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, 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
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 26, 1998 was $18,195,869 based on
the closing selling price.
2,095,929 shares of Common Stock were outstanding as of March 26, 1998.
Documents Incorporated by Reference: Portions of the registrant's
definitive proxy statement issued in conjunction with the June 10, 1998
Annual Meeting of Shareholders (Part III).
MOTOR CLUB OF AMERICA
ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 1997
PART I PAGE
ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 25
ITEM 3. LEGAL PROCEEDINGS 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 25
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS 27
ITEM 6. SELECTED FINANCIAL DATA 28
ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 28
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA 42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 42
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF
THE REGISTRANT 42
ITEM 11. EXECUTIVE COMPENSATION 42
ITEM 12. SECURITY OWNERSHIP OF CERTAIN 42
BENEFICIAL OWNERS AND MANAGEMENT 42
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS 42
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS
SCHEDULES AND REPORTS ON FORM 8-K 43
Cautionary Statement
This Report on Form 10-K contains statements that
are not historical facts and are considered "forward-looking
statements" (as defined in the Private Securities Litigation
Reform Act of 1995), which can be identified by terms such as
"believes", "expects", "may", "will", "should", "anticipates",
the negatives thereof, or by discussions of strategy.
Certain statements contained herein are forward-looking
statements that involve risks, uncertainties, opinions
and predictions, and no assurance can be given that the future
results will be achieved since events or results may differ
materially as a result of risks facing the Company. These
include, but are not limited to, economic, market or
regulatory conditions as well as risks associated with Motor
Club of America's entry into new markets; diversification;
catastrophic events; and state regulatory and legislative
actions which can affect the profitability of certain lines of
business and impede Motor Club of America's ability to charge
adequate rates. Accordingly, Motor Club of America's premium
growth and underwriting results have been and will continue to
be potentially materially affected by these factors.
PART I
Item 1. Business
(a) General Development of Business
Motor Club of America ("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 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.
The Registrant seeks to increase its identification
as a provider of small commercial lines insurance and has
continued to expand its product line in support of this
objective. 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 1998 and beyond.
(b) Financial Information About Industry Segments
The Registrant does not have any reportable industry
segments for the three fiscal years reported in this Form 10-
K.
(c) Narrative Description of Business
See Items 1 (a) and 7.
Fire and Casualty Insurance Operations
General
The Insurance Companies distribute insurance
policies and generate premium revenue through approximately
160 independent producers in New Jersey.
The Registrant anticipates continuing its emphasis
of the small commercial and ancillary coverages written by
Preserver in the State of New Jersey. Commencing in 1998,
Preserver is offering workers' compensation insurance as part
of its commercial lines product offerings, along with product
offerings in boiler and machinery and umbrella coverages which
were enhanced in 1997. New PPA writings by Motor Club are
expected to continue as well.
Preserver has sought to increase its identity as a
commercial lines market through these product improvements as
well as a new corporate identification program, specifically,
its "Preserver - The Business Advantage" logo. The Registrant
believes these improvements, combined with Preserver's
existing product line, enable Preserver to offer a broad,
competitive product line which will grow steadily in the
future.
Since January 1, 1996, Preserver and Motor Club have
participated in an intercompany pooling agreement under which
their property and casualty business is combined. In both
1996 and 1997, Preserver's participation in the pooling was
30% and Motor Club's 70%. The Insurance Companies have a
pooled rating of B+ (Very Good) by A.M. Best Company, Inc.
("Best"). Best's ratings are based upon factors relevant to
policyholders and are not directed toward the protection of
investors. Management believes that the Best rating is an
important factor in marketing the Insurance Companies'
products, and in particular Preserver's, to their agents and
customers.
The following table sets forth the direct premiums
written, by line of insurance, for the Insurance Companies for
the last five years:
[CAPTION]
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Direct Written Premiums
(Amounts in Thousands - Exclusive of Service Charges)
1997 1996 1995 1994 1993
Direct Percent Direct Percent Direct Percent Direct Percent Direct Percent
Program Premium of Total Premium of Total Premium of Total Premium of Total Premium of Total
Private Passenger
Automobile $43,238 74.7% $41,055 76.0% $32,100 73.1% $27,636 74.4% $30,473 87.2%
Commercial Lines 8,019 13.9% 6,744 12.5% 5,828 13.3% 4,431 12.0% 2,219 6.3%
Personal Property 6,596 11.4% 6,216 11.5% 5,972 13.6% 5,056 13.6% 2,285 6.5%
Total $57,853 100.0% $54,015 100.0% $43,900 100.0% $37,123 100.0% $34,977 100.0%
</TABLE>
The following table sets forth ratios for the
Insurance Companies prepared in accordance with generally
accepted accounting principles ("GAAP") and with statutory
accounting practices ("SAP") prescribed or permitted by state
insurance authorities. The SAP combined ratio, a standard
measure of underwriting profitability, is the sum of: (i) the
ratio of incurred losses and loss expenses to net earned
premium ("loss ratio"); and (ii) the ratio of expenses
incurred for commissions, premium taxes, administrative and
other underwriting expenses to net written premium ("expense
ratio"). The GAAP combined ratio is calculated in the same
manner except that it is based on GAAP amounts and the
denominator for each component is net earned premium.
December 31,
1997 1996 1995
GAAP operating ratios:
Loss ratio 65.1% 64.5% 58.7%
Expense ratio 33.3% 37.9% 43.9%
Combined ratio 98.4% 102.4% 102.6%
Statutory operating ratios:
Loss ratio 66.3% 66.6% 59.0%
Expense ratio 32.4% 37.5% 40.0%
Combined ratio 98.7% 104.1% 99.0%
In general, when the combined ratio is under 100%,
underwriting results are generally considered profitable.
Conversely, when the combined ratio is over 100%, underwriting
results are generally considered unprofitable. The combined ratio
reflects underwriting results and not investment income, federal
income taxes or other non-operating income or expense. The
Registrant's operating income is a function of both underwriting
results and investment income.
Pooling Arrangement
Since January 1, 1996, the Insurance Companies have
participated in an intercompany pooling arrangement with each
other. The pooling is intended to permit a more uniform and stable
underwriting result from year to year for both companies in the
pooling than they would experience individually and to reduce the
risk of either of the pooling participants by spreading the risk of
loss of either of the pool participants. The Insurance Companies
therefore have at their disposal the underwriting capacity of the
entire pool, rather than being limited to policy exposures of a
size commensurate with its own capital and surplus. The additional
capacity exists because such policy exposures are spread between
both pool participants which each have its own capital and surplus.
Regulation by state insurance departments is applied to the
individual companies rather than to the pooling. The pooling
enabled Preserver to attain a Best rating it would not otherwise
have been able to achieve, due to its insufficient operating
experience, having commenced operations in 1993. It is the
Registrant's intention to maintain the pooling only until Preserver
can secure a Best rating equivalent or greater than the present
pooled Best rating of B+ (Very Good).
Pursuant to the terms of the pooling agreement, Preserver
cedes 100% of its premiums and expenses on all of its business, and
losses incurred after January 1, 1996, to Motor Club. All of Motor
Club's premium and expenses on all of its business, and losses
incurred after January 1, 1996, are included in the pooled
business. Motor Club then retrocedes to Preserver 30% of the
premiums, losses and expenses subject to the pooling. Motor Club
retains 70% of the premiums, losses and expenses subject to the
pooling. The pooling does not legally discharge the Insurance
Companies from their primary liability for the full amount of the
policies ceded.
Loss Reserves
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 is
determined using case-basis evaluations and statistical projections
and represents 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, 1997.
The Registrant's insurance subsidiaries generally
reinsure all risks in excess of $150,000 for casualty lines and
$100,000 for property lines (raised from $75,000 for losses
incurred before July 1, 1997).
The following table presents a reconciliation of
beginning and ending liability balances for 1997, 1996 and 1995,
reported under GAAP:
[CAPTION]
<TABLE>
RECONCILIATION OF LIABILITY FOR LOSSES AND LOSS EXPENSES
<S> <C> <C> <C>
1997 1996 1995
(Thousands of Dollars)
Liability for losses and loss expenses, net of
reinsurance recoverables, at January 1 $28,114 $23,409 $22,356
Incurred losses and loss expenses
Provision for current year claims 29,369 28,244 19,625
Increase in provision for prior years'
claims 3,773 904 1,112
Total incurred losses and loss expenses 33,142 29,148 20,737
Payments for losses and loss expenses
Payments on current year claims 12,169 13,029 8,577
Payments on prior years' claims 16,203 11,414 11,107
Total payments for losses and loss expenses 28,372 24,443 19,684
Liability for losses and loss expenses, net
of reinsurance recoverables, at December 31 32,884 28,114 23,409
Reinsurance recoverables on unpaid losses
and loss expenses, at December 31 17,363 19,553 16,415
Liability for losses and loss expenses,
gross of reinsurance recoverables,
at December 31 $50,247 $47,667 $39,824
</TABLE>
The reconciliation shows a 1997 deficiency of
$3,773,000 in the liability recorded at December 31, 1996.
The deficiency is primarily the result of the development of
losses incurred in 1996. Management believes this development
does not indicate any adverse trends in the Registrant's loss
development.
