#### **SECURITIES ANDEXCHANGE COMMISSION**

### **Washington, D.C. 20549**

 

##### **FORM 10–K/A**

### **AMENDMENT NO. 1**

 

**ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d)**

# **OF THE SECURITIES EXCHANGEACT OF 1934**

 

| For the fiscal year end |   | Commission File Number |
|-------------------------|--------|------------------------|
| December 31, 1998       |   | 0–671             |

 

 

###### **MOTOR CLUB OFAMERICA**

(Exact name ofregistrant 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 telephonenumber, including area code:  **(201) 291–2000**

** **

Securitiesregistered pursuant to Section 12(b) of the Act:

**None**

Securitiesregistered pursuant to Section 12(g) of the Act:

**CommonStock (par value) $.50 per share**

 

(Title of Class)

Indicate by check mark whether the registrant (l) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes  ý  No  o

 

Indicate by check mark if disclosure of delinquentfilers 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 definitiveproxy or information statements incorporated by reference in Part III of thisForm 10–K or any amendment to this Form 10–K. ý

 

The aggregate market value of the voting Common Stock (par value $.50 pershare) held by non–affiliates on March 26, 1999 was $15,895,456 based onthe closing selling price.

 

2,116,429 shares of Common Stock were outstanding as of March 26, 1999.

 

Documents Incorporated by Reference: Portions of the registrant’s definitive proxy statement issued inconjunction with the June 9, 1999 Annual Meeting of Shareholders (Part III).

 

 

# **EXPLANATORY NOTE**

 

This Amendment No. 1 on Form 10-K/A to the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 1998 amends the Form 10-K byrestating certain financial information for prior periods which is discussed inNote U of the notes to consolidated financial statements.

 

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the Registrant has duly caused this amendment to its Form 10-K to be signed on its behalf by theundersigned, thereunto duly authorized.

 

# **MOTORCLUB OF AMERICA**

**                                                                                                                                (Registrant)**

 

 

| Dated:  January 9, 2002 |   | By  s/Patrick J. Haveron      |
|------------------------------|--------|------------------------------------|
|                         |   | Patrick  J. Haveron                |
|                         |   | Executive  Vice President,         |
|                         |   | Chief  Executive Officer and Chief |
|                         |   | Financial Officer                  |
|                         |   |                               |
|                         |   | By  s/Francis J. Fenwick      |
|                         |   | Francis  J. Fenwick                |
|                         |   | Vice  President - Finance          |
|                         |   | and  Chief Accounting Officer      |

 

 

### **MOTORCLUB OF AMERICA**

**ANNUAL REPORT ON FORM 10-K/A**

**DECEMBER 31, 1998**

 

 

|           |   | PART  I                                                                                     |   |   |
|----------------|--------|---------------------------------------------------------------------------------------------|--------|--------|
|           |   |                                                                                        |   |   |
| ITEM   1. |   | BUSINESS                                                                                    |   |   |
| ITEM  2.  |   | PROPERTIES                                                                                  |   |   |
| ITEM  3.  |   | LEGAL PROCEEDINGS                                                                           |   |   |
| ITEM  4.  |   | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                        |   |   |
|           |   |                                                                                        |   |   |
|           |   | PART  II                                                                                    |   |   |
|           |   |                                                                                        |   |   |
| ITEM  5.  |   | MARKET  FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS             |   |   |
| ITEM  6.  |   | SELECTED FINANCIAL  DATA                                                                    |   |   |
| ITEM  7.  |   | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |   |   |
|           |   |                                                                                        |   |   |
| ITEM  8.  |   | FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA                                                |   |   |
| ITEM  9.  |   | CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE       |   |   |
|           |   |                                                                                        |   |   |
|           |   | PART  III                                                                                   |   |   |
|           |   |                                                                                        |   |   |
| ITEM  10. |   | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                          |   |   |
| ITEM  11. |   | EXECUTIVE COMPENSATION                                                                      |   |   |
| ITEM  12. |   | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND  MANAGEMENT                             |   |   |
| ITEM  13. |   | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                              |   |   |
|           |   |                                                                                        |   |   |
|           |   | PART  IV                                                                                    |   |   |
|           |   |                                                                                        |   |   |
| ITEM  14. |   | EXHIBITS,  FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K                           |   |   |

 

 

 

**CautionaryStatement**

 

This Report on Form 10-K contains statements that arenot historical facts and are considered “forward-looking statements” (asdefined in the Private Securities Litigation Reform Act of 1995), which can beidentified by terms such as “believes”, “expects”,  “may”, “will”, “should”, “anticipates”, the negatives thereof, orby discussions of strategy.  Certainstatements contained herein are forward-looking statements that involve risks,uncertainties, opinions and predictions, and no assurance can be given that thefuture results will be achieved since events or results may differ materiallyas a result of risks facing the Company. These include, but are not limited to, economic, market or regulatoryconditions as well as risks associated with Motor Club of America’s entry intonew markets;  Motor Club of America’spending merger with North East Insurance Company; diversification; catastrophicevents; potential future tax liabilities related to an insolvent subsidiary;and state regulatory and legislative actions which can affect the profitabilityof certain lines of business and impede Motor Club of America’s ability tocharge adequate rates.  Accordingly,Motor Club of America’s premium growth and underwriting results have been andwill 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 groupof wholly-owned subsidiaries of which the Registrant is parent, are known asthe “Motor Club of America Companies” (the “Motor Club of America Group”) andprovide property and casualty insurance services.  The Registrant, incorporated in New Jersey in 1933 as “AutomobileAssociation of New Jersey”, is the successor to a New Jersey corporationorganized in 1926.  The present name wasadopted in 1958.

 

The Registrant has two subsidiaries which writeproperty and casualty insurance, Motor Club of America Insurance Company(“Motor Club”) and Preserver Insurance Company (“Preserver”).  Motor Club writes private passengerautomobile (“PPA”)  business. Preserverwrites small commercial, homeowners and ancillary coverages.  Motor Club and Preserver are collectivelyreferred to as the “Insurance Companies”. The Insurance Companies are domiciled in the State of New Jersey.

 

The Registrant is pursuing a strategy to: (1) increaseits identification as a provider of small commercial lines insurance and hascontinued to expand its product line in support of this objective; and (2)expand and diversify its insurance operations outside the State of NewJersey.  The Registrant believes thatboth of these objectives can be attained through the acquisition of otherinsurance companies which present opportunities to write these product lines indifferent geographic areas.  TheRegistrant expects to continue to pursue these objectives during 1999 andbeyond.

 

 

On March 16, 1999, the Registrant signed a definitiveAgreement and Plan of Merger (“Merger Agreement”) to acquire North EastInsurance Company (“North East”) through a merger of a wholly-owned subsidiaryof the Registrant with and into North East (“Merger”).  North East is a NASDAQ listed property andcasualty insurance company, headquartered in Scarborough, Maine and tradingunder the symbol NEIC.  Under the termsof the Merger Agreement, North East shareholders will receive, at theirindividual election, (a) $3.30 per share of North East common stock, (b) oneshare of the Registrant’s common stock for each 5.25 shares of North Eastcommon stock, or (c) a combination thereof. If the North East shareholders in the aggregate elect to exchange morethan 50% of their shares for the Registrant’s stock, the aggregate percentagewill be ratably reduced to 50%.

 

Consummation of the Merger is subject to thesatisfaction of certain conditions set forth in the merger agreement, includingapproval from the shareholders of the Registrant and North East andauthorization by state insurance regulators. Both the Registrant and North East expect that these conditions will besatisfied in due course.

 

The Company has restated certain financial informationfor prior periods, which is discussed in Note U of the Notes to ConsolidatedFinancial Statements.

 

(b)           **Financial Information About IndustrySegments**

 

The Registrant does not have any reportable industrysegments for the three fiscal years reported in this Form 10-K.

 

(c)           **Narrative Description of Business**

 

See Items 1 (a) and 7.

 

**Fire andCasualty Insurance Operations**

** **

**General**

 

The Insurance Companies distribute insurance policiesand generate premium revenue through approximately 160 independent producers inNew Jersey.

 

The Registrant anticipates continuing its emphasis ofthe small commercial and ancillary coverages written by Preserver in the Stateof New Jersey.  Commencing in 1998,Preserver began to offer workers’ compensation insurance as part of itscommercial lines product offerings, along with product offerings in boiler andmachinery and umbrella coverages which were enhanced in 1997.  New PPA writings by Motor Club are expectedto continue as well.

 

Preserver has sought to increase its identity as acommercial lines market through these product improvements as well as a newcorporate identification program, specifically, its “Preserver - The BusinessAdvantage” logo.  The Registrantbelieves these improvements, combined with Preserver’s existing product line,enable Preserver to offer a broad, competitive product line which will growsteadily in the future.

 

As of December 31, 1998, the Insurance Companies had apooled rating of B+ (Very Good) by A.M. Best Company, Inc. (“Best”).  See Item 1(c) “Narrative Description of Business- Fire and Casualty Insurance Operations - Pooling Arrangement”.

 

In January 1999, Preserver and Motor Club receivedseparate ratings of B+ (Very Good) from Best. Best ratings are based upon factors relevant to policyholders and arenot directed toward the protection of investors.  Management believes that the Best rating is an important factorin marketing the Insurance Companies’ products, and in particular Preserver’s,to their agents and customers.

 

 

From January 1, 1996 to December 31, 1997, Preserverand Motor Club participated in an intercompany pooling agreement (“Pooling”)under which their property and casualty business was combined.  See Item 1(c) “Narrative Description ofBusiness - Fire and Casualty Insurance Operations - Pooling Arrangement” forfurther details. In each of Accident Years 1996 and 1997, Preserver’sparticipation in the Pooling was 30% and Motor Club’s was 70%.

 

Effective July 1, 1998, Motor Club began convertingits existing policies with six month terms to twelve month policy terms (the“Policy Term Conversion”).  Managementbelieves this measure will further improve the Registrant’s operatingefficiency and service levels, and reduce expenses.  While the Policy Term Conversion will, for a one year periodcommencing July 1, 1998, temporarily increase the amount of premiums written byMotor Club, it will not effect the amount of premiums earned.

 

The table which follows reflects the increase inpremium written as a result of the Policy Term Conversion and sets forth the directpremiums written, by line of insurance, for the Insurance Companies for thelast five years:

 
| **Direct Written Premiums**                                |
|------------------------------------------------------------|
| **(Amounts in Thousands - Exclusive  of Service Charges)** |
|                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                       |   | **1998** |   | **1997** |   | **1996** |   | **1995** |   | **1994** |   |
|                                                       |   | **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                               |   | $ | 54,254 |   | 76.7 | % | $ | 43,238 |   | 74.7 | % | $ | 41,055 |   | 76.0 | % | $ | 32,100 |   | 73.1 | % | $ | 27,636 |   | 74.4 | % |
| Commercial Lines                                           |   | 9,672 |   | 13.7 | % | 8,019 |   | 13.9 | % | 6,744 |   | 12.5 | % | 5,828 |   | 13.3 | % | 4,431 |   | 12.0 | % |
| Personal Property                                          |   | 6,833 |   | 9.6 | % | 6,596 |   | 11.4 | % | 6,216 |   | 11.5 | % | 5,972 |   | 13.6 | % | 5,056 |   | 13.6 | % |
| Total                                                      |   | $ | 70,759 |   | 100.0 | % | $ | 57,853 |   | 100.0 | % | $ | 54,015 |   | 100.0 | % | $ | 43,900 |   | 100.0 | % | $ | 37,123 |   | 100.0 | % |

 

 

 

The following table sets forth ratios for theInsurance Companies prepared in accordance with generally accepted accountingprinciples (“GAAP”) and with statutory accounting practices (“SAP”) prescribedor permitted by state insurance authorities. The SAP combined ratio, a standard measure of underwritingprofitability, is the sum of: (i) the ratio of incurred losses and lossexpenses to net earned premium (“loss ratio”); and (ii) the ratio of expensesincurred for commissions, premium taxes, administrative and other underwritingexpenses to net written premium (“expense ratio”).  The GAAP combined ratio is calculated in the same manner exceptthat it is based on GAAP amounts and the denominator for each component is netearned premium.

 

 
|                         |   | **December 31,** |   |
|------------------------------|--------|------------------|--------|
|                         |   | **1998**         |   | **1997** |   | **1996** |   |
| GAAP operating  ratios:      |   |             |   |   |   |   |   |
| Loss ratio                   |   | 68.6             | %      | 65.1 | % | 64.5 | % |
| Expense ratio                |   | 29.1             | %      | 33.3 | % | 37.9 | % |
| Combined ratio               |   | 97.7             | %      | 98.4 | % | 102.4 | % |
| Statutory  operating ratios: |   |             |   |   |   |   |   |
| Loss ratio                   |   | 69.9             | %      | 66.3 | % | 66.6 | % |
| Expense ratio                |   | 28.8             | %      | 32.4 | % | 37.5 | % |
| Combined ratio               |   | 98.7             | %      | 98.7 | % | 104.1 | % |

 

In general, when the combined ratio is under 100%,underwriting results are considered profitable.  Conversely, when the combined ratio is over 100%, underwritingresults are generally considered unprofitable. The combined ratio reflects underwriting results and not investmentincome, federal income taxes or other non-operating income or expense.  The Registrant’s operating income is afunction of both underwriting results and investment income.

 

**PoolingArrangement**

 

From January 1, 1996 to December 31, 1997, theInsurance Companies participated in an intercompany pooling arrangement (“Pooling”)with each other.  Since the inception ofthe Pooling, it was the Registrant’s intention to maintain the Pooling onlyuntil Preserver could secure a separate Best rating equal to or greater thanthe pooled Best rating of B+ (Very Good).

 

On December 17, 1998, the New Jersey Department ofBanking and Insurance (“NJ DOBI”) approved the termination of the poolingagreement on a run-off basis effective January 1, 1998, which means that losseson the years covered by the Pooling will still be pooled until they arecompletely settled.  Pursuant to theapproved Pooling termination, the Insurance Companies have no further liabilityto each other under the pooling agreement as to losses occurring after December31, 1997.  As noted previously,Preserver received a separate rating of B+ (Very Good) from Best in January1999.

 

The Pooling enabled Preserver, which commencedoperations in 1993, to attain a Best rating it would not otherwise have beenable to achieve due to its relatively insufficient operating experience.  The Pooling was intended to permit a moreuniform and stable underwriting result from year to year for the InsuranceCompanies in the Pooling than they would experience individually and to reducethe risk of either of the Pooling participants by spreading the risk of loss ofeither of the pool participants.  TheInsurance Companies therefore had at their disposal the underwriting capacityof the entire pool, rather than being limited to policy exposures of a sizecommensurate with its own capital and surplus. The additional capacity existed because such policy exposures are spreadbetween both pool participants which each have its own capital andsurplus.  Regulation by state insurancedepartments is applied to the individual companies rather than to the Pooling.

 

Pursuant to the terms of the Pooling, Preserver cededto Motor Club 100% of its net premiums on all of its business as of January 1,1996 and between that date and December 31, 1997, and 100% of its net lossesand expenses on all of its business occurring between January 1, 1996 andDecember 31, 1997. All of Motor Club’s net premiums, losses and expenses during these same periods, as applicable,were included in the pooled business. Motor Club then retroceded to Preserver 30% of the premiums, losses andexpenses subject to the Pooling, and retained the remaining 70%.  The Pooling does  not legally discharge the Insurance Companies from their primaryliability for the full amount of the policies ceded.

** **

**LossReserves**

 

Reserves for unpaid losses and loss expenses at anyreport date reflect the estimate of the liabilities for the ultimate net lossof reported claims and estimated incurred but not reported claims.

 

The liability for unpaid losses and loss expenses isdetermined using case–basis evaluations and statistical projections andrepresents estimates of the ultimate net cost of all unpaid losses and lossexpenses through December 31 of each year. These estimates are continually reviewed and refined as historicalexperience develops, new information becomes known and the effects of trends infuture claim severity and frequency are considered.

 

The liabilities are adjusted accordingly with suchadjustments being reflected in the current year operations.  No trends that are considered abnormal havebeen identified as of the most recent evaluation date, December 31, 1998.

 

The Insurance Companies generally reinsure all risksin excess of $100,000 for property lines (increased from $75,000 for lossesincurred before July 1, 1997) and $150,000 for casualty lines.

 

The followingtable presents a reconciliation of beginning and ending liability balances for1998, 1997 and 1996, reported under GAAP:

**RECONCILIATIONOF LIABILITY FOR LOSSES AND LOSS EXPENSES**

 
|                                                                                           |   | **1998**                   |   | **1997** |   | **1996** |   |
|------------------------------------------------------------------------------------------------|--------|----------------------------|--------|----------|--------|----------|--------|
|                                                                                           |   | **(Thousands of Dollars)** |   |
| Liability for  losses and loss expenses, net of reinsurance recoverables, at January 1         |   | $                          | 32,884 |     | $      | 28,114   |   | $ | 23,409 |   |
| **Incurred losses and loss expenses**                                                          |   |                       |   |     |   |     |   |
| Provision for  current year claims                                                             |   | 32,598                     |   | 29,369   |   | 28,244   |   |
| Increase in  provision for prior years’ Claims                                            |   | 3,881                      |   | 3,773    |   | 904      |   |
| Total incurred  losses and loss expenses                                                       |   | 36,479                     |   | 33,142   |   | 29,148   |   |
| **Payments for losses and loss  expenses**                                                     |   |                       |   |     |   |     |   |
| Payments on  current year claims                                                               |   | 12,038                     |   | 12,169   |   | 13,029   |   |
| Payments on  prior years’ claims                                                          |   | 17,511                     |   | 16,203   |   | 11,414   |   |
| Total payments  for losses and loss expenses                                                   |   | 29,549                     |   | 28,372   |   | 24,443   |   |
| Liability  for losses and loss expenses, net of  reinsurance recoverables, at December 31 |   | 39,814                     |   | 32,884   |   | 28,114   |   |
| Reinsurance  recoverables on unpaid losses and loss expenses, at December 31                   |   | 18,521                     |   | 17,363   |   | 19,553   |   |
| Liability for  losses and loss expenses, gross of reinsurance recoverables, at December 31     |   | $                          | 58,335 |     | $      | 50,247   |   | $ | 47,667 |   |

 

The reconciliation shows a 1998 deficiency of$3,881,000 in the liability recorded at December 31, 1997.  The deficiency is primarily the result of;(1) initial net adverse development of reserves at December 31, 1997 which isconsistent with the Registrant’s loss development history; and (2) continuingadverse development of losses incurred in 1996.

 

The Registrant believes that its book of business,particularly Motor Club’s PPA book of business, has loss developmentcharacteristics which result in initial adverse development (“InitialDevelopment”) but ultimately develop closer to the reserves initiallyestablished.  This Initial Developmenttypically occurs during the first 24 to 36 months of a given year’sreserves.  Historically, the InitialDevelopment has been offset by redundancies from older years approximating orgreater than the Initial Development. However, as Motor Club’s PPA book of business has grown, the InitialDevelopment has been greater than the redundancies in  older years.

 

The Registrant believes that as the new PPA book ofbusiness written by Motor Club continues to stabilize and  mature, the Net Cumulative Deficiency in themore recent years will decline and thus the deficiencies indicated willdiminish.  The Registrant believes thispattern is supported by the generally sequential decline in the Net CumulativeDeficiency from the most recent year presented to the oldest yearpresented.  The Registrant also believesthat the Initial Development referred to is generally consistent andidentifiable in the table on page 14.

 

The Registrant also believes that the 1996 adversedevelopment is attributable principally to losses which occurred in 1996,primarily in Motor Club’s PPA book of business.  During 1996, Motor Club’s new PPA book of business was in itsfirst twelve months of development.  Asis consistent with applicable New Jersey statutes, no business had yet beennon-renewed, resulting in a book of PPA business that lacked historicalexperience.  Thereafter, certainbusiness was non-renewed and the performance of the book has improved.  Given the adverse development of thisparticular year, it is possible that the Net Cumulative Deficiency for 1996 maynot develop consistently with the other years described above, but theRegistrant does not believe that this is indicative of prospective lossdevelopment for years after 1996.

 

The differencesbetween the liability for unpaid losses and loss expenses reported in theRegistrant’s consolidated financial statements prepared in accordance with GAAPand those reported in the annual statements filed by the Insurance Companieswith State insurance departments in accordance with SAP are reconciled asfollows:

 
|                                                                                                                                |   | **December 31,**           |   |
|-------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------|--------|
|                                                                                                                                |   | **1998**                   |   | **1997** |   | **1996** |   |
|                                                                                                                                |   | **(thousands of dollars)** |   |
| Liability for  unpaid losses and loss expenses on a SAP basis (net of reinsurance  recoverables on unpaid losses and loss expenses) |   | $                          | 43,111 |   | $ | 35,900 |   | $ | 30,686 |   |
| Reinsurance  recoverables on unpaid losses and loss expenses                                                                        |   | 18,521                     |   | 17,363 |   | 19,553 |   |
| Anticipated  salvage and subrogation recoveries                                                                                     |   | (3,297                     | )      | (3,016 | ) | (2,572 | ) |
| Liability for  unpaid losses and loss expenses, as reported in the Registrant’s GAAP basis  financial Statements               |   | $                          | 58,335 |   | $ | 50,247 |   | $ | 47,667 |   |

 

The anticipated effect ofinflation is implicitly considered when estimating liabilities for losses andloss expenses.  While anticipated priceincreases due to inflation are considered in estimating the ultimate claimcosts, the increase in the average severity of claims is caused by a number offactors that vary with the individual type of policy written.  These anticipated trends are monitored basedon actual development and are modified if necessary.

 

The table on Page 14presents the development of the GAAP balance sheet liabilities for 1992 through1998; data is presented for those years in which the Insurance Companies hadoperations.

 

The top line on the tableshows the estimated liability for unpaid losses and loss expenses recorded atthe balance sheet date for each of the indicated years.  This liability represents the estimatedamount of losses and loss expenses for claims arising in that and all prioryears that are unpaid at the balance sheet date, including losses that had beenincurred but not yet reported. The upper portion of the table shows the re–estimatedamount of the previously recorded liability, based on experience as of the endof each succeeding year.  The estimateis increased or decreased as more information becomes known about the frequencyand severity of claims for development years. The Net Cumulative Deficiency represents the aggregate change in theestimates over all prior years.  Thelower section of the table shows the cumulative amounts paid with respect topreviously recorded liabilities as of the end of each succeeding year.

