SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended Commission File No.
September 30, 1997 0-671
MOTOR CLUB OF AMERICA
(Exact name of registrant as specified in its charter)
New Jersey 22-0747730
(State of Incorporation) (I.R.S. Employer
Identification No.)
95 Route 17 South, Paramus, New Jersey 07653
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (201) 291-2000
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes x . No .
2,094,429 shares of Common Stock were outstanding as of
November 13, 1997.
<TABLE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
MOTOR CLUB OF AMERICA
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
September 30, December 31,
<S> <C> <C>
1997 1996
ASSETS
Investments $58,927,935 $50,307,040
Cash and cash equivalents 2,385,404 3,476,948
Premiums receivable 7,128,016 7,801,583
Reinsurance recoverable on
paid & unpaid losses and
loss expenses 18,171,432 21,767,329
Notes and accounts receivable
- net 112,931 248,875
Deferred policy acquisition costs 5,273,653 5,761,496
Fixed assets - at cost, less
accumulated depreciation 1,658,099 1,826,753
Federal income tax
recoverable - current 63,539 -
Prepaid reinsurance premiums 444,016 1,145,944
Deferred tax asset 1,067,811 2,075,535
Other assets 1,056,143 1,121,599
Total Assets $96,288,979 $95,533,102
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Losses and loss expenses $48,655,027 $47,666,856
Unearned premiums 17,061,295 18,934,200
Other liabilities 8,812,067 10,120,426
Federal income taxes
payable - current - 25,969
Total Liabilities 74,528,389 76,747,451
Shareholders' Equity:
Common Stock, par value $.50 per share:
(Authorized - 10,000,000 shares;
issued and outstanding - 2,091,429
(1997) and 2,046,379 (1996)) 1,045,715 1,023,752
Paid in additional capital 1,943,829 1,730,508
Unfunded accumulated benefit
obligation in excess of Plan assets (4,690,900) (4,690,900)
Net unrealized gains
on debt securities, net of
deferred taxes 374,335 270,037
Retained earnings 23,087,611 20,452,254
Total Shareholders' Equity 21,760,590 18,785,651
Total Liabilities and
Shareholders' Equity $96,288,979 $95,533,102
(Financial statements should be read in
conjunction with the accompanying notes)
</TABLE>
<TABLE>
MOTOR CLUB OF AMERICA
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
For the Nine Months Ended For the Three Months Ended
September 30, 1997 September 30, 1996 September 30, 1997 September 30, 1996
<S> <C> <C> <C> <C>
Revenues:
Insurance premiums (net of
premiums ceded totaling
$5,265,869; $5,357,968
$1,712,385 and $2,040,890) $38,214,590 $33,409,805 $12,635,632 $11,712,976
Net investment income 2,653,173 2,265,322 946,253 778,855
Realized gains on sales
of investments - 5,410 - -
Motor Club membership fees - 980,540 - 322,436
Other revenues 168,005 94,156 48,923 24,427
Total revenues 41,035,768 36,755,233 13,630,808 12,838,694
Losses and Expenses:
Insurance losses and
loss expenses incurred
(net of reinsurance recoveries
totaling $2,401,641, $7,019,809,
$1,607,180 and $552,765) 25,203,606 21,455,430 8,705,299 7,604,549
Amortization of deferred policy
acquisition costs 11,085,228 9,354,776 3,483,588 3,144,532
Other operating expenses 1,271,278 3,577,014 343,255 1,131,101
Lease termination charge - 359,077 - -
Motor Club benefits - 213,835 - 67,284
Total losses and expenses 37,560,112 34,960,132 12,532,142 11,947,466
Income before Federal
income taxes 3,475,656 1,795,101 1,098,666 891,228
Provision (benefit) for Federal
income taxes: current 25,273 22,271 (27,168) (771)
deferred 814,940 - 280,924 -
Total provision (benefit) for
Federal income taxes 840,213 22,271 253,756 (771)
Net income $ 2,635,443 $ 1,772,830 $ 844,910 $ 891,999
Per common share:
Net income $1.27 $ .87 $.40 $.44
(Financial statements should be read in
conjunction with the accompanying notes)
</TABLE>
<TABLE>
MOTOR CLUB OF AMERICA
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
For the Nine Months Ended
September 30, 1997 September 30, 1996
<S> <C> <C> <C> <C>
Operating activities:
Net income $ 2,635,443 $1,772,830
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and net amortization 413,908 235,680
Gain on sale of investments - (5,410)
Write-off of leasehold improvement
(net) due to lease termination - 227,077
Loss on disposal of fixed assets - 13,400
Changes in:
Deferred policy
acquisition costs 487,843 155,690
Premiums receivable 673,567 647,930
Notes and accounts
receivable 135,944 37,373
Other assets 65,014 224,022
Losses and loss expenses 988,171 7,673,689
Unearned premiums and
membership fees (1,872,905) (1,035,433)
Federal income tax - current (89,508) (16,191)
