-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T+1Jy0SVKzlSeINZUSbP9vTMEY+5O5alpzOdlwGqYRGxI2REwJlNnoStDhIjwqMh g/A/ZXJZYsXT5pY3qqBAcw== 0000068480-97-000008.txt : 19971117 0000068480-97-000008.hdr.sgml : 19971117 ACCESSION NUMBER: 0000068480-97-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MOTOR CLUB OF AMERICA CENTRAL INDEX KEY: 0000068480 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 220747730 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-00671 FILM NUMBER: 97721370 BUSINESS ADDRESS: STREET 1: 95 ROUTE 17 SOUTH CITY: PARAMUS STATE: NJ ZIP: 07653 BUSINESS PHONE: 201-291-2112 MAIL ADDRESS: STREET 1: 95 ROUTE 17 SOUTH CITY: PARAMUS STATE: NJ ZIP: 07653-0931 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended Commission File No. September 30, 1997 0-671 MOTOR CLUB OF AMERICA (Exact name of registrant as specified in its charter) New Jersey 22-0747730 (State of Incorporation) (I.R.S. Employer Identification No.) 95 Route 17 South, Paramus, New Jersey 07653 (Address of principal executive offices) Zip Code Registrant's telephone number, including area code (201) 291-2000 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x . No . 2,094,429 shares of Common Stock were outstanding as of November 13, 1997. PART I FINANCIAL INFORMATION Item 1. Financial Statements MOTOR CLUB OF AMERICA AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, December 31, 1997 1996 ASSETS Investments $58,927,935 $50,307,040 Cash and cash equivalents 2,385,404 3,476,948 Premiums receivable 7,128,016 7,801,583 Reinsurance recoverable on paid & unpaid losses and loss expenses 18,171,432 21,767,329 Notes and accounts receivable - net 112,931 248,875 Deferred policy acquisition costs 5,273,653 5,761,496 Fixed assets - at cost, less accumulated depreciation 1,658,099 1,826,753 Federal income tax recoverable - current 63,539 - Prepaid reinsurance premiums 444,016 1,145,944 Deferred tax asset 1,067,811 2,075,535 Other assets 1,056,143 1,121,599 Total Assets $96,288,979 $95,533,102 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Losses and loss expenses $48,655,027 $47,666,856 Unearned premiums 17,061,295 18,934,200 Other liabilities 8,812,067 10,120,426 Federal income taxes payable - current - 25,969 Total Liabilities 74,528,389 76,747,451 Shareholders' Equity: Common Stock, par value $.50 per share: (Authorized - 10,000,000 shares; issued and outstanding - 2,091,429 (1997) and 2,046,379 (1996)) 1,045,715 1,023,752 Paid in additional capital 1,943,829 1,730,508 Unfunded accumulated benefit obligation in excess of Plan assets (4,690,900) (4,690,900) Net unrealized gains on debt securities, net of deferred taxes 374,335 270,037 Retained earnings 23,087,611 20,452,254 Total Shareholders' Equity 21,760,590 18,785,651 Total Liabilities and Shareholders' Equity $96,288,979 $95,533,102 (Financial statements should be read in conjunction with the accompanying notes)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the Nine Months Ended For the Three Months Ended September 30, 1997 September 30, 1996 September 30, 1997 September 30, 1996 Revenues: Insurance premiums (net of premiums ceded totaling $5,265,869; $5,357,968 $1,712,385 and $2,040,890) $38,214,590 $33,409,805 $12,635,632 $11,712,976 Net investment income 2,653,173 2,265,322 946,253 778,855 Realized gains on sales of investments - 5,410 - - Motor Club membership fees - 980,540 - 322,436 Other revenues 168,005 94,156 48,923 24,427 Total revenues 41,035,768 36,755,233 13,630,808 12,838,694 Losses and Expenses: Insurance losses and loss expenses incurred (net of reinsurance recoveries totaling $2,401,641, $7,019,809, $1,607,180 and $552,765) 25,203,606 21,455,430 8,705,299 7,604,549 Amortization of deferred policy acquisition costs 11,085,228 9,354,776 3,483,588 3,144,532 Other operating expenses 1,271,278 3,577,014 343,255 1,131,101 Lease termination charge - 359,077 - - Motor Club benefits - 213,835 - 67,284 Total losses and expenses 37,560,112 34,960,132 12,532,142 11,947,466 Income before Federal income taxes 3,475,656 1,795,101 1,098,666 891,228 Provision (benefit) for Federal income taxes: current 25,273 22,271 (27,168) (771) deferred 814,940 - 280,924 - Total provision (benefit) for Federal income taxes 840,213 22,271 253,756 (771) Net income $ 2,635,443 $ 1,772,830 $ 844,910 $ 891,999 Per common share: Net income $1.27 $ .87 $.40 $.44 (Financial statements should be read in conjunction with the accompanying notes)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Nine Months Ended September 30, 1997 September 30, 1996 Operating activities: Net income $ 2,635,443 $1,772,830 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and net amortization 413,908 235,680 Gain on sale of investments - (5,410) Write-off of leasehold improvement (net) due to lease termination - 227,077 Loss on disposal of fixed assets - 13,400 Changes in: Deferred policy acquisition costs 