 

 

In evaluating thisinformation, it should be noted that each amount includes the effects of allchanges in amounts for prior periods. For example, the amount of deficiency relating to losses settled in1997, but incurred in 1993, will be included in the cumulative deficiency forthe 1997 year.

 

This table does notpresent accident or policy year development data, which readers may be moreaccustomed to analyzing.  Conditions andtrends that have affected development of liabilities in the past may notnecessarily occur in the future. Accordingly, it may not be appropriate toextrapolate future redundancies or deficiencies based on this table.

** **
| **LOSS  AND LOSS EXPENSE DEVELOPMENT (In Thousands)**                               |
|-------------------------------------------------------------------------------------|
|                                                                                |   |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Year ended December 31**                                                          |   | **1992** |   | **1993** |   | **1994** |   | **1995** |   | **1996** |   | **1997** |   | **1998** | ** ** |
| **Liability for unpaid losses and  loss expenses, net of reinsurance recoverables** |   | **$** | **28,469** | ** ** | **$** | **25,334** | ** ** | **$** | **22,356** | ** ** | **$** | **23,409** | ** ** | **$** | **28,114** | ** ** | **$** | **32,884** | ** ** | **$** | **39,814** | ** ** |
| **Net Liability Re–estimated as  of:**                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **One year later**                                                                  |   | **27,145** | ** ** | **26,253** | ** ** | **23,468** | ** ** | **24,313** | ** ** | **31,887** | ** ** | **36,765** | ** ** | **—** | ** ** |
| **Two years later**                                                                 |   | **28,563** | ** ** | **26,766** | ** ** | **23,813** | ** ** | **25,759** | ** ** | **33,848** | ** ** | **—** | ** ** | **—** | ** ** |
| **Three years later**                                                               |   | **28,454** | ** ** | **26,819** | ** ** | **24,181** | ** ** | **25,680** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** |
| **Four years later**                                                                |   | **28,702** | ** ** | **26,572** | ** ** | **23,759** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** |
| **Five years later**                                                                |   | **28,662** | ** ** | **26,066** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** |
| **Six years later**                                                                 |   | **28,516** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** |
|                                                                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net Cumulative Deficiency**                                                       |   | **$** | ** (47** | **)** | **$** | ** (732** | **)** | **$** | ** (1,403** | **)** | **$** | ** (2,271** | **)** | **$** | ** (5,734** | **)** | **$** | ** (3,881** | **)** | **$** | ** —** | ** ** |
|                                                                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Cumulative Amount of Liability Paid  Through:**                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **One year later**                                                                  |   | **12,314** | ** ** | **12,311** | ** ** | **11,106** | ** ** | **11,414** | ** ** | **16,203** | ** ** | **17,511** | ** ** | **—** | ** ** |
| **Two years later**                                                                 |   | **20,270** | ** ** | **18,992** | ** ** | **17,231** | ** ** | **18,357** | ** ** | **24,830** | ** ** | **—** | ** ** | **—** | ** ** |
| **Three years later**                                                               |   | **24,546** | ** ** | **23,032** | ** ** | **20,821** | ** ** | **22,164** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** |
| **Four years later**                                                                |   | **26,878** | ** ** | **24,882** | ** ** | **22,488** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** |
| **Five years later**                                                                |   | **27,642** | ** ** | **25,373** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** |
| **Six years later**                                                                 |   | **27,810** | ** ** | **—** | ** ** | **—** | ** ** | **—** |   |   |   |   |   |   |   |
|                                                                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net liability - December 31**                                                     |   | **$** | **28,469** | ** ** | **$** | **25,334** | ** ** | **$** | **22,356** | ** ** | **$** | **23,409** | ** ** | **$** | **28,114** | ** ** | **$** | **32,884** | ** ** | **39,814** | ** ** |
| **Reinsurance recoverables**                                                        |   | **21,698** | ** ** | **20,484** | ** ** | **19,309** | ** ** | **16,415** | ** ** | **19,553** | ** ** | **17,363** | ** ** | **18,521** | ** ** |
| **Gross liability - December 31**                                                   |   | **$** | **50,167** | ** ** | **$** | **45,818** | ** ** | **$** | **41,665** | ** ** | **$** | **39,824** | ** ** | **$** | **47,667** | ** ** | **$** | **50,247** | ** ** | **$** | **58,335** | ** ** |

** **

 

**Reinsurance**

 

The Insurance Companiesfollow the customary industry practice of reinsuring a portion of their risksand paying to reinsurers a portion of the premiums received on thepolicies.  The Insurance Companies’reinsurance program permits greater diversification of business and the abilityto write larger policies while limiting maximum net losses; in addition, the reinsurance program is designed toprotect against catastrophic losses. Reinsurance does not legally discharge an insurer from its primaryliability for the full amount of the policies, although it does make thereinsurer liable to the insurer to the extent of the reinsurance ceded.  Therefore, the Insurance Companies aresubject to credit risk with respect to their reinsurers.  Reinsurance premiums and recoveries have been,and during the run-off period, are being allocated to the participants in thePooling according to their respective participation percentages.

 

Reinsurance for propertylosses of Preserver is maintained under a per risk excess of loss treatyaffording recovery to $2 million, in excess of a retention of $100,000.  This retention had been $75,000 until July1, 1997.  In addition, the InsuranceCompanies’ catastrophe reinsurance program presently covers substantially allof the losses in excess of $500,000 up to $42.5 million.  The Company also maintains a 100% quotashare treaty for boiler and machinery coverage.

 

Casualty reinsurance iscurrently maintained under an excess of loss treaty affording recovery up to $3million, in excess of a retention of $150,000. The Insurance Companies also maintain reinsurance coverage for personaland commercial umbrella policies up to $2 million for personal lines policiesand up to $5 million for commercial lines policies.  Effective March 1, 1998, Preserver entered into reinsurancecontracts for the workers’ compensation policies it commenced writing on thatdate.  An 80% quota share reinsurancecontract on the first $500,000 of workers’ compensation coverage has beenimplemented; an excess of loss treaty affording coverage up to $10 million inexcess of the retention of $500,000 has also been implemented.

 

Effective January 1,1999, Preserver purchased aggregate stop loss reinsurance for all of its lines of business which will provide $3million coverage in excess of a loss ratio of 67.5% (in 1999) after theapplication of all other reinsurance. The treaty is subject to experience adjustments over a three-year periodand pays Preserver for the time use of premiums paid to the reinsurer, net oflosses paid.  This treaty affordsPreserver protection against elevated levels of frequency or severity of losseswhich are not consistent with its historical experience, and includes but isnot limited to weather-related events which may not rise to the level of acatastrophe.

 

The Insurance Companiesalso maintained an 80% quota share reinsurance agreement for theirnon-automobile policies issued prior to February 19, 1994, until theirexpiration dates.

 

The Insurance Companiesconsider numerous factors in selecting reinsurers, the most important of whichis the financial stability of the reinsurer. The Insurance Companies have not experienced any collectibility problemsfor its reinsurance recoverables.

** **

**Competition**

 

The property and casualtyinsurance industry is generally highly competitive on the basis of both priceand service.

 

There are numerouscompanies competing for the coverages which Preserver offers in New Jersey,many of which are substantially larger and have considerably greater resourcesthan Preserver.  In addition, becausePreserver’s insurance products are marketed exclusively through independentinsurance agencies, most of which represent more than one insurance company,Preserver faces competition within each agency.

 

While Motor Clubdistributes its personal auto policies similarly and thus faces the same issuesas Preserver in concept, the personal auto regulatory environment in NewJersey, particularly its “take-all-comers” requirements (see Regulation), hassuppressed competition and effectively eliminated risk selection.  In addition, the New Jersey market hashistorically been subject to regulatory and legislative volatility which has,at times, adversely affected the profitability of the PPA line of business, furthersuppressing competition.  Finally,approximately 24% of Motor Club’s appointed independent insurance agenciesrepresent only Motor Club for PPA coverage and thus, Motor Club has nocompetition for this business in those agencies.  New Jersey law also substantially restricts the ability of aninsurer to terminate its agencies, limiting Motor Club’s ability to manage itsagency force for PPA.  Managementbelieves this lack of competition in PPA presents a significant business riskwhich must be monitored very closely on an ongoing basis.

** **

**Investmentsand Information about Market Risk**

 

Management hasmaintained, in its opinion, a conservative investing philosophy.  The Registrant manages its investmentportfolio with the assistance of investment professionals based on guidelinesestablished by management and approved by the Board of Directors.

 

The overall goal of theportfolio is to enhance investment returns within the structure of limitedcredit risk assumption which management has utilized, with evaluations ofportfolio duration made in relation to the current interest rate environment.

 

During 1998, theRegistrant’s investment guidelines were expanded to allow for a higherpercentage of investments in investment grade corporate bonds andmortgage-backed securities and to include certain investment grade asset-backedsecurities, which provide more structured cash flows.   The objectives of these changes to the Registrant’s investmentpolicy were: (1) to reduce the amount of interest risk in the portfolio; and(2) enhance portfolio yield without unreasonably increasing credit risk.  The Registrant believes these objectiveshave been accomplished.

 

The Registrant does notinvest in or hold any derivative financial instruments.

 

Tax exempt securitieshave not been acquired.  Managementbelieves that the current tax position of the Registrant, which includes netoperating loss carryforwards, dictates the exclusion of tax exempt securitiesfrom the portfolio, which historically provide substantially lower yields on abefore tax basis than taxable securities.

 

Market risk representsthe potential for loss due to adverse changes in the fair value of financialinstruments.  The market risks relatedto the financial instruments of the Registrant relate to the investment portfolio,which exposes the Registrant to risks related to interest rates, and to alesser extent, credit quality and prepayment. The Registrant does not have exposure to foreign currency exchange ratesor equity prices.

 

Interest rate risk is theprice sensitivity of a fixed income security to changes in interest rates.  The Registrant views these potential changesin price within the overall context of asset and liability management.  The payout pattern of insurance liabilitiesare actuarially determined, to determine their duration, which is the presentvalue of the weighted average payments expressed in years.  Duration targets are then set for theRegistrant’s fixed income investment portfolio after consideration of theseliabilities and other factors, which the Registrant believes mitigates theoverall effect of its exposure to interest rate risk.

 

At December 31, 1998 and1997, the Registrant’s investment portfolio was comprised of the followingtypes of securities:

 
|                        |   | **December 31, 1998** |       | **December 31, 1997** |   |
|-----------------------------|--------|-----------------------|------------|-----------------------|--------|
|                        |   | **Market**            |       |                  |   | **Market** |   |   |   |
|                        |   | **Value**             |       | **Percent**           |   | **Value** |   | **Percent** |   |
| Taxable Fixed  Maturities   |   | $                     | 69,594,904 |                  | 91.6   | % | $ | 56,831,444 |   | 88.1 | % |
| Short Term  Investments     |   | 5,995,299             |       | 7.9                   | %      | 7,150,000 |   | 11.1 | % |
| Mortgage Loans              |   | 361,038               |       | 0.5                   | %      | 522,555 |   | 0.8 | % |
| Total Investment  Portfolio |   | $                     | 75,951,241 |                  | 100.0  | % | $ | 64,503,999 |   | 100.0 | % |

 

                                AtDecember 31, 1998 and 1997, the taxable fixed maturity portfolio consisted ofthe following types of securities:

 
|                               |   | **December 31, 1998** |       | **December 31, 1997** |   |
|------------------------------------|--------|-----------------------|------------|-----------------------|--------|
|                               |   | **Market**            |       |                  |   | **Market** |   |   |   |
|                               |   | **Value**             |       | **Percent**           |   | **Value** |   | **Percent** |   |
|                               |   |                  |       |                  |   |   |   |   |   |
| United States  Treasuries          |   | $                     | 18,669,055 |                  | 26.8   | % | $ | 29,205,469 |   | 51.3 | % |
| United States  Government Agencies |   | 4,476,576             |       | 6.5                   | %      | 5,495,828 |   | 9.7 | % |
| Mortgage-Backed  Securities        |   | 11,213,589            |       | 16.1                  | %      | 10,096,820 |   | 17.8 | % |
| Asset-Backed  Securities           |   | 10,805,970            |       | 15.5                  | %      | — |   | — |   |
| Corporate Bonds                    |   | 24,429,714            |       | 35.1                  | %      | 12,033,327 |   | 21.2 | % |
| Total                              |   | $                     | 69,594,904 |                  | 100.0  | % | $ | 56,831,444 |   | 100.0 | % |

 

Mortgage-backedsecurities (“MBS”) consist primarily of Government National MortgageAssociation issues, along with other MBS issues of the United StatesGovernment.  Asset-backed securities(“ABS”) issues are all rated “Aaa” by Moody’s and “AAA” by Standard &Poor’s.  The underlying collateral ofABS issues at December 31, 1998 consist primarily of home equity loans.

 

Thetaxable fixed maturity portfolio duration at December 31, 1998 and 1997 was3.69 and 3.74 years, respectively.

 

United States Treasuriesare weighted towards maturities of five years or less, to reduce interest raterisk and match the Insurance Companies’ claims payout ratio; corporateobligations are generally weighted towards five to ten year maturities, to takeadvantage of the yield curve; the average life of the GNMA portfolio has beenmaintained at approximately 10 years to reduce interest rate risk.

 

Please refer to Note C inthe Notes to Consolidated Financial Statements (“Notes”) for statisticsregarding portfolio maturity composition.

 

The Registrant has notacquired, nor are there plans to acquire, below investment grade or “junk”bonds.  Ninety-seven percent of thefixed maturity portfolio as of December 31, 1998 was graded Class 1 accordingto the National Association of Insurance Commissioners’ valuation system.  This classification is reserved for only thehighest quality securities, generally rated A or better by two major ratingservices.

 

At December 31, 1998 and1997, the Registrant’s taxable fixed maturity investment portfolio at marketvalue by Moody’s rating was:

 
|                                 |   | **December 31, 1998** |             | **December 31, 1997** |   |
|--------------------------------------|--------|-----------------------|------------------|-----------------------|--------|
|                                 |   | **Market**            |             |                  |   | **Market** |   |   |   |
|                                 |   | **Value**             |             | **Percent**           |   | **Value** |   | **Percent** |   |
|                                 |   |                  |             |                  |   |   |   |   |   |
| United States  Government Securities |   | $                     | 34,359,229       |                  | 49.4   | % | $ | 44,798,117 |   | 78.9 | % |
| Aaa                                  |   | 11,311,103            |             | 16.2                  | %      | 500,000 |   | 0.9 | % |
| Aa                                   |   | 7,504,082             |             | 10.8                  | %      | 2,797,273 |   | 4.9 | % |
| A                                    |   | 13,388,045            |             | 19.2                  | %      | 7,078,067 |   | 12.4 | % |
| Baa                                  |   | 3,032,445             |             | 4.4                   | %      | 1,657,987 |   | 2.9 | % |
| Total                                |   | $                     |  69,594,904 |                  | 100.0  | % | $ |  56,831,444 |   | 100.0 | % |

 

 

The following tableprovides information about the Registrant’s taxable fixed maturity portfolio atDecember 31, 1998 that are sensitive to changes in interest rates.  The table presents cash flows of principalamounts and related weighted average interest rates by expected maturitydates.  The cash flows are based on theearlier of the call date or the maturity date or, for mortgage and asset-backedsecurities, expected payments patterns. Actual cash flows could differ from the expected amounts.

** **

**EXPECTED CASH FLOWS OF PRINCIPALAMOUNTS**
|                                                 |   |      |      |      |   |      |   |      |      | **TOTAL** |   |           |   |
|------------------------------------------------------|--------|-----------|-----------|-----------|--------|-----------|--------|-----------|-----------|-----------|--------|----------------|--------|
|                                                 |   | **1999**  |      | **2000**  |   | **2001**  |   | **2002**  |      | **2002**  |   | **Thereafter** |   | **AMORTIZED**

**COST** |   | **ESTIMATED**

**MARKET**

**VALUE** |   |
| Taxable— Other than mortgage- backed securities |   | $         | 5,587,108 |      | $      | 2,906,843 |   | $         | 4,648,076 |      | $      | 3,798,001      |   | $ | 1,912,271 |   | $ | 27,072,074 |   | $ | 45,924,373 |   | $ | 47,575,345 |   |
| Average interest rate                                |   | 6.9       | %         | 6.7       | %      | 7.1       | %      | 6.6       | %         | 6.4       | %      | 6.4            | %      | 6.6 | % |   |   |
| Mortgage- backed Securities                          |   | 1,613,735 |      | 1,198,588 |   | 1,035,728 |   | 847,843   |      | 1,111,715 |   | 5,246,077      |   | 11,053,686 |   | 11,213,589 |   |
| Average interest rate                                |   | 7.1       | %         | 7.0       | %      | 7.0       | %      | 6.9       | %         | 6.6       | %      | 6.6            | %      | 6.8 | % |   |   |
| Asset-backed  Securities                        |   | 203,704   |      | 1,802,700 |   | 1,311,088 |   | 2,547,807 |      | 1,194,550 |   | 3,638,503      |   | 10,698,352 |   | 10,805,970 |   |
| Average interest Rate                                |   | 6.1       | %         | 6.3       | %      | 6.3       | %      | 6.4       | %         | 6.4       | %      | 6.5            | %      | 6.4 | % |   |   |
| Total                                                |   | $         | 7,404,547 |      | $      | 5,908,131 |   | $         | 6,994,892 |      | $      | 7,193,651      |   | $ | 4,218,536 |   | $ | 35,956,654 |   | $ | 67,676,411 |   | $ | 69,594,904 |   |

 

Management anticipatescontinuing this minimum risk approach to investing for the foreseeablefuture.  Management believes that themix of investments in both type and maturity length is appropriate in order topreserve capital, take advantage of investment opportunities as they arepresented, and provide the Registrant and its subsidiaries with sufficientliquidity to react to economic and business circumstances as they evolve.

 

The Registrant’sinvestment portfolio yielded 6.30%, 6.41% and 6.25% in 1998, 1997 and 1996,respectively. Including realized gains and losses, the investment portfolioyielded 6.34%, 6.41% and 6.26% in 1998, 1997 and 1996, respectively.

 

**Regulation**

 

General

 

Insurance companies aresubject to supervision and regulation in the states in which they transactbusiness.  Such supervision andregulation relate to numerous aspects of an insurance company’s business andfinancial condition.  The primarypurpose of such supervision and regulation is the protection of policyholders.  The extent of such regulation varies, butgenerally derives from state statutes which delegate regulatory, supervisoryand administrative authority to state insurance departments. Accordingly, theauthority of the state insurance departments includes the establishment ofstandards of solvency which must be met and maintained by insurers; thelicensing to do business of insurers and agents; the nature of and limitationson investments; premium rates for property and casualty insurance; theprovisions which insurers must make for current losses and future liabilities;the deposit of securities for the benefit of policyholders; and the approval ofpolicy forms.  Insurance departmentsalso conduct periodic examinations of the affairs of insurance companies andrequire the filing of annual and other reports relating to the financialcondition of insurance companies.

 

New Jersey law requiresthe Insurance Companies to participate in involuntary insurance programs forautomobile insurance, as well as other property and casualty lines. Theseprograms include joint underwriting associations, assigned risk plans, fairaccess to insurance requirements plans and reinsurance facilities.  These laws generally require all companiesthat write lines covered by these programs to provide coverage (either directlyor through reinsurance) for insureds who cannot obtain insurance in thevoluntary market.  The legislationcreating these programs usually allocates a pro rata portion of risksattributable to such insureds to each company on the basis of direct writtenpremiums or the number of automobiles insured. Generally, state law requires participation in such programs as acondition to doing business.  The lossratio on insurance written under involuntary programs generally has beengreater than the loss ratio on insurance in the voluntary market.

 

During 1997, Motor Clubbegan to participate in the New Jersey Personal Automobile Insurance Plan; feestotaling $254,000 and $191,000 were paid in 1998 and 1997, respectively, to aservicing carrier rather than process these policies and take a risk of furtherloss.

 

State insurance holdingcompany acts regulate insurance holding company systems.  Each insurance company in the holdingcompany system is required to register with the insurance supervisory agency ofits state of domicile and furnish certain information concerning the operationsof companies within the holding company system that may materially affect theoperations, management or financial condition of the insurers within thesystem.  Such laws further requiredisclosure of material transactions including the payment of “extraordinarydividends” from the insurance subsidiaries to the Registrant.

 

Insurance holding companyacts require that all transactions within the holding company system affectingthe insurance subsidiaries must be fair and equitable.  Further, approval of the insurancecommissioner is required prior to the consummation of transactions affectingthe control of an insurer.

 

The Insurance Companiesare restricted by the insurance laws of New Jersey as to the amount ofdividends they may pay to the Registrant without prior approval of theCommissioner of Banking and Insurance. To the extent that statutorily defined surplus is available, the maximumdividend that may be paid by either Motor Club or Preserver during any yearwithout prior regulatory approval is limited to the greater of 10% of thatCompany’s statutory surplus as of the prior December 31, or adjusted net incomeof that Company, for the preceding year. Applying current regulatory restrictions as of December 31, 1998,approximately $1.4 and $1.1 million in dividends would be available fordistribution by Motor Club and Preserver, respectively, to the Registrantwithout prior regulatory approval during 1999. During 1998, Motor Club paid $1 million in dividends to theRegistrant.  No dividends were paid in1997 or 1996 by the Insurance Companies.

 

National Association of Insurance Commissioners(“NAIC”)

 

The Insurance Companiesare subject to the general statutory accounting practices and reporting formatsestablished by the NAIC as well as accounting practices prescribed or permittedby the State of New Jersey.  The NAIChas codified SAP to afford preparers and users of statutory basis financialstatements a more uniform application of SAP by insurers in differing states ofdomicile.  It is not known whetherregulatory authorities in the State of New Jersey will recognize SAP ascodified by the NAIC as the approved basis of financial statement preparationfor insurers domiciled in the State.