Federal income tax - deferred 814,940 -
Other liabilities (1,308,359) (302,256)
Reinsurance recoverable on
paid and unpaid losses 3,595,897 (6,163,097)
Prepaid reinsurance premiums 701,928 508 355
Net cash provided by
operating activities $7,241,883 $4,051,493
Investing activities:
Investments purchased (69,247,424) (7,138,285)
Fixed assets purchased (167,739) (693,853)
Proceeds from sales of investments 60,846,452 4,637,400
Net cash (used in)
investing activities (8,568,711) (3,194,738)
Financing activities:
Common stock issued 235,284 6,891
Net cash provided by financing activities 235,284 6,891
Net increase (decrease) in cash and
cash equivalents (1,091,544) 863,646
Cash and cash equivalents at
beginning of period 3,476,948 2,630,909
Cash and cash equivalents at
end of period $2,385,404 $3,494,555
Supplemental Disclosures of Cash Flow Information
Note - Interest paid was $7,096 in 1997 and $0 in 1996.
Federal income tax paid was $114,781 in 1997 and
$38,462 in 1996.
Non Cash Investing Activities:
Invested assets and shareholders' equity increased by $104,298 and
decreased by $1,345,223 in 1997 and 1996, respectively, as a result of
changes in market value pertaining to the Registrant's application of
SFAS No. 115 - Accounting for Certain Investments in Debt and Equity
Securities.
(Financial statements should be read in
conjunction with the accompanying notes)
</TABLE>
MOTOR CLUB OF AMERICA
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Preparation and Presentation
The accompanying condensed consolidated financial
statements of Motor Club of America (the "Registrant") include its
accounts and those of its subsidiary companies and, in the opinion
of management, contain all adjustments necessary to present fairly
the Registrant's consolidated financial position, results of
operations and cash flows.
These statements should be read in conjunction with the
Summary of Significant Accounting Policies and other notes included
in the Notes to Financial Statements in the Registrant's 1996
Annual Report on Form 10-K.
2. Shareholders' Equity
Shareholders' equity at September 30, 1997 and December 31,
1996 include the undistributed GAAP net income of Motor Club of
America Insurance Company ("Motor Club") and Preserver Insurance
Company ("Preserver") (collectively referred to as the "Insurance
Companies"), the net assets of which exceed the consolidated net
assets of the Registrant.
3. Per Share Data
Per share data for 1997 are computed based upon 2,068,045 and
2,091,429 weighted average number of shares of common stock
outstanding for the nine and three month periods, respectively.
Per share data for 1996 are computed based upon 2,044,968 and
2,046,379 weighted average number of shares outstanding for the
nine and three month periods, respectively.
4. Federal Income Taxes
The Registrant and its subsidiaries file a consolidated
Federal income tax return. In the nine month periods ended
September 30, 1997 and 1996, the provision for Federal income
taxes resulted in effective tax rates different from the expected
statutory Federal income tax rates, principally as a result of (i)
certain adjustments, principally those enacted under the Tax Reform
Act of 1986; and (ii) utilization of Net Operating Loss ("NOL")
carryforwards. The Registrant's NOL carryforward at September 30,
1997 is approximately $4.0 million.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview of Business Operations
The Registrant provides property and casualty insurance
related services through the Insurance Companies. The Registrant
also operated until December 1, 1996 a motor club through Motor
Club of America Enterprises, Inc. ("Enterprises"). The Insurance
Companies provide coverage only in the State of New Jersey.
The Registrant anticipates continuing revenue growth in the
State of New Jersey through small commercial and ancillary
coverages written by Preserver as well as, on a more limited basis,
through new private passenger automobile ("PPA") writings by Motor
Club.
The Registrant seeks to increase its identification as a
provider of small commercial lines insurance. Commencing in 1998,
the Registrant will add, with substantial reinsurance support,
workers compensation insurance to its commercial lines product
offerings. The Registrant believes this product offering will
improve its opportunities in the commercial lines insurance
marketplace and result in increased total commercial lines premium
revenue and profitability. The Registrant also seeks to expand and
diversify its insurance operations outside the State of New Jersey.