487,843 155,690 Premiums receivable 673,567 647,930 Notes and accounts receivable 135,944 37,373 Other assets 65,014 224,022 Losses and loss expenses 988,171 7,673,689 Unearned premiums and membership fees (1,872,905) (1,035,433) Federal income tax - current (89,508) (16,191) Federal income tax - deferred 814,940 - Other liabilities (1,308,359) (302,256) Reinsurance recoverable on paid and unpaid losses 3,595,897 (6,163,097) Prepaid reinsurance premiums 701,928 508 355 Net cash provided by operating activities $7,241,883 $4,051,493 Investing activities: Investments purchased (69,247,424) (7,138,285) Fixed assets purchased (167,739) (693,853) Proceeds from sales of investments 60,846,452 4,637,400 Net cash (used in) investing activities (8,568,711) (3,194,738) Financing activities: Common stock issued 235,284 6,891 Net cash provided by financing activities 235,284 6,891 Net increase (decrease) in cash and cash equivalents (1,091,544) 863,646 Cash and cash equivalents at beginning of period 3,476,948 2,630,909 Cash and cash equivalents at end of period $2,385,404 $3,494,555 Supplemental Disclosures of Cash Flow Information Note - Interest paid was $7,096 in 1997 and $0 in 1996. Federal income tax paid was $114,781 in 1997 and $38,462 in 1996. Non Cash Investing Activities: Invested assets and shareholders' equity increased by $104,298 and decreased by $1,345,223 in 1997 and 1996, respectively, as a result of changes in market value pertaining to the Registrant's application of SFAS No. 115 - Accounting for Certain Investments in Debt and Equity Securities. (Financial statements should be read in conjunction with the accompanying notes)
MOTOR CLUB OF AMERICA AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Preparation and Presentation The accompanying condensed consolidated financial statements of Motor Club of America (the "Registrant") include its accounts and those of its subsidiary companies and, in the opinion of management, contain all adjustments necessary to present fairly the Registrant's consolidated financial position, results of operations and cash flows. These statements should be read in conjunction with the Summary of Significant Accounting Policies and other notes included in the Notes to Financial Statements in the Registrant's 1996 Annual Report on Form 10-K. 2. Shareholders' Equity Shareholders' equity at September 30, 1997 and December 31, 1996 include the undistributed GAAP net income of Motor Club of America Insurance Company ("Motor Club") and Preserver Insurance Company ("Preserver") (collectively referred to as the "Insurance Companies"), the net assets of which exceed the consolidated net assets of the Registrant. 3. Per Share Data Per share data for 1997 are computed based upon 2,068,045 and 2,091,429 weighted average number of shares of common stock outstanding for the nine and three month periods, respectively. Per share data for 1996 are computed based upon 2,044,968 and 2,046,379 weighted average number of shares outstanding for the nine and three month periods, respectively. 4. Federal Income Taxes The Registrant and its subsidiaries file a consolidated Federal income tax return. In the nine month periods ended September 30, 1997 and 1996, the provision for Federal income taxes resulted in effective tax rates different from the expected statutory Federal income tax rates, principally as a result of (i) certain adjustments, principally those enacted under the Tax Reform Act of 1986; and (ii) utilization of Net Operating Loss ("NOL") carryforwards. The Registrant's NOL carryforward at September 30, 1997 is approximately $4.0 million. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview of Business Operations The Registrant provides property and casualty insurance related services through the Insurance Companies. The Registrant also operated until December 1, 1996 a motor club through Motor Club of America Enterprises, Inc. ("Enterprises"). The Insurance Companies provide coverage only in the State of New Jersey. The Registrant anticipates continuing revenue growth in the State of New Jersey through small commercial and ancillary coverages written by Preserver as well as, on a more limited basis, through new private passenger automobile ("PPA") writings by Motor Club. The Registrant seeks to increase its identification as a provider of small commercial lines insurance. Commencing in 1998, the Registrant will add, with substantial reinsurance support, workers compensation insurance to its commercial lines product offerings. The Registrant believes this product offering will improve its opportunities in the commercial lines insurance marketplace and result in increased total commercial lines premium revenue and profitability. The Registrant also seeks to expand and diversify its insurance operations outside the State of New Jersey. The Registrant believes that its objectives can be attained