Item 1. BUSINESS
INTRODUCTION
Motors Mechanical Reinsurance Company, Limited (the "Company") was incorporated in Barbados on June 12, 1986. It became registered in Barbados as an insurer on June 30, 1986 and commenced insurance operations on December 11, 1987.
The business of the Company is the assumption of motor vehicle mechanical service agreements arising under insurance policies reinsured by Motors Insurance Corporation ("MIC") to the extent such policies are attributable to an MIC Mechanical account in respect of which a series of shares is issued and outstanding (the "Policies"). These policies are issued either to General Motors Corporation or affiliates ("GM") or to automobile dealers, reinsured by MIC, and retroceded to the Company. Shares of the Company's Participating Stock (the "Shares") are sold to persons designated by owners of motor vehicle sales franchises with respect to which MIC maintains an MIC Mechanical Account. A separate series is created for Shares relating to each MIC Mechanical Account, and a separate "Subsidiary Capital Account" is maintained for each such series. The profitability of the Company reflects both underwriting and investment experience, which is allocated among the Subsidiary Capital Accounts.
THE RETROCESSION
The Retroceding Company. MIC, the retroceding company under the Retrocession Agreement described below, is a stock insurance company organized under the laws of Michigan. All of MIC's outstanding stock is owned by GMAC Insurance Holdings, Inc., a subsidiary of General Motors Acceptance Corporation which, in turn, is a wholly owned subsidiary of GM. MIC, directly and through its subsidiaries, offers property and casualty coverages in all 50 states and the District of Columbia, Canada, Europe, Latin America and Asia Pacific. MIC consistently has been awarded A.M. Best Company's insurance financial rating of A + (Superior), one of the highest possible ratings.
The Retrocession Agreement -- Principal Agreement. The Company has entered into a "quota share" retrocession agreement (the "Agreement") which became effective as of December 11, 1987. Pursuant to the Agreement, MIC retrocedes to the Company, and the Company is obligated to assume, MIC's risks in respect of policies issued by any MIC subsidiary and reinsured by MIC that cover motor vehicle mechanical service agreements, to the extent that risks under such policies are attributable to an MIC Mechanical Account in respect of which a series of Shares is issued and outstanding. MIC retrocedes 100% of the risk and the Company receives 75% of the original gross premium, reduced by agents' commissions, if any, and cancellations. The remaining 25% of the net premium is retained by MIC as a ceding commission. The Company assumes 75% of the risk with respect to these policies and MIC pays 56.25% of the net premium at the time the policies are written. The remaining 25% of the risk is ceded to the Company and MIC pays 18.75% of the net premium as the premiums are earned. Net settlements between the Company and MIC are made quarterly and accordingly will fluctuate quarter to quarter.
The Agreement may be terminated at any time by mutual consent of the parties, or by either party upon 30 days written notice. Upon termination of the Agreement, MIC and the Company will remain bound by their respective obligations under the Agreement with respect to risks retroceded prior to the close of business on the date of termination. However, risks not yet retroceded to the Company under the Agreement shall remain risks of MIC.
The Retrocession Agreement -- Supplemental Agreement. MIC from time to time enters into agreements with Franchise owners for which an MIC Mechanical Account is established, pursuant to which MIC, acting for itself and on behalf of certain of its subsidiaries, agrees to cede or retrocede to another insurance company mutually satisfactory to MIC and the respective Franchise owners the unexpired liability on service contracts, insured under the Policies, sold after the date specified in each such agreement. This liability can be ceded or retroceded to dealer-owned companies organized specifically with respect to a particular Franchise or, if a series of Shares is issued which relates to the Franchise, pursuant to an agreement between MIC and the Company (the "Supplemental Retrocession Agreement"). For this purpose, unexpired liability means MIC's liability in respect of the remaining period of coverage under the Policy as of the effective date of the cession. Under the Supplemental Retrocession Agreement, unexpired liability in respect of the Policies is assumed on the same basis as risks retroceded to the Company under the principal Retrocession Agreement.
Types of Risks Subject to Retrocession. Coverages assumed under the Agreement are limited to service contracts or insurance policies insured or reinsured by MIC that provide indemnification against specific motor vehicle mechanical
repairs not covered by manufacturer's new vehicle warranties. Such service contracts or insurance policies often provide additional coverages, such as towing and rental allowances.