The difference between the liability 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 SAP are reconciled as follows:
December 31,
1997 1996 1995
(thousands of dollars)
Liability for unpaid losses and
loss expenses on a SAP basis
(net of reinsurance recoverables
on unpaid losses and loss expenses) $35,900 $30,686 $25,519
Reinsurance recoverables on unpaid
losses and loss expenses 17,363 19,553 16,415
Anticipated salvage and subrogation
recoveries (2,572) (2,572) (2,110)
Liability for unpaid losses and loss
expenses, as reported in the
Registrant's GAAP basis financial
statements $50,247 $47,667 $39,824
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 12 presents the development of the
GAAP balance sheet liabilities for 1992 through 1997; 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 1997, but incurred in
1993, will be included in the cumulative deficiency for the
1997 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.
[CAPTION]
<TABLE>
LOSS AND LOSS EXPENSE DEVELOPMENT (In Thousands)
<S> <C> <C> <C> <C> <C> <S>
Year ended December 31 1992 1993 1994 1995 1996 1997
Liability for unpaid
losses and loss expenses, net
of reinsurance recoverables $28,469 $25,334 $22,356 $23,409 $28,114 $32,884
Net Liability Re-estimated as of:
One year later 27,145 26,253 23,468 24,313 31,887 -
Two years later 28,563 26,766 23,813 25,759 - -
Three years later 28,454 26,819 24,181 - - -
Four years later 28,702 26,572 - - - -
Five years later 28,662 - - - - -
Net Cumulative Deficiency ($ 193) ($ 1,238) ($ 1,825) ($ 2,350) ($ 3,773) $ -
Cumulative Amount of Liability Paid Through:
One year later 12,314 12,311 11,106 11,414 16,203 -
Two years later 20,270 18,992 17,231 18,357 - -
Three years later 24,546 23,032 20,821 - - -
Four years later 26,878 24,882 - - - -
Five years later 27,642 - - - - -
Net liability - December 31 $28,469 $25,334 $22,356 $23,409 $28,114 $32,884
Reinsurance recoverables 21,698 20,484 19,309 16,415 19,553 17,363
Gross liability - December 31 $50,167 $45,818 $41,665 $39,824 $47,667 $50,247
</TABLE>
Reinsurance
The Insurance Companies follow the customary
industry practice of reinsuring a portion of their risks and
paying to reinsurers a portion of the premiums received on the
policies. The Insurance Companies' reinsurance program
permits greater diversification of business and the ability to
write larger policies while limiting maximum net losses; in
addition, the reinsurance program is designed to protect
against catastrophic losses. Reinsurance does not legally
discharge an insurer from its primary liability for the full
amount of the policies, although it does make the reinsurer
liable to the insurer to the extent of the reinsurance ceded.
Therefore, the Insurance Companies are subject to credit risk
with respect to their reinsurers. Reinsurance premiums and
recoveries are allocated to the participants in the pooling
according to their respective participation percentages.
Reinsurance for property losses of Preserver is
maintained under a per risk excess of loss treaty affording
recovery to $2 million, in excess of a retention of $100,000.
This retention had been $75,000 until July 1, 1997. In
addition, the Insurance Companies catastrophe reinsurance
program presently covers substantially all of the losses in
excess of $500,000 up to $40 million. The Company also
maintains a 100% quota share treaty for boiler and machinery
coverage.
Casualty reinsurance is currently maintained under
an excess of loss treaty affording recovery up to $3 million,
in excess of a retention of $150,000. The Insurance Companies
also maintain reinsurance coverage for personal and commercial
umbrella policies up to $2 million for personal lines policies
and up to $5 million for commercial lines policies. Effective
March 1, 1998, Preserver entered into reinsurance contracts
for the workers' compensation policies it commenced writing on
that date. An 80% quota share reinsurance contract on the
first $500,000 of workers' compensation coverage has been
implemented. An excess of loss treaty affording coverage up
to $10 million in excess of the retention of $500,000 has also
been implemented.
The Insurance Companies also maintained an 80% quota
share reinsurance agreement for their non-automobile policies
issued prior to February 19, 1994, until their expiration
dates.
Competition
The property and casualty insurance industry is
generally highly competitive on the basis of both price and
service.
There are numerous companies competing for the
coverages which Preserver offers in New Jersey, many of which
are substantially larger and have considerably greater
resources than Preserver. In addition, because Preserver's
insurance products are marketed exclusively through
independent insurance agencies, most of which represent more
than one insurance company, Preserver faces competition within
each agency.
While Motor Club distributes its personal auto
policies similarly and thus faces the same issues as Preserver
in concept, the personal auto regulatory environment in New
Jersey, particularly its "take-all-comers" requirements (see
Regulation), has suppressed competition and effectively
eliminated risk selection. In addition, the New Jersey market
has historically been subject to regulatory and legislative
volatility which has, at times, adversely affected the
profitability of this line of business, further suppressing
competition. Finally, approximately 23% of Motor Club's
appointed independent insurance agencies represent only Motor
Club for personal auto coverage and thus, Motor Club has no
competition for this business in those agencies. New Jersey
law also substantially restricts the ability of an insurer to
terminate its agencies, limiting Motor Club's ability to
manage its agency force for personal auto. Management
believes this lack of competition in personal auto presents a
significant business risk which must be monitored very closely
on an ongoing basis.
Investments
Management has maintained, in its opinion, a
conservative investing philosophy. At December 31, 1997 and
1996, the Registrant's investment portfolio was comprised of
the following types of securities:
December 31, 1997 December 31, 1996
Carrying Carrying
Amount Percent Amount Percent
Taxable Fixed Maturities $56,831,444 88.1% $47,927,093 95.3%
Short Term Investments 7,150,000 11.1% 1,745,455 3.5%
Mortgage Loans 522,555 0.8% 634,492 1.2%
Total Investment Portfolio $64,503,999 100.0% $50,307,040 100.0%
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, 1997 and 1996, the taxable fixed
maturity portfolio consisted of the following types of
securities:
December 31, 1997 December 31, 1996
Carrying Carrying
Amount Percent Amount Percent
United States Treasuries $29,205,469 51.3% $27,758,603 57.9%
United States Government
Agencies 5,495,828 9.7% 6,637,485 13.9%
GNMA Mortgage-Backed Securities 10,096,820 17.8% 8,363,964 17.4%
Corporate Bonds 12,033,327 21.2% 5,167,041 10.8%
Total $56,831,444 100.0% $47,927,093 100.0%
The fixed maturity portfolio duration at December
31, 1997 and 1996 is 3.74 and 3.35 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 C in the Notes to Consolidated
Financial Statements ("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, 1997 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. However,
during 1998, the Registrant's investment policy has been
expanded to include certain investment grade asset-backed
securities and will allow for a higher percentage of
investments in investment grade corporate bonds and mortgage-
backed securities.
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.
The Registrant's investment portfolio yielded 6.41%,
6.25% and 6.23% in 1997, 1996 and 1995, respectively.
Including realized gains and losses, the investment portfolio
yielded 6.41%, 6.26% and 6.36% in 1997, 1996 and 1995,
respectively.
Regulation
General
Insurance companies are subject to supervision and
regulation in the states in which they transact business.
Such supervision and regulation relate to numerous aspects of
an insurance company's business and financial condition. The
primary purpose of such supervision and regulation is the
protection of policyholders. The extent of such regulation
varies, but generally derives from state statutes which
delegate regulatory, supervisory and administrative authority
to state insurance departments. Accordingly, the authority of
the state insurance departments includes the establishment of
standards of solvency which must be met and maintained by
insurers; the licensing to do business of insurers and agents;
the nature of and limitations on investments; premium rates
for property and casualty insurance; the provisions which
insurers must make for current losses and future liabilities;
the deposit of securities for the benefit of policyholders;
and the approval of policy forms. Insurance departments also
conduct periodic examinations of the affairs of insurance
companies and require the filing of annual and other reports
relating to the financial condition of insurance companies.
New Jersey law also requires the Insurance Companies
to participate in involuntary insurance programs for
automobile insurance, as well as other property and casualty
lines. These programs include joint underwriting associations,
assigned risk plans, fair access to insurance requirements
plans and reinsurance facilities. These laws generally
require all companies that write lines covered by these
programs to provide coverage (either directly or through
reinsurance) for insureds who cannot obtain insurance in the
voluntary market. The legislation creating these programs
usually allocates a pro rata portion of risks attributable to
such insureds to each company on the basis of direct written
premiums or the number of automobiles insured. Generally,
state law requires participation in such programs as a
condition to doing business. The loss ratio on insurance
written under involuntary programs generally has been greater
than the loss ratio on insurance in the voluntary market.
During 1997, Motor Club began to participate in the
New Jersey Personal Automobile Insurance Plan, and paid fees
totaling $191,000 to a servicing carrier rather than process
these policies.
State insurance holding company acts regulate
insurance holding company systems. Each insurance company in
the holding company system is required to register with the
insurance supervisory agency of its state of domicile and
furnish certain information concerning the operations of
companies within the holding company system that may
materially affect the operations, management or financial
condition of the insurer within the system. Such laws further
require disclosure of material transactions including the
payment of "extraordinary dividends" from the insurance
subsidiaries to the Company.
Insurance holding company acts require that all
transactions within the holding company system affecting the
insurance subsidiaries must be fair and equitable. Further,
approval of the insurance commissioner is required prior to
the consummation of transactions affecting the control of an
insurer.
The Insurance Companies are restricted by the
insurance laws of New Jersey as to the amount of dividends
they may pay to the Registrant without prior approval of the
insurance commissioner. To the extent that surplus (as
defined) is available, the maximum dividend that may be paid
by either Motor Club of Preserver during any year without
prior regulatory approval is limited to 10% of that company's
statutory surplus as of December 31, or adjusted net income of
that company, for the preceding year. Applying current
regulatory restrictions as of December 31, 1997, Motor Club
would have been able to pay, without prior regulatory
approval, approximately $2.2 million in dividends to the
Registrant. Preserver is not able to pay dividends at this
time. The Insurance Companies have not paid any dividends to
the Registrant.