through the acquisition of other insurance companies. The Registrant expects to pursue these objectives during 1997 and beyond. New Jersey Private Passenger Automobile Insurance The New Jersey Department of Banking and Insurance ("NJ DOBI") may grant an insurer relief, by written notification, from writing new PPA pursuant to the take-all-comers provisions of FAIRA, if a showing finds that the insurer's premium to surplus ("leverage") ratio exceeds 3 to 1. Motor Club's present applicable leverage ratio for the twelve months ended September 30, 1997 is 3.03 to 1. In June 1997, the State of New Jersey enacted PPA legislation, which principally: (1) repealed the annual "flex" rate increase available to insurers, which was required by law to be no less than 3%, and replaced it with an expedited prior approval rate filing process for rate increase requests up to 3% on an overall basis. Subsequent to the enactment of this legislation, the Commissioner of the NJ DOBI froze all personal auto insurance rates until March 1998; (2) restricted the ability of insurers to non-renew at their discretion up to 2% of their policies; (3) repealed the ability of insurers to non-renew one policy for every two new policies written in each rating territory; and (4) replaced the current rating system which assesses surcharges to insureds' policies for specific driving violations and accidents with a broader-based "multi- tiered" rating system. The New Jersey PPA market has historically been subject to regulatory and legislative volatility which has, at times, adversely affected the profitability of this line of business. Consistent with this history, the enacted legislation, current rate freeze and ongoing volatility could adversely affect the Registrant's long-term profitability in this line of business. Earnings Nine Months Net income for the nine months ended September 30, 1997 was $2,635,000 or $1.27 per share compared to $1,773,000 or $.87 for the comparable period of 1996. Excluding certain items described below, net income for the nine months ended September 30, 1997 increased $793,000 or $.36 per share as compared to the same period in 1996, primarily due to a 14% growth in premium revenue coupled with a lower combined ratio. The combined ratio for the nine months ended September 30, 1997 was 98.3% as compared to 100.3% for the same period in 1996 (as adjusted for the non-recurring charges in 1996 described below). Net income for the nine months ended September 30, 1997 was reduced by an increase in the provision for deferred Federal income taxes of $815,000 over the comparable period of 1996, the result of the Registrant's recognition (at December 31, 1996) and subsequent realization of deferred tax assets, which consist primarily of NOL carryforwards. Net income for the nine months ended September 30, 1996 was reduced by: (1) a $359,000 or $.18 per share non-recurring charge incurred in conjunction with the termination of the lease of the office building in which the Registrant and its subsidiaries formerly operated; (2) certain non-recurring operational expenses (totaling $328,000 or $.16 per share) relating to the Registrant's tenancy at its former office building and relocation; and (3) a $197,000 or $.10 per share charge incurred associated with the settlement of a previously reported dispute with a reinsurer of Motor Club. Three Months Net income for the three months ended September 30, 1997 was $845,000 or $.40 per share compared to $892,000 or $.44 per share for the same period in 1996. Net income in 1997 was decreased by the provision for deferred Federal income taxes of $281,000 for the reasons described above. Net income for the three months ended September 30, 1996 was reduced by a $197,000 or $.10 per share change incurred associated with the settlement of a previously reported dispute with a reinsurer of Motor Club. Excluding these items, net income for the three months ended September 30, 1997 increased $37,000 or $.01 per share compared to the same period in 1996, primarily due to an 8% growth in premium revenue coupled with a lower combined ratio. The combined ratio for the three months ended September 30, 1997 was 99.2% as compared to 100.4% for the same period in 1996. Revenues Insurance Premiums Insurance premiums increased $4,805,000 or 14% in the nine months ended September 30, 1997 and $923,000 or 8% in the three months ended September 30, 1997, as compared to the same periods in 1996, the result of increases in new business written, primarily new PPA. In the nine months ended September 30, 1997 as compared to the same period in 1996, direct premium written increased $4,062,000 or 11%; Motor Club's increased by $2,457,000 or 8%, while Preserver's direct premiums written increased $1,605,000 or 24% ($1,210,000 or 75% of which emanated from its commercial lines products). In the third quarter of 1997 as compared to the same