Loss Reserves. Reserves are balance sheet liabilities representing estimates of amounts needed in the future to pay claims with respect to insured events which have occurred as of the balance sheet dates.
For purposes of establishing loss reserves, the Company relies upon the advice of MIC. Loss reserves are established after periodic actuarial reviews, based on judgments of the effects of technological change, manufacturers' warranties, and MIC's historical experience with motor vehicle mechanical service agreements. Consequently, the determination of loss reserves is an estimate and a process inherently subject to a number of highly variable factors. Any adjustments to reserves are reflected in the operating results for the periods in which they become known.
The Company's incurred loss ratios (losses incurred as a percentage of net premium earned) on all mechanical business for the years ended December 31, 2000, 1999, and 1998 were 74.9%, 80%, and 78.8% respectively.
The following table sets forth an analysis of changes in the loss reserves for the years ended December 31, 2000, 1999 and 1998:
Year Ended 12/31/00 12/31/99 12/31/98 -------- -------- -------- Beginning balance in reserves for losses....... $ 4,725,239 $ 5,393,818 $ 5,421,160 ----------- ----------- -----------
Add-provision for losses incurred related to:
Current claim year..... 41,579,713 47,211,542 45,843,093
Prior claim years..... (877,045) (427,390) (290,547) ----------- ----------- -----------
Total.............. 40,702,668 46,784,152 45,552,546 ----------- ----------- -----------
Deduct-paid losses attributable to:
Current claim......... 36,837,642 43,514,155 40,767,738
Prior claim years..... 3,835,555 3,938,576 4,812,150 ----------- ----------- -----------
Total............. 40,673,197 47,452,731 45,579,888
Ending balance in reserves for losses................ $ 4,754,710 $ 4,725,239 $ 5,393,818 =========== =========== ===========
The following table analyzes the development of losses and loss adjustment expenses from January 1, 1995 through December 31, 2000.
*/ Because mechanical breakdown claims are generally paid within 90 days of when they are incurred, liability for unpaid claims incurred in prior years is negligible. Accordingly, liability for unpaid claims incurred in all prior years has been combined at each year end.
The table shows initial estimated reserves at December 31, 2000, 1999, 1998, 1997, 1996, and 1995 and amounts paid on claims unsettled at each prior period end. Claims are typically processed for payment at the time the claim is reported. Therefore, the recorded claim liability at each year end represents the estimated incurred but not reported claims and claims in the process of payment. The cumulative deficiency or redundancy represents the total change in reserve estimates covering prior years.
The policies reinsured by the Company are written for multiple years (up to six years) and losses do not occur equally over the period for which the policy is written but tend to be clustered in the later years. Therefore, loss experience for prior years may not be indicative of that for future years.
INVESTMENT INCOME
A major source of income to an insurance company is income earned on the investment of amounts not currently required to meet losses or expenses. The principal funds available for investment by the Company come from accumulated capital and the cumulative excess of premiums collected over losses and operating expenses paid.
The Company's investment portfolio consists of U.S. dollar denominated fixed income securities and shares of a U.S. dollar denominated international equity fund. At December 31, 2000 and 1999, 81% and 90%, respectively, of the Company's investment portfolio consisted of cash and fixed income securities with the balance of the portfolio consisting of shares of the international equity fund.
Effective February 8, 2000, the Company entered into an investment management agreement with BlackRock International, Ltd. ("BlackRock") pursuant to which
BlackRock manages the investment and reinvestment of the Company's fixed income portfolio in accordance with the Company's investment guidelines. BlackRock is a subsidiary of BlackRock, Inc. which had approximately $204 billion of assets under management as of December 31, 2000. BlackRock, Inc. manages assets on behalf of more than 3,300 institutions and 200,000 individuals through a variety of equity, fixed income, liquidity and alternative investment, and mutual fund products. Under the terms of the investment management agreement, BlackRock charges a management fee calculated as a percentage of the net asset value of the Company's portfolio managed by BlackRock. The applicable percentage is based on the aggregate amount of assets managed by BlackRock on behalf of the Company and certain other related entities. The applicable percentage is tiered on the first $50 million of assets under management on behalf of the foregoing entities and lower on all assets in excess of $50 million. Prior to the effective date of the Company's agreement with BlackRock, the Company's fixed income portfolio was managed by Rothschild Asset Management Limited ("Rothschild").