 

The NAIC also promulgatesmodel insurance laws and regulations relating to the financial and operationalregulation of insurance companies, which includes the Insurance RegulatingInformation System (“IRIS”). IRIS identifies eleven industry ratios andspecifies “usual values” for each ratio. Departure from the usual values on four or more of the ratios can leadto inquiries from individual state insurance commissioners as to certainaspects of an insurer’s business.  TheInsurance Companies have, in recent years, met substantially all of the IRIStest ratios.  During 1998, Motor Clubdid return two unusual values as a result of the Policy Term Conversion whichare not expected to recur.

 

NAIC model rules andregulations generally are not directly applicable to an insurance company untilthey are adopted by applicable state legislatures and departments ofinsurance.  However, NAIC model laws andregulations have become increasingly important in recent years, due primarilyto the NAIC’s Financial Regulations Standards and Accreditation Program. Underthis program, states which have adopted certain required model laws andregulations and meet various staffing and other requirements are “accredited”by the NAIC.  Such accreditation reflectsan eventual nationwide regulatory network of accredited states.  The State of New Jersey is accredited by theNAIC.

 

The NAIC has adoptedRisk-Based Capital (“RBC”) requirements for property/casualty insurancecompanies, to evaluate the adequacy of statutory capital and surplus inrelation 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 earlywarning tool to identify, for the purpose of initiating regulatory action,insurance companies that potentially are inadequately capitalized.  Regulatory compliance is determined by aratio of the insurer’s regulatory total adjusted capital to its authorizedcontrol level RBC, as defined by the NAIC. Insurers below specific trigger points or ratios are classified withincertain levels, each of which requires specific corrective action.  The ratios of each Insurance Company are inexcess of that required, therefore requiring no action.

 

New Jersey Private Passenger Automobile

 

The New Jersey PPA markethas historically been subject to regulatory and legislative volatility whichhas, at times, adversely affected the profitability of this line of business,despite New Jersey having among the highest average premium rate in the UnitedStates.  New Jersey insurance lawpresently requires insurers to write all eligible PPA coverage presented tothem from drivers with eight points or less on their driving record.  This is commonly referred to as“take-all-comers”.

 

The NJ DOBI may grant aninsurer relief, by written notification, from writing new PPA business pursuantto the take-all-comers provisions of New Jersey law if a showing finds that theinsurer’s premium to surplus (“leverage”) ratio exceeds 3 to 1.  Motor Club’s present applicable leverageratio for the year ended December 31, 1998 is 3.46 to 1.  However, this ratio is temporarily elevateddue to the aforementioned Policy Term Conversion.  It appears that Motor Club’s leverage ratio adjusted for thePolicy Term Conversion was below 3 to 1 at December 31, 1998.

 

In June 1997, the Stateof New Jersey enacted PPA legislation, which principally: (1) repealed theannual “flex” rate increase available to insurers, which was required by law tobe no less than 3%, and replaced it with an expedited prior approval ratefiling process for rate increase requests up to 3% on an overall basis.  Subsequent to the enactment of thislegislation, the Commissioner of the NJ DOBI froze all PPA insurance ratesuntil March 1998, but has not yet promulgated the regulations required forinsurers to file for an expedited rate increase; (2) restricted the ability ofinsurers 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 newpolicies written in each rating territory; and (4) replaced the rating systemwhich assessed surcharges to insureds’ policies for specific driving violationsand accidents with a broader-based tiered rating system. Motor Club’s tierrating system was approved by the NJ DOBI and has been implemented on all PPApolicies with effective dates on and after November 1, 1998.

 

Additional PPAlegislation was enacted in 1998 which: 1) allows insureds to reduce levels ofcompulsory coverages, including the option to reduce their coverage forPersonal Injury Protection (“PIP”) to as low as $15,000, from the presentlyrequired $250,000; 2) revises the PIP policy form to set forth the medicaltreatments and services, valid diagnostic tests and appropriate health careprotocols which are eligible to be paid; 3) seeks to limit lawsuits byclaimants by redefining of the type of injury which would be grounds forlitigation; 4) replaces the present PIP arbitration system which utilizespart-time arbitrators who render only oral decisions without consulting medicalprofessionals with one using full-time dispute resolution professionals who mayrefer questions of medical necessity or diagnosis to medical revieworganizations and who must render written decisions; 5) appoints a specialfraud prosecutor to increase enforcement of fraudulent acts committed againstinsurance companies; 6) removes the system of territorial rating caps whichhave been in place since 1983, enabling insurers to modify (as appropriate)rates charged in various rating territories, which will be redefined; and 7)requires up to a 15% reduction in rates on all PPA policies.

 

Implementation of most ofthe provisions of the 1998 legislation (with one exception) will start with newpolicies issued on March 22, 1999.  Theonly exception is the redefinition of the territories and removal of theterritorial rating caps, which will be implemented in 2000.  The Registrant believes that the legislationwill have a modest net negative effect on Motor Club’s PPA operations andprofitability, because the mandated rate reductions do not appear to becompletely cost justified (based on information presently available) by thecost savings in the legislation.

 

Consistent with NewJersey’s regulatory and legislative history, the enacted and proposedlegislation, current rate freeze and ongoing volatility could adversely affectthe Registrant’s long-term profitability in the PPA line of business.

 

The State of New Jerseyalso maintains an excess profits law which provides that PPA insurers whoseprofits exceed a statutorily computed maximum over a three year period will berequired to pay such excess to its policyholders.  It would appear that presently Motor Club does not have suchexcess profits.

 

The Insurance Companieswere subject to certain assessments in the State of New Jersey, the mostsubstantial of which had been the FAIR Act surtaxes and assessments commencingin 1990; the surtaxes expired after 1992 and the assessments expired after1997.  FAIR Act assessments totaled$971,000 and $962,000 in 1997 and 1996, respectively.

** **

**MotorClub Operations**

 

On December 2, 1996, theRegistrant sold Motor Club of America Enterprises, Inc. (“Enterprises”) to JVLHolding Properties, Inc. (“JVL”), a non-affiliated Oklahoma corporation, for$1,125,000, resulting in a gain of $702,000.

 

Pursuant to an additionalagreement entered into concurrent with the sale of Enterprises, the Registrantprovides certain services to Enterprises’ members whose memberships are writtenwith PPA policies written by Motor Club. In exchange, the Registrant receives a servicing fee from JVL.  The Registrant also receives certain feesfor other memberships written by Enterprises, as defined by this additionalagreement.  The Registrant earned$134,000 and $143,000 in fees from this agreement in 1998 and 1997,respectively.

** **

**Year2000**

 

The Registrant has beenaddressing the issues resulting from computer programs which use two digits,rather than four digits to define a year and which may be affected by the useof dates after January 1, 2000 (“Y2K Issue”). The Registrant has divided theY2K Issue into the following three areas: (1) Internal  Technology; (2) External Technology; and (3)Insurance Issues.

 

The Internal Technologysection pertains to the Registrant’s internal technology systems, includinghardware, operating and applications software, telecommunications systems andother technology controlled or developed by the Registrant (“Business CriticalInternal Technology”). These systems include the Insurance Companies’ ratingand policy processing, billing, claims, management reporting and supportingapplications. Internal Technology also includes the Registrant’s financial,administrative and telecommunications technology systems (“Other Internal Technology”).

 

The Registrant utilizesan AS/400 computer platform along with various Local Area Networks (“LAN’s”)and personal computers (“PC’s”) to operate its Internal Technology.  The operating software for the AS/400 iscurrently Y2K compliant.  LAN’s and PC’swill be certified as Y2K compliant no later than July 1, 1999.  Implementation of operating software has andwill include testing systems operating together using aged data and criticalfuture dates.

 

As of December 31, 1998,the Registrant had completed conversion of and had placed in productionversions of the Policy Management Systems Corporation Point (“PMSC Point”)system which was Y2K compliant for its billing, claims and certain managementreporting systems which the Registrant utilizes. Implementation of the PMSCPoint software applications included testing production systems operatingtogether using aged data and critical future dates.

 

As of December 31, 1998,the Registrant had completed conversion of and had placed in productionversions of its rating and policy processing systems which were Y2K compliantfor all of the Insurance Companies’ business. Implementation of these software applications included testingproduction systems operating together using aged data and critical future dates.

 

The Registrant iscurrently converting the remainder of its management reporting not emanatingfrom the PMSC Point system to Y2K compliant versions and expects to becompleted by July 1, 1999; this process is presently 95% complete. TheRegistrant is also presently converting its Other Internal Technology to Y2Kcompliant versions and expects to be completed by July 1, 1999. Implementationof these software applications will include testing production systemsoperating together using aged data and critical future dates as applicable.

 

The Registrant has beenable to continue to design, test and implement other projects related to itsInternal Technology while addressing the Y2K Issue.

 

The Registrant has beenassessing its External Technology exposure to the Y2K Issue during 1998 andcontinues to do so in 1999. This ongoing assessment includes: (1) inventoryingall operating systems and processes which are not related to its InternalTechnology and rely on embedded technology not controlled by or developed bythe Registrant and provided by a third-party vendor, supplier or businesspartner (“Business Partners”); and (2) communicating in  detail with the Business Partners as totheir individual Y2K readiness. The Registrant has received responses from allsuch Business Partners. The Registrant will continue to identify andcommunicate with Business Partners as it conducts business up to, through andbeyond the Year 2000 as to the Business Partners’ Y2K readiness.

 

The Registrant has alsobeen assessing what action, if any, is required to limit and or eliminate theRegistrant’s exposure to Y2K Issues emanating from Insurance Issues. Theseissues primarily relate to coverage questions which may emerge from insurancepolicies issued by the Insurance Companies. It is the position of theRegistrant that most of the claims for losses related to the Y2K Issue are notcovered by insurance policies issued by the Insurance Companies. This positionis consistent with that taken by insurance companies regarding coverage and Y2KIssues. Exposure to the Y2K Issue primarily relates to commercial insurancepolicies issued by Preserver.

 

Preserver is also takingthe following steps related to Insurance Issues: 1) it has notified itscommercial insureds that they may have Y2K Issues which they need to addresswhich are not covered by their commercial insurance policies; 2) it hasnotified its agents of these exposures their insureds may have and providedthem with the notice being sent to insureds; and 3) commercial insurance policies(not including automobile) effective on and after December 31, 1998, willinclude policy language which specifically excludes coverages related to Y2KIssues.

 

The Registrant hasexpended less than $250,000 to address Y2K Issues, almost all of it in 1998,consisting primarily of costs of internal resources. Estimated costs tocomplete work related to the Y2K Issue are currently less than $250,000.  The Registrant has combined Y2K conversionefforts to its Internal Technology with required enhancements not related toY2K to the Insurance Companies’ rating and policy processing, billing, claimsand management reporting applications, thereby minimizing the cost of Y2Kconversion.

 

The Registrant believesthat it has provided adequate time and resources to correct problems related toInternal Technology, and is continually assessing the most reasonably likelyworst case Y2K scenario, which is currently believed to be if Business CriticalInternal Technology reveals problems which were not identified in testing andimplementation of Y2K compliant versions of Business Critical Internal Technology. Under such a scenario, thecontingency plan is to devote more internal resources to solving such problemsin a timely manner so that delays in processing transactions are avoided orminimized.

 

The Registrant does haverisk that External Technology will suffer Y2K problems. Responses to theRegistrant’s Y2K communications to date with its Business Partners have notrevealed any Y2K readiness issues; however, the Registrant will continue tocommunicate with its Business Partners during 1999 and will develop contingencyplans as appropriate.

 

The Registrant does haverisk that its coverage positions regarding Insurance Issues will be challengedin court, or that court decisions regarding coverage involving other insurerswill be applied to the Insurance Companies’ policies.

 

The risks associated withthe Registrant’s Internal Technology, External Technology and Insurance Issueswith regard to the Y2K Issue could result in an interruption in, or a failureof, certain normal business activities or operations, in addition to increasedamounts of losses and loss expenses incurred. This could materially andadversely affect the Registrant’s results of operations, liquidity andfinancial condition. Due to the general uncertainty inherent in the Y2K Issue,the Registrant is unable to determine at this time whether the consequences ofY2K failures will have a material impact on the Registrant’s results ofoperations, liquidity and financial condition. The Registrant’s efforts toaddress the Y2K Issue are expected to significantly reduce its level ofuncertainty about the Y2K Issue. The Registrant believes that, with the stepsdescribed herein, the possibility of significant interruptions of normaloperations should be reduced.  Thisdisclosure regarding the Y2K Issue contains statements which are forwardlooking and that involve risks and uncertainties and qualify for the statutorysafe harbor under the Private Securities Litigation Reform Act of  1995. Future activities related to the Y2K Issue may not adhere to theanticipated schedule and cost estimates because the Registrant may encounter :(1) more problems than anticipated in bringing its Internal Technology incompliance with the Y2K Issue and not be able to provide adequate resources toaddress those problems; (2) unexpected problems with External Technology due toBusiness Partners who are not able to be in compliance with the Y2K Issuesdespite their communications with the Registrant to the contrary; and (3)public policy decisions related to Insurance Issues which adversely affect theRegistrant’s operations.

 

**Employees**

 

At December 31, 1998, theMotor Club of America Group had approximately 95 employees.

 

Item 2. Properties

 

Effective January 1,1996, the Registrant entered into a lease at 95 Route 17 South, Paramus, NewJersey.  The Registrant’s home office islocated at this facility.  The lease expireson December 31, 2005.  The Registranthas an option to terminate the lease after six years, and an option to extendthe lease for an additional five years after the initial lease term expires.

 

Item 3.  LegalProceedings

 

The Insurance Companiesare a party to numerous lawsuits arising in the ordinary course of their insurancebusiness. The Registrant believes that the resolution of these lawsuits willnot have a material adverse effect on its results of operations, financialcondition, or cash flows.

 

Item 4. Submission of Matters to a Vote of Security Holders

 

No matter was submittedto a vote of security holders in the fourth quarter of 1998.

 

Item Pursuant to Instruction 3 to Paragraph (b) ofItem 401 of Regulation S–K. Executive Officers of the Registrant.

 

At December 31, 1998, theexecutive officers of the Registrant and their offices with the Registrant andprincipal occupations were as follows:

 

| **Name**               |   | **Age** |   | **Office  and Principal as Occupation**                                                                                                                                                                                    |   | **Years  in Which Officer Has Served as Such (3)** |   |
|------------------------|--------|---------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------|--------|
|                   |   |    |   |                                                                                                                                                                                                                       |   |                                               |   |
| Archer McWhorter (1)   |   | 77      |   | Chairman of the Board of Directors and Director of  the Registrant and Companies in the Motor Club of America Group                                                                                                        |   | 1986-1998                                          |   |
|                   |   |    |   |                                                                                                                                                                                                                       |   |                                               |   |
| Stephen A. Gilbert (2) |   | 59      |   | President, Chief Executive Officer, General Counsel  and Director of the Registrant and Companies in the Motor Club of America Group                                                                                       |   | 1975–1998                                     |   |
|                   |   |    |   |                                                                                                                                                                                                                       |   |                                               |   |
| Patrick J. Haveron (2) |   | 37      |   | 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 |   | 1988-1998                                          |   |
|                   |   |    |   |                                                                                                                                                                                                                       |   |                                               |   |
| Peter K. Barbano       |   | 48      |   | Vice President, Secretary and Associate General  Counsel                                                                                                                                                                   |   | 1993-1998                                          |   |
|                   |   |    |   |                                                                                                                                                                                                                       |   |                                               |   |
| Myron Rogow            |   | 55      |   | Vice President                                                                                                                                                                                                             |   | 1987–1998                                     |   |
|                   |   |    |   |                                                                                                                                                                                                                       |   |                                               |   |
| G. Bruce Patterson     |   | 54      |   | Vice President                                                                                                                                                                                                             |   | 1989–1998                                     |   |
|                   |   |    |   |                                                                                                                                                                                                                       |   |                                               |   |
| Charles J. Pelosi      |   | 53      |   | Vice President                                                                                                                                                                                                             |   | 1983–1998                                     |   |
|                   |   |    |   |                                                                                                                                                                                                                       |   |                                               |   |
| Norma Rodriguez        |   | 49      |   | Treasurer                                                                                                                                                                                                                  |   | 1984–1998                                     |   |

----

(l)            Chairman of the Board of Directorsof Companies in the Motor Club of America Group; from 1995 to March 1997,Director of National Car Rental Systems, Inc. and affiliated corporations, acar rental enterprise (“NCR”); from 1995 to February 1997, one-third owner ofSanta Ana Holdings, Inc., which exchanged its 90% stock interest in NCR forstock in Republic Industries, Inc.; from February 1997 to February 1998,consultant to NCR; President (to January 1996) of Acceptance Inc., a financecompany.

 

(2)           Member of Finance Committee.

 

(3)           Includes years during any portion ofwhich the officer served as such.  Allterms of office are until the date of the 1999 Annual Meetings of Stockholdersand Directors.

 

Except for ArcherMcWhorter, each of the officers devoted substantially all of their businesstime to the affairs of the Registrant or one or more other companies in theMotor Club of America Group.

**PARTII**

 

Item 5.  Market for theRegistrant’s Common Equity and Related Stockholder Matters

 

TheRegistrant’s Common Stock trades on the NASDAQ Stock Market under the symbolMOTR.  The following are the high andthe low selling prices for each quarter of 1997 and 1998, as reported by theNASDAQ:

 
| **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  |   |
|        |   |     |   |    |   |
| **1998**    |   |     |   |    |   |
| **Quarter** |   | **High** |   | **Low** |   |
| I           |   | 17 1/2   |   | 13 5/8  |   |
| II          |   | 17 5/8   |   | 15      |   |
| III         |   | 15 3/4   |   | 10      |   |
| IV          |   | 15 1/4   |   | 11 1/2  |   |

 

There were approximately483 holders of record of the Common Stock of the Registrant as of December 31,1998.  The Registrant paid no dividendsin 1997 and 1998.

 

Item 6. Selected Financial Data

 
|                                                |   | **Years ended December 31,**                 |         |
|-----------------------------------------------------|--------|----------------------------------------------|--------------|
|                                                |   | **1998***                                    |         | **1997*** |   | **1996*** |   | **1995** |   | **1994** |   |
|                                                |   | (in thousands, except  as to per share data) |         |
| **Operating Results:**                              |   |                                         |         |   |   |   |   |   |   |   |   |
| Revenues from  operations                           |   | $                                            | 53,347       |   | $ | 51,102 |   | $ | 46,525 |   | $ | 36,703 |   | $ | 29,471 |   |
| Realized gains  (losses) on sale of investments     |   | 28                                           |         | — |   | 5 |   | 57 |   | (43 | ) |
| Realized gain on  sale of Subsidiary                |   | —                                       |         | — |   | 702 |   | — |   | — |   |
| Net investment  income                              |   | 4,305                                        |         | 3,595 |   | 3,087 |   | 2,764 |   | 2,730 |   |
| Total revenues                                      |   | $                                            |  57,680 |   | $ |  54,697 |   | $ |  50,319 |   | $ |  39,524 |   | $ |  32,158 |   |
| Income before  federal income taxes                 |   | $                                            |  5,719  |   | $ |  4,630 |   | $ |  3,297 |   | $ |  2,455 |   | $ |  5,039 |   |
| Net income                                          |   | $                                            |  3,778  |   | $ |  3,357 |   | $ |  5,330 |   | $ |  2,417 |   | $ |  5,035 |   |
|                                                |   |                                         |         |   |   |   |   |   |   |   |   |
| **Financial Condition:**                            |   |                                         |         |   |   |   |   |   |   |   |   |
| Total assets                                        |   | $                                            | 131,046      |   | $ | 102,787 |   | $ | 97,128 |   | $ | 81,959 |   | $ | 79,172 |   |
| Shareholders’  equity                          |   | $                                            | 28,814       |   | $ | 24,415 |   | $ | 20,381 |   | $ | 14,081 |   | $ | 10,546 |   |
|                                                |   |                                         |         |   |   |   |   |   |   |   |   |
| **Per Common Share:**                               |   |                                         |         |   |   |   |   |   |   |   |   |
| Net income –  Basic                            |   | $                                            | 1.79         |   | $ | 1.62 |   | $ | 2.61 |   | $ | 1.18 |   | $ | 2.46 |   |
| Net income –  Diluted                          |   | $                                            | 1.78         |   | $ | 1.60 |   | $ | 2.56 |   | $ | 1.17 |   | $ | 2.46 |   |
| Book Value                                          |   | $                                            | 13.61        |   | $ | 11.66 |   | $ | 9.95 |   | $ | 6.89 |   | $ | 5.16 |   |
|                                                |   |                                         |         |   |   |   |   |   |   |   |   |
| **Weighted average number of shares  outstanding**: |   |                                         |         |   |   |   |   |   |   |   |   |
| Basic                                               |   | 2,108,722                                    |         | 2,074,473 |   | 2,045,590 |   | 2,043,197 |   | 2,043,004 |   |
| Diluted                                             |   | 2,121,366                                    |         | 2,102,395 |   | 2,081,080 |   | 2,061,791 |   | 2,043,004 |   |
|                                                |   |                                         |         |   |   |   |   |   |   |   |   |
| **Significant Insurance Indicators:**               |   |                                         |         |   |   |   |   |   |   |   |   |
| Net premiums  written                               |   | $                                            | 64,303       |   | $ | 51,680 |   | $ | 47,337 |   | $ | 38,073 |   | $ | 31,797 |   |
| Loss and loss  expense ratio                        |   | 68.6                                         | %            | 65.1 | % | 64.5 | % | 58.7 | % | 54.8 | % |
| Expense ratio                                       |   | 29.1                                         | %            | 33.3 | % | 37.9 | % | 43.9 | % | 39.3 | % |
| Combined ratio                                      |   | 97.7                                         | %            | 98.4 | % | 102.4 | % | 102.6 | % | 94.1 | % |

----

* The financial data asof and for the years ended December 31, 1996, 1997 and 1998 have been restatedas described in Note U in the Notes to the Consolidated Financial Statements.

 

Item 7.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations

 

**Overviewof Business Operations**

 

The Registrant and agroup of affiliated corporations provide property and casualty insurancerelated services.  The Registrant alsooperated until December 1, 1996 a motor club through Enterprises.  One hundred percent of the Registrant’sinsurance operations are presently in the State of New Jersey.

 

The Registrant has twosubsidiaries which write property and casualty insurance, Motor Club andPreserver.  Motor Club writes PPAbusiness; Preserver writes small commercial, homeowners and ancillarycoverages.  The Insurance Companies aredomiciled in the State of New Jersey.