The Registrant believes that its objectives can be attained through
the acquisition of other insurance companies. The Registrant
expects to pursue these objectives during 1997 and beyond.
New Jersey Private Passenger Automobile Insurance
The New Jersey Department of Banking and Insurance ("NJ DOBI")
may grant an insurer relief, by written notification, from writing
new PPA pursuant to the take-all-comers provisions of FAIRA, if a
showing finds that the insurer's premium to surplus ("leverage")
ratio exceeds 3 to 1. Motor Club's present applicable leverage
ratio for the twelve months ended September 30, 1997 is 3.03 to 1.
In June 1997, the State of New Jersey enacted PPA legislation,
which principally: (1) repealed the annual "flex" rate increase
available to insurers, which was required by law to be no less than
3%, and replaced it with an expedited prior approval rate filing
process for rate increase requests up to 3% on an overall basis.
Subsequent to the enactment of this legislation, the Commissioner
of the NJ DOBI froze all personal auto insurance rates until March
1998; (2) restricted the ability of insurers to non-renew at their
discretion up to 2% of their policies; (3) repealed the ability of
insurers to non-renew one policy for every two new policies written
in each rating territory; and (4) replaced the current rating
system which assesses surcharges to insureds' policies for specific
driving violations and accidents with a broader-based "multi-
tiered" rating system.
The New Jersey PPA market has historically been subject to
regulatory and legislative volatility which has, at times,
adversely affected the profitability of this line of business.
Consistent with this history, the enacted legislation, current rate
freeze and ongoing volatility could adversely affect the
Registrant's long-term profitability in this line of business.
Earnings
Nine Months
Net income for the nine months ended September 30, 1997 was
$2,635,000 or $1.27 per share compared to $1,773,000 or $.87 for
the comparable period of 1996. Excluding certain items described
below, net income for the nine months ended September 30, 1997
increased $793,000 or $.36 per share as compared to the same period
in 1996, primarily due to a 14% growth in premium revenue coupled
with a lower combined ratio. The combined ratio for the nine
months ended September 30, 1997 was 98.3% as compared to 100.3% for
the same period in 1996 (as adjusted for the non-recurring charges
in 1996 described below).
Net income for the nine months ended September 30, 1997 was
reduced by an increase in the provision for deferred Federal income
taxes of $815,000 over the comparable period of 1996, the result of
the Registrant's recognition (at December 31, 1996) and subsequent
realization of deferred tax assets, which consist primarily of NOL
carryforwards.
Net income for the nine months ended September 30, 1996 was
reduced by: (1) a $359,000 or $.18 per share non-recurring charge
incurred in conjunction with the termination of the lease of the
office building in which the Registrant and its subsidiaries
formerly operated; (2) certain non-recurring operational expenses
(totaling $328,000 or $.16 per share) relating to the Registrant's
tenancy at its former office building and relocation; and (3) a
$197,000 or $.10 per share charge incurred associated with the
settlement of a previously reported dispute with a reinsurer of
Motor Club.
Three Months
Net income for the three months ended September 30, 1997 was
$845,000 or $.40 per share compared to $892,000 or $.44 per share
for the same period in 1996. Net income in 1997 was decreased by
the provision for deferred Federal income taxes of $281,000 for the
reasons described above. Net income for the three months ended
September 30, 1996 was reduced by a $197,000 or $.10 per share
change incurred associated with the settlement of a previously
reported dispute with a reinsurer of Motor Club. Excluding these
items, net income for the three months ended September 30, 1997
increased $37,000 or $.01 per share compared to the same period in
1996, primarily due to an 8% growth in premium revenue coupled with
a lower combined ratio. The combined ratio for the three months
ended September 30, 1997 was 99.2% as compared to 100.4% for the
same period in 1996.
Revenues
Insurance Premiums
Insurance premiums increased $4,805,000 or 14% in the nine
months ended September 30, 1997 and $923,000 or 8% in the three
months ended September 30, 1997, as compared to the same periods in
1996, the result of increases in new business written, primarily
new PPA.
In the nine months ended September 30, 1997 as compared to the
same period in 1996, direct premium written increased $4,062,000 or
11%; Motor Club's increased by $2,457,000 or 8%, while Preserver's
direct premiums written increased $1,605,000 or 24% ($1,210,000 or
75% of which emanated from its commercial lines products).
In the third quarter of 1997 as compared to the same period in
1996, direct premium written increased $291,000 or 2%; Motor Club's
increased by $247,000 or 2%, while Preserver's increased by $44,000
or 2%.