The Company's funds are invested in a manner consistent with investment guidelines that are proposed by the Investment Committee for adoption by the Board. In February of 2000, the Company began implementing new investment guidelines for its fixed income portfolio. Under these guidelines, the Company is permitted to invest in U.S. Treasury and agency securities, agency and non agency mortgage-backed securities, obligations or domestic and foreign corporations, asset-backed securities, taxable municipal securities and money market instruments. In addition to these fixed income securities, pursuant to a plan adopted in early 1999, the Company may invest a portion of its investment portfolio in equity securities provided that the portion of the Company's investment portfolio consisting of equity securities may not exceed 30%.
Under the investment guidelines for fixed income securities in effect prior to the implementation of the new investment guidelines, the Company had invested primarily in U.S. dollar-denominated securities issued outside of the United States by non-United States private or governmental issuers, U.S. dollar- denominated back certificates of deposit issued by foreign banks and foreign branches of U.S. banks, and, in certain situations, non-U.S. dollar denominated bonds, on a fully currency-hedged basis. The Company's fixed income investment portfolio was completely converted to investments permitted under the new guidelines in the latter half of 2000.
In June 1999, the Company invested $10 million into equity securities by purchasing shares in Capital International Fund (the "Fund"), an investment company incorporated under the laws of Luxembourg. The Company invested an additional $6 million in the Fund during November 2000. The Fund's investment objective is capital appreciation and it aims to achieve this objective through the continuous management of a diversified portfolio of transferable securities consisting primarily of common stocks, researched and selected on a world-wide basis. Shares are denominated in United States Dollars and are all of the same class and have like rights and liabilities. Shares are listed on the Luxembourg and the Amsterdam Stock Exchanges. The Fund had $836 million in total net assets as of December 31, 2000. The market value of the Company's equity portfolio at December 31, 2000 was approximately $17.1 million.
The Investment Committee reviews on a regular basis and, where appropriate, recommends for Board approval revisions to the investment objectives and guidelines for management of the Company's funds. There can be no assurance, however, as to whether a particular investment objective, once adopted, can be achieved or that adverse factors would not cause a decrease in the overall value of the Company's investment portfolio.
ALLOCATIONS TO SUBSIDIARY CAPITAL ACCOUNTS
The Company has established a Subsidiary Capital Account with respect to the Common Stock as a class, and establishes such an account with respect to each series of Shares at the time a series is issued. Subsidiary Capital Accounts are maintained solely for the purpose of the allocations described below, and do not serve any other legal or accounting function. None of the Company's assets are segregated or earmarked with respect to those accounts.
The consideration received by the Company upon the issuance of a particular series of Shares and the Common Stock as a class are allocated to the Subsidiary Capital Account for that series or class. Items of income and expense and losses attributable to insurance underwriting activities are determined and allocated to the Subsidiary Capital Accounts as of the end of each quarter. Investment experience, and other items of income and expense, gains and losses and distributions with respect to the Shares and the Common Stock, are determined and allocated to the Subsidiary Capital Accounts as of the end of each quarter. All such accounting determinations are made using accounting principles generally accepted in the United States, unless otherwise required by the Articles.
For purposes of the following description, items shall be "related" to the Subsidiary Capital Account for the series identified with the MIC Mechanical Account to which such items can be attributed.
(1) Allocations with respect to underwriting activities are made as follows:
(a) With respect to premiums ceded by MIC to the Company, 100% to the related Subsidiary Capital Account; provided, however, that an amount equal to 1-1/3% of those premiums, net of related ceding commissions, are subtracted
from such Subsidiary Capital Account and allocated to the Subsidiary Capital Account for the Common Stock.
(b) With respect to any agents' or brokers' commissions, commissions recaptured, unearned premiums, reinsurance premiums ceded, and any United States excise tax, 100% to the related Subsidiary Capital Account.
(c) With respect to losses incurred, and any amount of losses recovered through salvage, subrogation, reimbursement or otherwise one hundred percent (100%) shall be allocated to the related Subsidiary Capital Account. For the purpose of this section (1)(c), losses incurred includes both paid and unpaid (reported and unreported) losses.
(d) With respect to return premiums, 98-2/3% to the related Subsidiary Capital Account and 1-1/3% to the Subsidiary Capital Account for the Common Stock.