period in 1996, direct premium written increased $291,000 or 2%; Motor Club's increased by $247,000 or 2%, while Preserver's increased by $44,000 or 2%. Effective July 1, 1997, the Registrant significantly reduced the premium rate it pays for excess of loss reinsurance. The Registrant also increased its retention for property excess of loss reinsurance at that date, which contributed to the reduction in rate and is described further in Losses and Loss Expenses Incurred. During the three months ended September 30, 1997, the Registrant realized reinsurance premium savings of $159,000 as a result of the changes described. The Registrant anticipates greater savings from the changes in these programs in the fourth quarter 1997 as a result of Preserver's bulk renewal. Net Investment Income Net investment income increased $388,000 or 17% and $167,000 or 21% for the nine and three months ended September 30, 1997 as compared to the same periods in 1996, respectively, due to higher average invested assets in both periods. Average invested assets for the nine month period ended September 30, 1997 were $53,527,000 as compared to $44,711,000 for the same periods in 1996. The investment portfolio (including short-term investments and excluding realized capital gains) yielded 6.21% for the nine months ended September 30, 1997 as compared to 6.38% for the same periods in 1996. Losses and Expenses Losses and Loss Expenses Incurred Losses and loss expenses incurred increased $3,748,000 or 17% and $1,101,000 or 14% in the nine and three months ended September 30, 1997 as compared to 1996, respectively. The Insurance Companies' combined loss and loss expense ratios were 66.0% and 68.9% for the nine and three months ended September 30, 1997, as compared to 64.2% and 64.9% for the same periods in 1996, respectively. During the 1996 first quarter, losses and loss expenses incurred were increased by $635,000 due to winter storm losses, which increased the loss and loss expense ratio by 1.9 points. Excluding these winter storms, the loss and loss expense ratio was 62.3% for the nine months ended September 30, 1996. The PPA loss and loss expense ratio was 67.6% for the nine months ended September 30, 1997 as compared to 59.7% in 1996. The increase in losses and loss expenses incurred and loss and loss expense ratio in 1997 as compared to 1996 (as adjusted) is primarily due to the increased amounts of new PPA business which Motor Club is writing. In addition, during the three months ended September 30, 1997, additional loss development increased the PPA loss ratio to 71.4% for the three months ended September 30, 1997 as compared to 65.1% in 1996. The increase in the PPA loss and loss expense ratio has been offset by improved loss experience in the Preserver business. Excluding the 1996 winter storm losses, the Preserver loss and loss expense ratio was 60.4% in 1997 as compared to 71.1% in 1996. Apart from the higher PPA loss ratios noted during the nine months and third quarter of 1997 as compared to the same periods in 1996 (which were expected), no significant adverse trends were experienced or identified during the nine months and third quarter of 1997. Effective July 19, 1997, the Registrant increased its retention on property excess of loss reinsurance from $75,000 to $100,000. During the three months ended September 30, 1997, the increased retention resulted in an increase in losses and loss expenses incurred of $25,000. Amortization of Deferred Policy Acquisition Costs Amortization of deferred policy acquisition costs increased $1,730,000 or 18% and $339,000 or 11% in the nine and three months ended September 30, 1997 as compared to the same periods in 1996, respectively, which generally correspond to the growth in premium previously described. Other Operating Expenses Other operating expenses for the nine months ended September 30, 1996 included certain non-recurring operational expenses (totaling $687,000 or $.34 per share) relating to the Registrant's tenancy at its former office building and relocation. In addition, such expenses included $197,000 or $.10 per share resulting from the aforementioned settlement with a reinsurer of Motor Club. Excluding these non-recurring charges, other operating expenses decreased $1,422,000 or 53% and $591,000 or 63% in the nine and three months ended September 30, 1997 as compared to the same periods in 1996, respectively. This decrease in expenses allowed for a decrease in the expense ratio to 32.3% and 30.3% for the nine and three months ended September 30, 1997 as compared to 36.1% and 33.9% for the same periods in 1996, respectively (as adjusted for the non-recurring charges described above). The Registrant remains committed to reducing its expense ratio by increasing revenues while limiting increases or reducing its overhead expenditures, namely through the implementation of technology and operating