Effective July 1, 1997, the Registrant significantly reduced
the premium rate it pays for excess of loss reinsurance. The
Registrant also increased its retention for property excess of loss
reinsurance at that date, which contributed to the reduction in
rate and is described further in Losses and Loss Expenses Incurred.
During the three months ended September 30, 1997, the Registrant
realized reinsurance premium savings of $159,000 as a result of the
changes described. The Registrant anticipates greater savings from
the changes in these programs in the fourth quarter 1997 as a
result of Preserver's bulk renewal.
Net Investment Income
Net investment income increased $388,000 or 17% and $167,000
or 21% for the nine and three months ended September 30, 1997 as
compared to the same periods in 1996, respectively, due to higher
average invested assets in both periods. Average invested assets
for the nine month period ended September 30, 1997 were $53,527,000
as compared to $44,711,000 for the same periods in 1996. The
investment portfolio (including short-term investments and
excluding realized capital gains) yielded 6.21% for the nine months
ended September 30, 1997 as compared to 6.38% for the same periods
in 1996.
Losses and Expenses
Losses and Loss Expenses Incurred
Losses and loss expenses incurred increased $3,748,000 or 17%
and $1,101,000 or 14% in the nine and three months ended September
30, 1997 as compared to 1996, respectively. The Insurance
Companies' combined loss and loss expense ratios were 66.0% and
68.9% for the nine and three months ended September 30, 1997, as
compared to 64.2% and 64.9% for the same periods in 1996,
respectively. During the 1996 first quarter, losses and loss
expenses incurred were increased by $635,000 due to winter storm
losses, which increased the loss and loss expense ratio by 1.9
points. Excluding these winter storms, the loss and loss expense
ratio was 62.3% for the nine months ended September 30, 1996.
The PPA loss and loss expense ratio was 67.6% for the nine
months ended September 30, 1997 as compared to 59.7% in 1996. The
increase in losses and loss expenses incurred and loss and loss
expense ratio in 1997 as compared to 1996 (as adjusted) is
primarily due to the increased amounts of new PPA business which
Motor Club is writing. In addition, during the three months ended
September 30, 1997, additional loss development increased the PPA
loss ratio to 71.4% for the three months ended September 30, 1997
as compared to 65.1% in 1996.
The increase in the PPA loss and loss expense ratio has been
offset by improved loss experience in the Preserver business.
Excluding the 1996 winter storm losses, the Preserver loss and loss
expense ratio was 60.4% in 1997 as compared to 71.1% in 1996.
Apart from the higher PPA loss ratios noted during the nine
months and third quarter of 1997 as compared to the same periods in
1996 (which were expected), no significant adverse trends were
experienced or identified during the nine months and third quarter
of 1997.
Effective July 19, 1997, the Registrant increased its
retention on property excess of loss reinsurance from $75,000 to
$100,000. During the three months ended September 30, 1997, the
increased retention resulted in an increase in losses and loss
expenses incurred of $25,000.
Amortization of Deferred Policy Acquisition Costs
Amortization of deferred policy acquisition costs increased
$1,730,000 or 18% and $339,000 or 11% in the nine and three months
ended September 30, 1997 as compared to the same periods in 1996,
respectively, which generally correspond to the growth in premium
previously described.
Other Operating Expenses
Other operating expenses for the nine months ended September
30, 1996 included certain non-recurring operational expenses
(totaling $687,000 or $.34 per share) relating to the Registrant's
tenancy at its former office building and relocation. In addition,
such expenses included $197,000 or $.10 per share resulting from
the aforementioned settlement with a reinsurer of Motor Club.
Excluding these non-recurring charges, other operating
expenses decreased $1,422,000 or 53% and $591,000 or 63% in the
nine and three months ended September 30, 1997 as compared to the
same periods in 1996, respectively. This decrease in expenses
allowed for a decrease in the expense ratio to 32.3% and 30.3% for
the nine and three months ended September 30, 1997 as compared to
36.1% and 33.9% for the same periods in 1996, respectively (as
adjusted for the non-recurring charges described above).
The Registrant remains committed to reducing its expense ratio
by increasing revenues while limiting increases or reducing its
overhead expenditures, namely through the implementation of
technology and operating efficiencies.
In August 1997, the Registrant completed its information
technology conversion to a smaller, more contemporary computing
platform for its claims, billing and management reporting systems.
Completion of this conversion is expected to be the primary
catalyst to enable the Registrant to pursue these additional future
expense savings and expense ratio reductions in 1997 and beyond,
particularly through agency automation.
The aforementioned headquarters' relocation has also enabled
the Registrant to realize expense savings in overhead expenditures
related to its facilities in the nine and three months ended
September 30, 1997.