 

The Registrant seeks to:(1) increase its identification as a provider of small commercial linesinsurance; and (2) expand and diversify its insurance operations outside theState of New Jersey.  The Registrantbelieves that both of these objectives can be attained through the acquisitionof other insurance companies which present opportunities to write these productlines in different geographic areas. The Registrant expects to continue to pursue these objectives during1999 and beyond.

 

On March 16, 1999, theRegistrant signed a definitive Agreement and Plan of Merger (“MergerAgreement”) to acquire North East through a merger of a wholly-owned subsidiaryof the Registrant with and into North East (“Merger”).  North East is a NASDAQ listed property andcasualty insurance company, headquartered in Scarborough, Maine and tradingunder the symbol NEIC.

 

Under the terms of theMerger Agreement, North East shareholders will receive, at their individualelection, (a) $3.30 per share of North East common stock, (b) one share of theRegistrant’s common stock for each 5.25 shares of North East common stock, or(c) a combination thereof.  If the NorthEast shareholders in the aggregate elect to exchange more than 50% of theirshares for the Registrant’s stock, the aggregate percentage will be ratablyreduced to 50%.

 

Consummation of theMerger is subject to the satisfaction of certain conditions set forth in themerger agreement, including approval from the shareholders of the Registrantand North East and authorization by state insurance regulators.  Both the Registrant and North East expectthat these conditions will be satisfied in due course.

 

The Registrantanticipates continuing revenue growth in the State of New Jersey through smallcommercial and ancillary coverages written by Preserver as well as through newPPA writings by Motor Club.

 

The Registrant alsoanticipates continued reductions in its operating expenses, namely through theimplementation of operating efficiencies which should reduce other overheadexpenditures.

 

Historically, theInsurance Companies’ results of operations have been influenced by factorsaffecting the property and casualty insurance industry in general and the NewJersey PPA market in particular.  Theoperating results of the U.S. property and casualty insurance industry have beensubject to significant variations due to competition, weather, catastrophicevents, regulation, general economic conditions, judicial trends, fluctuationsin interest rates and other changes in the investment environment.

 

**Resultsof Operations**

 

In March 2001, theCompany’s management determined that certain tax benefits should not have beenrecognized and that certain deferred tax liabilities had not bee recorded.  These tax matters relate to the tax effectsof temporary differences arising from MCAIC, which was de-consolidated forfinancial reporting purposes due to its insolvency in 1992 (see Note H in theNotes to the Consolidated Financial Statements).  These tax matters have no impact on the operations, cash flow orcapital and surplus of the Company’s active insurance subsidiaries or onconsolidated income before Federal income taxes for the periods presented, noris the Company subject to penalties and interest on the recording of thedeferred tax liabilities.

 

As a result, the 1996,1997 and 1998 Consolidated Financial Statements have been restated from amountspreviously reported.  The principaleffects of these items on the accompanying financial statements are presentedin Note U in the Notes to Consolidated Financial Statements.

 

In addition, deferred taxassets were not recorded for the tax effects of the minimum pension liabilitythat is presented as a component of other comprehensive income.  Shareholders’ equity at December 31, 1996increased by $1,594,906, representing the cumulative effect on prior periods’results of revising the tax accrual.

 

The table belowreconciles operating net income to reported net income for 1996 withadjustments for certain unusual and non-recurring items (all per share amountsshown are basic):

 

 
|                                              |   | **1998 (Restated)** |      | **1997 (Restated)** |   | **1996**   |   |
|---------------------------------------------------|--------|---------------------|-----------|---------------------|--------|------------|--------|
|                                              |   |                |      |                |   |       |   |   |   |   |   |   |   |
|                                              |   | **Amount**          |      | **Per Share**       |   | **Amount** |   | **Per Share** |   | **Amount** |   | **Per Share** |   |
|                                              |   |                |      |                |   |       |   |   |   |   |   |   |   |
| **Operating net income**                          |   | $                   | 3,778,384 |                | $      | 1.79       |   | $ | 3,356,399 |   | $ | 1.62 |   | $ | 3,436,343 |   | $ | 1.69 |   |
| 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**                                    |   | $                   | 3,778,384 |                | $      | 1.79       |   | $ | 3,356,399 |   | $ | 1.62 |   | $ | 5,330,108 |   | $ | 2.61 |   |

----

(1)           This non-recurring charge wasincurred in connection with the termination of the lease of the office buildingin which the Registrant and its subsidiaries formerly operated.

 

(2)           These non-recurring charges wereincurred in connection with the Registrant’s tenancy at its former officebuilding and its subsequent relocation.

 

(3)           This non-recurring charge wasincurred in connection with the settlement of a previously reported disputewith a reinsurer of Motor Club.

 

(4)           This is a non-recurring gain.

 

(5)           The Registrant believed that it wasmore likely than not that it will generate future taxable income to realize thebenefits of the net deferred tax asset, which consists primarily of netoperating loss carryforwards.  TheRegistrant accordingly eliminated the valuation allowance on its net deferredtax 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 fromprojected future taxable income.

 

**1998Compared to 1997**

 

The 13% increase in netincome was largely due to the elimination of FAIR Act assessments paid through1997, when $971,000 in expenses were incurred for this assessment.  Absent the FAIR Act assessments in 1997,pre-tax income increased $118,000 or 2% in 1998 as compared to 1997, due tocontinuing improvements in the combined ratio and higher revenues for Preserver,higher investment income, offset by higher combined ratios for Motor Club dueto the increasing effects of the new PPA business which it has written.

 

Insurancepremiums increased by $2,298,000 or 5% during the year, due primarily tocommercial lines premiums written by Preserver and savings on reinsuranceprograms. The following table details the increases in Insurance Premiums:

 

|                          |   | **Increase in** |      |
|-------------------------------|--------|-----------------|-----------|
|                          |   | **Net**         |      |   |   |
| **Class of Business**         |   | **Premium**     |      | **Percent** |   |
| Private  Passenger Automobile |   | $               | 659,000   |   | 2 | % |
| Commercial Lines              |   | 951,000         |      | 14 | % |
| Personal  Property            |   | 688,000         |      | 14 | % |
| Total                         |   | $               | 2,298,000 |   | 5 | % |

 

The Registrant continuesto write new amounts of personal lines business, both PPA by Motor Club andHomeowners by Preserver.  However, thegrowth in these respective lines of business is at  a slower rate than the Commercial Lines business written byPreserver, which is expected to continue in 1999 and beyond.

 

Net investment incomeincreased $710,000 or 20% resulting from an increase in invested assets.Average invested assets (at amortized cost) were $68,374,000 during 1998 ascompared to $56,239,000 during 1997. The increase in insurance premiums notedabove, combined with the Note Payable discussed in Liquidity and CapitalResources, provided the increase in invested assets. Other revenues decreased$53,000 or 24%, due to declines in mortgage loan revenue, servicing fee incomeand other miscellaneous income items.

 

Losses and loss expensesincurred increased by $3,338,000 or 10%, which produced the following loss andloss expense ratios:

** **

|       |   | **1998** |   | **1997** |   |
|------------|--------|----------|--------|----------|--------|
| Motor Club |   | 71.6     | %      | 66.8     | %      |
| Preserver  |   | 59.6     | %      | 59.7     | %      |
| Total      |   | 68.6     | %      | 65.1     | %      |

 

 

Despite the higher lossand loss expense ratio on a comparative basis, no significant adverse trendswere experienced or identified during 1998.

 

The increase in MotorClub’s PPA loss and loss expense ratio is largely due to the new businesswritten by Motor Club since January 1995 which constituted 53% of Motor Club’stotal PPA business as of December 31, 1998. The Registrant has reserved theultimate development of this new business at a loss and loss expense ratio ofapproximately 78%; the underlying loss development to date for each accidentyear on this new business has supported the ultimate development selected, withthe exception of Accident Year 1996, which has developed approximately 25%worse than anticipated.  This has beenthe primary cause of some initial deficient development in the Registrant’sloss reserves in 1997 and 1998. However, the Registrant believes that the 1996 Accident Year experienceis not indicative of the overall book of business and subsequent accident yeardevelopment continues to support the ultimate loss ratios utilized.

 

As the Registrantcontinues to write additional new PPA business, PPA loss and loss expenseratios should generally continue to trend higher, although within levels thatshould remain profitable. However, the effects of the 1997 and 1998 PPA reformscontinue to be uncertain as to their ultimate outcome.  As noted previously, the Registrant believesthat the collective effect of these reforms to be a modest net negative.  During 1999 however, PPA revenue may declineon a per policy basis and its combined ratio may increase as a result of thereforms.

 

Preserver continues toexperience stable loss and loss expenses and loss ratios.  During September 1998, severe storms struckNew Jersey, resulting in $217,000 in losses to Preserver which increased itsloss ratio by 2 points during 1998. Frequency of losses remains at acceptable levels for all lines ofPreserver’s business.

 

More than half of the$1,787,000 or 12% decrease in acquisition costs is attributable to the 1998elimination of the FAIR Act assessments previously paid, which totaled $971,000in 1997. The remainder of the decrease is attributable to the temporary effectsof the Policy Term Conversion, which has resulted in additional expenses beingdeferred to reflect the increase in unearned premiums through December 31,1998.  This circumstance is temporary asnoted, and the amount of expense amortized in 1999 related to acquisitionexpenses may rise in conjunction with the completion of the Policy TermConversion.

 

The $343,000 or 20%increase in other operating expenses is due to increased expenditures relatedto the Registrant’s merger and acquisition efforts along with expenditures tocomply with the PPA reforms being implemented in New Jersey.

 

This decrease in netexpenses is the realization of the Registrant’s previously stated strategy toincrease its revenue while decreasing its overhead expenditures and hasresulted in a decrease in the expense ratio to 29.1% in 1998 as compared to31.4% in 1997 (as adjusted for the FAIR Act assessments described above).

 

The Registrant expects toreduce its expenses and expense ratio further in the long-term by pursuingfurther automation of its policy processing functions, particularly as relatesto data provided by and to its independent agents.  During 1997, the Registrant converted its information systems toa smaller, more contemporary computing platform which will allow for moreefficient operations and lower maintenance costs.  The Registrant expects to continue the efforts made previously toreduce all unnecessary overhead expenditures.

 

However, during 1999, theaforementioned completion of the Policy Term Conversion, in conjunction withthe rate rollback required under the 1998 PPA reforms, may increase theRegistrant’s expense ratio.  Althoughthe Registrant anticipates that the net impact of these reforms will be amodest net negative, the impact of these reforms on premiums, losses, expensesor related financial ratios cannot be completely quantified.

 

The Registrant’s bookvalue increased to $13.61 per share at December 31, 1998 from $11.66 per shareat December 31, 1997.  The principalsources of the net increase were:  (1)net income of $3,778,000 or $1.79 per share described previously;  and (2) $668,000 or $.32 per share increasedue to the increase (net of applicable deferred taxes) in the fair value of thefixed maturity investments accounted for as available-for-sale securities underSFAS No. 115 (“Accounting for Certain Investments in Debt and EquitySecurities”).

 

These increases in bookvalue were offset by (1) $105,000 or $.08 decrease per share (net of applicabledeferred taxes) due to the increase of the minimum required pension liabilityfor the defined benefit pension plan sponsored by the Registrant; and (2) thedilutive effects ($.08 per share) of the issuance of 22,000 shares of commonstock upon exercise of employee stock options granted under the 1987 and 1992Stock Option plans.  See Note O of theNotes for additional information regarding the Registrant’s stock option plans.

 

The increase in theminimum pension liability was the result of a decrease in the discount rateused to compute Plan liabilities to 6.75% at December 31, 1998, from 7.25% atDecember 31, 1997, offset by the performance of the Plan assets in excess ofthe expected return on these assets. See Note K of the Notes for additionalinformation regarding the Registrant’s minimum pension liability.

 

**1997Compared to 1996**

 

In 1997, increasedFederal tax expense reduced operating net income by $1,232,000 as a result ofutilization 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 inoperating net income of $517,000 or 13% was due to continuing revenue growthand a stable combined ratio. The combined ratio was 98.4% in 1997 as comparedto 99.1% in 1996 (adjusted for the non-recurring items noted).  Insurance premiums increased by $5,684,000or 13% during the year, due primarily to increased earnings of personal autopremiums written by Motor Club. The following table details the increases inInsurance Premiums:

 

|                          |   | **Increase in** |      |
|-------------------------------|--------|-----------------|-----------|
| **Class  of Business**        |   | **Net Premium** |      | **Percent** |   |
| Private  Passenger Automobile |   | $               | 4,040,000 |   | 12 | % |
| Commercial Lines              |   | 1,175,000       |      | 21 | % |
| Personal  Property            |   | 469,000         |      | 11 | % |
|                          |   | $               | 5,684,000 |   | 13 | % |

 

The increases inCommercial Lines and Personal Property premium were enhanced by $331,000 insavings on reinsurance programs which principally affected Preserver and wereimplemented effective July 1, 1997. Preserver also increased its retention forproperty excess of loss reinsurance at that date from $75,000 to $100,000,which contributed to the reduction in rate.

 

Net investment incomeincreased $507,000 or 16% resulting from an increase in invested assets. Theincrease in insurance premiums noted above provided the increase in investedassets. Other revenues increased $110,000 or 95%, primarily as a result ofservicing fees earned by the Registrant in 1997 on the Motor Club membershipprogram after the sale of Enterprises in December 1996.

 

Losses and loss expensesincurred increased by $3,993,000 or 14%, which produced the following loss andloss expense ratios:

 

|       |   | **1997** |   | **1996** |   |
|------------|--------|----------|--------|----------|--------|
| Motor Club |   | 66.8     | %      | 61.4     | %      |
| Preserver  |   | 59.7     | %      | 75.5     | %      |
| Total      |   | 65.1     | %      | 64.5     | %      |

 

Despite the higher lossand loss expense ratio on a comparative basis, no significant adverse trendswere experienced or identified during 1997.

 

The increase in MotorClub’s PPA loss and loss expense ratio is largely due to the new businesswritten by Motor Club since January 1995. The Registrant reserved the ultimate development of this new business ata loss and loss expense ratio of 78%.

 

During 1996, winter stormlosses of $635,000 increased Preserver’s loss ratio from 69.2% to 75.5%.  The remaining improvement in Preserver’sloss ratio during 1997 was attributable to reduced amounts of losses,particularly large losses greater than $35,000. Frequency of losses remains atacceptable levels for all lines of Preserver’s business.

 

The increase inacquisition costs of $1,483,000 or 11% generally corresponds with the increasein insurance premiums noted above, although the rate of increase was slightlylower due to savings on net commissions realized in 1997. During 1998, the FAIRAct assessments previously paid were eliminated. These assessments totaled$971,000 and $962,000 in 1997 and 1996, respectively.

 

Excluding thenon-recurring items in 1996 noted in the table, which includes the leasetermination charge, other operating expenses declined $1,282,000 or 42%, due tolower overhead expenditures.

 

The decrease in expensesallowed for a decrease in the expense ratio (as adjusted for the non-recurringcharges described above) to 33.3% as compared to 36.0%.

 

The Registrant’s bookvalue increased to $11.66 per share at December 31, 1997 from $9.95 per shareat December 31, 1996.  The principalsources of the net increase were:  (1)net income of $3,356,000 or $1.62 per share described previously; (2) $107,000or $.05 increase per share (net of applicable deferred taxes) due to thereduction of the minimum required pension liability for the defined benefitpension plan sponsored by the Registrant; and (3) $327,700 or $.16 per shareincrease due to the increase (net of applicable deferred taxes) in the fairvalue of the fixed maturity investments accounted for as available-for-salesecurities under SFAS No. 115 (“Accounting for Certain Investments in Debt andEquity Securities”).

 

These increases in bookvalue were offset by the dilutive effects ($.12 per share) of the issuance of46,925 shares of common stock upon exercise of employee stock options grantedunder the 1987 and 1992 Stock Option plans. See Note O of the Notes for additional information regarding theRegistrant’s stock option plans.

 

The reduction in theminimum pension liability was the result of the performance of the Plan assetsin excess of the expected return on these assets, offset by a decrease in thediscount rate used to compute Plan liabilities to 7.25% at December 31, 1997,from 7.50% at December 31, 1996.  SeeNote K of the Notes for additional information regarding the Registrant’sminimum pension liability.

 

**Liquidityand Capital Resources**

 

The Insurance Companies’need for liquidity arises primarily from the obligation to pay claims.  The primary sources of liquidity are premiumsreceived, collections from reinsurers and proceeds from investments.

 

Reserving assumptions(except as noted in Loss Reserves) and payment patterns of the InsuranceCompanies did not materially change from the prior year and there were nounusually large retained losses resulting from claim activity.  Unpaid losses are not discounted.

 

Deferred tax liabilitiesrelated to MCAIC (captioned as  “ExcessLoss Account” in the schedule of net deferred tax assets in Note H in the Notesto Consolidated Financial Statements) will likely be payable on the finalliquidation of MCAIC by its Receiver, which the Company does not control.  It is not presently known when MCAIC’s finalliquidation will occur, although the Company does anticipate that it will haveapproximately one year notice before this event occurs and that this shouldoccur prior to 2006.  Accordingly, theCompany may be required to seek financing depending on the timing and magnitudeof this liability.

** **

**Operatingand Investing Activities**

 

Net cash provided byoperating activities was $10,547,000, $10,389,000 and $6,851,000 in 1998, 1997and 1996, respectively.  The higheramounts in these years are attributable to the growth in premium revenuecombined with the reduction in overhead expenses described previously.

 

Net cash utilized ininvesting activities was $11,054,000, $13,886,000 and $6,015,000 in 1998, 1997and 1996, respectively.  The amountsused reflect the investment of cash provided by operating activities; the amountsused in 1996 were offset by the $1,125,000 proceeds from the sale ofEnterprises described previously.

 

Aside from the changes inoperating expenditures noted previously, particularly the State mandatedassessments related to the FAIR Act, no unusual or nonrecurring operatingexpenditures have been incurred over this period.

 

The Registrant’s cash andcash equivalents at year end 1996 were enhanced by the proceeds of the sale ofEnterprises.  As part of its strategy toexpand and diversify its insurance operations, the Registrant seeks to increasethe level of cash and cash equivalents available to enable the execution ofthis strategy.

 

The payout ratio oflosses has not fluctuated substantially over this period.  Cash flow from operations is expected tocontinue to increase as the Registrant increases its revenue through additionalpremium writings, specifically commercial lines and PPA, and continues toreduce its expenses and expense ratio. This will be offset somewhat by the development and payment of losses onthe new PPA which Motor Club is writing.

** **

**FinancingActivities**

 

The Registrant paid nodividend on its common stock in 1998, 1997 and 1996.

 

On September 30, 1998,the Registrant borrowed $3 million from Dresdner Bank, AG (the “Loan”).  The Loan assisted the Registrant withcertain internal restructuring of its organization, in order to improve theprospects of Preserver to attain its own separate rating from Best, which wasachieved in January 1999. Please refer to Note G in the Notes to ConsolidatedFinancial Statements for further information on the Loan.

 

In connection with itsannounced acquisition of North East, the Registrant may borrow up to $10million additional funds in either the public or private securities markets.While such a borrowing is not expected to have a material effect on theRegistrant’s financial condition or results of operations, credit terms havenot been agreed upon.  The cost of theany such borrowing is subject to rising interest rates and economic downturns.The Registrant has no other material outstanding capital commitments whichwould require additional financing.

 

**RecentAccounting Pronouncements**

 

In June 1998, Statementof Financial Accounting Standards (SFAS) No. 133, “Accounting for DerivativeInstruments and Hedging Activities”, was issued and established standards foraccounting and reporting of derivative instruments and hedging activities.  The Statement is effective for all fiscalquarters of fiscal years beginning after June 15, 1999.  The Registrant is in the process of determiningthe effect, if any, of this Statement on its financial statements.

 

In December 1997, theAccounting Standards Executive Committee of the American Institute of theAmerican Institute of Certified Public Accountants (“AcSEC”) issued Statementof Position (“SOP”) 97-3, “Accounting by Insurance and Other Enterprises forInsurance Related Assessments.”  ThisStatement provides guidance for the recording of a liability for insurancerelated assessments.  The Statementrequires that a liability be recognized in certain defined circumstances. TheRegistrant believes that the impact of this Statement on its results ofoperations, financial condition or liquidity will not be significant.  This Statement is effective for the yearcommencing January 1, 1999.

 

In October 1998, AcSECissued SOP 98-7, “Deposit Accounting: Accounting for Insurance and ReinsuranceContracts That Do Not Transfer Insurance Risk.”  This Statement identifies several methods of deposit accounting andprovides guidance on the application of each method.  This Statement classifies insurance and reinsurance contracts forwhich the deposit method is appropriate as contracts that (i) transfer onlysignificant timing risk, (ii) transfer only significant underwriting risk,(iii) transfer neither significant timing nor underwriting risk, and (iv) havean indeterminate risk. This Statement is effective for financial statements forthe year commencing January 1, 2000. Restatement of previously issued financial statements is notpermitted.  The Registrant does notbelieve the Insurance Companies’ reinsurance contracts would require thedeposit method of accounting.

 

Item 8.  FinancialStatements and Supplementary Data

 

See Item 14 (a).

 

Item 9.  Disagreements withAccountants on Accounting and Financial Disclosures

None

 

**PARTIII**

 

Items 10, 11, 12 and 13are omitted from this Report on Form 10–K; the Registrant shall file adefinitive 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.

** **

**PARTIV**

 

Item 14.  Exhibits, FinancialStatements Schedules and Reports on Form 8–K

 

(a)           (1)           Thefollowing financial statements are included in Part II, Item 8:

 

Report of IndependentAccountants               

Consolidated Balance Sheetsat December 31, 1998 and 1997

ConsolidatedStatements of Operations for the years ended December 31, 1998, 1997 and 1996

ConsolidatedStatements of Shareholders’ Equity for the years ended December 31, 1998, 1997and 1996

ConsolidatedStatements of Cash Flows for the years ended December 31, 1998, 1997 and 1996

Notes toConsolidated Financial Statements

 

(2)           The following financial statementschedules for the years 1998, 1997 and 1996 (pursuant Rule 5–04 ofRegulation S–X) are presented herewith:

 

Schedule I –           Summary of Investments– Otherthan

Investments in RelatedParties*

Schedule II –         Condensed Financial Information

of Registrant

ScheduleIV –        Reinsurance*

Schedule V –          Valuation and Qualifying

Accounts and Reserves 

ScheduleVI –        Supplemental Information

ConcerningProperty/

Casualty Insurance

Operations*

 

*Presented pursuant to Rule 7–05 of Regulation S–X.