efficiencies. In August 1997, the Registrant completed its information technology conversion to a smaller, more contemporary computing platform for its claims, billing and management reporting systems. Completion of this conversion is expected to be the primary catalyst to enable the Registrant to pursue these additional future expense savings and expense ratio reductions in 1997 and beyond, particularly through agency automation. The aforementioned headquarters' relocation has also enabled the Registrant to realize expense savings in overhead expenditures related to its facilities in the nine and three months ended September 30, 1997. Financial Condition, Liquidity and Capital Resources The Registrant's book value at September 30, 1997 is $10.40 per share, as compared to $9.85 per share at June 30, 1997 and $9.17 per share at December 31, 1996. These increases in book value are principally due to the earnings described previously, and in the nine and three months ended September 30, 1997, an increase of $104,000 or $.05 per share (net of deferred taxes) and $325,000 or $.16 per share (net of deferred taxes), respectively, in the market value of fixed maturity investments accounted for as available-for- sale securities under SFAS No. 115. The Insurance Companies' need for liquidity arises primarily from the obligation to pay claims. The primary sources of liquidity are premiums received, collections from reinsurers and proceeds from investments. Reserving assumptions and payment patterns of the Insurance Companies did not materially change from the prior year and there were no unusually large retained losses resulting from claim activity. Unpaid losses are not discounted. Operating and Investing Activities Net cash provided by operating activities were $6,984,000 and $4,051,000 in the nine months ended September 30, 1997 and 1996, respectively. Cash flow provided by operating activities in both periods reflects the growth in the Insurance Companies' premium revenue, combined with the reduction in overhead expenses described previously. Net cash utilized in investing activities was $8,569,000 in 1997 and $3,195,000 in 1996. The amounts used in 1997 reflect the investment of cash provided by operating activities in both the current nine and three month and prior periods. No unusual or nonrecurring operating expenditures have been incurred over these periods. Additionally, the payout ratio of losses has not fluctuated substantially over these periods. The Registrant has maintained an investing philosophy during 1997 consistent with past practices and described in detail in its 1996 Annual Report on Form 10-K. Investment mix and portfolio duration as of September 30, 1997 have remained stable as compared to December 31, 1996. Management anticipates maintaining this approach to investing for the foreseeable future. Financing Activities Net cash provided by financing activities was $235,000 for the nine months ended September 30, 1997, reflecting the exercise of certain employee stock options during that period. The Registrant paid no dividend on its common stock in 1997 or 1996. The Registrant has no material outstanding capital commitments which would require additional financing. Recent Accounting Pronouncements The Registrant has calculated basic and diluted earnings per share ("EPS"), as defined in SFAS No. 128 - Earnings per Share. The Registrant has determined, based on its interpretation of information currently available, that such amounts do not differ materially from primary EPS, which is reflected in the Registrant's Statement of Operations for the years presented. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997 and requires restatement of all prior period EPS data presented. PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K a) Exhibits None b) Reports on Form 8-K None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. MOTOR CLUB OF AMERICA REGISTRANT Stephen A. Gilbert By: Stephen A. Gilbert President Patrick J. Haveron By: Patrick J. Haveron Executive Vice President - Chief Financial Officer and Chief Accounting Officer Dated: November 14, 1997 EX-27 2 ARTICLE 7 FIN. DATA SCHEDULE FOR 3RD QTR 10-Q
7 These schedules contain summary financial information extracted from Motor Club of America's Consolidated Balance Sheets for the period ending September 30, 1997 and the Consolidated Statements of Operations for the nine months then ended and is qualified in its entirety by reference to such financial statements. 9-MOS DEC-31-1997 SEP-30-1997 58,393,752 0 0 0 534,183 0 58,927,935 2,385,404 0 5,273,653 96,288,979 48,655,027 17,061,295 0 0 0 0 0 1,045,715 20,714,875 96,288,979 38,214,590 2,653,173 0 168,005 25,203,606 11,085,228 1,271,278 3,475,656 840,213 2,635,443 0 0 0 2,635,443 1.27 1.27 47,666,856 27,184,536 420,711 9,153,317 17,463,759 48,655,027 666,711
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