The Registrant provides a broad range of property and casualty insurance related services through the Insurance Companies. The Registrant also operates a motor club through Enterprises. The Insurance Companies form the largest segment of operations, which accounted for 96% of 1995 revenues. One hundred percent of the Registrant's insurance operations are in the State of New Jersey. Please refer to the New Jersey Private Passenger Automobile Insurance section for further information on the Registrant's insurance operations in the State of New Jersey.
The Registrant also anticipates continued reductions in its operating expenses, namely through the relocation of its headquarters in 1996 and continued implementation of operating efficiencies which will reduce other overhead expenditures.
On August 24, 1992, Hurricane Andrew struck the South Florida coast, causing losses to MCAIC which exceeded its surplus as regards policyholders. MCAIC was placed in liquidation on October 23, 1992 by the Oklahoma District Court, Oklahoma.
On February 15, 1995, pursuant to the Settlement Agreement, MCAIC was paid in full.
In relation to the insolvency of MCAIC, there are no additional liabilities, contingent or otherwise, which require accrual or disclosure in the accompanying financial statements.
Motor Club received relief from the New Jersey Department of Insurance ("NJDOI") from certain provisions of FAIRA. Such relief included the following: (1) exemption from its obligation to pay surtaxes and assessments on business written until December 31, 1992. These exemptions allowed Motor Club to reverse previously accrued surtaxes and assessments of $2,003,000 and $2,682,000, as a reduction of expense, in 1994 and 1993, respectively; (2) exemption (until January 1995) from the take-all-comers provisions of FAIRA, which requires the writing of new PPA insurance; (3) payment of only $2,275,000 of the Market Transition Facility ("MTF") deficit. Subsequent legislation retired the entire MTF deficit, enabling Motor Club to eliminate its remaining $1,653,445 MTF liability in 1994 as a reduction of expense; and (4) non- participation in the Personal Automobile Insurance ("Assigned Risk") Plan.
At December 31, 1995 and 1994, Motor Club has no accrued FAIRA liabilities which are subject to further relief from the NJDOI.
Net income in 1995 included $1,039,000 or $.51 per share for reduced reinsurance costs relating to a decrease in the 1995 rate assessed by the New Jersey Unsatisfied Claim and Judgment Fund ("UCJF"), which pertains to New Jersey Personal Injury Protection claims in excess of Motor Club's statutory retention limit of $75,000.
Net income in 1994 included $2,003,000 or $.98 per share of FAIRA surtaxes and assessments which became exempt during 1994 pursuant to NJDOI rules. In addition, the Registrant reversed its remaining liability for the MTF deficit of $1,653,000 or $.81 per share during 1994. The Registrant also recognized income of $625,000 or $.30 per share in 1994 for the discounting of the Note due to MCAIC Receiver under the Settlement.
Exclusive of non-recurring items, income was $1,377,000 or $.67 per share in 1995 as compared to $754,000 or $.37 per share in 1994. This increase in earnings is attributable to higher revenues overall, improved expense and combined ratios and reduced expenses from operations, primarily salaries and related benefits.
Net income in 1994 and 1993 includes the reversal of $2,003,000 or $.98 per share and $2,682,000 or $1.31 per share of FAIRA surtaxes and assessments which became exempt during 1994 and 1993, respectively, pursuant to NJDOI rules.
Exclusive of non-recurring items, income was $754,000 or $.37 per share in 1994 as compared to $857,000 or $.42 per share in 1993. This decline in earnings is attributable to lower revenues overall, although loss and loss expense ratios improved, and expenses from operations were reduced.
The 1994 non-PPA business insurance premiums include the effects of the 80% quota share reinsurance agreement for non-automobile business into which the Insurance Companies entered.
The following table depicts the composition of direct premiums written for the four years through 1995:
Net investment income increased $34,000 or 1% in 1995 as compared to 1994. Average invested assets were $41,806,000 in 1995 as compared to $42,272,000 in 1994. The investment portfolio, including short-term investments, yielded 6.23% in 1995 as compared to 6.21% in 1994. Despite the significant decline in interest rates in 1995, the increase in the Registrant's investment yield in 1995 reflects investments made at higher interest rate levels in 1994. The Registrant's investment philosophy is to hold fixed maturity investments until maturity.
Net investment income decreased $54,000 or 2% in 1994 as compared to 1993. Average invested assets were $42,272,000 in 1994 as compared to $42,574,000 in 1993. The investment portfolio, including short-term investments, yielded 6.21% in 1994 as compared to 6.34% in 1993. Although interest rate levels increased significantly during 1994, new investments at these higher interest rate levels made during 1994 had a limited impact on investment income for the year, and invested assets generally reflect the lower interest rates of the last several years.
Losses and loss expenses incurred increased $5,451,000 or 36% in 1995 as compared to 1994 and decreased $992,000 or 6% in 1994 as compared to 1993.
The combined loss and loss expense ratios were 58.7% in 1995, 54.8% in 1994 and 54.1% in 1993.
The higher loss ratio in 1995 as compared to 1994 is primarily attributable to a higher PPA loss ratio, which increased to 57.3% in 1995 from 52.9% in 1994. This increase was partially offset by a decrease in the corresponding ratio for Preserver's book of business, which decreased from 70.0% in 1994 to 63.1% in 1995. Despite the higher loss ratio on a comparative basis, no significant adverse trends were experienced or identified during 1995.
Therefore, excluding the loss ratio on the new PPA business, the PPA loss ratio was 55.1% in 1995, which compares with the loss ratios of 52.9% in 1994 and 54.1% in 1993 on the same business. The Registrant does believe that the 1994 PPA loss ratios were historically low, and the 1995 results are a return to a more representative experience which remains profitable.