 

Schedules other thanthose mentioned above are omitted because the conditions requiring their filingdo not exist, or because the information is given in the financial statementsfiled herewith, including the notes thereto.

 

                                (b)  Exhibits:

 

| **Exhibit  No.** |   | **Description** |   | **Reference** |  
 

 

 

 

 

 
2–a

 

Agreement and Plan of Merger between Motor Club of  America and North East Insurance Company, dated as of March 16, 1999

 

Exhibit 2 to Motor Club of America’s Form 8-K dated  March 17, 1999

 
 

 

 

 

 

 
3–a

 

Restated and Amended Certificate of Incorporation of  Motor Club of America, dated June 12, 1972

 

Exhibit 1(i) to Motor Club of America’s Annual  Report on Form 10–K for fiscal year ended December 31, 1972

 
 

 

 

 

 

 
3–b

 

By–Laws of Motor Club of America, effective  March 15, 1989

 

Exhibit 3-l to Motor Club of America’s Annual Report  on Form 10-K for fiscal year ended December 31, 1988

 
 

 

 

 

 

 
3-c

 

By-law Amendment of Motor Club of America, effective  August 3, 1994

 

Exhibit 3-m to Motor Club of America’s Form 8-K  dated July 21, 1994

 
 

 

 

 

 

 
4–a

 

Specimen Certificate representing Common Stock, $.50  par value

 

Exhibit 4 to File No. 2–39996 on Form S–1

 
 

 

 

 

 

 
10–a

 

Motor Club of America 1987 Stock Option Plan

 

Exhibit 10–o to Motor Club of America’s Annual  Report on Form 10–K for fiscal year ended December 31, 1987

 
 

 

 

 

 

 
10–b

 

Specimen copy of Motor Club of America 1987 Stock  Option Agreement

 

Exhibit 10–p to Motor Club of America’s Annual  Report on Form 10–K for fiscal year ended December 31, 1987

 
 

 

 

 

 

 
10–c

 

Motor Club of America 1992 Stock Option Plan

 

Exhibit A to Motor Club of America’s Proxy Statement  for fiscal year ended December 31, 1991

 
 

 

 

 

 

 
10-d

 

Specimen copy Motor Club of America 1992 Stock  Option Plan Agreement

 

Exhibit 10-r to Motor Club of America’s Annual  Report on Form 10-K for fiscal year ended December 31, 1992

 
 

 

 

 

 

 
10-e

 

Settlement Agreement between Motor Club of America  et als. and Receiver of MCA Insurance Company in Liquidation et als. and  related documents

 

Exhibit 99 to Motor Club of America’s Form 8-K dated  December 20, 1994

 
 

 

 

 

 

 
10-f

 

Order dated December 30, 1994 Approving Settlement  between Motor Club of America et als and Receiver of MCA Insurance Company in  Liquidation et als and related conformed documents

 

Exhibit 99-C to Motor Club of America’s Form 8-K  dated December 30, 1994

 

 

 

 

 

10-g

 

Stock Purchase Agreement between Motor Club of  America and JVL Holding Properties, Inc.

 

Exhibit 99-F to Motor Club of America’s Form 8-K  dated December 2, 1996

 

 

 

 

 

10-h

 

Agreement dated December 2, 1996 between Motor Club  of America and Motor Club of America Enterprises, Inc.

 

Exhibit 99-G to Motor Club of America’s Form 8-K  dated December 2, 1996

 

 

 

 

 

10–i

 

$3 Million Senior Unsecured Revolving Credit  Facility between Motor Club of America and Dresdner Bank, AG and related  documents

 

Exhibit 10-i to Motor Club of America’s Annual  Report on Form 10-K for fiscal year ended December 31, 1998

 

 

 

 

 

22

 

Subsidiaries of Motor Club of America

 

Exhibit 22 to Motor Club of America’s Annual Report  on Form 10-K for fiscal year ended December 31, 1998

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 

 

**MOTOR  CLUB OF AMERICA**

 

 

**(Registrant)**

 

 

 

 

 

 

 

 

 

Dated:  March  30, 1999

By 

 s/Stephen A.  Gilbert

 

Stephen A. Gilbert

 

President, Chief Executive

 

Officer, General Counsel

 

and Director

 

 

 

Dated:  March  30, 1999

By 

 s/Patrick J.  Haveron

 

Patrick J. Haveron

 

Executive Vice President,

 

Chief Financial Officer and

 

Chief Accounting Officer

 

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated.

 

 

 

 

 

 

Dated:  March  30, 1999

By 

 s/Archer  McWhorter

 

Archer McWhorter

 

Chairman of the Board

 

and Director

 

 

 

 

 

 

Dated:  March  30, 1999

By 

 s/Alvin E.  Swanner

 

Alvin E. Swanner

 

Director

 

 

 

Dated:  March  30, 1999

By 

 s/William E.  Lobeck,Jr.

 

William E. Lobeck, Jr.

 

Director

 

 

 

REPORT OF INDEPENDENTACCOUNTANTS

 

To the Board of Directors of

Motor Club of America:

 

 

In our opinion, theconsolidated financial statements listed in the index appearing under Item14(a)(1) on page 49 present fairly, in all material respects, the financialposition of Motor Club of America and Subsidiaries at December 31, 1998 and1997, and the results of their operations and their cash flows for each of thethree years in the period ended December 31, 1998, in conformity with generallyaccepted accounting principles.  Inaddition, in our opinion, the financial statement schedules listed in the indexappearing under Item 14(a)(2) on page 51 present fairly, in all materialrespects, the information set forth therein when read in conjunction with therelated consolidated financial statements. These financial statements and financial statement schedules are theresponsibility of the Company’s management; our responsibility is to express anopinion on these financial statements and financial statement schedules basedon our audits.  We conducted our auditsof these statements in accordance with generally accepted auditing standardswhich require that we plan and perform the audit to obtain reasonable assuranceabout whether the financial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for the opinion expressed above.

 

As discussed in Note U, the Company has restated itsDecember 31, 1998 and 1997 financial statements for certain tax matters.

 

 

 

 

PricewaterhouseCoopers LLP

New York, New York

March 1, 1999, except for Note U, as to which the dateis April 16, 2001.

 
****
 

**MOTOR CLUB OF AMERICA AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

 

 

 

**December 31,**

 

 

 

**1998**

 

**1997**

 

 

 

**(Restated)**

 

**(Restated)**

 

**ASSETS**

 

 

 

 

 

Investments:

 

 

 

 

 

Fixed maturity  securities, available- for-sale, at fair value (amortized cost $67,676,411  -1998 and $55,925,617 -1997)

 

$

69,594,904

 

$

56,831,444

 

Mortgage loans  on real estate – at the unpaid principal amount

 

361,038

 

522,555

 

Short–term  investments, at fair value which approximates cost

 

5,995,299

 

7,150,000

 

Total  investments

 

75,951,241

 

64,503,999

 

Cash and cash  equivalents

 

2,773,427

 

222,761

 

Premiums  receivable

 

20,401,069

 

7,809,567

 

Reinsurance  recoverable on paid and unpaid losses and loss expenses

 

19,234,277

 

18,666,066

 

Notes and  accounts receivable

 

125,444

 

124,669

 

Deferred policy  acquisition costs

 

8,708,329

 

5,858,650

 

Fixed assets –  at cost, less accumulated depreciation

 

1,671,902

 

1,586,649

 

Federal income  tax recoverable

 

12,993

 

—

 

Prepaid  reinsurance premiums

 

1,015,581

 

695,245

 

Deferred tax  asset

 

46,625

 

2,098,144

 

Other assets

 

1,104,782

 

1,221,723

 

Total assets

 

$

131,045,670

 

$

102,787,473

 

 

 

 

 

 

 

**LIABILITIES AND SHAREHOLDERS’  EQUITY**

 

 

 

 

 

Liabilities:

 

 

 

 

 

Losses and loss  expenses

 

$

58,335,143

 

$

50,246,778

 

Unearned  premiums

 

30,733,144

 

19,285,757

 

Commissions  payable

 

2,835,408

 

1,322,669

 

Accounts payable

 

875,327

 

562,453

 

Accrued expenses

 

4,763,950

 

5,518,935

 

Drafts  outstanding

 

1,688,835

 

1,396,215

 

Note payable

 

3,000,000

 

—

 

Other  liabilities

 

—

 

27,191

 

Federal income  taxes payable - current

 

—

 

12,851

 

Total  liabilities

 

102,231,807

 

78,372,849

 

Shareholders’  Equity:

 

 

 

 

 

Common Stock,  par value $.50 per share:

 

 

 

 

 

Authorized -  10,000,000 shares; issued and outstanding shares 2,116,429 - 1998 and  2,094,429 - 1997

 

1,058,215

 

1,047,215

 

Paid in  additional capital

 

1,996,954

 

1,950,204

 

Accumulated  other comprehensive loss

 

(1,828,343

)

(2,391,448

)

Retained  earnings

 

27,587,037

 

23,808,653

 

Total Shareholders’  Equity

 

28,813,863

 

24,414,624

 

Total  Liabilities and Shareholders’ Equity

 

$

131,045,670

 

$

102,787,473

 

 

The accompanying notesare an integral part of

these consolidatedfinancial statements.

 

**MOTOR CLUB OF AMERICA AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

 

 

**For the years ended December 31,**

 

 

 

**1998**

 

**1997**

 

**1996**

 

 

 

**(Restated)**

 

**(Restated)**

 

 

 

**REVENUES**

 

 

 

 

 

 

 

Insurance  premiums (net of premiums ceded totaling $6,776,174, $7,151,204 and  $7,273,083)

 

$

53,175,663

 

$

50,877,890

 

$

45,194,073

 

Net investment  income

 

4,304,507

 

3,594,509

 

3,087,112

 

Realized gains  on sales of investments (net)

 

28,545

 

—

 

5,485

 

Realized gain on  sale of subsidiary

 

—

 

—

 

702,419

 

Motor club  membership fees

 

—

 

—

 

1,215,039

 

Other revenues

 

171,171

 

224,271

 

114,512

 

Total revenues

 

57,679,886

 

54,696,670

 

50,318,640

 

 

 

 

 

 

 

 

 

**LOSSES AND EXPENSES**

 

 

 

 

 

 

 

Losses and loss  expenses incurred (net of reinsurance recoveries totaling $4,736,671,  $3,650,474 and $6,840,459)

 

36,479,591

 

33,141,691

 

29,148,280

 

Amortization of  deferred policy acquisition costs

 

13,375,221

 

15,162,320

 

13,678,710

 

Other operating  expenses

 

2,105,668

 

1,762,192

 

3,569,564

 

Lease  termination charge

 

—

 

—

 

359,077

 

Motor Club benefits

 

—

 

—

 

266,112

 

Total losses and  expenses

 

51,960,480

 

50,066,203

 

47,021,743

 

Income before  Federal income taxes

 

5,719,406

 

4,630,467

 

3,296,897

 

Benefit  (provision) for Federal income taxes: 

 

 

 

 

 

 

 

current

 

(179,661

)

(37,573

)

(42,324

)

deferred

 

(1,761,361

)

(1,236,495

)

2,075,535

 

Total Federal  income tax

 

(1,941,022

)

(1,274,068

)

2,033,211

 

 

 

 

 

 

 

 

 

Net income

 

$

3,778,384

 

$

3,356,399

 

$

5,330,108

 

 

 

 

 

 

 

 

 

**Net Income per common share:**

 

 

 

 

 

 

 

Basic

 

$

1.79

 

$

1.62

 

$

2.61

 

Diluted

 

$

1.78

 

$

1.60

 

$

2.56

 

 

 

 

 

 

 

 

 

**Weighted average common and  potential common shares outstanding:**

 

 

 

 

 

 

 

Basic

 

2,108,722

 

2,074,473

 

2,045,590

 

Diluted

 

2,121,366

 

2,102,395

 

2,081,080

 

 

The accompanyingnotes are an integral part of

these consolidatedfinancial statements.

 

 

**MOTOR CLUB OF AMERICA ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFSHAREHOLDERS’ EQUITY**
****
** **

 

 

**Common  Stock (a)**

 

**Paid–In**

 

**Accumulated  Other**

 

 

 

 

 

 

 

**Shares**

 

 

 

**Additional**

 

**Comprehensive**

 

**Retained**

 

 

 

 

 

**Issued**

 

**Amount**

 

**Capital**

 

**Income  (Loss)(b)(c)**

 

**Earnings(c)**

 

**Total (c)**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 1995

 

2,043,754

 

$

1,021,876

 

$

1,722,539

 

$

(3,785,485

)

$

15,122,146

 

$

14,081,076

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

5,330,108

 

5,330,108

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized investment losses net of reclassification adjustment

 

 

 

 

 

 

 

(1,122,378

)

 

 

(1,122,378

)

Minimum pension liability adjustment

 

 

 

 

 

 

 

2,081,906

 

 

 

2,081,906

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

6,289,636

 

Common stock issued

 

3,750

 

1,876

 

7,969

 

 

 

 

 

9,845

 

Balance at December 31, 1996

 

2,047,504

 

1,023,752

 

1,730,508

 

(2,825,957

)

20,452,254

 

20,380,557

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

3,356,399

 

3,356,399

 

Other comprehensive income, net of tax: Unrealized investment gains,  net of reclassification adjustment

 

 

 

 

 

 

 

327,721

 

 

 

327,721

 

Minimum pension liability adjustment

 

 

 

 

 

 

 

106,788

 

 

 

106,788

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

3,790,908

 

Common stock issued

 

46,925

 

23,463

 

219,696

 

 

 

 

 

243,159

 

Balance at December 31, 1997

 

2,094,429

 

1,047,215

 

1,950,204

 

(2,391,448

)

23,808,653

 

24,414,624

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

3,778,384

 

3,778,384

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized investment gains, net of reclassification adjustment

 

 

 

 

 

 

 

668,309

 

 

 

668,309

 

Minimum pension liability adjustment

 

 

 

 

 

 

 

(105,204

)

 

 

(105,204

)

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

4,341,489

 

Common stock issued

 

22,000

 

11,000

 

46,750

 

 

 

 

 

57,750

 

Balance at December 31, 1998

 

2,116,429

 

$

1,058,215

 

$

1,996,954

 

$

(1,828,343

)

$

27,587,037

 

$

28,813,863

 

(a)        Par value $.50 per share; authorized –10,000,000 shares.

(b)        Net of deferred taxes.

(c)        The amounts for 1996, 1997 and 1998 havebeen restated, see Note U.

 

The accompanyingnotes are an integral part of these consolidated financial statements.
****
 

**MOTOR CLUB OF AMERICA AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 

 

 

**For the years ended December 31,**

 

 

 

**1998**

 

**1997**

 

**1996**

 

 

 

**(Restated)**

 

**(Restated)**

 

 

 

Net income

 

$

3,778,384

 

$

3,356,399

 

$

5,330,108

 

Adjustments to  reconcile net income to cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation  expense

 

527,644

 

461,845

 

379,453

 

Amortization of  bond premium - net

 

35,375

 

103,308

 

98,738

 

Gain on sale of  subsidiary

 

—

 

—

 

(702,419

)

Gain on sale of  investments

 

(28,545

)

—

 

(5,485

)

Write-off of  leasehold improvements (net) due to lease termination

 

—

 

—

 

227,077

 

Deferred tax  provision (benefit)

 

1,761,361

 

1,236,495

 

(2,075,535

)

 

 

 

 

 

 

 

 

Changes in:

 

 

 

 

 

 

 

Net assets of  Motor Club of America

 

 

 

 

 

 

 

Enterprises,  Inc.

 

—

 

—

 

(422,581

)

Premiums  receivable

 

(12,591,502

)

(7,984

)

(666,352

)

Notes and  accounts receivable

 

(775

)

124,206

 

(38,922

)

Deferred policy  acquisition costs

 

(2,849,679

)

(97,154

)

(692,274

)

Federal income  tax - current

 

(53,035

)

(13,118

)

39,649

 

Reinsurance  recoverable on paid and unpaid losses and loss expenses

 

(568,211

)

3,101,263

 

(4,128,475

)

Prepaid  reinsurance premiums

 

(320,336

)

450,699

 

47,154

 

Other assets

 

116,941

 

(100,563

)

129,820

 

Losses and loss  expenses

 

8,088,365

 

2,579,922

 

7,843,304

 

Unearned  premiums

 

11,447,387

 

351,557

 

1,571,169

 

Commissions  payable

 

1,512,739

 

(121,991

)

86,908

 

Accounts payable

 

312,874

 

(33,332

)

292,994

 

Accrued expenses

 

(914,385

)

(1,089,809

)

(415,706

)

Drafts  outstanding

 

292,620

 

86,778

 

(47,878

)

Total cash  provided by operating activities

 

10,547,222

 

10,388,521

 

6,850,747

 

 

 

 

 

 

 

 

 

 
**** **MOTOR CLUB OFAMERICA AND SUBSIDIARIES**
**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(CONTINUED)**

 

 

 

**For the years ended December 31,**

 

 

 

**1998**

 

**1997**

 

**1996**

 

 

 

**(Restated)**

 

**(Restated)**

 

 

 

Investing  activities:

 

 

 

 

 

 

 

Proceeds from:

 

 

 

 

 

 

 

Maturities of  fixed maturities

 

17,444,834

 

4,852,707

 

4,442,716

 

Sales of fixed  maturities

 

2,000,000

 

2,700,000

 

1,396,522

 

Sale of subsidiary

 

—

 

—

 

1,125,000

 

Payments  received on mortgage loan principal

 

161,517

 

111,937

 

131,609

 

Sale or  maturities of short- term investments

 

245,390,264

 

86,804,893

 

200,000

 

Sale of fixed  assets

 

—

 

—

 

13,400

 

Purchase of:

 

 

 

 

 

 

 

Fixed maturities

 

(31,304,235

)

(15,927,470

)

(10,350,787

)

Short–term  investments

 

(244,133,789

)

(92,206,193

)

(1,745,455

)

Fixed assets

 

(612,897

)

(221,741

)

(1,227,558

)

Total cash  utilized in investing activities

 

(11,054,306

)

(13,885,867

)

(6,014,553

)

Financing  activities:

 

 

 

 

 

 

 

Note payable

 

3,000,000

 

—

 

—

 

Common stock  issued

 

57,750

 

243,159

 

9,845

 

Total cash  provided by financing activities

 

3,057,750

 

243,159

 

9,845

 

Net increase  (decrease) in cash

 

2,550,666

 

(3,254,187

)

846,039

 

Cash and cash  equivalents at beginning of year

 

222,761

 

3,476,948

 

2,630,909

 

Cash and cash  equivalents at end of year

 

$

2,773,427

 

$

222,761

 

$

3,476,948

 

 

SupplementalDisclosures of Cash Flow Information

 

(1) Total interestpaid was $60,389 (1998), $8,890 (1997) and $8,166  (1996).

(2) Total Federal incometaxes paid was $212,738(1998), $50,691 (1997) and $38,462 (1996).

 

 

 

The accompanyingnotes are an integral part of

these consolidatedfinancial statements.

 
**MOTOR CLUB OF AMERICAAND SUBSIDIARIES**
**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

Note A – Summary of Significant AccountingPolicies:

 

(a)           Basis of Presentation and Principlesof Consolidation:

 

The consolidatedfinancial statements of Motor Club of America (the “Company”) include itsaccounts and those of its wholly–owned subsidiary companies.  The financial statements have been preparedon the basis of generally accepted accounting principles (“GAAP”).  The preparation of financial statements inconformity with these practices requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during theperiod.  Actual results could differfrom those estimates.

 

The Company’s insurancesubsidiaries, Motor Club of America Insurance Company (“Motor Club”) andPreserver Insurance Company (“Preserver”) are collectively referred to as the“Insurance Companies”.  All materialintercompany items and transactions have been eliminated in consolidation.

 

(b)           Nature of Operations:

 

The Company is a NewJersey corporation which owns the Insurance Companies. The Company’s financesubsidiary, Motor Club of America Finance Company, was merged into the Companyon December 9, 1997.  The Company’ssubsidiary, Motor Club of America Enterprises, Inc. (“Enterprises”),  was sold on December 2, 1996 (see Note B,Sale of Subsidiary for further details). Enterprises operated a motor club. The Insurance Companies engage in property and casualty insurance,principally private passenger automobile, small commercial and homeownersinsurance, produced by independent agents; at the present time, one hundredpercent of the Insurance Companies’ operations are conducted in the State ofNew Jersey.  The Company generatessubstantially all of its revenues from its insurance operations.

 

(c)           Insurance Premiums:

 

Insurance premiums arecredited to income by the monthly pro rata method over the terms of thecontracts.  Beginning July 1, 1998,Motor Club began converting its contracts for private passenger automobileinsurance from six month to twelve month policies (“Policy Term Conversion”).  While the Policy Term Conversion will, for aone year period commencing July 1, 1998, temporarily increase the amount ofpremiums written by Motor Club, it will not effect the amount of premiumsearned. Insurance contracts for policies other than private passengerautomobile are for terms of twelve months.

 

(d)           Motor Club Operations:

 

Through December 2, 1996(See Note B) Motor club membership fees were credited to income by the straight–linemethod over the terms of the contracts. Commission expense was deferred and amortized in the same manner as therelated unearned membership fees.  Otherrelated costs were charged to expense as incurred.

 

(e)           Investments:

 

All of the Company’sfixed maturity securities are classified as available-for-sale securities, andare therefore reported at fair value, with unrealized gains and losses excludedfrom earnings and reported as a separate component of shareholders’ equity, netof applicable deferred taxes.

 

The Company does notinvest in, hold or issue any derivative financial instruments.

 

Premium and discountamounts are amortized into income based on the stated contractual life of thesecurities. The Company recognizes income for the mortgage-backed andasset-backed bond portion of its fixed maturity securities portfolio using theconstant effective yield method.

