The Registrant and its subsidiaries (including MCAIC and PCCMCA) are parties to an agreement with Fairmount for the lease of an office building in Newark, New Jersey in which the Registrant and its subsidiaries formerly operated. The Registrant presently has a limited operation at this building. The Registrant is finalizing discussions of the termination of its lease with Fairmount; at this time, the Registrant does not believe that any lease termination costs will be material.
The Joint Services Agreement ("JSA") entered into as part of the Settlement was retroactive to May 1, 1994 and provided for the rendering of certain services by the parties to the JSA and amounts due for these services, as well as the sharing of certain common expenses. Common expenses emanated from the parties' co-tenancy in the office building in which the parties' principal offices resided. The JSA was terminated effective February 29, 1996.
Net income decreased $2,618,000 or $1.28 per share in 1995 as compared to 1994, after increasing $1,775,000 or $.86 per share in 1994 as compared to 1993.
Insurance premiums increased $7,409,000 or 27% in 1995 as compared to 1994, primarily as a result of: (1) the termination in February 1994 of Preserver's 80% quota share reinsurance treaty; (2) the aforementioned reduction in UCJF costs; and (3) increases in new business written in 1995, particularly PPA.
Insurance premiums decreased $2,183,000 or 7% in 1994 as compared to 1993, primarily as a result of continued attrition in the PPA book of business.
In 1995, Motor Club began to write new PPA business for the first time since March 1990. New business written, net of reinsurance, was $5,644,000 during 1995, of which $2,964,000 was earned.
The Insurance Companies earned a 37% commission on the business ceded to this reinsurance agreement, which was recorded as a reduction of deferred policy acquisition costs. The quota share reinsurance agreement was terminated effective February 19, 1994; the policies covered by the quota share as of the termination date were run-off through the policies' respective expiration dates.
Other revenues decreased $72,000 or 37% in 1995 as compared to 1994, and $132,000 or 40% in 1994 as compared to 1993.
The decreases were due to reduced mortgage loan revenue and other miscellaneous income reductions.
Finally, as the Registrant continues to write more new PPA business, PPA loss ratios should generally trend higher, although within levels that should remain profitable. Concurrently, as was the case in 1995, the Registrant will also continue to experience continued reductions in its expense ratio as a result of these new PPA writings. This should result in lower overall combined ratios for the Registrant.
The improvement in Preserver's loss ratio in 1995 as compared to 1994 is primarily attributable to lower levels of large losses (greater than $35,000) which had been experienced prior to 1995. Both personal and commercial lines' loss ratios for Preserver showed improvement in 1995 as compared to 1994. In 1994 and 1993, the business written by Preserver performed at levels worse than historically experienced. The 1995 results are a return to a more representative experience. Frequency of losses has generally been at acceptable levels.
These expenses include in 1995 and 1994, a reserve for a reinsurance dispute (see Note G (c) in the Notes to the Financial Statements) and expenses related to State Mandated Assessments discussed separately below. Excluding these items, expenses decreased $94,000 or 1% in 1995 as compared to 1994. The decrease in expenses (excluding non-recurring items discussed previously, primarily the reversal of State mandated assessments) contributed to the decrease in expense ratio to 43.9% for 1995 as compared to 53.9% in 1994. The Registrant is committed to further reducing its expense ratio by increasing revenues without increasing overhead expenditures.
Excluding acquisition related expenses, which increased commensurately with the aforementioned 27% increase in insurance premiums, other operating expenses decreased $1,136,000 or 12% in 1995 as compared to 1994. During 1994, these expenditures increased $181,000 or 2% as compared to 1993.
The Registrant expects to reduce its expenses and expense ratio further by converting its information systems to a smaller, more contemporary computing platform which will allow for more efficient operations and by re-doubling the efforts made previously to reduce all unnecessary overhead expenditures.
The most substantial assessments have been the FAIRA surtaxes and assessments and the MTF accrual. Please refer to the section on New Jersey Private Passenger Automobile for a detailed explanation of these items.
The Registrant was advised in 1994 by AVCO that it would discontinue selling the Registrant's motor club membership in its offices as of January 1, 1995. ' Sales of the Registrant's motor club through AVCO constituted 16% of the Registrant's total motor club membership revenues in 1994 and 1993.
The State of New Jersey has enacted an excess profits law which provides that private passenger automobile insurers whose profits exceed a statutorily computed maximum over a period of years, will be required to pay such excess to its policyholders. It would appear that Motor Club does not have any such excess profits.
The Registrant's insurance subsidiaries generally reinsure all risks in excess of $150,000 for casualty lines and $75,000 for property lines.
December 31, 1995 1994 1993 (thousands of dollars) Reserves for unpaid losses and loss expenses on a SAP basis (net of reinsurance recoverables on unpaid losses) $25,519 $24,473 $27,729 Reinsurance recoverables on unpaid losses and loss expenses 16,415 19,309 20,484 Anticipated salvage and subrogation recoveries (2,110) (2,117) (2,395) Reserves for unpaid losses and loss expenses, as reported in the Registrant's GAAP basis financial statements $39,824 $41,665 $45,818
The anticipated effect of inflation is implicitly considered when estimating liabilities for losses and loss expenses. While anticipated price increases due to inflation are considered in estimating the ultimate claim costs, the increase in average severities of claims is caused by a number of factors that vary with the individual type of policy written. These anticipated trends are monitored based on actual development and are modified if necessary.