National Association of Insurance Commissioners ("NAIC")
The insurance subsidiaries are subject to the
general statutory accounting practices and reporting formats
established by the NAIC as well as accounting practices
prescribed or permitted by the State of New Jersey. The NAIC
is actively reviewing the codification of SAP to afford
preparers and users of statutory basis financial statements a
more uniform application of SAP by insurers in differing
states of domicile. It is not known whether regulatory
authorities in the State of New Jersey will recognize SAP as
may be codified by the NAIC as the approved basis of financial
statement preparation for insurers domiciled in the State.
The NAIC also promulgates model insurance laws and
regulations relating to the financial and operational
regulation of insurance companies, which includes the
Insurance Regulating Information System ("IRIS"). IRIS
identifies eleven industry ratios and specifies "usual values"
for each ratio. Departure from the usual values on four or
more of the ratios can lead to inquiries from individual state
insurance commissioners as to certain aspects of an insurer's
business. The Insurance Companies on a consolidated basis
have, in recent years, met substantially all of the IRIS test
ratios.
NAIC rules and regulations generally are not
directly applicable to an insurance company until they are
adopted by applicable state legislatures and departments of
insurance. NAIC model laws and regulations have become
increasingly important in recent years, due primarily to the
NAIC's Financial Regulations Standards and Accreditation
Program. Under this Program, states which have adopted certain
required model laws and regulations and meet various staffing
and other requirements are "accredited" by the NAIC. Such
accreditation reflects an eventual nationwide regulatory
network of accredited states. The State of New Jersey is
accredited by the NAIC.
The 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.
New Jersey Private Passenger Automobile
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, despite New Jersey having the highest average
premium rate in the United States. New Jersey insurance law
presently requires insurers to write all eligible personal
automobile coverage presented to them from drivers with eight
points or less on their driving record. This is commonly
referred to as "take-all-comers".
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 New Jersey law 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
year ended December 31, 1997 is 2.81 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, but has not
yet promulgated the regulations required for insurers to file
for an expedited rate increase; (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, which will be implemented during 1998.
In addition, in November 1997, the Governor of New
Jersey appointed a special legislative committee to review and
make further recommendations on reducing the cost to consumers
of personal automobile coverage in New Jersey. Management
anticipates that legislation based upon the Committee's
recommendations will be enacted during 1998 and that such
legislation could include, but not be limited to, a mandatory
reduction in premium for certain coverages.
Consistent with New Jersey's regulatory and
legislative history, the enacted and proposed legislation,
current rate freeze and ongoing volatility could adversely
affect the Registrant's long-term profitability in 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 three year period
will be required to pay such excess to its policyholders. It
would appear that presently Motor Club does not have such
excess profits.
The Registrant was subject to certain assessments in
the State of New Jersey, the most substantial of which had
been the FAIR Act surtaxes and assessments commencing in 1990;
the surtaxes expired after 1992 and the assessments expired
after 1997. FAIR Act assessments totaled $971,000, $962,000
and $843,000 in 1997, 1996 and 1995, respectively.
Motor Club Operations
On December 2, 1996, the Registrant sold Motor Club
of America Enterprises, Inc. ("Enterprises") to JVL Holding
Properties, Inc. ("JVL"), a non-affiliated Oklahoma
corporation, 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
provides certain services to Enterprises' members whose
memberships are written with PPA policies written by Motor
Club. In exchange, the Registrant receives a servicing fee
from JVL. The Registrant also receives certain fees for other
memberships written by Enterprises, as defined by this
additional agreement. The Registrant earned $143,000 in fees
from this agreement in 1997.
Year 2000
The Registrant is actively addressing its
information technology infrastructure, including hardware,
software and facilities, in order to ensure compliance with
"Year 2000" issues. These issues result from computer programs
which use two digits, rather than four digits to define a year
and which may be affected by the use of dates after January 1,
2000. The Registrant has instituted a company wide effort to
address and implement in 1998 the necessary changes to
hardware, software and facilities associated with Year 2000
compliance. The Registrant is also reviewing its exposure to
Year 2000 issues resulting from computer systems of vendors,
suppliers and insureds.
During 1997, the costs related to Year 2000
compliance did not have a material effect on net income,
financial condition or cash flows, nor are they expected to in
1998. However, unforseen developments or delays could cause
this expectation to change. Also, the Registrant cannot
guarantee that the vendors, suppliers and insureds with whom
the Company does business with will achieve timely Year 2000
compliance, or that such failure would not have a material
adverse impact on the Registrant.
Maintenance or modification costs related to Year
2000 compliance will be expensed as incurred, while the costs
of new information technology will be capitalized and
depreciated in accordance with the Registrant's policy.
Employees
At December 31, 1997, the Motor Club of America
Group had approximately 100 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 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.
Item 3. Legal Proceedings
The Insurance Companies are a party to numerous
lawsuits arising in the ordinary course of their insurance
business. The Registrant believes that the resolution of
these lawsuits will not have a material adverse effect on its
results of operations, financial condition, or cash flows.
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 1997.
Item Pursuant to Instruction 3 to Paragraph (b) of Item 401 of
Regulation S-K. Executive Officers of the Registrant.
At December 31, 1997, 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) 76 Chairman of the Board of
Directors and Director of
the Registrant and Companies
in the Motor Club of America
Group 1986-1997
Stephen A. Gilbert (2) 58 President, Chief Executive
Officer, General Counsel and
Director of the Registrant and
Companies in the Motor Club of
America Group 1975-1997
Patrick J. Haveron (2) 36 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 1988-1997
Peter K. Barbano 47 Secretary and Associate
General Counsel 1993-1997
Myron Rogow 54 Vice President 1987-1997
George B. Meyers 70 Vice President 1971-1997
G. Bruce Patterson 53 Vice President 1989-1997
Charles J. Pelosi 52 Vice President 1983-1997
Norma Rodriguez 48 Treasurer 1984-1997
(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 to February 1998, consultant of NCR;
consultant (to 1994) of Thrifty Rent-A-Car System,
Inc., a car rental 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 1998 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 1996 and
1997, as reported by the NASDAQ:
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
1997
Quarter High Low
I .............................. 11 5/8 9 1/2
II .............................. 14 1/2 9 7/8
III .............................. 14 1/2 11 7/8
IV .............................. 14 1/2 12 1/4
There were approximately 535 holders of record of
the Common Stock of the Registrant as of December 31, 1997.
The Registrant paid no dividends in 1996 and 1997.
[CAPTION]
<TABLE>
Item 6. Selected Financial Data
<S> <C> <C> <C> <C> <C>
Years ended December 31,
1997 1996 1995 1994 1993
(in thousands, except as to per share data)
Operating Results:
Revenues from operations $ 51,102 $46,525 $36,703 $29,471 $31,695
Realized gains (losses) on sale
of investments - 5 57 (43) 288
Realized gain on sale of
subsidiary - 702 - - -
Net investment income 3,595 3,087 2,764 2,730 2,784
Total revenues $ 54,697 $50,319 $39,524 $32,158 $34,767
Income before
federal income taxes $ 4 630 $ 3,297 $ 2,455 $ 5,039 $ 3,827
Net income $ 3,483 $ 5,330 $ 2,417 $ 5,035 $ 3,260
Financial Condition:
Total assets $101,347 $95,533 $81,959 $79,172 $86,669
Shareholders' equity $ 23,001 $18,786 $14,081 $10,546 $ 7,168
Per Common Share:
Net income - Basic $ 1.68 $ 2.61 $ 1.18 $ 2.46 $ 1.60
Net income - Diluted $ 1.66 $ 2.56 $ 1.17 $ 2.46 $ 1.60
Book Value $ 10.98 $ 9.17 $ 6.89 $ 5.16 $ 3.51
Weighted average number of
shares outstanding:
Basic 2,074,473 2,045,590 2,043,197 2,043,004 2,043,004
Diluted 2 102,395 2,081,080 2,061,791 2,043,004 2,043,004
Significant Insurance Indicators:
Net premiums written $51,680 $47,337 $38,073 $31,797 $28,058
Loss and loss expense ratio 65.1% 64.5% 58.7% 54.8% 54.1%
Expense ratio 33.3% 37.9% 43.9% 39.3% 45.7%
Combined ratio 98.4% 102.4% 102.6% 94.1% 99.8%
</TABLE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Overview of Business Operations
The Registrant and a group of affiliated corporations
provide property and casualty insurance related services. The
Registrant also operated until December 1, 1996 a motor club
through Enterprises. One hundred percent of the Registrant's
insurance operations are in the State of New Jersey.
The Registrant has two subsidiaries which write property
and casualty insurance, Motor Club and Preserver. Motor Club
writes PPA business; Preserver writes small commercial, homeowners
and ancillary coverages. The Insurance Companies are domiciled in
the State of New Jersey.
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 1998 and beyond.
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.
The Registrant also anticipates continued reductions in
its operating expenses, namely through the implementation of
operating efficiencies which should reduce other overhead
expenditures.
Historically, the Insurance Companies' results of
operations have been influenced by factors affecting the property
and casualty insurance industry in general and the New Jersey
personal automobile market in particular. The operating results of
the U.S. property and casualty insurance industry have been subject
to significant variations due to competition, weather, catastrophic
events, regulation, general economic conditions, judicial trends,
fluctuations in interest rates and other changes in the investment
environment.
