Effective March 31, 1996, the Registrant entered into a Mutual Release Agreement (the "Release") with Fairmount Central Urban Renewal Corporation ("Fairmount"), Property-Casualty Company of MCA ("PCCMCA") and MCA Insurance Company ("MCAIC").
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.
(6) See the New Jersey Private Passenger Automobile Insurance section for further information.
(7) See the Insolvency of MCA Insurance Company section for further information.
The increases in operating net income in 1996 and 1995 are attributable to higher revenues overall, improved expense and combined ratios and reduced expenses from operations, primarily salaries and related benefits, and in 1996, the Registrant's relocation.
Private Passenger Automobile $8,532,000 32% Commercial Lines 1,185,000 27% Personal Property 176,000 4% Total $9,893,000 28%
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 reduction in the UCJF assessment rate; and (3) increases in new business written in 1995, particularly PPA.
The Registrant does not actively trade its investment portfolio. Securities have been occasionally sold to reflect operating requirements or business circumstances, which have resulted in realized gains and losses.
The increase in PPA loss and loss expense ratio in 1996 as compared to 1995 is largely due to the new business written by Motor Club since January 1995. The Registrant has reserved the ultimate development of this new business at a loss and loss expense ratio of 78%; however it will be approximately twelve to eighteen months before the underlying loss development experience on this new business fully emerges.
As the Registrant continues to write additional new PPA business, PPA loss and loss expense ratios should generally continue to trend higher, although within levels that should remain profitable. Concurrently, as was the case in 1996, the Registrant also will continue to experience continued reductions in its expense ratio, which should result in lower overall combined ratios for the Registrant.
Other operating expenses in 1996 included the following: (1) certain non-recurring operational expenses (totaling $328,000 or $.16 per share) relating to the Registrant's tenancy at its former office building and relocation; and (2) a $197,000 or $.10 per share charge incurred associated with the settlement of a previously reported dispute with a reinsurer of Motor Club.
Excluding these non-recurring items, other operating expenses decreased $2,035,000 or 37% in 1996 as compared to 1995.
In February 1996, the Registrant relocated its headquarters to a smaller facility commensurate with the scope of its operations. This relocation will reduce the Registrant's expenses over $500,000 annually.
Prior to 1995, the Registrant's expense ratio had increased because the reduction of overhead expenditures had not kept pace with the reduction in the Registrant's insurance premiums. With the commencement of new PPA writings in 1995, the Registrant began to realize economies of scale which enhanced the reduction of expenses and consequently expense ratio.
During 1997, Motor Club will participate in the Assigned Risk Plan. Motor Club will pay a fee of approximately $300,000 to a servicing carrier rather than processing these policies. See the section on New Jersey Private Passenger Automobile for further information on these items.
Motor Club membership fees written through Enterprises decreased $30,000 or 3% in 1996 as compared to 1995, and decreased $124,000 or 10% in 1995 as compared to 1994. As previously described, the Registrant operated Enterprises through November 30, 1996; the writings for 1996 are therefore only included through that date.
The reconciliation shows a 1996 deficiency of $904,000 in the liability recorded at December 31, 1995. The deficiency is primarily the result of the latent development of a limited number of large losses incurred in 1995 and prior. Management believes this development does not indicate any adverse trends in the Registrant's loss development.
December 31, 1996 1995 1994 (thousands of dollars) Reserves for unpaid losses and loss expenses on a SAP basis (net of reinsurance recoverables on unpaid losses) $30,686 $25,519 $24,473 Reinsurance recoverables on unpaid losses and loss expenses 19,553 16,415 19,309 Anticipated salvage and subrogation recoveries (2,572) (2,110) (2,117) Reserves for unpaid losses and loss expenses, as reported in the Registrant's GAAP basis financial statements $47,667 $39,824 $41,665
The Registrant's book value increased to $9.17 per share at December 31, 1996 from $6.89 per share at December 31, 1995. The principal sources of the net increase are: (1) net income of $5,330,000 or $2.61 per share described previously; plus (2) an increase in shareholders' equity of $487,000 or $.24 per share due to the reduction of the minimum required pension liability for the defined benefit pension plan sponsored by the Registrant; offset by (3) a reduction in shareholders' equity of $1,122,000 or $.55 per share due to the decrease in the fair value of the fixed maturity investments accounted for as available-for-sale securities under SFAS No. 115 ("Accounting for Certain Investments in Debt and Equity Securities").
The Insurance Companies' need for liquidity arises primarily from the obligation to pay claims. The primary sources of liquidity are premiums received, collections from reinsurers and proceeds from investments.
Net cash provided by operating activities was $6,851,000 in 1996 and $3,807,000 in 1995. Net cash utilized by operating activities was $3,060,000 in 1994. The higher amounts in both 1996 and 1995 as compared to 1995 and 1994, respectively, are attributable to the growth in premium revenue combined with the reduction in overhead expenses described previously.
Aside from the changes in operating expenditures noted previously, particularly the State mandated assessments related to FAIRA, no unusual or nonrecurring operating expenditures have been incurred over this period.
December 31, 1996 December 31,1995 Carrying Carrying Amount Percent Amount Percent Taxable Fixed Maturities $47,927,093 95.3% $44,630,457 97.9% Short Term Investments 1,745,455 3.5% 200,719 0.4% Mortgage Loans 634,492 1.2% 766,101 1.7% Total Investment Portfolio $50,307,040 100.0% $45,597,277 100.0%
United States Treasuries are weighted towards maturities of five years or less, to reduce interest rate risk and match the Insurance Companies claims payout ratio; corporate obligations are generally weighted towards five to ten year maturities, to take advantage of the yield curve; the average life of the GNMA portfolio has been maintained at approximately 10 years to reduce interest rate risk.
Please refer to Note D in the Notes for statistics regarding portfolio maturity composition.
Management anticipates continuing this minimum risk approach to investing for the foreseeable future.
As noted previously, the investment portfolio yielded 6.25% in 1996 as compared to 6.23% in 1995.
The Registrant paid no dividend on its common stock in 1996, 1995 and 1994.
In February 1997, FASB issued SFAS No. 128 - Earnings per Share. This Statement becomes effective for financial statements issued for periods ending after December 15, 1997. This Statement establishes standards for computing and presenting earnings per share ("EPS"). This Statement simplifies the standards for computing EPS previously found in APB Opinion No. 15, Earnings per Share, and makes them comparable to international EPS standards. It replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures, which the Registrant is considered to have, and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. This Statement requires restatement of all prior-period EPS data presented. The Registrant anticipates presenting its EPS in compliance with the dual presentation standards mandated by this Statement at December 31, 1997.
In October 1995, FASB issued SFAS No. 123 - Accounting for Stock-Based Compensation. This Statement became effective beginning in the first quarter of 1996 and applies to options granted in 1995 and subsequent years. No options were granted in 1995 and 1996 and therefore the adoption of this Statement does not have any effect on the Registrant's financial position or results of operations. 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.