 

When actual prepaymentsdiffer from this assumption, the effective yield is recalculated to reflectactual payments to date.  The netinvestment in the security is adjusted to the amount that would have existedhad the new effective yield been applied since the acquisition of thesecurity.  That adjustment is includedin net investment income.

 

Gains and losses oninvestments are recognized when investments are sold or redeemed on a specificcertificate basis.

 

(f)            Other Revenues:

 

Other revenues consistprincipally of interest on mortgage loans and in 1997 and 1998, servicing feesfrom motor club membership fees written by Enterprises.

 

(g)           Losses and Loss Expenses:

 

The estimated liabilityfor losses is based on (1) the accumulation of cost estimates for unpaid lossesreported prior to the close of the accounting period; and (2) estimates ofincurred but not reported losses based upon past experience; less (3) estimatesof anticipated salvage and subrogation recoveries. In the normal course ofbusiness, the Company seeks to reduce the loss that may arise from catastrophesor other events that cause unfavorable underwriting results by reinsuringcertain levels of risk in various areas of exposure with other insuranceenterprises or reinsurers.

 

Changes to the estimatedliabilities are reflected in the results of operations currently.

 

Amounts recoverable fromreinsurers are estimated in a manner consistent with the claim liabilityassociated with the reinsured policy. The liability for loss expenses is based on estimates of expenses tobe  incurred in the settlement ofclaims.

 

(h)           Deferred Policy Acquisition Costs:

 

Deferred policyacquisition costs are costs that vary with and are primarily related to theproduction of new and renewal business. Such costs include commissions, premium taxes, certain State mandatedassessments and certain underwriting and policy issuance costs which aredeferred when incurred (subject to a maximum) and  amortized to income as the related written premiums are earned.  Investment income is anticipated indetermining whether a premium deficiency relating to these costs exists.

 

(i)            Fixed Assets:

 

Depreciation on leaseholdimprovements is computed by the straight–line method over the remaininglease term.   Depreciation on furnitureand fixtures, data processing  and otherequipment, is computed by the straight–line method over the estimateduseful lives, ranging from three to twenty years.

 

Expenditures for majorrenewals and betterments are capitalized, and expenditures for maintenance andrepairs are charged to income as incurred. When property units are retired, or otherwise disposed of, the costthereof and related accumulated depreciation are eliminated from the accounts.  Any gain or loss on disposal is credited orcharged to operations.

 

(j)            Federal Income Taxes:

 

Deferred Federal incometaxes are provided for temporary differences between the financial statementand tax basis of assets and liabilities using enacted tax rates expected toapply in the years in which the differences are expected to reverse.

 

(k)           Statement of Cash Flows:

 

For purposes of thestatement of cash flows, the Company considers demand deposits held withfinancial institutions and money market mutual fund holdings to be cashequivalents.

 

(l)            Per Share Data:

 

Basic earnings per shareare computed based upon the weighted average number of common sharesoutstanding during each year.  Dilutedearnings per share are computed based upon the weighted average number ofcommon shares outstanding including outstanding stock options.  See Note O for more information onoutstanding stock options and Note R for more information on the computation ofEarnings per Share.

 

(m)          Comprehensive Income:

 

In 1998, the Companyadopted SFAS No. 130 (“Comprehensive Income”), which established standards forthe reporting and disclosure of comprehensive income and its components.  Comprehensive income consists of net income,the unfunded accumulated benefit obligation in excess of plan assets and netunrealized investment gains or losses and is presented separately.  The adoption of SFAS No. 130 had no impacton shareholders’ equity.  Prior yearfinancial statements have been reclassified to conform to theserequirements.  These amounts arereported net of deferred Federal income taxes.

 

Note B - Sale of Subsidiary:

 

On December 2, 1996, theCompany sold Enterprises to JVL Holding Properties, Inc., (“JVL”) anon-affiliated Oklahoma corporation, for $1,125,000.  As a result of this transaction, the Company recorded a gain of$702,419.

 

Pursuant to an additionalagreement entered into concurrent with the sale, the Company provides certainservices to members whose memberships are written with private passengerautomobile (“PPA”) policies written by Motor Club.  In exchange the Company receives a servicing fee from JVL.  The Company also receives certain fees forother memberships written by Enterprises, as defined by this additionalagreement.  During 1998, 1997 and 1996,these fees collectively totaled $134,000, $143,000 and $11,000, respectively.

 

Note C – Investments:

 

(a)           The amortized cost and estimated fairvalue of investments in fixed maturity securities at December 31, 1998 were asfollows:

 

 

 

 

 

**Gross**

 

**Gross**

 

 

 

 

 

**Amortized**

 

**Unrealized**

 

**Unrealized**

 

**Fair**

 

 

 

**Cost**

 

**Gains**

 

**Losses**

 

**Value**

 

U.S. Government  securities

 

$

22,027,700

 

$

1,128,251

 

$

(10,320

)

$

23,145,631

 

Mortgage-backed  securities

 

11,053,686

 

165,978

 

(6,075

)

11,213,589

 

Asset-backed  securities

 

10,698,352

 

107,618

 

—

 

10,805,970

 

Corporate  securities

 

23,896,673

 

558,555

 

(25,514

)

24,429,714

 

Total

 

$

67,676,411

 

$

1,960,402

 

$

(41,909

)

$

69,594,904

 

 

The amortized costand estimated fair value of investments in fixed maturity securities atDecember 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 andfair value of investments in fixed maturity securities at December 31, 1998, bycontractual maturity, were as follows:

 

 

 

**Amortized**

 

**Fair**

 

 

 

**Cost**

 

**Value**

 

 

 

 

 

 

 

Due in one year  or less

 

$

5,293,385

 

$

5,359,253

 

Due after one  year through five years

 

12,090,697

 

12,625,197

 

Due after five  years through ten years

 

25,327,919

 

26,183,629

 

Due after ten  years

 

24,964,410

 

25,426,825

 

 

 

$

67,676,411

 

$

69,594,904

 

 

The above maturity tablesinclude $22,019,559 (at fair value) of mortgage-backed and asset-backedsecurities, which were classified as due after ten years based on the contractuallife of the securities.

 

Expected maturities maydiffer from contractual maturities because borrowers may have the right to callor prepay obligations with or without call or prepayment penalties.  Gross gains of $50,099 and $5,485 were realizedon proceeds of $10,434,411 and $264,795 in 1998 and 1996, respectively, onthose sales and calls.  Gross losses of$21,554 were realized on proceeds of $5,391,130 in 1998 on those sales andcalls.  There were no gross gains orgross losses in 1997 and no gross losses in 1996.

 

(b)           Net investment income by category ofinvestments consisted of the following:

 

**Category**

 

**1998**

 

**1997**

 

**1996**

 

Fixed maturities

 

$

3,950,500

 

$

3,387,140

 

$

3,093,534

 

Other,  principally short–term investments

 

498,253

 

431,932

 

196,457

 

Total investment  income

 

4,448,753

 

3,819,072

 

3,289,991

 

Investment  expenses

 

144,246

 

224,563

 

197,394

 

Net investment  income

 

$

4,304,507

 

$

3,594,509

 

$

3,092,597

 

 

(c)           At December 31, 1998 and 1997, fixedmaturity investments (at fair value) deposited with the New Jersey Departmentof Banking and Insurance (“NJ DOBI”) amounted to $222,784 and $220,859,respectively.

 

(d)           There were no investments in anypersons 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,**

 

 

 

**1998**

 

**1997**

 

**1996**

 

Fixed maturities

 

$

 1,012,666

 

$

 635,790

 

$

 (1,122,378

)

 

(f)            In the opinion of management therehas been no permanent impairment in the carrying amount of investments.

 

Note D - Unpaid Losses and Loss Expenses:

(a)           The following table provides areconciliation of the beginning and ending balances for unpaid losses and lossexpenses for 1998, 1997 and 1996:

 

 

 

**1998**

 

**1997**

 

**1996**

 

 

 

 

 

 

 

 

 

Balance at  January 1

 

$

50,246,778

 

$

47,666,856

 

$

39,823,552

 

Less:  Reinsurance recoverables

 

17,363,319

 

19,553,223

 

16,414,610

 

Net balance at  January 1

 

32,883,459

 

28,113,633

 

23,408,942

 

Incurred losses  and loss expenses:

 

 

 

 

 

 

 

Provision for  current year claims

 

32,598,287

 

29,368,738

 

28,244,599

 

Increase in  provision for prior years’ claims

 

3,881,304

 

3,772,953

 

903,681

 

Total incurred  losses and loss expenses

 

36,479,591

 

33,141,691

 

29,148,280

 

Payment for  losses and loss expenses:

 

 

 

 

 

 

 

Payment on  current year claims

 

12,038,000

 

12,169,000

 

13,029,214

 

Payment on prior  years’ claims

 

17,510,773

 

16,202,865

 

11,414,375

 

 

 

 

 

 

 

 

 

Total payments  for losses and loss expenses

 

29,548,773

 

28,371,865

 

24,443,589

 

Net balance at  December 31

 

39,814,277

 

32,883,459

 

28,113,633

 

Plus:  Reinsurance recoverables

 

18,520,866

 

17,363,319

 

19,553,223

 

Balance at  December 31

 

$

58,335,143

 

$

50,246,778

 

$

47,666,856

 

 

The reconciliation showsa 1998 deficiency of $3,881,304 in the liability recorded at December 31,1997.  The deficiency is primarily theresult of: (1) initial adverse development of reserves at December 31, 1997which is consistent with the Company’s loss development history; and (2)continuing adverse development of losses incurred in 1996.

 

(b)           Losses incurred are reduced bysalvage and subrogation approximating $2,661,000, $2,801,000 and $2,188,000 forthe years ended December 31, 1998, 1997 and 1996, respectively.

 

Note E – Fixed Assets:

 

Fixed assets consist ofthe following:

 

 

 

**1998**

 

**1997**

 

Leasehold  improvements

 

$

191,937

 

$

191,937

 

Office  furniture, fixtures and data processing equipment

 

3,287,546

 

3,155,739

 

 

 

3,479,483

 

3,347,676

 

Less accumulated  depreciation

 

1,807,581

 

1,761,027

 

 

 

$

1,671,902

 

$

1,586,649

 

 

Note F – Reinsurance:

 

(a)           Unearned premiums and unpaid loss andloss expenses are stated gross of the effects of reinsurance.

 

(b)           Reinsurance contracts do not relievethe Insurance Companies from their obligations to policyholders.  Failure of reinsurers to honor theirobligations could result in losses to the Insurance Companies.  Generally, all risks in excess of $150,000for liability lines and $100,000 for property lines are reinsured.  Prior to July 1, 1997 the property retentionwas $75,000.

 

The Insurance Companiesevaluate the financial condition of their reinsurers and monitor concentrationsof credit risk arising from activities or economic characteristics of thereinsurers to minimize their exposure to significant losses from reinsurerinsolvencies.

 

As referred to in Note A,one hundred percent of the Company’s insurance operations are presently locatedin the State of New Jersey, the laws of which require participation in certainreinsurance funds.

 

Reinsurance recoverableon paid and unpaid loss and loss expenses are principally attributable to theamounts of reinsurance recoverable from the Unsatisfied Claim and Judgment Fund(“UCJF”) of the State of New Jersey, which pertains to New Jersey PersonalInjury Protection claims in excess of Motor Club’s statutory retention limit of$75,000.  Reinsurance recoverable fromthe UCJF was $9,139,160 and $10,552,385 as of December 31, 1998 and 1997,respectively.

 

Motor Club isrequired to participate in the New Jersey Automobile Insurance Risk Exchange(“NJ AIRE”).  NJ AIRE is designed tobalance differences between Motor Club’s bodily injury exposures and losspayments as compared to industry exposures and loss payments under New Jersey’sdual tort threshold system.

 

Assessments paid to NJAIRE based on subject bodily injury exposures are accounted for as cededpremiums written and totaled $1,113,756, $1,728,341 and $1,613,095 in 1998,1997 and 1996, respectively. Reimbursements from NJ AIRE based on subject claim payment experienceare accounted for as ceded losses incurred and totaled $548,415, $500,657 and$482,105 in 1998, 1997 and 1996, respectively.

 

Prepaid reinsurancepremiums of $1,015,581 and $695,245 as of December 31, 1998 and 1997,respectively, are mainly attributable to, in 1998, Preserver’s workers’compensation program and in both years, the Insurance Companies’ excess of lossreinsurance treaties which are with one reinsurer.

 

The effect of reinsuranceon premiums written and earned is as follows:

 

 

 

**1998**

 

**1997**

 

**1996**

 

 

 

**Written**

 

**Earned**

 

**Written**

 

**Earned**

 

**Written**

 

**Earned**

 

Direct

 

$

71,399,224

 

$

59,951,837

 

$

58,380,651

 

$

58,029,094

 

$

54,563,224

 

$

52,467,156

 

Ceded

 

(7,096,511

)

(6,776,174

)

(6,700,505

)

(7,151,204

)

(7,225,929

)

(7,273,083

)

Net

 

$

64,302,713

 

$

53,175,663

 

$

51,680,146

 

$

50,877,890

 

$

47,337,295

 

$

45,194,073

 

 

(c)           During 1993, Motor Club was notifiedby one of its reinsurers of a dispute. The reinsurer did not deny the validity of coverage; rather, thereinsurer indicated that it believed that a right of set-off existed for thereinsurance which Motor Club had ceded to the reinsurer for accident years 1973to 1975 against reinsurance which MCA Insurance Company (“MCAIC”) had assumed fromthe reinsurer between 1968 and 1976. Motor Club assumed the ceded reinsurance from MCAIC in 1991.  The reinsurer had indicated that payments toMotor 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 installmentsprior to December 31, 1996.  In return, thereinsurer agreed to: (1) pay Motor Club all past amounts due under thereinsurance 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 reinsurerunder the terms of the same reinsurance agreement.

 

The ConsolidatedStatement of Operations includes in other operating expenses $254,226 for thismatter in 1996.

 

Note G - Note Payable:

 

On September 14, 1998,the Company entered into a $3 million revolving credit facility (the “Loan”)and drew on the entire amount of the Loan on September 30, 1998.  The Loan has a three-year term and bearsinterest payable in varying periods depending on the interest period, not toexceed three months, at rates selected by the Company under the terms of Loan,including a Base Rate (which is the lender’s prime rate) or the Eurodollar Rateplus applicable margin of 2%.  AtDecember 31, 1998, the interest rate under the Loan was 7.0625%.  Interest paid on the loan in 1998 was$54,146.

 

The Loan requires compliancewith certain financial and operating covenants which require certain financialratios and limit, among other things, the incurrence of additional indebtednessby the Company and the Insurance Companies, investments by the Company, salesof assets and changes in control, along with maintenance by the InsuranceCompanies of their ratings by A.M. Best. At December 31, 1998, the Company was in compliance with thesecovenants.  The commitment fee for anyunborrowed portion of the Loan is 0.35%.

 

Note H – Taxes:

 

(a)           The Company and its subsidiaries(including MCA Insurance Company in Liquidation and its subsidiaries (“MCAIC”),former affiliates) file a consolidated Federal income tax return, andparticipate in a Tax Sharing Agreement.

 

Despite being declaredinsolvent in 1992, MCAIC is required to continue to be included in theCompany’s consolidated tax return filed with the Internal Revenue Service.  Since that time, MCAIC has generallycontinued to generate taxable losses included in the consolidated tax return.

 

Under the applicablerules, the Company is entitled to, and has taken current tax benefits for netoperating losses that MCAIC and its subsidiaries have generated since1992.  However, to the extent that theCompany does not have positive basis (as defined by the Internal Revenue Code),it may also be required to pay future tax liabilities (which may offset thecurrent tax benefit) subject to certain events which may trigger suchpayments.  Accordingly, when suchcurrent tax benefits are recognized, a corresponding deferred tax liability isrecorded.

 

In March 2001, theCompany’s management determined that certain tax benefits should not have beenrecognized and that certain deferred tax liabilities had not been recorded. Inaddition, deferred tax assets were not recorded that should have been for thetax effects of the minimum pension liability that is presented as a componentof other comprehensive income.  As aresult, the 1997 and 1998 Consolidated Financial Statements have been restatedfrom amounts previously reported and are discussed in Note U.

 

At the time of itsinsolvency, MCAIC realized approximately $150 million in losses, whichgenerated a net operating loss (“NOL”) that could not be utilized at that timeby either the Company or MCAIC under applicable IRS regulations and whichexpire in 2006.  Additional netoperating losses have been experienced by MCAIC since 1992, some of which wereutilized by the Company at a time when it had no tax basis in MCAIC, thuscreating a deferred tax liability represented by the $710,916 “Excess LossAccount” item (for the year ended December 31, 1998) as shown in the deferredtax reconciliation of this Note.  The$150 million of NOL’s generated in 1992 will likely increase the Company’sexcess loss account at the time they expire in 2006.

 

An excess loss account ina subsidiary generally creates taxable income at the time of the sale,liquidation or other disposition of the subsidiary.

 

Management expects thatthe liquidation or other disposition of MCAIC will take place prior to theexpiration of these NOL’s in 2006 and prior to the corresponding increase inthe Company’s excess loss account.  Asthe control of the liquidation process rests with the Insurance Department ofthe State of Oklahoma (the “Receiver”) and not with management, there is apotential risk that such tax liability could be incurred by the Company after2006 when the 1992 generated NOL’s will have been converted into the Company’sexcess loss account.  Managementbelieves it is unlikely that such risk will occur, as the liquidation of MCAICis probable before the expiration of the NOL. However, the tax effects of these transactions are subject to thecircumstances of the liquidation process itself and tax-planning strategiesexist which could mitigate the impact of such a tax exposure.

 

With respect to theCompany’s excess loss account created by the Company’s utilization of MCAIC’spost 1992 NOL’s, these excess losses will likely result in the Companyrecognizing taxable income in the year MCAIC is liquidated or otherwisedisposed of.  The effect of the deferredtaxes attributable to such income has been reflected in the ConsolidatedFinancial Statements.

 

(b)           The tax effects of temporarydifferences that give rise to significant portions of the deferred tax assetsand liabilities were as follows:

 

 

 

**December 31,**

 

 

 

**1998**

 

**1997**

 

 

 

**(Restated)**

 

**(Restated)**

 

Deferred tax  assets:

 

 

 

 

 

Net operating  loss (“NOL”) carryforward

 

$

429,513

 

$

3,618,464

 

Unpaid losses  and loss expenses

 

1,637,930

 

1,385,862

 

Unearned premium

 

2,020,794

 

1,264,155

 

Minimum pension  liability

 

1,594,090

 

1,539,894

 

Alternative  minimum tax and general business credit carry-forwards

 

328,942

 

149,281

 

Total deferred  tax assets

 

6,011,269

 

7,957,656

 

Deferred tax  liabilities:

 

 

 

 

 

Deferred  acquisition costs

 

(2,960,832

)

(1,991,941

)

Excess loss  account

 

(710,916

)

(529,135

)

Unrealized gain  on debt securities

 

(652,288

)

(307,936

)

Prepaid pension  cost

 

(1,173,680

)

(937,880

)

Other deferred  tax liabilities

 

(166,071

)

(172,458

)

Total deferred  tax liabilities

 

(5,663,787

)

(3,939,350

)

Less: valuation  allowance for deferred tax assets

 

(300,857

)

(1,920,162

)

Net deferred tax  asset

 

$

46,625

 

$

2,098,144

 

 

The Company believes itis more likely than not that it will generate future taxable income to realizethe benefits of the net deferred tax asset. The Company has provided a valuation allowance at December 31, 1998 forthose deferred tax assets related to NOL carryforwards of MCAIC and itssubsidiaries as a percentage of the total NOL carryforward in the Consolidatedreturn.  The ultimate amounts realized,however, could be reduced if actual amounts of future taxable income differfrom projected future taxable income.

 

The net operating losscarryforward of $1,263,274 expires beginning in 2009.

 

(c)           The provision for Federal incometaxes resulted in effective tax rates lower than the statutory Federal incometax rates, as follows:

 

 

 

**1998**

 

**1997**

 

**1996**

 

 

 

**(Restated)**

 

**(Restated)**

 

 

 

Tax provision  computed at statutory federal income tax rates

 

$

(1,944,598

)

$

(1,574,359

)

$

(1,120,945

)

Change in  valuation allowance

 

—

 

—

 

3,170,855

 

Other-net

 

3,576

 

300,291

 

(16,699

)

Benefit  (provision)

 

$

(1,941,022

)

$

(1,274,068

)

$

2,033,211

 

 

(d)           The Consolidated Statements ofoperations for the years ended December 31, 1998, 1997 and 1996 include statetaxes based on insurance premiums of $189,346, $153,333 and $143,262.

 

Note I –Shareholders’ Equity:

 

(a)           The Insurance Companies are domiciledin the State of New Jersey and therefore prepare their statutory financialstatements in accordance with accounting practices prescribed or permitted bythe NJ DOBI (“SAP”).

 

Prescribed statutoryaccounting practices include a variety of publications of the NationalAssociation of Insurance Commissioners, as well as state laws, regulations andgeneral administrative rules.  Permittedstatutory accounting practices encompass all accounting practices not soprescribed.

 

The maximum amount of dividendswhich the Insurance Companies can pay to shareholders without approval of theInsurance Commissioner is subject to restrictions. To the extent that surplusas defined is available, the maximum amount distributable is limited to thegreater of: (1) ten percent of statutory surplus as regards policyholders; or(2) net income, excluding realized capital gains.  Accordingly, the maximum dividend which may be paid without priorapproval in 1999 is $1.4 million and $1.1 million for Motor Club and Preserver,respectively.  Motor Club paid $1million in dividends to the Company in 1998. The Insurance Companies paid no dividends in 1997 or 1996.

 

(b)           The consolidated financial statementsof the Company’s insurance subsidiaries have been prepared in accordance withGAAP, which differ in certain respects from SAP.

 

The principal differencesrelate to (1) acquisition costs incurred in connection with acquiring newbusiness which are charged to expense under SAP but under GAAP aredeferred and amortized as the related premiums are earned; (2) anticipatedsalvage and subrogation recoveries which have not been credited to lossesincurred for SAP; (3) net deferred tax assets created by the tax effects oftemporary differences; (4) unpaid losses, unpaid loss adjustment expenses andunearned premium reserves are presented gross of reinsurance with acorresponding asset recorded; and (5) fixed maturity portfolios that qualify asavailable for sale are carried at fair value and changes in fair value arereflected directly in unassigned surplus, net of related deferred taxes.