Results of Operations
The table below reconciles operating net income to
reported net income for 1997, 1996 and 1995 with adjustments
for certain unusual and non-recurring items (all per share
amounts shown are basic):
[CAPTION]
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1997 1996 1995
Amount Per Share Amount Per Share Amount Per Share
Operating net income $3,482,702 $1.68 $3,436,343 $1.69 $2,416,779 $1.18
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 - -
Net income $3,482,702 $1.68 $5,330,108 $2.61 $2,416,779 $1.18
</TABLE>
(1) This non-recurring charge was 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) This non-recurring charge was 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 believed that it was 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 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.
1997 Compared to 1996
In 1997, increased Federal tax expense reduced
operating net income by $1,105,000 as a result of utilization
of the deferred tax asset recognized in 1996 as noted in the
table. Operating net income was also reduced in 1996 by the
effects of winter storms, which increased losses by $635,000.
Excluding these items, the increase in operating net income of
$517,000 or 13% was due to continuing revenue growth and a
stable combined ratio. The combined ratio was 98.4% in 1997 as compared
to 99.1% in 1996 (adjusted for the non-recurring items noted).
Insurance premiums increased by $5,684,000 or 13% during the year,
due primarily to increased earnings of personal auto premiums written by
Motor Club. The following table details the increases in
Insurance Premiums:
Increase in
Net
Class of Business Premium Percent
Private Passenger
Automobile $4,040,000 12%
Commercial Lines 1,175,000 21%
Personal Property 469,000 11%
Total $5,684,000 13%
The increases in Commercial Lines and Personal
Property premium were enhanced by $331,000 in savings on
reinsurance programs which principally affected Preserver and
were implemented effective July 1, 1997. Preserver also
increased its retention for property excess of loss
reinsurance at that date from $75,000 to $100,000, which
contributed to the reduction in rate.
Net investment income increased $507,000 or 16%
resulting from an increase in invested assets. The increase in
insurance premiums noted above provided the increase in
invested assets. Other revenues increased $110,000 or 95%,
primarily as a result of servicing fees earned by the
Registrant in 1997 on the Motor Club membership program after
the sale of Enterprises in December 1996.
Losses and loss expenses incurred increased by
$3,993,000 or 14%, which produced the following loss and loss
expense ratios:
1997 1996
Motor Club 66.8% 61.4%
Preserver 59.7% 75.5%
Total 65.1% 64.5%
Despite the higher loss and loss expense ratio on
a comparative basis, no significant adverse trends were
experienced or identified during 1997.
The increase in Motor Club's PPA loss and loss
expense ratio 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.
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 1997, the Registrant should continue to experience
continued reductions in its expense ratio, which should
result in lower overall combined ratios for the Registrant.
During 1996, winter storm losses of $635,000
increased Preserver's loss ratio by 6.3 points. The
remaining improvement in Preserver's loss ratio during 1997
was attributable to reduced amounts of losses, particularly
large losses greater than $35,000. Frequency of losses
remains at acceptable levels for all lines of Preserver's
business.
The increase in acquisition costs of $1,483,000 or
11% generally corresponds with the increase in insurance
premiums noted above, although the rate of increase was
slightly lower due to savings on net commissions realized in
1997. During 1998, the FAIR Act assessments previously paid
will be eliminated. These assessments totaled $971,000 and
$962,000 in 1997 and 1996, respectively.
Excluding the non-recurring items in 1996 noted in
the table, which includes the lease termination charge,
other operating expenses declined $1,282,000 or 42%, due to
lower overhead expenditures.
The decrease in expenses has allowed for a
decrease in the expense ratio (as adjusted for the non-
recurring charges described above) to 33.3% as compared to
36.0%. 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 pursuing further automation of its
policy processing functions, particularly as relates to data
provided by and to its independent agents. During 1997, the
Registrant converted its information systems to a smaller,
more contemporary computing platform which will allow for
more efficient operations and lower maintenance costs. The
Registrant expects to continue the efforts made previously
to reduce all unnecessary overhead expenditures.
The Registrant's book value increased to $10.98
per share at December 31, 1997 from $9.17 per share at
December 31, 1996. The principal sources of the net
increase were: (1) net income of $3,483,000 or $1.68 per
share described previously; (2) $161,800 or $.08 increase
per share due to the reduction of the minimum required
pension liability for the defined benefit pension plan
sponsored by the Registrant; and (3) $327,700 or $.16 per
share increase due to the increase (net of applicable
deferred taxes) in the fair value of the fixed maturity
investments accounted for as available-for-sale securities
under SFAS No. 115 ("Accounting for Certain Investments in
Debt and Equity Securities").
These increases in book value were offset by the
dilutive effects ($.11 per share) of the issuance of 46,925
shares of common stock upon exercise of employee stock
options granted under the 1987 and 1992 Stock Option plans.
See Note M of the Notes for additional information regarding
the Registrant's stock option plans.
The reduction in the minimum pension liability was
the result of the performance of the Plan assets in excess
of the expected return on these assets, offset by a decrease
in the discount rate used to compute Plan liabilities to
7.25% at December 31, 1997, from 7.50% at December 31, 1996.
See Note J of the Notes for additional information regarding
the Registrant's minimum pension liability.
1996 Compared to 1995
Excluding the effects of winter storms, which
increased losses by $635,000, the $1,655,000 or 68% increase
in 1996 operating net income was due to strong revenue
growth and a lower combined ratio. The combined ratio as
adjusted in 1996 was 98.4% as compared 102.6% in 1995.
Insurance premiums increased by $9,893,000 or 28%
during the year, due primarily to increased earnings of
personal auto premiums written by Motor Club. The following
table details the increases in Insurance Premiums:
Increase in
Net
Class of Business 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%
In 1995, Motor Club began to write new PPA
business for the first time since March 1990.
Net investment income increased $323,000 or 12%
resulting from an increase in invested assets. The increase
in insurance premiums noted above contributed to the
increase in invested assets. Other revenues decreased
$11,000 or 9%, primarily due to reduced mortgage loan
revenue and other miscellaneous income reductions.
Losses and loss expenses incurred increased by
$8,411,000 or 41%, which produced the following loss and
loss expense ratios:
1996 1995
Motor Club 61.4% 57.3%
Preserver 75.5% 63.1%
Total 64.5% 58.7%
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 Motor Club's loss and loss expense
ratio in 1996 was largely due to the new PPA 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%.
The increase in Preserver's loss and loss expense
ratio in 1996 was 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 was generally at acceptable
levels. This increase was partially offset by improved
experience (excluding winter storm losses) in Preserver's
homeowner book 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).
The increase in acquisition costs of $2,856,000 or
25% generally corresponds with the increase in insurance
premiums noted above. FAIR Act assessments totaled $962,000
and $843,000 in 1996 and 1995, respectively.
Excluding the non-recurring items in 1996 noted in
the table, which includes the lease termination charge,
other operating expenses declined $2,035,000 or 37%.
The decrease in other operating expenses resulted
from lower operating expenses in general, including lower
salaries and the savings realized from the aforementioned
relocation. The decrease in expenses allowed for a decrease
in the expense ratio (as adjusted for the non-recurring
charges) to 36.8% for 1996 as compared to 43.9% for 1995.
Motor Club membership fees written through
Enterprises decreased $30,000 or 3%. As previously
described, the Registrant operated Enterprises through
November 30, 1996; the writings for 1996 are therefore only
included through that date.
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 were:
(1) net income of $5,330,000 or $2.61 per share described
previously; and (2) a $487,000 or $.24 per share increase
due to the reduction of the minimum required pension
liability for the defined benefit pension plan sponsored by
the Registrant; and (3) a $1,122,000 or $.55 per share
decrease due to the decrease in the fair value of the fixed
maturity investments accounted for as available-for-sale
securities under SFAS No. 115.
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 in excess of the expected
return on these assets.
Liquidity and Capital Resources
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
Reserves) 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
$10,389,000, $6,851,000 and $3,807,000 in 1997, 1996 and 1995,
respectively. The higher amounts in these years are
attributable to the growth in premium revenue combined with
the reduction in overhead expenses described previously.
Net cash utilized in investing activities was
$13,885,000, $6,015,000 and $3,255,000 in 1997, 1996 and 1995,
respectively. The amounts used 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.
Aside from the changes in operating expenditures
noted previously, particularly the State mandated assessments
related to the FAIR Act, 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.
Financing Activities
The Registrant paid no dividend on its common stock
in 1997, 1996 and 1995. 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 Receiver of MCA Insurance Company in
Liquidation.
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share". As compared
to the prior standard, SFAS No. 128 simplifies computational
guidelines, revises disclosure requirements and increases
earnings per share ("EPS") comparability on an international
basis.
Basic EPS, which is calculated by dividing net
income by the weighted average number of common shares
outstanding, replaces primary EPS from the prior standard.
For all periods previously reported, basic EPS is the same as
primary EPS, since the impact of the Registrant's common stock
equivalents (i.e., stock options) for those periods did not
reach the significance threshold prescribed to require
adjustment under the prior standard. Diluted EPS reflects the
potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock
that then shared in the earnings of the entity. Diluted EPS
is computed similarly to fully diluted EPS from the prior
standard.
For all entities with complex capital structures,
basic and diluted EPS must be shown on the face of the income
statement with equal prominence. In addition, a
reconciliation of the numerator and denominator from the basic
EPS computation to the diluted EPS computation is required. See Note P of
Notes to Consolidated Financial Statements.
Pursuant to the standard, the Registrant has adopted
SFAS No. 128 in 1997 and has restated all prior period EPS
data presented.