Large losses on older homes had been substantially increasing Preserver's homeowners' loss ratio. In 1995 the Registrant implemented certain measures in this book of business which should assist in improving its profitability prospectively.
In February 1996, the Registrant relocated its headquarters to a smaller facility commensurate with the scope of its operations. This relocation is expected to reduce the Registrant's expenses over $500,000 annually.
See the New Jersey Private Passenger Automobile section for an extended discussion of the 1994 and 1993 New Jersey expenses mandated by FAIRA.
The Registrant has been subjected to increasing costs in recent years from assessments and required participations in mandated pools, associations and funds in the State of New Jersey.
Motor Club membership fees written through Enterprises decreased $124,000 or 10% in 1995 as compared to 1994, and decreased $27,000 or 2% in 1994 as compared to 1993.
Exclusive of AVCO sales, motor club membership fees generated though independent agents increased $91,000 or 8% in 1995 as compared to 1994. This is attributable primarily to incentives provided producers to write motor club memberships with the new PPA business Motor Club is now writing.
The liabilities are adjusted accordingly with such adjustments being reflected in the current year operations. No trends that are considered abnormal have been identified as of the most recent evaluation date, December 31, 1995.
The following table presents a reconciliation of beginning and ending liability balances for 1995, 1994 and 1993 reported under generally accepted accounting principles ("GAAP"):
Both the current and prior years' provisions are affected by a decrease in the estimated amount of salvage and subrogation recoverable at December 31, 1994 as compared to December 31, 1993.
In evaluating this information, it should be noted that each amount includes the effects of all changes in amounts for prior periods. For example, the amount of deficiency relating to losses settled in 1995, but incurred in 1993, will be included in the cumulative deficiency for the 1995 year.
This table does not present accident or policy year development data, which readers may be more accustomed to analyzing. Conditions and trends that have affected development of the liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on this table.
Cumulative Amount of Liability Paid Through: One year later 12,314 12,311 11,106 - Two years later 20,270 18,992 - - Three years later 24,546 - - -
Net liability - December 31 $28,469 $25,334 $22,356 $23,409 Reinsurance recoverables 21,698 20,484 19,309 16,415 Gross liability - December 31 $50,167 $45,818 $41,665 $39,824
The Registrant's book value increased to $6.89 per share at December 31, 1995 from $5.16 per share at December 31, 1994. The principal sources of the increase are: (1) net income of $2,417,000 or $1.18 per share described previously; and (2) an increase of $2,661,000 or $1.30 per share in the market value of the fixed maturity investments accounted for as available-for-sale securities under SFAS No. 115.
These increases were partially offset by a reduction in shareholders' equity of $1,545,000 or $.75 per share for recognition of additional minimum required pension liabilities for the defined benefit pension plan sponsored by the Registrant. This additional minimum liability was the result of a reduction in the discount rate used to compute pension plan liabilities to 7.25% at December 31, 1995, from 8.25% at December 31, 1994. Please refer to Note K in the Notes to Financial Statements of the Registrant's Form 10-K for additional information regarding the Registrant's minimum pension liability.
The New Jersey Insurance Department requires that insurers maintain a premium to surplus ("leverage") ratio of 3 to 1 or less in order to write new PPA. Motor Club's present applicable leverage ratio for the twelve months ended December 31, 1995 is 2.87 to 1.
Management has maintained, in its opinion, a conservative investing philosophy. At December 31, 1995 and 1994, the Registrant's investment portfolio was comprised of the following types of securities: December 31, 1995 December 31, 1994 Carrying Carrying Amount Percent Amount Percent Taxable Fixed Maturities $44,630,457 97.9% $37,250,613 93.1% Short Term Investments 200,719 0.4% 1,901,649 4.7% Mortgage Loans 766,101 1.7% 872,937 2.2% Total Investment Portfolio $45,597,277 100.0% $40,025,199 100.0%
December 31, 1995 December 31, 1994 Carrying Carrying Amount Percent Amount Percent United States Treasuries and Government Agencies $31,788,829 71.2% $27,230,510 73.1% GNMA Mortgage-Backed Securities 7,798,432 17.5% 5,283,701 14.2% Corporate Bonds 5,043,196 11.3% 4,736,402 12.7% Total $44,630,457 100.0% $37,250,613 100.0%
The fixed maturity portfolio duration at December 31,1995 and 1994 is 3.32 and 3.73 years, respectively.
All corporate obligations are generally of a maturity of five years or less, to reduce credit risk; United States Treasuries are weighted towards five to ten year maturities, to take advantage of the yield curve; the average life of the GNMA portfolio has been maintained at approximately 10 years to reduce interest rate risk. Accelerated prepayments on GNMA's were experienced in 1993 as a result of the sharp decline in long-term interest rates which are a principal determinant of mortgage lending activity. As such, refinancing activity was at record levels, causing the increase in prepayments; as interest rates rose in 1994, this activity stabilized.
Including realized gains and losses, the investment portfolio yielded 6.36% in 1995 as compared to 6.11% in 1994.
The Registrant has no material outstanding capital commitments which would require additional financing. In 1995 the Registrant repaid the $2,750,000 borrowed from Midlantic Bank, N.A. in conjunction with the Settlement with the MCAIC Receiver.
The Insurance Companies ratios of Total Adjusted Capital to Authorized Control Level RBC are in excess of three to one at December 31, 1995, therefore requiring no action.
In October 1994, the Financial Accounting Standards Board ("FASB") promulgated SFAS No. 119 - Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments. This Statement prescribes new disclosures about derivatives and other financial instruments.