(2) Any expenses or liabilities attributable to day-to-day Company operations, excluding any United States Federal income taxes, shall be allocated among all Subsidiary Capital Accounts for the Shares pro rata in accordance with the number of series issued and outstanding at the end of the fiscal quarter immediately preceding the fiscal quarter in which the expense or liability is incurred, provided, that for purposes of such allocation, series of shares issued at any time during the twelve calendar months preceding the end of the fiscal quarter in which the expense or liability is incurred and series with respect to which unearned premium is zero as of the date of such allocation, shall be excluded.
(3) Any United States Federal income tax liability (and any interest thereon or any penalties related thereto) is allocated among the Subsidiary Capital
Accounts based upon the relative contribution of each of those accounts to the taxable income of the Company upon which the tax (or any interest or penalties) is imposed.
(4) Any expenses or liabilities attributable to the sale and issuance of Shares, including but not limited to the costs of compliance with regulations and requirements of the Securities and Exchange Commission and state securities laws (but not including ongoing periodic reporting costs), are allocated to the Subsidiary Capital Account for the Common Stock; however, MIC may undertake to pay such expenses.
(5) Any expenses or liabilities of the Company not allocable in the manner described in paragraphs 2 through 4 above are allocated among the Subsidiary Capital Accounts on the basis of the relative balances of those accounts as of the end of the quarter preceding the date on which the expense or liability is incurred.
(6) (a) Investment income, net of any direct investment expense, is allocated among the Subsidiary Capital Accounts pro rata based upon the relative Investment Asset Balance (as defined in subparagraph (b) below) of each of those accounts as of the last day of the quarter preceding the quarter for which the investment income is being allocated. For these purposes, net investment income includes realized (but not unrealized) gains and losses.
(b) The Investment Asset Balance of each Subsidiary Capital Account is equal to the capital and surplus of each account, increased by:
(i) the unearned portions of the written premiums that have been collected by the Company attributable to those accounts as of the last day of the
quarter preceding the quarter for which the income is being allocated, net of any applicable commissions and taxes;
(ii) the outstanding loss reserves attributable to each of those accounts as of the last day of the quarter preceding the quarter for which the income is being allocated; and
(iii) any other outstanding liability that has been charged to the account as of the last day of the quarter preceding the quarter for which the income is being allocated.
(7) (a) If, after the credits and charges described in paragraphs 1-6 above are made to the Subsidiary Capital Accounts there exists a deficit in one or more of the accounts, then each such deficit is allocated to and charged against:
(i) first, the Subsidiary Capital Account for the Common Stock to the extent of Restricted Earned Surplus (the phrase "Restricted Earned Surplus" refers to the portion of the earned surplus, if any, in the Subsidiary Capital Account for the Common Stock equal to that 1-1/3% of the premiums ceded to the Company during the immediately preceding five-year period which was subtracted from the Subsidiary Capital Accounts for the Shares pursuant to paragraph (1)(a) above, net of losses allocated to that account during such period pursuant to the allocation procedure described in this paragraph (7) and net of return premiums allocated to that Account during such period pursuant to the allocation procedure described in paragraph (1)(d) above);
(ii) then, the Subsidiary Capital Accounts for the Shares, pro rata, based upon the relative earned premiums allocated to each such account for the quarter for which the allocation is being made, provided, however, that only
accounts which have positive balances are taken into account for purposes of this allocation;
(iii) then, the remaining Subsidiary Capital Accounts for the Shares with positive balances as of the last day of the quarter for which the allocation is being made, pro rata, based upon such balances; and
(iv) then, to the extent necessary, the Subsidiary Capital Account for the Common Stock.
(b) If, as a result of an allocation of a deficit as described in subparagraph (ii) or (iii) of paragraph (a) above, a deficit is created in one or more of the Subsidiary Capital Accounts, then the resulting deficit(s) are further allocated in the manner provided in that subparagraph before applying a subsequent subparagraph.
(c) Notwithstanding the foregoing, if any Subsidiary Capital Account for a series of Shares had a deficit that was allocated to and charged against the Restricted Earned Surplus or, after January 1, 1995, to the Subsidiary Capital Account for any series of Shares, then at the end of any succeeding quarter for which that account otherwise would show an account balance greater than zero, the balance is reallocated to the Restricted Earned Surplus until all reductions of that surplus attributable to that Subsidiary Capital Account have been restored and thereafter, to the Subsidiary Capital Accounts for the Shares, pro rata based on the relative amount of deficits allocated to such accounts, until all reductions of such Subsidiary Capital Accounts after January 1, 1995 have been restored.