Also in February 1997, the Securities and Exchange
Commission ("SEC") issued Financial Reporting Release No. 48,
"Disclosure of Accounting Policies for Derivative Financial
Instruments and Derivative Commodity Instruments and
Disclosure of Quantitative and Qualitative Information about
Market Risk Inherent in Derivative Financial Instruments,
Other Financial Instruments, and Derivative Commodity
Instruments" ("FRR No. 48").
FRR No. 48 amends rules and forms for registrants
and requires clarification and expansion of existing
disclosures for derivate financial instruments, other
financial instruments and derivative commodity instruments, as
defined therein. The amendments require enhanced disclosure
with respect to these derivative instruments in the notes to
financial statements. As of December 31, 1997, the Registrant
has no derivative financial instruments.
Additionally, the amendments expand existing
disclosure requirements to include quantitative and
qualitative discussions with respect to market risk inherent
in market risk sensitive instruments such as equity and fixed
maturity securities, as well as derivative instruments. These
amendments are designed to provide additional information
about market risk sensitive instruments which investors can
use to better understand and evaluate market risk exposures of
the registrants. For the Registrant, these disclosures will
be effective in 1998.
In June 1997, FASB adopted SFAS No. 130, "Reporting
Comprehensive Income." This statement establishes standards
for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full
set of general-purpose financial statements. Comprehensive
income is defined as the change in stockholders' equity during
a period from transactions and other events and circumstances
from non-owner sources and includes net income and all changes
in stockholders' equity except those resulting from
investments by owners and distribution to owners.
This standard requires that an enterprise: (a)
classify items of other comprehensive income by their nature
in a financial statement and (b) display the accumulated
balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section
of a statement of financial position.
Comprehensive income for the Registrant would
presently consist of net income, the change in net unrealized
appreciation of investments, net of deferred income taxes, and
the change in its unfunded accumulated benefit obligation
("minimum pension liability"). The Registrant is presently
evaluating the impact of this standard. The differences in
comprehensive income between years are caused principally by
significant fluctuations in the changes in unrealized
appreciation of investments net of deferred income taxes and
minimum pension liability, combined with the impact of
steadily increasing net income.
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,
1998, 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,
1997 and 1996 F-2
Consolidated Statements of Operations for
the years ended December 31, 1997, 1996
and 1995 F-3
Consolidated Statements of Shareholders'
Equity for the years ended December 31,
1997, 1996 and 1995 F-4
Consolidated Statements of Cash Flows
for the years ended December 31, 1997,
1996 and 1995 F-5 to F-6
Notes to Consolidated Financial Statements F-7 to F-29
(2) The following financial statement schedules for the years
1997, 1996 and 1995 (pursuant Rule 5-04 of Regulation
S-X) are presented herewith:
Schedule I - Summary of Investments - Other than
Investments
in Related Parties* F-30
Schedule II - Condensed Financial Information of Registrant
F-31 to F-33
Schedule IV - Reinsurance* F-34
Schedule V - Valuation and Qualifying Accounts and
Reserves F-35
Schedule VI - Supplemental Information Concerning Property/
Casualty Insurance Operations* F-36
*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 47
<PAGE>
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 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, 1997 and 1996, and the consolidated results
of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, 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 10, 1998
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
1997 1996
ASSETS
Investments:
Fixed maturity securities, available-
for-sale, at fair value (amortized
cost $55,925,617 -1997 and
$47,657,056 -1996) $ 56,831,444 $47,927,093
Mortgage loans on real estate - at the
unpaid principal amount 522,555 634,492
Short-term investments, at fair value
which approximates cost 7,150,000 1,745,455
Total investments 64,503,999 50,307,040
Cash and cash equivalents 222,761 3,476,948
Premiums receivable 7,809,567 7,801,583
Reinsurance recoverable on paid
and unpaid losses and loss expenses 18,666,066 21,767,329
Notes and accounts receivable 124,669 248,875
Deferred policy acquisition costs 5,858,650 5,761,496
Fixed assets - at cost, less accumulated
depreciation 1,586,649 1,826,753
Prepaid reinsurance premiums 695,245 1,145,944
Deferred tax asset 657,362 2,075,535
Other assets 1,221,723 1,121,599
Total assets $101,346,691 $95,533,102
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Losses and loss expenses $50,246,778 $47,666,856
Unearned premiums 19,285,757 18,934,200
Commissions payable 1,322,669 1,444,660
Accounts payable 562,453 595,785
Accrued expenses 5,518,935 6,770,544
Drafts outstanding 1,396,215 1,309,437
Federal income taxes payable - current 12,851 25,969
Total liabilities 78,345,658 76,747,451
Shareholders' Equity:
Common Stock, par value $.50 per share:
Authorized - 10,000,000 shares;
issued and outstanding - 1997
2,094,429, 1996 - 2,047,504 shares 1,047,215 1,023,752
Paid in additional capital 1,950,204 1,730,508
Unfunded accumulated benefit
obligation in excess of Plan assets (4,529,100) (4,690,900)
Net unrealized gains on fixed maturity
securities, net of deferred taxes 597,758 270,037
Retained earnings 23,934,956 20,452,254
Total Shareholders' Equity 23,001,033 18,785,651
Total Liabilities and
Shareholders' Equity $101,346,691 $95,533,102
The accompanying notes are an integral part of
these consolidated financial statements.
[CAPTION]
<TABLE>
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<S> <C> <C> <C>
For the years ended December 31,
1997 1996 1995
REVENUES
Insurance premiums (net of premiums
ceded totaling $7,151,204, $7,273,083
and $5,750,247) $50,877,890 $45,194,073 $35,300,872
Net investment income 3,594,509 3,087,112 2,764,188
Realized gains on
sales of investments (net) - 5,485 56,823
Realized gain on sale of subsidiary - 702,419 -
Motor club membership fees - 1,215,039 1,276,324
Other revenues 224,271 114,512 125,613
Total revenues 54,696,670 50,318,640 39,523,820
LOSSES AND EXPENSES
Losses and loss expenses
incurred (net of reinsurance
recoveries totaling $3,650,474,
$6,840,459 and $1,153,901) 33,141,691 29,148,280 20,737,548
Amortization of deferred
policy acquisition costs 15,162,320 13,678,710 10,611,978
Other operating expenses 1,762,192 3,569,564 5,438,359
Lease termination charge - 359,077 -
Motor Club benefits - 266,112 280,836
Total losses and expenses 50,066,203 47,021,743 37,068,721
Income before Federal income
taxes 4,630,467 3,296,897 2,455,099
Benefit (provision) for Federal
income taxes: current (37,573) (42,324) (38,320)
deferred (1,110,192) 2,075,535 -
Total Federal income tax (1,147,765) 2,033,211 (38,320)
Net income $ 3,482,702 $ 5,330,108 $ 2,416,779
Net Income per common share:
Basic $1.68 $2.61 $1.18
Diluted $1.66 $2.56 $1.17
Weighted average common and potential common shares outstanding:
Basic 2,074,473 2,045,590 2,043,197
Diluted 2,102,395 2,081,080 2,061,791
</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> <C> <C>
Unfunded
Accumulated
Benefit
Common Stock (a) Paid-In Net Unrealised Gains Obligation In
Shares Additional (Loss) Fixed Maturities Excess of Retained
Issued Amount Capital Securities (b) Plan Assets Earnings Total
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
Change in net unrealized gain
on fixed maturity 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
Change in net unrealized loss
on fixed maturity 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
Common stock issued 46,925 23,463 219,696 243,159
Change in net unrealized gain
on fixed maturity securities 327,721 327,721
Adjustment to recognize
minimum required pension
liability 161,800 161,800
Net income 3,482,702 3,482,702
Balance at December 31, 1997 2,094,429 $1,047,215 $1,950,204 $ 597,758 ($4,529,100) $23,934,956 $23,001,033
(a) Par value $.50 per share; authorized - 10,000,000 shares.
(b) Net of deferred taxes.
</TABLE>
[CAPTION]
<TABLE>
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<S> <C> <C> <C>
For the years ended December 31,
1997 1996 1995
Net income $ 3,482,702 $ 5,330,108 $ 2,416,779
Adjustments to reconcile net income
to cash provided by
operating activities:
Depreciation expense 461,845 379,453 297,291
Amortization of bond
premium - net 103,308 98,738 66,843
Gain on sale of subsidiary - (702,419) -
Gain on sale of investments - (5,485) (56,823)
Write-off of leasehold improvement
(net) due to lease termination - 227,077 -
Deferred tax provision (benefit) 1,110,192 (2,075,535) -
Changes in:
Net assets of Motor Club of America
Enterprises, Inc. - (422,581) -
Premiums receivable (7,984) (666,352) (1,587,853)
Notes and accounts receivable 124,206 (38,922) 74,146
Deferred policy acquisition costs (97,154) (692,274) (902,854)
Federal income tax - current (13,118) 39,649 19,600
Reinsurance recoverable on paid and
unpaid losses 3,101,263 (4,128,475) 3,127,417
Prepaid reinsurance premiums 450,699 47,154 (511,033)
Other assets (100,563) 129,820 406,825
Losses and loss expenses 2,579,922 7,843,304 (1,841,549)
Unearned premiums and membership fees 351,557 1,571,169 3,179,001
Commissions payable (121,991) 86,908 230,872
Accounts payable (33,332) 292,994 33,361
Accrued expenses (1,089,809) (415,706) 1,406,751
Drafts outstanding 86,778 (47,878) 198,247
Amount due to/from MCA Insurance
Company in Liquidation and
subsidiaries - - (2,750,000)
Total cash provided by
operating activities 10,388,521 6,850,747 3,807,021
</TABLE>
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
[CAPTION]
<TABLE>
<S> <C> <C> <C>
For the years ended December 31,
1997 1996 1995
Investing activities:
Proceeds from:
Maturities of fixed maturities 4,852,707 4,442,716 4,128,756
Sales of fixed maturities 2,700,000 1,396,522 4,417,499
Sale of subsidiary - 1,125,000 -
Payments received on mortgage
loan principal 111,937 131,609 106,835
Sale or maturities of short-
term investments 86,804,893 200,000 1,916,411
Sale of fixed assets - 13,400 -
Purchase of:
Fixed maturities (15,927,470) (10,350,787) (13,289,423)
Short-term investments (92,206,193) (1,745,455) (201,134)
Fixed assets (221,741) (1,227,558) (333,635)
Total cash utilized in
investing activities (13,885,867) (6,014,553) (3,254,691)
Financing activities:
Common stock issued 243,159 9,845 1,969
Repayment of borrowing -
Midlantic Bank, N.A. - - (2,750,000)
Total cash provided by (utilized
in) financing activities 243,159 9,845 (2,748,031)
Net increase (decrease) in cash (3,254,187) 846,039 (2,195,701)
Cash and cash equivalents
at beginning of year 3,476,948 2,630,909 4,826,610
Cash and cash equivalents
at end of year $ 222,761 $ 3,476,948 $ 2,630,909
</TABLE>
Supplemental Disclosures of Cash Flow Information
(1) Total interest paid was $8,890 (1997), $8,166 (1996) and $33,934
(1995).