 

 

The consolidated capitaland surplus, shareholders’ equity and income of Motor Club and Preserver on astatutory and GAAP basis were as follows:

 

 

 

 

**December 31,**

 

 

 

**1998**

 

**1997**

 

Capital and  surplus –

 

 

 

 

 

Statutory basis

 

$

24,886,388

 

$

18,129,018

 

Shareholders’  equity –

 

 

 

 

 

GAAP basis

 

$

42,143,091

 

$

29,308,852

 

 

 

 

 

**Years ended December 31,**

 

 

 

**1998**

 

**1997**

 

**1996**

 

Net income  (loss):

 

 

 

 

 

 

 

Statutory basis

 

$

(762,471

)

$

3,719,782

 

$

212,807

 

GAAP basis

 

$

5,157,732

 

$

4,316,713

 

$

2,737,318

 

 

 

Distribution by theInsurance Companies of the excess of GAAP shareholders’ equity over statutorycapital and surplus to the Company is prohibited by law.

 

Note J – Contingencies:

 

The Company and itssubsidiaries are parties to various legal actions and administrativeproceedings and subject to various claims arising in the ordinary course ofbusiness.  The Company believes that thedisposition of these matters will not have a material adverse effect on thefinancial position, the results of operations or cash flows of the Company.

 

Note K – Pensions:

 

(a)           The Company has a non–contributorydefined benefit plan (the “Plan”). Eligible salaried and hourly employees of the Company participate in thePlan after twelve months of continuous employment with the Company when age 21has been attained.  Retirement benefitsare based on each participant’s average compensation and years of service.  Vesting of benefits  begins after five years of servicecommencing from the minimum age of 21 or date of hire, if later.

 

The Company’scontributions are designed to fund the Plan’s normal costs on a current basisand to  fund the unfunded prior servicecosts, including accrued benefits arising from qualifying employee serviceoccurring prior to the establishment of the Plan, over 40 years.

 

On January 15, 1992, theCompany suspended the accrual of benefits arising from participantservice.  The Company continues to fundthe Plan for benefits earned through January 31, 1992.

 

The Plan maintains asignificant amount of assets in group annuity contracts with Mutual BenefitLife Insurance Company (“Mutual”), which was placed in rehabilitation by the NJDOBI on July 16, 1991.

 

On November 10, 1993, aPlan of Rehabilitation for Mutual was confirmed by the Superior Court of NewJersey.  As a result, certain amendmentswere made to the Plan’s contracts (“the restructured contract”), which is nowtransferred to the MBL Life Assurance Corporation (“MBLLAC”), the successorcorporation of Mutual, where the restructured contract continues.

 

The restructured contractis supported by a group of life insurance companies who are participating inthe Plan of Rehabilitation.  Thisarrangement has the effect of guaranteeing the contract balances should MBLLACnot be able to fulfill its obligations under the contract.

 

In October 1994, MBLLACapproved and subsequently paid a “hardship withdrawal” of $2,666,204 (net of anadministrative charge of $470,507) to the Plan.

 

The Plan also received$183,876, $183,876 and $177,517 in distributions from MBLLAC and Mutual in1998, 1997 and 1996, respectively, under provisions of the Plan ofRehabilitation.

 

On January 9, 1997, thePlan of Rehabilitation was amended. Prior to the amendment, the payment of principal and interest under therestructured contract was to be in five installments beginning December 31,1999.  Under the amended Plan ofRehabilitation, such payments have been accelerated and will be paid in full onor before December 31, 1999.

 

On December 9, 1998MBLLAC announced that this date had been accelerated further and that therevised maturity date will likely occur between April 1, 1999 and June 30,1999.

 

(b)           Pension expense for 1998, 1997 and1996 included the following components:

 

 

 

**1998**

 

**1997**

 

**1996**

 

Interest cost

 

$

813,900

 

$

837,900

 

$

831,800

 

Expected return  on plan assets

 

(946,800

)

(862,000

)

(805,000

)

Recognized loss

 

312,500

 

277,900

 

320,100

 

Net periodic  benefit cost benefit obligation

 

$

179,600

 

$

253,800

 

$

346,900

 

 

Measurement of theCompany’s benefit obligation and pension expense as of December 31 of each yearused the following assumptions:

 

 

 

**1998**

 

**1997**

 

**1996**

 

 

 

 

 

 

 

 

 

Discount rate

 

6.75

%

7.25

%

7.50

%

Expected return  on plan assets

 

10.00

%

10.00

%

10.00

%

Rate of  compensation increase

 

N/A

 

N/A

 

N/A

 

 

(c)           A reconciliation of the changes inthe Plan’s benefit obligations and fair value of assets during 1998 and 1997and a statement of the funded status of the Plan as of December 31 of each yearis as follows:

 

 

 

**1998**

 

**1997**

 

Change in  benefit obligation:

 

 

 

 

 

Benefit  obligation at January 1

 

$ 11,605,700

 

$ 11,591,100

 

Service cost

 

—

 

—

 

 

 

 

 

 

 

Interest Cost

 

813,900

 

837,900

 

Actuarial loss

 

568,000

 

403,600

 

Benefits paid

 

(1,018,700

)

(1,226,900

)

Benefit  obligation at December 31

 

$ 11,968,900

 

$ 11,605,700

 

 

 

 

 

 

 

Change in plan  assets:

 

 

 

 

 

Fair value of  plan assets at January

 

$ 9,340,000

 

$ 8,791,900

 

Actual return on  plan assets

 

1,165,300

 

1,241,500

 

Employer  contribution

 

1,254,500

 

625,500

 

Benefits paid

 

(1,018,700

)

(1,226,900

)

Other

 

(122,400

)

(92,000

)

Fair value of  plan assets at December 31

 

$ 10,618,700

 

$ 9,340,000

 

 

 

 

 

 

 

Funded Status at  December 31

 

$ (1,350,200

)

$ (2,265,700

)

Unrecognized  loss

 

4,688,500

 

4,529,100

 

Net amount  recognized at December 31

 

$ 3,338,300

 

$ 2,263,400

 

Following are  the amounts recognized in  the  statement of financial position as of December 31 of each year:

 

 

 

 

 

Accrued benefit  liability

 

$

(1,350,200

)

$

(2,265,700

)

Accumulated  other comprehensive income

 

4,688,500

 

4,529,100

 

Deferred tax  benefit, as restated

 

(1,594,090

)

(1,539,894

)

Net amount  recognized

 

$

1,744,210

 

$

723,506

 

 

The adjustmentrequired to recognize the minimum liability is reflected as a component ofaccumulated comprehensive income (loss) as of December 31, 1998 and 1997,respectively.

(d)           The Company maintains a definedcontribution plan for substantially all employees (including those of MCAIC). Employercontributions of a discretionary amount are made by the Company and itssubsidiaries.  MCAIC and itssubsidiaries provide similar employer contributions.  Employer contributions in the amount of $116,329, $115,995 and$116,938 were made by the Company in 1998, 1997  and 1996, respectively, for its employees and charged to expense.

 

(e)           In 1997, the Company established anon-qualified deferred compensation plan for certain employees.  Employer contributions of a discretionaryamount are made by the Company.

 

Note L –Post–retirement Benefits:

 

(a)           The Company currently providescertain life and health benefits to retired employees who had twenty-five ormore years of service, subject to certain eligibility restrictions.  These benefits consist of the payment ofmedical, life and dental premiums for the retired employees.  The Company’s funding policy is to pay forthe premiums currently; any future increases in the cost of these benefits willbe borne by the retirees and not the Company.

 

(b)           Net periodic post-retirement benefitcost for 1998, 1997 and 1996 included the following components:

 

 

 

**1998**

 

**1997**

 

**1996**

 

 

 

 

 

 

 

 

 

Service cost

 

$

2,500

 

$

2,300

 

$

2,000

 

Interest cost

 

36,000

 

40,200

 

40,000

 

Amortization of  transition obligation

 

28,000

 

28,000

 

28,000

 

Amortization of  net loss

 

21,800

 

22,400

 

17,000

 

Net  postretirement expense

 

$

88,300

 

$

92,900

 

$

87,000

 
****
 

Measurement of theCompany’s benefit obligation and post-retirement benefit expense as of December31 of each year used the following assumptions:

 

 

 

**1998**

 

**1997**

 

**1996**

 

 

 

 

 

 

 

 

 

Discount Rate

 

6.75

%

7.25

%

7.50

%

Expected return  on assets

 

N/A

 

N/A

 

N/A

 

Average rate of  increase in compensation

 

N/A

 

N/A

 

N/A

 

 

(c)           A reconciliation of the changes inthe benefit obligations and fair value of assets during 1998 and 1997 and astatement of the funded status as of December 31 of each year is as follows:

 

 

 

**1998**

 

**1997**

 

Change in  Accumulated Postretirement

 

 

 

 

 

Benefit  Obligation

 

 

 

 

 

Benefit  Obligation at January 1

 

$

552,900

 

$

536,000

 

Service Cost

 

2,500

 

2,300

 

Interest Cost

 

36,000

 

40,200

 

Employee  Contributions

 

12,400

 

11,400

 

Benefit Paid

 

(125,100

)

(126,900

)

Actuarial loss

 

23,900

 

89,900

 

Benefit  Obligation at December 31

 

$

502,600

 

$

552,900

 

 

 

 

 

 

 

Change in Plan  Assets

 

 

 

 

 

Fair Value of  Plan Assets at January 1

 

$

—

 

$

—

 

Company  Contributions

 

112,700

 

115,500

 

Employee  Contributions

 

12,400

 

11,400

 

Benefits Paid

 

(125,100

)

(126,900

)

Fair Value of Plan  Assets at December 31

 

$

 —

 

$

 —

 

 

 

 

 

 

 

Funded Status of  the Plan

 

 

 

 

 

Benefit  obligation less than plan assets

 

$

(502,600

)

$

(552,900

)

Unamortized  transition obligation

 

389,000

 

417,000

 

Unamortized net  loss

 

257,600

 

255,500

 

Net prepaid  assets

 

$

144,000

 

$

119,600

 

 
****
 

The following arethe amounts recognized in the statement of financial position as of December 31of each year:

 

 

 

**1998**

 

**1997**

 

 

 

 

 

 

 

Prepaid benefit  cost

 

$

144,000

 

$

119,600

 

Accumulated  other comprehensive income

 

—

 

—

 

Net amount  recognized

 

$

144,000

 

$

119,600

 

 

(d)           It is the policy of the Company thatany future increase in life and health care benefits will be borne by theretirees and not the Company; as a result, there will be no increase in eitherthe accumulated post-retirement benefit obligation or the service and interestcost components of net periodic post-retirement benefit cost related to a 1%increase in the health care trend rate.

 

Note M - SelectedQuarterly Financial Data (Unaudited):

 

(a)  Year ended December 31, 1998: **(Restated)**

 

 

 

**1st**

 

**2nd**

 

**3rd**

 

**4th**

 

 

 

**Quarter**

 

**Quarter**

 

**Quarter**

 

**Quarter**

 

Revenues

 

$

14,122,238

 

$

14,196,905

 

$

14,481,138

 

$

14,879,605

 

 

 

 

 

 

 

 

 

 

 

Losses and  expenses

 

$

12,689,535

 

$

12,629,606

 

$

13,140,836

 

$

13,500,503

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

946,480

 

$

1,035,397

 

$

885,437

 

$

911,070

 

 

 

 

 

 

 

 

 

 

 

Net income per  common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

.45

 

$

.49

 

$

.42

 

$

.43

 

Diluted

 

$

.45

 

$

.48

 

$

.42

 

$

.43

 

 

                                Reconciliationof previously reported to restated net income and per share information:

 

                                Net income:

 

 

 

**1st**

 

**2nd**

 

**3rd**

 

**4th**

 

 

 

**Quarter**

 

**Quarter**

 

**Quarter**

 

**Quarter**

 

Previously  reported

 

$

1,024,531

 

$

1,134,939

 

$

1,015,460

 

$

1,080,861

 

Effect of tax  adjustment

 

(78,051

)

(99,542

)

(229,565

)

(169,791

)

As restated

 

$

946,480

 

$

1,035,397

 

$

885,437

 

$

911,070

 

 

 

 

 

 

 

 

 

 

 

Per share  information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

Previously  reported

 

$

.49

 

$

.54

 

$

.48

 

$

.51

 

Effect of tax  adjustment

 

(.04

)

(.05

)

(.06

)

(.08

)

As restated

 

$

.45

 

$

.49

 

$

.42

 

$

.43

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

Previously  reported

 

$

.48

 

$

.54

 

$

.48

 

$

.51

 

Effect of tax  adjustment

 

(.03

)

(.06

)

(.06

)

(.08

)

As restated

 

$

.45

 

$

.48

 

$

.42

 

$

.43

 

 

 

(b)  Year ended December 31, 1997: **(Restated)**

 

 

 

 

**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

 

$

877,165

 

$

845,799

 

$

796,369

 

$

837,066

 

 

 

 

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

.43

 

$

.41

 

$

.38

 

$

.40

 

Diluted

 

$

.42

 

$

.40

 

$

.38

 

$

.40

 

 

                                Reconciliationof previously reported to restated net income and per share information:

 

**Net income:**

 

 

 

 

 

 

 

 

 

 

 

**1st**

 

**2nd**

 

**3rd**

 

**4th**

 

 

 

**Quarter**

 

**Quarter**

 

**Quarter**

 

**Quarter**

 

Previously  reported

 

$

921,993

 

$

868,540

 

$

844,910

 

$

847,259

 

Effect of tax  adjustment

 

(44,828

)

(22,741

)

(48,541

)

(10,253

)

As restated

 

$

877,165

 

$

845,799

 

$

796,369

 

$

837,066

 

 

 

 

 

 

 

 

 

 

 

Per share  information:

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

Previously  reported

 

$

.45

 

$

.42

 

$

.40

 

$

.41

 

Effect of tax  adjustment

 

(.02

)

(.01

)

(.02

)

(.01

)

As restated

 

$

.43

 

$

.41

 

$

.38

 

$

.40

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

Previously  reported

 

$

.44

 

$

.42

 

$

.40

 

$

.41

 

Effect of tax  adjustment

 

(.02

)

(.02

)

(.02

)

(.01

)

As restated

 

$

.42

 

$

.40

 

$

.38

 

$

.40

 

 
****
 

Comprehensiveincome consisted of the following:

** **

 

 

**1998**

 

**1997**

 

**1996**

 

Net income

 

$

3,778,384

 

$

3,356,399

 

$

5,330,108

 

Other  comprehensive income

 

 

 

 

 

 

 

Unrealized gains  (losses) on securities: Unrealized gains (losses) during period (net of taxes  of ($354,257), ($216,243) and $0)

 

687,149

 

327,721

 

(1,118,758

)

Less:  Reclassification adjustment for gains included in net income (net of taxes of  ($9,705), $0 and ($1,865))

 

(18,840

)

—

 

(3,620

)

Net unrealized  gains (losses)

 

668,309

 

327,721

 

(1,122,378

)

Minimum pension  liability adjustment (net of taxes of (($54,196) $55,012 and $1,594,908)

 

(105,204

)

106,788

 

2,081,906

 

 

 

 

 

 

 

 

 

Other  comprehensive income

 

563,105

 

434,509

 

959,528

 

Comprehensive  income

 

$

4,341,489

 

$

3,790,908

 

$

6,289,636

 

 

Note O –Stock Option Plans:

The Motor Club ofAmerica 1987 and 1992 Stock Option Plans (“1987 Option Plan” and “1992 OptionPlan”, respectively) provide for the issuance of options to purchase 100,000common shares, respectively, by key executives at the  market price at date of grant.

 

Options underboth  Option Plans are exercisable for afive year period in twenty-five percent increments each year, commencing oneyear from the date of grant. As of December 31, 1998: (1) 5,125 shares underthe 1987 Option Plan are available for grant; 57,000 shares were exercisableand 37,875 shares had been exercised as of that date; and (2) 32,950 sharesunder the 1992 Option Plan are available for grant; 31,500 shares wereexercisable and 35,550 shares had been exercised as of that date.

 

Transactionsduring 1996, 1997 and 1998 relating to the 1987 Option Plan are as follows:

 

 

 

 

 

**Weighted**

 

 

 

 

 

 

 

**Average**

 

 

 

 

 

 

 

**Exercise**

 

 

 

 

 

**Number of**

 

**Price per**

 

**Aggregate**

 

 

 

**Shares**

 

**Share**

 

**Amount**

 

 

 

 

 

 

 

 

 

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

 

$

12.75

 

790,500

 

Options  outstanding at December 31, 1997

 

84,000

 

$

 10.098

 

848,250

 

Options  exercised in 1998

 

(22,000

)

$

 2.625

 

(57,750

)

Options lapsed  in 1998

 

(5,000

)

$

 12.75

 

$

 (63,750

)

Options  outstanding at December 31, 1998

 

57,000

 

$

 12.75

 

$

 726,750

 

 

 

Transactionsduring 1996, 1997 and 1998 relating to the 1992 Option Plan are as follows:

 

 

 

 

 

**Weighted**

 

 

 

 

 

 

 

**Average**

 

 

 

 

 

 

 

**Exercise**

 

 

 

 

 

**Number of**

 

**Price per**

 

**Aggregate**

 

 

 

**Shares**

 

**Share**

 

**Amount**

 

 

 

 

 

 

 

 

 

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

 

$

 12.75

 

38,250

 

Options  outstanding at December 31, 1997

 

3,000

   

$

 12.75

   

38,250

   

Options granted  in 1998

 

28,500

 

$

 11.75

 

334,875

 

Options  outstanding at December 31, 1998

 

31,500

   

$

 11.845

   

$

 373,125

   

 

The Company hasadopted the provision of SFAS No. 123 (“Accounting for Stock-BasedCompensation”), which calls for companies to measure employee stock compensationexpense based on the fair value method of accounting.  However, as allowed by SFAS No. 123, the Company has elected thecontinued use of APB Opinion No. 25 (“Accounting for Stock Issued toEmployees”), with pro forma disclosures of net income and earnings per sharedetermined as if the fair value method had been applied in measuringcompensation cost.

 

These calculationsonly take into consideration options issued since January 1, 1995.  No options were granted by the Company in1996 and therefore the adoption of this Statement does not have any effect onthat year’s financial position or results of operations.  In 1998 and 1997, had the fair value methodbeen applied, net income would have been reduced by $21,100 and $10,200, $.01and less than $.01 basic net earnings per share, respectively.

 

The average fairvalue of options granted during 1998 and 1997 was $5.79 and $6.52,respectively.  The fair value wasestimated using the Black-Scholes option pricing model based on the followingassumptions for 1998 and 1997: risk-free interest rate of 4.66% and 5.65%;volatility of 52.3% and 54.5%; and expected life of 4.75 and 4.5 years. TheCompany does not pay a dividend on its common stock.  The following table summarizes options outstanding andexercisable at December 31, 1998:

**Options Outstanding**

 

**Options Exercisable**

 

 

 

 

 

 

 

 

 

 

 

**Average**

 

**Exercise**

 

 

 

**Average**

 

**Exercise**

 

 

 

**Exercise**

 

**Price**

 

**Options**

 

**Life(a)**

 

**Price**

 

**Options**

 

**Price**

 

 

 

 

 

 

 

 

 

 

 

 

 

$

11.75

 

28,500

 

4.75

 

$

11.75

 

0

 

$

—

 

$

12.75

 

60,000

 

3.25

 

$

12.75

 

15,000

 

12.75

 

Total

 

88,500

 

3.73

 

$

12.42

 

15,000

 

$

12.75

 

(a)           Average contractual life remainingyears.

 

 

 

Note P –Related Party Transactions:

 

Three of theCompany’s directors (“Ownership Group”) own 42.2% of the outstanding commonstock of the Company at December 31, 1998. The Company paid directors fees’ of $180,000 during 1998, 1997 and 1996to the Ownership Group.

 

Note Q –Lease Obligations:

 

Effective January1, 1996, the Company entered into a lease (“Paramus Lease”) at 95 Route 17South, Paramus, New Jersey.  The ParamusLease expires on December 31, 2005.  TheCompany has an option to terminate the Paramus Lease after six years, and anoption to extend the Paramus Lease for an additional five years after the initiallease term expires. The Company will pay a base annual rental of $371,745through  December 31, 2000 and $416,805thereafter until the Paramus Lease expires. Additional charges for electricity and escalation of certain operatingcosts apply.  In 1998, 1997  and 1996, rent expense paid by the Companyon the Paramus Lease was $410,000, $410,000 and $310,000, respectively.

 

Through March 31,1996, the Company was party to a lease (“Newark Lease”) with Fairmount CentralUrban Renewal Corporation (“Fairmount”), a subsidiary of MCAIC, for the leaseof the office building in which the Company and its subsidiaries formerlyoperated. Rent of $324,000 per year, subject to adjustment for property taxesin excess of $200,000, was paid by the Company, along with other costs asdefined in the Newark Lease.

 

Effective March31, 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, theNewark Lease was terminated in exchange for $132,000.

 

The Newark Leasewas to run to December 31, 2011.  TheRelease also enabled the Company to terminate the Joint Service Agreement(“JSA”).  Concurrent with the executionof the Release in 1996, the Company charged off $227,000 in leaseholdimprovements at that facility.

 

In 1996, rentexpense paid by the Company (net of amounts paid by MCAIC) on the Newark Leasewas $75,000.