Thus, a loss in a Subsidiary Capital Account which exceeds the balance in that account is absorbed by other Subsidiary Capital Accounts, in general, as
follows: The amount of such excess losses is charged first to the Restricted Earned Surplus portion of the Subsidiary Capital Account of the Common Stock. Any remaining losses, should the Restricted Earned Surplus be exhausted, is allocated among the Subsidiary Capital Accounts of other participating series. Any then unabsorbed losses are charged to the Subsidiary Capital Account of the Common Stock.
Funds drawn from the Restricted Earned Surplus or the Subsidiary Capital Accounts for the Shares in the manner described above must be restored from the Subsidiary Capital Account that drew the funds if at any time it returns to a positive balance.
(8) (a) Dividends, payments upon redemption or liquidation (described below), and any other distributions with respect to the Shares and the Common Stock are allocated to the Subsidiary Capital Account for the class or series with respect to which the dividend, payment or distribution was made.
(b) Where all Shares of a series are repurchased by the Company pursuant to its right of first refusal or redeemed in accordance with the Company's procedures for redemption, the Subsidiary Capital Account for that series is terminated. Thereafter, all underwriting income and expenses, and losses that would have been allocated to the terminated account, are allocated among the Subsidiary Capital Accounts of the existing series of Shares pro rata based upon relative earned premiums attributable to each of those accounts for the calendar quarter in which the item was earned or incurred; provided, however, that a net deficit for any such period is allocated to the Subsidiary Capital Account for the Common Stock (to the extent of Restricted Earned Surplus) before allocating any remaining deficits to the Subsidiary Capital Accounts for the participating series.
Using the procedures described above, the Company has allocated items of gain and loss to the Subsidiary Capital Account for each series. Initially each Account had a balance of $7,500 representing the amount paid for the Shares of that series. During the year ended December 31, 2000, $467,177 of net underwriting losses and $663,358 of administrative expenses were allocated among the series of Shares outstanding during the year ended December 31, 2000, and $4,808,908 of net investment income was allocated among such series of Shares and the Common Stock.
As of December 31, 2000, 175 series of Shares outstanding had balances greater than or equal to $7,500 (ranging from $7,642 to $685,617) and 160 of such series had balances less than $7,500 (ranging from $7,325 to zero). (The amounts in the Subsidiary Capital Accounts can fluctuate substantially and therefore may not be indicative of future accumulated amounts.) At December 31, 2000, an aggregate of $4,516,426 had been advanced from the Restricted Earned Surplus (which forms a portion of the Account established for the Common Stock owned by MIC) to 104 Subsidiary Capital Accounts and remained outstanding at that date including net deficits of $3,637,222 associated with 56 series of Shares that have been redeemed. As of December 31, 2000, $7,348,811 of aggregate deficits had been reallocated among the Subsidiary Capital Accounts of the Shares and remained outstanding. Of this amount $2,833,577 could be recovered from deficit accounts should they return to profitability and to the extent that the risk fund is repaid in full. However, there can be no assurances that such deficit accounts will return to profitability or, if they return to profitability, that they will generate sufficient profits to repay any portion of deficits previously allocated to the Subsidiary Capital Account for the other series of Shares.
The Subsidiary Capital Account for the Common Stock had, at the time it was established, a balance of approximately $200,000, representing the capital
paid in by MIC for the 2,000 shares of the Common Stock issued to it. That Subsidiary Capital Account is not affected directly by underwriting gains and losses attributable to the various Subsidiary Capital Accounts related to series of Shares, but is affected by those gains and losses indirectly to the extent that one of the Subsidiary Capital Accounts for a series of Shares incurs a deficit, in which case an allocation to the Subsidiary Capital Account for the Common Stock will result, in the manner described above.
The allocations of income and expense, gains and losses, and distributions described above are subject to approval by the Board, and when so approved are considered final and conclusive and will be binding on all holders of Shares for all purposes including without limitation any redemption of Shares pursuant to the Company's procedures for redemption.
Barbados insurance law requires that the Company maintain certain levels of net assets, calculated without regard to unrealized gains or losses. The Company is currently in compliance with these requirements. However, in the event that the Company is unable to comply with such requirements in the future, it has the right to reduce the business related to a Subsidiary Capital Account by retrocession or any other means to the extent necessary to permit the Subsidiary Capital Account to meet its pro rata share of the Company's required capital and surplus.
