855) (342,333)
Investments in subsidiaries (1,663,715) (1,978,815) (2,929,014)
Other assets (146,637) 284,074 1,344,928
Other liabilities 103,409 (712,909) (1,162,720)
Indebtedness to related parties 1,594,981 2,501,916 1,689,614
Amounts due to MCA Insurance Company
in Liquidation and subsidiaries - (2,750,000) (1,458,624)
Net cash provided by (utilized in)
operating activities 2,034,519 (1,494,638) 1,834,130
Investing activities:
Proceeds from:
Sale of subsidiary 1,125,000 - -
Disposal of short-term
investments - 1,665,897 -
Disposal of fixed
maturities 15,039 596,783 1,448,129
Sale of fixed assets 13,400
- -
Purchase of:
Fixed maturities -
(608,402) (1,447,525)
Short-term investments (1,745,455)
- (1,649,740)
Fixed assets (1,097,883)
(232,003) (114,600)
Net cash provided by (utilized in)
investing activities (1,689,899)
1,422,275 (1,763,736)
Financing activities:
(Repayment to) borrowing from
Midlantic Bank, N.A. -
(2,750,000) 2,750,000
Common stock issued 9,845
1,969 -
Net cash provided by (utilized in)
financing activities 9,845
(2,748,031) 2,750,000
Increase (decrease) in cash and
cash equivalents 354,465
(2,820,394) 2,820,394
Cash and cash equivalents at
beginning of year - 2,820,394 -
Cash and cash equivalent at end of year $ 354,465 $ - $2,820,394
</TABLE>
Supplemental Disclosures of Cash Flow Information
(1) Total interest paid was $8,166 (1996), $33,934 (1995) and
$53 (1994).
(2) Total federal income taxes paid was $38,462 (1996),
$52,000 (1995) and $54,227 (1994).
(Continued)
<TABLE>
<CAPTION>
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
SCHEDULE IV. REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 and 1994
<S> <C> <C> <C> <C> <C>
Column A Column B Column C Column D Column E Column F
% of
Ceded to Assumed from Amount
other other Assumed
Gross Amount Companies Companies Net Amount to Net
December 31, 1996:
Total property and casualty
insurance premiums earned $52,467,156 $7,273,083 $ - $45,194,073 0.0%
December 31, 1995:
Total property and casualty
insurance premiums earned $41,051,119 $5,750,247 $ - $35,300,872 0.0%
December 31, 1994:
Total property and casualty
insurance premiums earned $37,065,794 $9,173,851 $ - $27,891,943 0.0%
</TABLE>
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
SCHEDULE V. VALUATION AND QUALIFYING
ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 and 1994
Column A Column B Column C Column D Column E
Additions
Balance at Charged to Charged to Balance
Beginning Cost and Other at end
Description of Period Expenses Accounts Deductions of Period
Allowance for
doubtful
receivables:
December 31, 1996 $ 656,083 $ - $ - $ 614,743 $ 41,340
December 31, 1995 $ 439,309 $316,774 $ - $ 100,000 $ 656,083
December 31, 1994 $ 200,000 $239,309 $ - $ - $ 439,309
Valuation allowance
for deferred taxes:
December 31, 1996 $2,974,408 $ - $ 722,894 $3,697,302 $ -
December 31, 1995 $5,070,974 $ - $ 682,329 $2,778,895 $2,974,408
December 31, 1994 $7,057,259 $ - $1,309,191 $3,295,476 $5,070,974
(Continued)
<TABLE>
<CAPTION>
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
SCHEDULE VI. SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY/CASUALTY INSURANCE OPERATIONS
For the years ended December 31, 1996, 1995 and 1994
<C> <C> <C> <C> <C> <C> <C>
Column A Column B Column C Column D ColumnE Column F Column G
Reserves for
Deferred Unpaid Claims Discount,
Policy and Claim if any, Net
Acquisition Adjustment Deducted in Unearned Earned Investment
Costs Expenses Column C Premiums Premiums Income (a)
Year ended
December 31, 1996 $ 5,761,496 $47,666,856 - $18,934,200 $45,194,073 $2,998,897
Year ended
December 31, 1995 $ 5,069,222 $39,823,552 - $16,838,135 $35,300,872 $2,759,337
Year ended
December 31, 1994 $ 4,166,368 $41,665,101 - $13,554,754 $27,891,943 $2,506,701
</TABLE>
Note: (a) Excludes non-insurance subsidiaries' investment
income and realized investment gains.
<TABLE>
<CAPTION>
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
SCHEDULE VI. SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY/CASUALTY INSURANCE OPERATIONS
For the years ended December 31, 1996, 1995 and 1994
<C> <C> <C> <C> <C> <C>
Column A Column H Column I Column J Column K
Claims and Claim
Adjustment Expenses Amortization Paid
Incurred Related to of deferred Claims
(1) (2) policy and Claim
Current Prior acquisition Adjustment Premium
Year Years Costs Expenses Written
Year ended
December 31, 1996 $28,244,599 $ 903,681 $13,678,710 $24,443,589 $46,789,538
Year ended
December 31, 1995 $19,625,070 $1,112,475 $10,611,978 $19,682,580 $37,639,344
Year ended
December 31, 1994 $14,367,136 $ 919,165 $ 9,353,336 $18,264,953 $31,365,121
</TABLE>
Note: (a) Excludes non-insurance subsidiaries' investment
income and realized investment gains.
<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 December 31, 1996
and the Consolidated Statements of Operations for the twelve months then ended
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 47,927,093
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 634,492
<REAL-ESTATE> 0
<TOTAL-INVEST> 50,307,040
<CASH> 3,476,948
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 5,761,496
<TOTAL-ASSETS> 95,533,102
<POLICY-LOSSES> 47,666,856
<UNEARNED-PREMIUMS> 18,934,200
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 1,023,752
<OTHER-SE> 17,761,899
<TOTAL-LIABILITY-AND-EQUITY> 95,533,102
45,194,073
<INVESTMENT-INCOME> 3,087,112
<INVESTMENT-GAINS> 707,904
<OTHER-INCOME> 1,329,551
<BENEFITS> 29,148,280
<UNDERWRITING-AMORTIZATION> 13,678,710
<UNDERWRITING-OTHER> 3,928,641
<INCOME-PRETAX> 3,296,897
<INCOME-TAX> 2,033,211
<INCOME-CONTINUING> 5,330,108
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,330,108
<EPS-PRIMARY> 2.61
<EPS-DILUTED> 2.61
<RESERVE-OPEN> 39,823,552
<PROVISION-CURRENT> 33,659,958
<PROVISION-PRIOR> 2,328,781
<PAYMENTS-CURRENT> 13,756,475
<PAYMENTS-PRIOR> 14,388,960
<RESERVE-CLOSE> 47,666,856
<CUMULATIVE-DEFICIENCY> 2,328,781
</TABLE>