 

Note R - Earningsper Share (“EPS”):

 

In 1997, theCompany 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 sharesoutstanding.  Diluted earnings per shareare based on weighted average diluted shares outstanding, which is calculatedby adding shares contingently issuable under stock options to the average basicshares outstanding.  The calculations ofaverage basic and diluted common shares outstanding and net income per commonshare are as follows:

 

 

 

**1998**

 

**1997**

 

**1996**

 

 

 

**(Restated)**

 

**(Restated)**

 

 

 

 

 

 

 

 

 

 

 

Net income  (numerator)

 

$

3,778,384

 

$

3,356,399

 

$

5,330,108

 

Weighted average  basic common shares outstanding (denominator)

 

2,108,722

 

2,074,473

 

2,045,590

 

Shares  contingently issuable under Stock Option plans

 

12,644

 

27,922

 

35,490

 

Average diluted  common shares outstanding (denominator)

 

2,121,366

 

2,102,395

 

2,081,080

 

Net income per  common share:

 

 

 

 

 

 

 

Basic

 

$

1.79

 

$

1.62

 

$

2.61

 

Diluted

 

$

1.78

 

$

1.60

 

$

2.56

 

 

Note S -Reportable Segments:

 

In 1998, theCompany adopted SFAS No. 131 (“Disclosures about Segments of an Enterprise andRelated Information”).  Under thisStatement, the Company does not have any reportable segments but is required todisclose certain enterprise-wide information.

 

The Company writesproperty and casualty insurance in the State of New Jersey only throughindependent producers, none of which generate more than 10% of the Company’sinsurance premiums.  Products includeprivate passenger automobile, homeowners and ancillary coverages (“PersonalProperty”), and small commercial lines insurance, including commercial auto.  Insurance premiums generated by theseproducts during 1998, 1997 and 1996 were as follows:

 

 

 

**1998**

 

**1997**

 

**1996**

 

**Product**

 

 

 

 

 

 

 

Private  Passenger Automobile

 

$

39,872,261

 

$

39,213,154

 

$

35,172,633

 

Commercial Lines

 

7,703,054

 

4,912,797

 

5,577,301

 

Personal  Property

 

5,600,348

 

6,751,939

 

4,444,139

 

Total

 

$

53,175,663

 

$

50,877,890

 

$

45,194,073

 

 

Note T -Subsequent Event (Unaudited):

 

On March 16, 1999,the Company signed a definitive Agreement and Plan of Merger (“MergerAgreement”) to acquire North East Insurance Company (“North East”) through amerger of a wholly-owned subsidiary of the Company with and into North East(“Merger”).  North East is a NASDAQlisted property and casualty insurance company, headquartered in Scarborough,Maine and trading under the symbol NEIC. Under the terms of the MergerAgreement, North East shareholders will receive, at their individual election,(a) $3.30 per share of North East common stock, (b) one share of the Company’scommon stock for each 5.25 shares of North East common stock, or (c) acombination thereof.  If the North Eastshareholders in the aggregate elect to exchange more than 50% of their sharesfor the Company’s stock, the aggregate percentage will be ratably reduced to50%.

 

Consummation ofthe Merger is subject to the satisfaction of certain conditions set forth inthe merger agreement, including approval from the shareholders of the Companyand North East and authorization by state insurance regulators.  Both the Company and North East expect thatthese conditions will be satisfied in due course.

 

Note U -Restatement:

 

In March 2001, theCompany’s management determined that certain tax benefits should not have beenrecognized and that certain deferred tax liabilities had not beenrecorded.  These tax matters, which arediscussed in Note H, relate to the tax effects of temporary differences arisingfrom a subsidiary that was deconsolidated for financial reporting purposes dueto its insolvency in 1992.

 

As a result, the1997 and 1998 Consolidated Financial Statements have been restated from amountspreviously reported.

 

Finally, deferredtax assets were not recorded for the tax effects of the minimum pensionliability that is presented as a component of other comprehensive income.Shareholders’ equity at December 31, 1996 increased by $1,594,906, representingthe cumulative effect on prior periods’ results of revising the tax accrual.

 

These tax mattershave no impact on the operations, cash flow or capital and surplus of theCompany’s active insurance subsidiaries or on the consolidated income beforeFederal income taxes for the periods presented nor is the Company subject topenalties and interest in the recording of the deferred tax liabilities.  The effect of these tax items on theaccompanying are set forth below.

 

 

 

 

**Consolidated  Balance Sheet as of**

 

 

 

**December  31, 1998**

 

**December  31, 1997**

 

 

 

**As**

 

 

 

**As**

 

 

 

 

 

**previously**

 

**As**

 

**previously**

 

**As**

 

**ASSETS**

 

**Reported**

 

**Restated**

 

**Reported**

 

**Restated**

 

Investments:

 

 

 

 

 

 

 

 

 

Fixed maturity securities

 

$

69,594,904

 

$

69,594,904

 

$

56,831,444

 

$

56,831,444

 

Equity securities

 

0

 

0

 

0

 

0

 

Mortgage loans on real estate

 

361,038

 

361,038

 

522,555

 

522,555

 

Short-term investments

 

5,995,299

 

5,995,299

 

7,150,000

 

7,150,000

 

Total investments

 

75,951,241

 

75,951,241

 

64,503,999

 

64,503,999

 

Cash and cash equivalents

 

2,773,427

 

2,773,427

 

222,761

 

222,761

 

Premiums receivable

 

20,401,069

 

20,401,069

 

7,809,567

 

7,809,567

 

Reinsurance recoverable

 

19,234,277

 

19,234,277

 

18,666,066

 

18,666,066

 

Notes and accounts receivable

 

125,444

 

125,444

 

124,669

 

124,669

 

Deferred policy acquisition costs

 

8,708,329

 

8,708,329

 

5,858,650

 

5,858,650

 

Fixed assets

 

1,671,902

 

1,671,902

 

1,586,649

 

1,586,649

 

Federal income tax recoverable

 

26,724

 

12,993

 

0

 

0

 

Prepaid reinsurance premiums

 

1,015,581

 

1,015,581

 

695,245

 

695,245

 

Deferred tax asset

 

0

 

46,625

 

657,362

 

2,098,144

 

Goodwill

 

0

 

0

 

0

 

0

 

Other assets

 

1,104,782

 

1,104,782

 

1,221,723

 

1,221,723

 

Total Assets

 

$

131,012,776

 

$

131,045,670

 

$

101,346,691

 

$

102,787,473

 

 

 

 

 

 

 

 

 

 

 

**LIABILITIES AND SHAREHOLDERS' EQUITY**

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Losses and loss expenses

 

$

58,335,143

 

$

58,335,143

 

$

50,246,778

 

$

50,246,778

 

Unearned premiums

 

30,733,144

 

30,733,144

 

19,285,757

 

19,285,757

 

Commission payable

 

2,835,408

 

2,835,408

 

1,322,669

 

1,322,669

 

Accounts payable

 

875,327

 

875,327

 

562,453

 

562,453

 

Accrued expenses

 

4,763,950

 

4,763,950

 

5,518,935

 

5,518,935

 

Drafts outstanding

 

1,688,835

 

1,688,835

 

1,396,215

 

1,396,215

 

Convertible subordinated debentures

 

0

 

0

 

0

 

0

 

Note payable

 

3,000,000

 

3,000,000

 

0

 

0

 

Deferred tax liability

 

957,440

 

0

 

0

 

0

 

Federal income tax payable

 

0

 

0

 

12,851

 

12,851

 

Other liabilities

 

0

 

0

 

0

 

27,191

 

Total liabilities

 

103,189,247

 

102,231,807

 

78,345,658

 

78,372,849

 

Shareholders' Equity:

 

 

 

 

 

 

 

 

 

Common stock

 

1,058,215

 

1,058,215

 

1,047,215

 

1,047,215

 

Paid in capital

 

1,996,954

 

1,996,954

 

1,950,204

 

1,950,204

 

Accumulated other comprehensive income

 

(3,422,387

)

(1,828,343

)

(3,931,342

)

(2,391,448

)

Retained earnings

 

28,190,747

 

27,587,037

 

23,934,956

 

23,808,653

 

Total Shareholders' Equity

 

27,823,529

 

28,813,863

 

23,001,033

 

24,414,624

 

Total Liabilities and Shareholders' Equity

 

$

131,012,776

 

$

131,045,670

 

$

101,346,691

 

$

102,787,473

 

 

 

 

 

 

 

 

 

 

 

 

 

**Consolidated Income Statements for the Years Ended  December 31,**

 

 

 

**1998**

 

**1997**

 

 

 

**As**

 

 

 

**As**

 

 

 

 

 

**Previously**

 

**As**

 

**previously**

 

**As**

 

 

 

**Reported**

 

**Restated**

 

**Reported**

 

**Restated**

 

Income before Federal income taxes

 

$

5,719,406

 

$

5,719,406

 

$

4,630,467

 

$

4,630,467

 

 

 

 

 

 

 

 

 

 

 

Benefit (provision) for Federal income taxes:

 

 

 

 

 

 

 

 

 

Current

 

(193,121

)

(179,661

)

(37,573

)

(37,573

)

Deferred

 

(1,270,494

)

(1,761,361

)

(1,110,192

)

(1,236,495

)

Total Federal income tax

 

(1,463,615

)

(1,941,022

)

(1,147,765

)

(1,274,068

)

Net income

 

$

4,255,791

 

$

3,778,384

 

$

3,482,702

 

$

3,356,399

 

 

 

 

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

2.02

 

$

1.79

 

$

1.68

 

$

1.62

 

Diluted

 

$

2.01

 

$

1.78

 

$

1.66

 

$

1.60

 

 

**MOTOR CLUB OF AMERICA****ANDSUBSIDIARIES**

**SCHEDULEI.  SUMMARY OF INVESTMENTS****–**

**OTHER THAN INVESTMENTS IN RELATEDPARTIES**

**at December 31, 1998**

 

**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

 

$

33,081,386

 

$

34,359,220

 

$

34,359,220

 

Industrial and  Miscellaneous

 

31,741,156

 

32,325,042

 

32,325,042

 

Public utilities

 

2,853,869

 

2,910,642

 

2,910,642

 

 

 

 

 

 

 

 

 

Total fixed  maturities

 

67,676,411

 

 

 

69,594,904

 

 

 

 

 

 

 

 

 

Mortgage loans  on real Estate

 

361,038

 

 

 

361,038

 

Short–term  investments, available-for-sale

 

5,995,299

 

5,995,299

 

5,995,299

 

 

 

 

 

 

 

 

 

Total  investments

 

$

74,032,748

 

 

 

$

75,951,241

 

Note: (a)  Represents original cost ofinvestments reduced by repayment and as to fixed maturities, adjusted foramortization of premiums or accrual of discounts.

 
****
 
**MOTOR CLUB OF AMERICA ANDSUBSIDIARIES****SCHEDULE II. CONDENSED FINANCIAL INFORMATION**
**OF REGISTRANT (PARENT COMPANY)**

**BALANCE SHEETS**

 

 

 

**December 31,**

 

 

 

**1998**

 

**1997**

 

 

 

**(Restated)**

 

**(Restated)**

 

**Assets:**

 

 

 

 

 

 

 

 

 

 

 

Cash and cash  equivalents

 

$

1,238,530

 

$

—

 

 

 

 

 

 

 

Investments in  subsidiaries

 

40,707,745

 

28,889,766

 

 

 

 

 

 

 

Insurance  premiums receivable

 

19,587,908

 

7,366,692

 

 

 

 

 

 

 

Other assets

 

2,024,056

 

7,462,269

 

 

 

 

 

 

 

Total assets

 

$

63,558,239

 

$

43,718,727

 

 

 

 

 

 

 

**Liabilities and shareholders’  equity:**

 

 

 

 

 

 

 

 

 

 

 

Indebtedness to  subsidiaries

 

$

26,498,457

 

$

14,641,404

 

 

 

 

 

 

 

Note payable

 

3,000,000

 

—

 

 

 

 

 

 

 

Other  liabilities

 

5,245,919

 

4,662,699

 

 

 

 

 

 

 

Total  liabilities

 

34,744,376

 

19,304,103

 

 

 

 

 

 

 

Shareholders’  equity

 

28,813,863

 

24,414,624

 

Total  liabilities and shareholders’ equity

 

$

63,558,239

 

$

43,718,727

 

 

 

 

 

 

 

** **

**Notes to Schedule**

 

The Notes toConsolidated Financial Statements of Motor Club of America and Subsidiaries areincorporated by reference to this schedule.

 

The Statements ofShareholders’ Equity are the same as those presented for Motor Club of Americaand Subsidiaries.

 

 
**MOTOR CLUB OF AMERICA ANDSUBSIDIARIES****SCHEDULE II.  CONDENSED FINANCIAL INFORMATION**
**OF REGISTRANT (PARENT COMPANY)**

**STATEMENTS OF OPERATIONS**

 

 

 

**For the years ended December 31,**

 

 

 

**1998**

 

**1997**

 

**1996**

 

 

 

**(Restated)**

 

**(Restated)**

 

 

 

**Revenues:**

 

 

 

 

 

 

 

Membership  servicing fees

 

$

133,531

 

$

152,791

 

$

21,481

 

Commission  income

 

—

 

1,595

 

9,960

 

Realized gain on  sale of Subsidiary

 

—

 

—

 

702,419

 

Interest on  mortgage loans

 

35,251

 

4,973

 

—

 

Other income (1)

 

204,640

 

216,161

 

135,704

 

Total revenues

 

373,422

 

375,520

 

869,564

 

 

 

 

 

 

 

 

 

**Expenses:**

 

 

 

 

 

 

 

Interest expense

 

60,389

 

8,890

 

8,166

 

General and  administrative expenses (2)

 

(248,636

)

(512,054

)

(41,111

)

Total expenses

 

(188,247

)

(503,164

)

(32,945

)

 

 

 

 

 

 

 

 

Income before

 

 

 

 

 

 

 

Federal income  taxes

 

561,669

 

878,684

 

902,509

 

Benefit  (provision) for

 

 

 

 

 

 

 

Federal income  taxes:  

 

 

 

 

 

 

 

Current

 

1,384,611

 

(37,573

)

(42,324

)

Deferred

 

(1,761,361

)

(1,236,495

)

2,075,535

 

Total Federal  income tax

 

(376,750

)

(1,274,068

)

2,033,211

 

 

 

 

 

 

 

 

 

Income before  item shown below

 

184,919

 

(395,384

)

2,935,720

 

Equity in net  income of subsidiaries

 

3,593,465

 

3,751,783

 

2,394,388

 

Net income

 

$

3,778,384

 

$

3,356,399

 

$

5,330,108

 

(1)           Amount includes $31,559 (1996) ofinterest due from Motor Club.

 

(2)           Amount is net of $296,810 (1998),$535,816 (1997) and  $520,579 (1996) ofmanagement fees charged to subsidiaries.

 
******MOTOR CLUB OF AMERICA ANDSUBSIDIARIES****SCHEDULE II.  CONDENSED FINANCIAL INFORMATION**
**OF REGISTRANT (PARENT COMPANY)**

**STATEMENTS OF CASH FLOWS**

 

 

 

**For the years ended December 31,**

 

 

 

**1998**

 

**1997**

 

**1996**

 

 

 

**(Restated)**

 

**(Restated)**

 

 

 

Net income

 

$

3,778,384

 

$

3,356,399

 

$

5,330,108

 

Adjustments to  reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Write-off of  leasehold improvement (net) due to lease termination

 

—

 

—

 

227,077

 

Depreciation  expense

 

426,703

 

371,756

 

309,875

 

Gain on sale of  subsidiary

 

—

 

—

 

(702,419

)

Accretion of  bond discount

 

—

 

—

 

10

 

Deferred tax  benefit

 

1,761,361

 

1,274,068

 

(2,075,535

)

 

 

 

 

 

 

 

 

Changes in:

 

 

 

 

 

 

 

Net assets of  Motor Club of America Enterprises, Inc.

 

—

 

—

 

(422,581

)

Premiums  receivable

 

(12,221,216

)

172,024

 

(520,054

)

Investments in  subsidiaries

 

(10,818,776

)

(2,676,923

)

(1,663,715

)

Other assets

 

125,831

 

229,053

 

(146,637

)

Other  liabilities

 

451,011

 

(305,577

)

103,409

 

Indebtedness to  related parties

 

11,857,053

 

(922,446

)

1,594,981

 

Net cash  provided by (utilized in) operating activities

 

(4,639,649

)

1,498,354

 

2,034,519

 

 

 

 

 

 

 

 

 

Investing  activities:

 

 

 

 

 

 

 

Proceeds from:

 

 

 

 

 

 

 

Sale of  subsidiary

 

—

 

—

 

1,125,000

 

Disposal of  short–term Investments

 

28,900,000

 

47,287,674

 

—

 

Disposal of  fixed Maturities

 

—

 

—

 

15,039

 

Sale of fixed  assets

 

—

 

—

 

13,400

 

Payments  received on mortgage loan principal

 

161,517

 

4,490

 

—

 

Purchase of:

 

 

 

 

 

 

 

Fixed maturities

 

—

 

—

 

—

 

Short–term  investments

 

(25,750,000

)

(48,692,219

)

(1,745,455

)

Fixed assets

 

(491,088

)

(168,878

)

(1,097,883

)

Mortgage loans  from Finance Company

 

—

 

(527,045

)

—

 

 

 

 

 

 

 

 

 

Net cash provide  by (utilized in) investing activities

 

2,820,429

 

(2,095,978

)

(1,689,899

)

Financing  activities:

 

 

 

 

 

 

 

Note payable

 

3,000,000

 

—

 

—

 

Common stock  issued

 

57,750

 

243,159

 

9,845

 

Net cash  provided by financing activities

 

3,057,750

 

243,159

 

9,845

 

Increase  (decrease) in cash and cash equivalents

 

1,238,530

 

(354,465

)

354,465

 

Cash and cash  equivalents at beginning of year

 

—

 

354,465

 

—

 

Cash and cash  equivalent at end of year

 

$

1,238,530

 

$

—

 

$

354,465

 

 

 

 

 

 

 

 

 

SupplementalDisclosures of Cash Flow Information

(1)           Total interest paid was$60,389(1998), $8,890 (1997) and $8,166 (1996).

(2)           Total federal income taxes paid was$212,738(1998), $50,691 (1997) and $38,462 (1996).

 

 
**MOTOR CLUB OF AMERICA ANDSUBSIDIARIES**
**SCHEDULEIV.  REINSURANCE**

**FOR THE YEARS ENDED DECEMBER 31,1998, 1997 and 1996**

 

**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,  1998:

 

 

 

 

 

 

 

 

 

 

 

Total property  and casualty insurance premiums earned

 

$

59,951,837

 

$

6,776,174

 

$

—

 

$

53,175,663

 

0.0

%

 

 

 

 

 

 

 

 

 

 

 

 

December 31,  1997:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total property  and casualty insurance premiums earned

 

$

58,029,094

 

$

7,151,204

 

$

—

 

$

50,877,890

 

0.0

%

 

 

 

 

 

 

 

 

 

 

 

 

December 31,  1996:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total property  and casualty insurance premiums earned

 

$

52,467,156

 

$

7,273,083

 

$

—

 

$

45,194,073

 

0.0

%

 
****
 

**MOTOR CLUB OF AMERICA ANDSUBSIDIARIES**

**SCHEDULEV. VALUATION AND QUALIFYING**

**ACCOUNTS AND RESERVES**

**FOR THE YEARS ENDED DECEMBER 31,1998, 1997 and 1996**

 

**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,  1998

 

$

68,091

 

$

—

 

$

–

 

$

—

 

$

68,091

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,  1997

 

$

41,340

 

$

26,751

 

$

–

 

$

—

 

$

68,091

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,  1996

 

$

656,083

 

$

—

 

$

–

 

$

614,743

 

$

41,340

 

 

 

 

 

 

 

 

 

 

 

 

 

Valuation  allowance for deferred taxes, as restated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,  1998

 

$

1,920,162

 

$

—

 

$

—

 

$

1,619,305

 

$

300,857

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,  1997

 

$

—

 

$

1,920,162

 

$

—

 

$

—

 

$

1,920,162

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,  1996

 

$

4,734,894

 

$

—

 

$

—

 

$

4,734,894

 

$

—

 

 

 
**MOTOR CLUB OF AMERICA AND SUBSIDIARIES****SCHEDULE VI. SUPPLEMENTAL INFORMATION CONCERNING****PROPERTY/CASUALTYINSURANCE OPERATIONS**
**For the years ended December 31,1998, 1997 and 1996**

 

**Column A**

** **

**Column B**

** **

**Column C**

** **

**Column D**

** **

**Column E**

** **

**Column F**

** **

**Column G**

** **

**Column H**

** **

**Column I**

** **

**Column J**

** **

**Column K**

** **

** **

** **

** **

** **

**Reserves**

** **

** **

** **

** **

** **

** **

** **

** **

** **

 

** **

 

** **

 

** **

** **

** **

** **

** **

**Deferred**

** **

**for  Unpaid Claims**

** **

**Discount**

** **

** **

** **

** **

** **

** **

** **

**Claims and  Claim  Adjustment Expenses   Incurred Related to**

** **

**Amortization  of deferred**

** **

**Paid  Claims**

** **

** **

** **

** **

** **

**Policy**

** **

**and Claim**

** **

**if any,**

** **

** **

** **

** **

** **

**Net**

** **

**(1)**

** **

**(2)**

** **

**policy**

** **

**and Claim**

** **

** **

** **

** **

** **

**Acquisition**

** **

**Adjustment**

** **

**Deducted  in**

** **

**Unearned**

** **

**Earned**

** **

**Investment**

** **

**Current**

** **

**Prior**

** **

**acquisition**

** **

**Adjustment**

** **

**Premium**

** **

** **

** **

**Costs**

** **

**Expenses**

** **

**Column C**

** **

**Premiums**

** **

**Premiums**

** **

**Income (a)**

** **

**Year**

** **

**Years**

** **

**Costs**

** **

**Expenses**

 

**Written**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 1998

 

$

8,708,329

 

$

58,335,143

 

–

 

$

30,733,144

 

$

53,175,663

 

$

4,102,255

 

$

32,598,287

 

$

3,881,304

 

$

13,375,221

 

$

29,548,773

 

$

64,302,713

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 1997

 

$

5,858,650

 

$

50,246,778

 

–

 

$

19,285,757

 

$

50,877,890

 

$

3,384,004

 

$

29,368,738

 

$

3,772,953

 

$

15,162,320

 

$

28,371,865

 

$

51,680,146

 

Year ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 1996

 

$

5,761,496

 

$

47,666,856

 

–

 

$

18,934,200

 

$

45,194,073

 

$

2,998,897

 

$

28,244,599

 

$

903,681

 

$

13,678,710

 

$

24,443,589

 

$

47,337,295

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note:  (a) Excludes non–insurance subsidiaries’ investment income andrealized investment gains.

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