EMPLOYEES
The Company does not have any full-time employees. Rather, the Company relies on Aon Insurance Managers (Barbados) Ltd. (the "Manager") to handle its day-to-day operations. (See "Business of the Company -- Insurance Management Agreement," below.) In addition, corporate secretarial services for the Company are provided by Colybrand Company Services Limited of St. Michael, Barbados. The Company's Board of Directors and the committees thereof,
however, remain responsible for the establishment and implementation of policy decisions.
COMPETITION
The insurance business is extremely competitive. MIC management believes that at present, MIC and its subsidiaries are, as a group, one of the largest mechanical repair insurers of new GM vehicles in the United States. There are other major companies offering similar coverage. Because the insurance business of the Company is limited to the assumption of certain motor vehicle mechanical service agreement reinsurance business ceded by MIC, the profitability of the Company depends to a large degree on the success experienced by MIC and its affiliates in competing with those other insurers. Many commercial insurance groups are seeking to capture additional mechanical insurance business by offering to assist automobile dealers in the formation of their own dealer-owned reinsurance companies. MIC has assisted in the establishment of such companies for a number of qualified dealers. However, MIC believes that participation in the Company represents a practical alternative for dealers who do not have the available capital, insurance management expertise or time for the personal involvement necessary for their own reinsurance company.
INSURANCE MANAGEMENT AGREEMENT
The Company has entered into an Insurance Management Agreement (the "Management Agreement") with the Manager, pursuant to which the Manager collects and disburses funds on behalf of the Company, provides accounting, clerical, telephone, facsimile, information management and other services for the Company, and advises and consults with the Company in regard to all aspects of the Company's retrocession activities. The current Management Agreement is for a continuous term subject to termination by either party upon 90 days advance written notice.
Pursuant to the Management Agreement, the Manager has undertaken to maintain an office in Barbados to perform its duties. Further, during the term of the Management Agreement and generally for a period of one year thereafter, the Manager has agreed not to provide management or accounting services for any other company which, by the nature of its operations, is offering, insuring or reinsuring motor vehicle mechanical service agreements or extended warranty or related coverages on a multi-state basis in the United States or Canada with respect to motor vehicles sold by franchized GM dealerships. Under the terms of the Management Agreement, the Company pays the Manager a fixed annual fee plus a monthly variable fee based on the number of outstanding series of Shares at each calendar month end. For the year ended December 31, 2000, the Company incurred fees payable to the Manager in the amount of $232,178.
The Manager is responsible for the payment of the salaries of its officers and employees and all office and staff overhead and other costs attributable to its services on the Company's behalf. However, out-of-pocket expenses, such as telephone, facsimile, postage, courier delivery, travel and other items are borne by the Company on an expense reimbursement basis.
The Manager performs services similar to those performed for the Company for several other entities. The Manager has thirteen employees. In addition, the Manager may draw upon the resources of its affiliates as needed to provide the services contemplated under the Management Agreement. No employee of the Manager devotes all of his or her time to the business of the Company. However, the Manager is obligated to devote all employee time necessary to ensure the performance of the Manager's duties under the Management Agreement. The Manager is subject to the control and direction of the Board.
The Manager has served in that capacity since 1986. The Manager was incorporated in Barbados in 1984, and is an affiliate of the Aon Group of
Companies ("Aon"), an international insurance brokerage and insurance consulting firm. Aon, through its subsidiaries, offers and insures motor vehicle mechanical service agreements, extended warranty and related coverages with respect to vehicles sold by automobile dealerships in the United States. Under the terms of the Management Agreement the Manager will treat all information concerning the business of the Company as confidential and will not disclose such information to Aon or any Aon affiliate without consent of the Company.
BARBADOS REGULATION AND TAXES
The Company's business is subject to regulation under the Barbados Exempt Insurance Act, 1983, as amended (the "Exempt Insurance Act"). The principal requirements of the Exempt Insurance Act require the Company to maintain its principal office in Barbados, appoint various professional advisors, and to meet certain capitalization and annual reporting requirements with respect to its operating activities and solvency requirements.