(2) Total Federal income taxes paid was $50,691 (1997), $38,462 (1996)
and $52,000 (1995).
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. The Company's finance subsidiary, Motor Club of America
Finance Company, was merged into the Company on December 9, 1997.
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, principally private passenger automobile,
small commercial and homeowners insurance, produced by independent
agents; one hundred percent of the Insurance Companies' operations
are conducted in the State of New Jersey. The Company generates
substantially all of its revenues from its insurance operations.
(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 generally 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 were credited to income by the straight-
line method over the terms of the contracts. Commission expense was
deferred and amortized in the same manner as the related unearned
membership fees. Other related costs were 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 and
in 1997, servicing fees from motor club membership fees written by
Enterprises.
(g) Losses and Loss Expenses:
The estimated liability for losses is based on (1) the accumulation
of cost estimates for unpaid losses reported prior to the close of
the accounting period; and (2) estimates of incurred but unreported
losses based upon past experience; less (3) 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 basis 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:
Basic earnings per share are computed based upon the weighted average
number of common shares outstanding during each year. Diluted
earnings per share are computed based upon the weighted average number
of common shares outstanding including outstanding stock options.
See Note M for more information on outstanding stock options and
Note P for more information on the computation of Earnings per Share.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 1997 and 1996, these fees
collectively totaled $143,000 and $11,000, respectively.
Note C - Investments:
(a) The amortized cost and estimated fair value of investments in
fixed maturity securities at December 31, 1997 were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
U.S. Government
securities $33,950,152 $ 768,123 ($ 16,978) $34,701,297
GNMA Mortgage-
backed
securities 10,015,258 131,866 (50,304) 10,096,820
Corporate
securities 11,960,207 108,689 (35,569) 12,033,327
Total $55,925,617 $1,008,678 ($102,851) $56,831,444
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
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note C - Investments (Continued):
The amortized cost and fair value of investments in fixed maturity
securities at December 31, 1997, by contractual maturity, were as
follows:
Amortized Fair
Cost Value
Due in one year or less $ 8,868,476 $ 8,893,248
Due after one year through
five years 23,794,770 24,354,105
Due after five years through
ten years 11,230,514 11,411,434
Due after ten years 12,031,857 12,172,657
$55,925,617 $56,831,444
The above maturity tables include $10,096,820 (at fair value) of
mortgage-backed securities, which were 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. There were no gross gains or
gross losses in 1997. Gross gains of $5,485 and $53,851, were
realized in 1996 and 1995, respectively, on those sales and calls.
(b) Investment income (including net realized gains and losses) by
category of investments consisted of the following:
Category 1997 1996 1995
Fixed maturities $3,387,140 $3,093,534 $2,837,597
Other, principally
short-term
investments 431,932 196,457 168,335
Total investment
income 3,819,072 3,289,991 3,005,932
Investment
expenses 224,563 197,394 184,921
Net investment
income $3,594,509 $3,092,597 $2,821,011
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note C - Investments (Continued):
(c) At December 31, 1997 and 1996, fixed maturity investments
(at fair value) deposited with the New Jersey Department of Banking
and Insurance ("NJDOBI") amounted to $220,859 and $220,275,
respectively.
(d) There were no investments in any persons and its affiliates in excess
of ten percent of shareholders' equity.
(e) The change in net unrealized gains (losses) on investments are as
follows:
Years Ended December 31,
1997 1996 1995
Fixed
maturities $635,790 ($1,122,378) $2,661,043
(f) In the opinion of management there has been no permanent impairment
in the carrying amount of investments.
Note D - 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 1997, 1996
and 1995:
1997 1996 1995
Balance at January 1 $47,666,856 $39,823,552 $41,665,101
Less: Reinsurance recover-
ables 19,553,223 16,414,610 19,311,132
Net balance at January 1 28,113,633 23,408,942 22,353,969
Incurred losses and loss
expenses:
Provision for current
year claims 29,368,738 28,244,599 19,625,070
Increase in provision for
prior years' claims 3,772,953 903,681 1,112,478
Total incurred losses and
loss expenses 33,141,691 29,148,280 20,737,548
Payment for losses and
loss expenses:
Payment on current
year claims 12,169,000 13,029,214 8,577,000
Payment on prior
years' claims 16,202,865 11,414,375 11,105,578
Total payments for losses
and loss expenses 28,371,865 24,443,589 19,682,578
Net balance at December 31 32,883,459 28,113,633 23,408,939
Plus: Reinsurance recover-
ables 17,363,319 19,553,223 16,414,613
Balance at December 31 $50,246,778 $47,666,856 $39,823,552
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note D - Unpaid Losses and Loss Expenses (Continued):
The reconciliation shows a 1997 deficiency of $3,773,000 in the
liability recorded at December 31, 1996. The deficiency is primarily
the result of development of losses incurred in 1996. 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
$2,801,000 $2,188,000 and $1,661,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
Note E - Fixed Assets:
Fixed assets consist of the following:
1997 1996
Leasehold improvements $ 191,937 $ 191,142
Office furniture, fixtures and
data processing equipment 3,155,739 2,934,793
3,347,676 3,125,935
Less accumulated depre-
ciation 1,761,027 1,299,182
$1,586,649 $1,826,753
Note F - 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
$100,000 for property lines are reinsured. Prior to July 1, 1997 the
property retention was $75,000.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note F - 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 $10,552,385 and $12,955,544
as of December 31, 1997 and 1996, 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 Motor Club's 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 $1,728,341,
$1,613,095 and $1,541,875 in 1997, 1996 and 1995, respectively.
Reimbursements from NJ AIRE based on subject claim payment experience
are accounted for as ceded losses incurred and totaled $500,657,
$482,105 and $800,872 in 1997, 1996 and 1995, respectively.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note F - Reinsurance (Continued):
Prepaid reinsurance premiums of $695,245 and $1,145,944 as of
December 31, 1997 and 1996, respectively, are mainly 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:
[CAPTION]
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1997 1996 1995
Written Earned Written Earned Written Earned
Direct $58,380,651 $58,029,094 $54,563,224 $52,467,156 $44,334,501 $41,051,119
Ceded (6,700,505) (7,151,204) (7,225,929) (7,273,083) (6,261,282) (5,750,247)
Net $51,680,146 $50,877,890 $47,337,295 $45,194,073 $38,073,219 $35,300,872
</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 and $239,357 for this matter in 1996 and 1995,
respectively.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note G - Taxes:
(a) The Company and its subsidiaries (including MCA Insurance Company
("MCAIC") and its subsidiaries, former affiliates) file a consolidated
Federal income tax return. The benefit (provision) for Federal income
taxes consisted of the following:
[CAPTION]
<TABLE>
<S> <C> <C> <C> <C> <C>
1997 1996 1995
Current provision ($ 37,573) ($ 42,324) ($38,320)
Deferred benefit (provision) ( 1,110,192) 2,075,535 -
Total benefit (provision) ($1,147,765) $2,033,211 ($38,320)
</TABLE>
(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,
1997 1996
Deferred tax assets:
Net operating loss carryforward $3,965,602 $2,549,738
Unpaid losses and loss expenses 1,385,862 1,137,478
Unearned premium 1,264,155 1,209,601
Alternative minimum tax and
general business credit carry-
forwards 91,094 128,701
Total deferred tax assets 6,706,713 5,025,518
Deferred tax liabilities:
Deferred acquisition costs (1,991,942) (1,958,909)
Unrealized gain on debt securities (307,981) (91,693)
Prepaid pension cost (937,880) (753,512)
Excess loss account (722,888) -
Other deferred tax liabilities (172,458) (145,869)
Total deferred tax liabilities (4,133,149) (2,949,983)
Less: valuation allowance for
deferred tax assets (1,916,202) -
Net deferred tax asset $ 657,362 $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. The Company has provided a valuation allowance at December 31,
1997 for those deferred tax assets related to net operating loss
carryforwards of MCAIC and its subsidiaries. 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 G - Taxes (Continued):
The net operating loss carryforward of $11,663,536 expires beginning
in 2009.