The table on Page 23 presents the development of the GAAP balance sheet liabilities for 1992 through 1995; data is presented for those years in which the Insurance Companies had operations.
Year ended December 31 1992 1993 1994 1995 Liability for unpaid losses and loss expenses, net of reinsurance recoverables $28,469 $25,334 $22,356 $23,409 Net Liability Re-estimated as of: One year later 27,145 26,253 23,468 - Two years later 28,563 26,766 - - Three years later 28,454 - - -
Net Cumulative Redundancy (Deficiency) $ 15 ($ 1,432) ($ 1,112) $ -
On July 1, 1995, the Insurance Companies obtained catastrophe reinsurance coverage in the increased amount of $24.5 million in excess of $500,000 with only a modest increase in premium.
Net cash utilized in and provided by investing activities was $3,255,000 in 1995 and $3,458,000 in 1994, respectively. The amount used in 1995 reflects the investment of cash provided by operating activities. The amount provided in 1994 reflects the sale of investments to provide cash utilized by operating activities.
Operating cash flow at year end 1995 and 1994 was enhanced by the receipt of premiums for the non-PPA business retained by Preserver, as well as the increase in new business written in 1995.
Aside from the changes in operating expenditures noted previously, particularly the State mandated assessments and costs related to FAIRA which may recur in the future, no unusual or nonrecurring operating expenditures have been incurred over this period.
Expenses incurred on a prospective basis are anticipated to reflect management's objective of continuing to improve the Registrant's financial condition through stringent expense control and limiting new writings to selected lines of business. Additionally, the payout ratio of losses has not fluctuated substantially over this period.
Tax exempt securities have not been acquired since 1987, primarily due to the Tax Reform Act of 1986. In addition, management believes that the current tax position of the Registrant, which includes substantial net operating loss carryforwards, dictates the exclusion of tax exempt securities from the portfolio, which historically provide substantially lower yields on a before tax basis than taxable securities.
Taxable fixed maturities consist of direct obligations of the United States Government, obligations of United States Government agencies, Government National Mortgage Association mortgage-backed securities ("GNMA's") and high quality corporate fixed maturity issues. The goal of the portfolio is to enhance investment returns within the structure of limited credit risk assumption which management has utilized, with evaluations of portfolio duration made in relation to the current interest rate environment.
At December 31, 1995 and 1994, the taxable fixed maturity portfolio consisted of the following types of securities:
Please refer to Note C of the Motor Club of America and Subsidiaries Consolidated Notes to Financial Statements for statistics regarding portfolio maturity composition.
The Registrant has not acquired, nor are there plans to acquire, below investment grade or "junk" bonds. Ninety-nine percent of the fixed maturity portfolio as of December 31, 1995 is graded Class 1 according to the National Association of Insurance Commissioners' valuation system. This classification is reserved for only the highest quality securities, generally rated A or better by two major rating services.
Management believes that the mix of investments in both type and maturity length is appropriate in order to preserve capital, take advantage of investment opportunities as they are presented, and provide the Registrant and its subsidiaries with sufficient liquidity to react to economic and business circumstances as they evolve.
As noted previously, the investment portfolio yielded 6.23% in 1995 as compared to 6.21% in 1994.
The Registrant paid no dividend on its common stock in 1995, 1994 and 1993.
The National Association of Insurance Commissioners ("NAIC") has adopted Risk-Based Capital ("RBC") requirements for property/casualty insurance companies, to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks such as asset quality, credit risk, loss reserve adequacy, and other business factors. The RBC formula is used by State insurance regulators as an early warning tool to identify, for the purpose of initiating regulatory action, insurance companies that potentially are inadequately capitalized. Regulatory compliance is determined by a ratio of the insurer's regulatory total adjusted capital to its authorized control level RBC, as defined by the NAIC. Insurers below specific trigger points or ratios are classified within certain levels, each of which requires specific corrective action. The levels and ratios are as follows: Ratio of Total Adjusted Capital to Authorized Control Level RBC Regulatory Event (Less Than or Equal to) Company action level 2 Regulatory action level 1.5 Authorized control level 1 Mandatory control level 0.7
The Registrant does not use derivatives or derivative securities for purposes of trading or risk management in its investment portfolio or operations.
The FASB has issued SFAS No. 123 - Accounting for Stock- Based Compensation. This statement becomes effective beginning with the Registrant's first quarter of 1996 and will not have a material effect on the Registrant's financial position or results of operations. Upon adoption of SFAS No. 123, the Registrant will continue to measure compensation expense for its stock-based employee compensation plans using the intrinsic value method prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees and will provide pro forma disclosures of net income and earnings per share as if the fair value-based method prescribed by SFAS No. 123 had been applied in measuring compensation expense.