Financial Condition, Liquidity and Capital Resources
The Registrant's book value at September 30, 1997 is $10.40
per share, as compared to $9.85 per share at June 30, 1997 and
$9.17 per share at December 31, 1996. These increases in book value
are principally due to the earnings described previously, and in
the nine and three months ended September 30, 1997, an increase of
$104,000 or $.05 per share (net of deferred taxes) and $325,000 or
$.16 per share (net of deferred taxes), respectively, in the market
value of fixed maturity investments accounted for as available-for-
sale securities under SFAS No. 115.
The Insurance Companies' need for liquidity arises primarily
from the obligation to pay claims. The primary sources of
liquidity are premiums received, collections from reinsurers and
proceeds from investments.
Reserving assumptions and payment patterns of the Insurance
Companies did not materially change from the prior year and there
were no unusually large retained losses resulting from claim
activity. Unpaid losses are not discounted.
Operating and Investing Activities
Net cash provided by operating activities were $6,984,000 and
$4,051,000 in the nine months ended September 30, 1997 and 1996,
respectively. Cash flow provided by operating activities in both
periods reflects the growth in the Insurance Companies' premium
revenue, combined with the reduction in overhead expenses described
previously.
Net cash utilized in investing activities was $8,569,000 in
1997 and $3,195,000 in 1996. The amounts used in 1997 reflect the
investment of cash provided by operating activities in both the
current nine and three month and prior periods.
No unusual or nonrecurring operating expenditures have been
incurred over these periods. Additionally, the payout ratio of
losses has not fluctuated substantially over these periods.
The Registrant has maintained an investing philosophy during
1997 consistent with past practices and described in detail in its
1996 Annual Report on Form 10-K. Investment mix and portfolio
duration as of September 30, 1997 have remained stable as compared
to December 31, 1996. Management anticipates maintaining this
approach to investing for the foreseeable future.
Financing Activities
Net cash provided by financing activities was $235,000 for the
nine months ended September 30, 1997, reflecting the exercise of
certain employee stock options during that period.
The Registrant paid no dividend on its common stock in 1997 or
1996.
The Registrant has no material outstanding capital commitments
which would require additional financing.
Recent Accounting Pronouncements
The Registrant has calculated basic and diluted earnings per
share ("EPS"), as defined in SFAS No. 128 - Earnings per Share. The
Registrant has determined, based on its interpretation of
information currently available, that such amounts do not differ
materially from primary EPS, which is reflected in the Registrant's
Statement of Operations for the years presented. SFAS No. 128 is
effective for financial statements issued for periods ending after
December 15, 1997 and requires restatement of all prior period EPS
data presented.
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
None
b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized.
MOTOR CLUB OF AMERICA
REGISTRANT
Stephen A. Gilbert
By: Stephen A. Gilbert
President
Patrick J. Haveron
By: Patrick J. Haveron
Executive Vice President -
Chief Financial Officer
and Chief Accounting
Officer
Dated: November 14, 1997
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
These schedules contain summary financial information extracted from Motor Club
of America's Consolidated Balance Sheets for the period ending September 30,
1997 and the Consolidated Statements of Operations for the nine months then
ended and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 58,393,752
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 534,183
<REAL-ESTATE> 0
<TOTAL-INVEST> 58,927,935
<CASH> 2,385,404
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 5,273,653
<TOTAL-ASSETS> 96,288,979
<POLICY-LOSSES> 48,655,027
<UNEARNED-PREMIUMS> 17,061,295
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 1,045,715
<OTHER-SE> 20,714,875
<TOTAL-LIABILITY-AND-EQUITY> 96,288,979
38,214,590
<INVESTMENT-INCOME> 2,653,173
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 168,005
<BENEFITS> 25,203,606
<UNDERWRITING-AMORTIZATION> 11,085,228
<UNDERWRITING-OTHER> 1,271,278
<INCOME-PRETAX> 3,475,656
<INCOME-TAX> 840,213
<INCOME-CONTINUING> 2,635,443
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,635,443
<EPS-PRIMARY> 1.27
<EPS-DILUTED> 1.27
<RESERVE-OPEN> 47,666,856
<PROVISION-CURRENT> 27,184,536
<PROVISION-PRIOR> 420,711
<PAYMENTS-CURRENT> 9,153,317
<PAYMENTS-PRIOR> 17,463,759
<RESERVE-CLOSE> 48,655,027
<CUMULATIVE-DEFICIENCY> 666,711
</TABLE>