(c) The provision for Federal income taxes resulted in effective tax rates
lower than the statutory Federal income tax rates, as follows:
[CAPTION]
<TABLE>
<S> <C> <C> <C> <C>
1997 1996 1995
Tax provision
computed at statutory
federal income tax rates ($1,574,359) ($1,120,945) ($ 834,734)
Change in valuation allowance (1,110,192) 2,075,535 1,191,781
Impact of alternative
minimum tax
calculation (63,607) (36,298) (38,320)
Effect of net operating
loss carryforward 1,548,594 1,095,320 -
Other-net 51,799 19,599 (357,047)
Benefit (provision) ($1,147,765) $2,033,211 ($ 38,320)
</TABLE>
(d) The Consolidated Statements of operations for the years ended
December 31, 1997, 1996 and 1995 include state taxes based on
insurance premiums of $153,333, $143,262 and $116,410 and state
income tax expense (benefit) of $2,314, $8,244 and ($19,928),
respectively.
Note H - 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 ("SAP").
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 H - 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. To the extent that surplus as defined is
available, 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 Motor Club may pay without prior approval in
1998 is $2,152,000. Preserver is not able to pay dividends at this
time.
(b) The consolidated financial statements of the Company's insurance
subsidiaries have been prepared in accordance with GAAP, which differ
in certain respects from SAP.
The principal differences relate to (1) acquisition costs incurred in
connection with acquiring new business which are charged to expense
under SAP 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 SAP;
(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
of Motor Club and Preserver on a statutory and GAAP basis were as
follows:
December 31,
1997 1996
Capital and surplus -
Statutory basis $18,129,018 $14,753,760
Shareholders' equity -
GAAP basis $29,308,852 $24,704,123
Years ended December 31,
1997 1996 1995
Net income:
Statutory basis $3,719,782 $ 212,807 $1,811,612
GAAP basis $4,316,713 $2,737,318 $2,808,466
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note H - 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 I - 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 J - 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 J - 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.
The restructured contract is supported by a group of life insurance
companies who are participating in the Plan of Rehabilitation.
This arrangement has the effect of guaranteeing the contract balances
should MBLLAC not be able to fulfill its obligations under the
contract.
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 $183,876, $177,517 and $167,368 in
distributions from MBLLAC and Mutual in 1997, 1996 and 1995,
respectively, under provisions of the Plan of Rehabilitation.
On January 9, 1997, the Plan of Rehabilitation was amended. Prior to
the amendment, the payment of principal and interest under the
restructured contract was to be in five installments beginning
December 31, 1999. Under the amended Plan of Rehabilitation, such
payments have been accelerated and will be paid in full on or before
December 31, 1999.
(b) Pension expense for 1997, 1996 and 1995 included the following
components:
1997 1996 1995
Interest cost on projected
benefit obligation $ 837,900 $ 831,800 $862,600
Actual return on assets (1,241,500) (1,027,700) (809,900)
Net amortization and deferral 657,400 542,800 214,400
Net periodic pension cost $ 253,800 $ 346,900 $267,100
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 7.50% (1997), 7.25% (1996) and 8.25%
(1995) 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 J - 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, 1997
and 1996. The discount rate assumed as of December 31, 1997 and 1996
was 7.25% and 7.50%, respectively.
[CAPTION]
<TABLE>
<S> <C> <C>
1997 1996
Actuarial present value of
benefit obligations:
Vested benefit obligation $11,605,700 $11,591,100
Accumulated benefit obli-
gation $11,605,700 $11,591,100
Projected benefit obli-
gation $11,605,700 $11,591,100
Plan assets at fair value,
including guaranteed insurance
contracts with MBL Life Assurance
Corporation, in rehabil-
itation, $3,143,000 (1997) and
$3,088,000 (1996) 9,340,000 8,791,900
Projected benefit obligation
in excess of plan assets 2,265,700 2,799,200
Unrecognized net loss (4,529,100) (4,690,000)
Adjustment required to recognize
minimum liability 4,529,100 4,690,000
Pension liability recognized
in the statement
of financial position $ 2,265,700 $ 2,799,200
</TABLE>
The adjustment required to recognize the minimum liability is
reflected as a reduction of shareholders' equity as of
December 31, 1997 and 1996, 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 $115,995, $116,938 and
$134,987 were made by the Company in 1997, 1996 and 1995,
respectively, for its employees and charged to expense.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note J - Pensions (Continued):
(e) In 1997, the Company established a non-qualified deferred
compensation plan for certain employees. Employer contributions of a
discretionary amount are made by the Company.
Note K - Post-retirement Benefits:
The Company currently provides certain life and health benefits to
retired employees who had 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,
1997 1996
Accumulated postretirement
benefit obligation:
Retirees $221,900 $266,000
Fully eligible active
plan participants 232,800 186,000
Other active plan
participants 98,200 75,000
Total 552,900 527,000
Plan assets at fair value - -
Accumulated postretirement
benefit obligation in excess
of plan assets 552,900 527,000
Unrecognized net loss
from past experience different
from that assumed and from
changes in assumptions (255,500) (189,000)
Unrecognized transition obli-
gation (417,000) (445,000)
Prepaid postretirement benefit
cost recognized in the state-
ment of financial position ($119,600) ($107,000)
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note K - Post-retirement Benefits (Continued):
Net periodic postretirement benefit cost for 1997 and 1996,
respectively, included the following components:
1997 1996
Service cost of benefits attributed
to service during the period $ 2,300 $ 2,000
Interest cost on accumulated post-
retirement benefit obligation 40,200 40,000
Net amortization and deferral 50,400 45,000
Net periodic postretirement
benefit cost $92,900 $87,000
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 7.25% in 1997
and 7.50% in 1996.
Note L - Selected Quarterly Financial Data (Unaudited):
(a) Year ended December 31, 1997:
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
Revenues $13,780,326 $13,624,634 $13,630,808 $13,660,902
Losses and
expenses $12,570,194 $12,457,776 $12,532,142 $12,506,091
Net income $ 921,993 $ 868,540 $ 844,910 $ 847,259
Net income per common share:
Basic $ .45 $ .42 $ .40 $ .41
Diluted $ .44 $ .42 $ .40 $ .40
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note L - 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, 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:
Basic $ (.03) $ .46 $ .44 $ 1.74
Diluted $ (.03) $ .46 $ .43 $ 1.70
Note M - 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 both Option Plans 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, 1997:
(1) 125 shares under the 1987 Option Plan are available for grant;
84,000 shares were exercisable and 15,875 shares had
been exercised as of that date; and (2) 61,450 shares under the
1992 Option Plan are available for grant; 3,000 shares were
exercisable and 35,550 shares had been exercised as of that date.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note M - Stock Option Plans (Continued):
Transactions during 1995, 1996 and 1997 relating to the 1987 Option
Plan are as follows:
Exercise
Number of Price per Aggregate
Shares Share Amount
Options outstanding at
December 31, 1994 41,250 $ 2.625 $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
Options exercised in 1997 (11,375) $ 2.625 (29,859)
Options lapsed in 1997 (1,125) $ 2.625 (2,953)
Options granted in 1997 62,000 $12.875 798,250
Options outstanding at
December 31, 1997 84,000 $10.19 $856,000
Transactions during 1995, 1996 and 1997 relating to the 1992 Option
Plan are as follows:
Exercise
Number of Price per Aggregate
Shares Share Amount
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
Options exercised in 1997 (35,550) $ 6.00 (213,300)
Options lapsed in 1997 (15,450) $ 6.00 (92,700)
Options granted in 1997 3,000 $12.875 38,625
Options outstanding at
December 31, 1997 3,000 $12.875 $ 38,625
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note M - Stock Option Plans (Continued):
The Company has adopted the provision of SFAS No. 123 ("Accounting
for Stock-Based Compensation"), which calls for companies to measure
employee stock compensation expense based on the fair value method of
accounting. However, as allowed by SFAS No. 123, the Company has
elected the continued use of APB Opinion No. 25 ("Accounting for Stock
Issued to Employees"), with pro forma disclosures of net income and
earnings per share determined as if the fair value method had been
applied in measuring compensation cost.
These calculations only take into consideration options issued since
January 1, 1995. No options were granted by the Company in
1995 and 1996 and therefore the adoption of this Statement does not
have any effect on those years financial position or results of
operations. In 1997, had the fair value method been applied, net
income would have been reduced by $10,200 or less than $.01 basic
net earnings per share.
The average fair value of options granted during 1997 was $6.52.
The fair value was estimated using the Black-Scholes option pricing
model based on the weighted average assumptions: of risk-free interest
rate of 5.65%; volatility of 54.5%; and expected life of 4.5 years.
The Company does not pay a dividend on its common stock. The
following table summarizes options outstanding and exercisable
at December 31, 1997:
Outstanding Exercisable
Average Average
Exercise Average Exercise Exercise
Price Options Life(a) Price Options Price
$2.625 22,000 0.5 $2.625 22,000 $2.625
$12.875 65,000 4.5 $12.875 0 -
Total 87,000 3.5 $10.280 22,000 $2.625
(a) Average contractual life remaining years.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note N - Related Party Transactions:
Three of the Company's directors ("Ownership Group") own 42.5%
of the outstanding common stock of the Company at December 31, 1997.
The Company paid directors fees' of $180,000 during 1997,
1996 and 1995 to the Ownership Group.
At December 31, 1997 and 1996, mortgage loans receivable from
officers and employees (there were no amounts receivable from
directors) amounted to $112,091 and $336,101, respectively, all of
which are collateralized by real property.
Note O - 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 1997 and
1996, rent expense paid by the Company on the Paramus Lease was
$410,000 and $310,000, respectively.
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.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note O - Lease Obligations (Continued):
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 and 1995, rent expense paid by the Company (net of amounts
paid by MCAIC) on the Newark Lease was $75,000 and $252,000,
respectively.
Note P - Earnings per Share ("EPS"):
In 1997, the Company adopted SFAS No. 128 ("Earnings Per Share")
specifying the computation, presentation and disclosure requirements
for EPS. The new standard defines "basic" and "diluted" earnings per
share. Basic earnings per share are based on weighted average basic
shares outstanding. Diluted earnings per share are based on weighted
average diluted shares outstanding, which is calculated by adding
shares contingently issuable under stock options to the average basic
shares outstanding. The calculations of average basic and diluted
common shares outstanding and net income per common share
are as follows:
1997 1996 1995
Net income (numerator) $3,482,702 $5,330,108 $2,416,779
Weighted average basic common
shares outstanding (denominator) 2,074,473 2,045,590 2,043,197
Shares contingently issuable
under Stock Option plans 27,922 35,490 18,594
Average diluted common shares
outstanding (denominator) 2,102,395 2,081,080 2,061,791
Net income per common share:
Basic $1.68 $2.61 $1.18
Diluted $1.66 $2.56 $1.17
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
SCHEDULE I. SUMMARY OF INVESTMENTS-
OTHER THAN INVESTMENTS IN RELATED PARTIES
at December 31, 1997
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 $43,965,410 $44,798,117 $44,798,117
Industrial and
miscellaneous 10,403,392 10,457,475 10,457,475
Public utilities 1,556,815 1,575,852 1,575,852
Total fixed maturities 55,925,617 56,831,444
Mortgage loans on real
estate 522,555 522,555
Short-term investments,
available-for-sale 7,150,000 7,150,000 7,150,000
Total investments $63,598,172 $64,503,999
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,
1997 1996
Assets:
Cash and cash equivalents $ - $ 354,465
Investments in subsidiaries 28,889,766 25,614,714
Insurance premiums receivable 7,366,692 7,538,716
Deferred tax asset 657,362 2,075,535
Other assets 5,364,125 3,868,956
Total assets $42,277,945 $39,452,386
Liabilities and shareholders' equity:
Indebtedness to subsidiaries $14,641,404 $15,563,850
Other liabilities 4,635,508 5,102,885
Total liabilities 19,276,912 20,666,735
Shareholders' equity 23,001,033 18,785,651
Total liabilities and
shareholders' equity $42,277,945 $39,452,386
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,
1997 1996 1995
Revenues:
Membership servicing fees $ 152,791 $ 21,481 $ -
Commission income 1,595 9,960 10,093
Realized gain on sale of
subsidiary - 702,419 -
Interest on mortgage loans 4,973 - -
Other income (1) 216,161 135,704 157,125
Total revenues 375,520 869,564 167,218
Expenses:
General and administrative
expenses (2) (503,164) (32,945) 52,759
Total expenses (503,164) (32,945) 52,759
Income before
Federal income taxes 878,684 902,509 114,459
Benefit (provision) for
Federal income taxes: current (37,573) (42,324) (38,320)
deferred (1,110,192) 2,075,535 -
Total Federal income tax (1,147,765) 2,033,211 (38,320)
Income before item
shown below (269,081) 2,935,720 76,139
Equity in net income
of subsidiaries 3,751,783 2,394,388 2,340,640
Net income $3,482,702 $5,330,108 $2,416,779
(1) Amount includes $31,559 (1996) and $67,117 (1995) of interest due
from Motor Club.
(2) Amount is net of $535,816 (1997), $520,579 (1996) and $223,691
(1995) of management fees charged to subsidiaries.
(Continued)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
SCHEDULE II. CONDENSED FINANCIAL INFORMATION
OF REGISTRANT (PARENT COMPANY)
[CAPTION]
<TABLE>
STATEMENTS OF CASH FLOWS
<S> <C> <C> <C>
For the years ended December 31,
1997 1996 1995
Net income $3,482,702 $5,330,108 $2,416,779
Adjustments to reconcile net
income to net cash provided by
(utilized in) operating
activities:
Write-off of leasehold improvement
(net) due to lease termination - 227,077 -
Depreciation expense 371,756 309,875 248,540
Gain on sale of subsidiary - (702,419) -
Accretion of bond discount - 10 (16,368)
Deferred tax benefit 1,418,173 (2,075,535) -
Changes in:
Net assets of Motor Club of America
Enterprises, Inc. - (422,581) -
Premiums receivable 172,024 (520,054) (1,487,855)
Investments in subsidiaries (2,947,331) (1,663,715) (1,978,815)
Other assets 229,053 (146,637) 284,074
Other liabilities (305,577) 103,409 (712,909)
Indebtedness to related parties (922,446) 1,594,981 2,501,916
Amounts due to MCA Insurance Company
in Liquidation and subsidiaries - - (2,750,000)
Net cash provided by (utilized in)
operating activities 1,498,354 2,034,519 (1,494,638)
Investing activities:
Proceeds from:
Sale of subsidiary - 1,125,000 -
Disposal of short-term
investments 47,287,674 - 1,665,897
Disposal of fixed
maturities - 15,039 596,783
Sale of fixed assets - 13,400 -
Payments received on mortgage
loan principal 4,490 - -
Purchase of:
Fixed maturities - - (608,402)
Short-term investments (48,692,219) (1,745,455) -
Fixed assets (168,878) (1,097,883) (232,003)
Mortgage loans from Finance Company (527,045) - -
Net cash provided by (utilized in)
investing activities (2,095,978) (1,689,899) 1,422,275
Financing activities:
Repayment of borrowing -
Midlantic Bank, N.A. - - (2,750,000)
Common stock issued 243,159 9,845 1,969
Net cash provided by (utilized in)
financing activities 243,159 9,845 (2,748,031)
Increase (decrease) in cash and
cash equivalents (354,465) 354,465 (2,820,394)
Cash and cash equivalents at
beginning of year 354,465 - 2,820,394
Cash and cash equivalent at end of year $ - $ 354,465 $ -
</TABLE>
Supplemental Disclosures of Cash Flow Information
(1) Total interest paid was $8,890 (1997), $8,166 (1996) and $33,934 (1995).
(2) Total federal income taxes paid was $50,691 (1997), $38,462 (1996) and
$52,000 (1995).
(Continued)
[CAPTION]
<TABLE>
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
SCHEDULE IV. REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
<S> <C> <C> <C> <S> <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, 1997:
Total property and casualty
insurance premiums earned $58,029,094 $7,151,204 $ - $50,877,895 0.0%
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%
</TABLE>
(Continued)
[CAPTION]
<TABLE>
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
SCHEDULE V. VALUATION AND QUALIFYING
ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
<C> <C> <C> <C> <C> <C> <C> <C> <C>
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, 1997 $ 41,340 $ 26,751 $ - $ - $ 68,091
December 31, 1996 $ 656,083 $ - $ - $ 614,743 $ 41,340
December 31, 1995 $ 439,309 $ 316,774 $ - $ 100,000 $ 656,083
Valuation allowance
for deferred taxes:
December 31, 1997 $ - $1,916,202 $ - $ - $1,916,202
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
</TABLE>
(Continued)
[CAPTION]
<TABLE>
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
SCHEDULE VI. SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY/CASUALTY INSURANCE OPERATIONS
For the years ended December 31, 1997, 1996 and 1995
<C> <C> <C> <C> <C> <S> <C> <C> <C>
Column A Column B Column C Column D Column E 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, 1997 $ 5,858,650 $50,246,778 - $19,285,757 $50,877,890 $3,384,004
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
Note: (a) Excludes non-insurance subsidiaries' investment
income and realized investment gains.
</TABLE>
[CAPTION]
<TABLE>
MOTOR CLUB OF AMERICA AND SUBSIDIARIES
SCHEDULE VI. SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY/CASUALTY INSURANCE OPERATIONS
For the years ended December 31, 1997, 1996 and 1995
<C> <C> <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, 1997 $29,368,738 $3,772,953 $15,162,320 $28,371,865 $51,152,770
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
</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, 1997
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-31-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 56,831,444
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 522,555
<REAL-ESTATE> 0
<TOTAL-INVEST> 64,503,999
<CASH> 222,761
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 5,858,650
<TOTAL-ASSETS> 101,346,691
<POLICY-LOSSES> 50,246,778
<UNEARNED-PREMIUMS> 19,285,757
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 1,047,215
<OTHER-SE> 21,953,818
<TOTAL-LIABILITY-AND-EQUITY> 101,346,691
50,877,890
<INVESTMENT-INCOME> 3,594,509
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 224,271
<BENEFITS> 33,141,691
<UNDERWRITING-AMORTIZATION> 15,162,320
<UNDERWRITING-OTHER> 1,762,192
<INCOME-PRETAX> 4,630,467
<INCOME-TAX> 1,147,765
<INCOME-CONTINUING> 3,482,702
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,482,702
<EPS-PRIMARY> 1.68
<EPS-DILUTED> 1.66
<RESERVE-OPEN> 47,666,856
<PROVISION-CURRENT> 34,322,429
<PROVISION-PRIOR> 2,469,736
<PAYMENTS-CURRENT> 12,753,265
<PAYMENTS-PRIOR> 21,458,978
<RESERVE-CLOSE> 50,246,778
<CUMULATIVE-DEFICIENCY> 2,469,736
</TABLE>