Under the Exempt Insurance Act, no income tax, capital gains tax or other direct tax or impost is levied in Barbados on the results of the Company's operations (except as noted below), or on transfers of securities or assets of the Company to any person who is not a resident of Barbados. The Company has received a guarantee from the Minister of Finance of Barbados that such benefits and exemptions will be available for a period ending December 31, 2031. Until December 31, 2016 the Company will be required to pay an annual licencing fee, which is currently $2,500, to obtain such guarantee. Thereafter, the Company will be subject to tax at a rate of 2% on its taxable income provided that the amount of such tax will not exceed $2,500 per annum.
Item 2.
Item 2. PROPERTIES
The Company neither owns nor maintains any office space or facilities. Rather, the business office for the Company is provided by the Manager and is located at One Financial Place, Collymore Rock, St. Michael, Barbados. The Company believes that these facilities are adequate for its current and anticipated future needs. In addition, the Manager supplies all equipment for the Company.
Item 3.
Item 3. LEGAL PROCEEDINGS
The Company is not involved in any legal proceedings.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the quarter ended December 31, 2000.
PART II
Item 5.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) There is no public market for the Shares or the other shares in the Common Stock of the Company, and none is expected to develop. Transfer of the Shares is restricted by the terms of a Stock Purchase Agreement and requires approval by the Supervisor of Insurance in Barbados.
(b) All of the common stock of the Company is held by MIC. As of March 1, 2001 there were 458 holders of Shares of record, representing 259 series of Shares.
(c) Under the Articles of Incorporation, the holders of Shares are entitled to receive minimum dividends equal to their pro-rata share of 20% of net income attributable to the associated Subsidiary Capital Account provided (i) the Company meets the Barbados regulatory requirements without regard to any
letter of credit or guarantee, and (ii) the related Subsidiary Capital Account would also meet those requirements after giving effect to the dividend. In March of 2001, May of 2000, and February of 1999, the Company declared dividends of $3,083,096, $673,134 and $4,066,464 respectively. These dividends were declared as a varying percentage of earned surplus attributable to each series of Shares with the percentage applicable depending on the amount of earned surplus attributable to such series.
(d) The Board considers the minimum regulatory capital requirement, a provision for fluctuations in the value of the Company's investment portfolio and a provision for adverse development of loss experience to determine an appropriate minimum capital level and therefore the amount of dividends to be paid. The Board's objective is to maintain adequate capital to provide capacity for growth in premium so that dividends may be paid annually. There can be no assurance that a prior dividend amount will be paid in the future.
Item 6.
Item 6. SELECTED FINANCIAL DATA
The following selected financial data for the years ended December 31, 2000, 1999, 1998, 1997 and 1996 have been derived from financial statements audited by Deloitte & Touche, independent chartered accountants, whose report with respect to their audits of the financial statements as of December 31, 2000 and 1999 and for each of the three years in the period ended December 31, 2000 is included elsewhere herein.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity. The Company expects to generate sufficient funds from operations to cover current liquidity needs. The Company's liquidity requirements are related to payment of insurance losses, administrative expenses, and dividends. Premiums generated by the Company's reinsurance business, combined with investment earnings plus proceeds from the sale of Shares, will continue to be the principal sources of funds for the Company. The Company believes that such funds will be sufficient to meet its liquidity requirements in 2001 and in future years to which its reinsurance liabilities extend. No capital expenditures are expected during the next few years.
The Company had unearned premium reserves of $91,915,465 as of December 31, 2000, and $93,941,365 as of December 31, 1999. This decrease in unearned premium is primarily attributable to the Company discontinuing accepting new business from certain unprofitable accounts. Unearned premium amounts are attributable to the long-term nature of the contracts sold. Such contracts may extend for up to 72 months from date of issue. In addition, the risk of loss to the Company under the contract arises primarily after the underlying manufacturer's warranty expires. For new vehicles, the warranty generally covers 36 months or 36,000 miles. For used vehicles, the applicable warranty period depends on the unexpired portion of the original manufacturer's warranty at the time of purchase of the vehicle. Because the Company has limited exposure to risk of loss prior to expiration of the underlying manufacturer's warranty, most premium is not recognized as earned until such expiration. Since very little premium is recognized as earned until the expiration of the underlying warranty, most of the premium written in any year is recorded as unearned.
On March 21, 2001, the Board of Directors authorized the payment of dividends aggregating $3,083,096 to eligible holders of Shares. See "Market for Registrant's Common Equity and Related Stockholders Matters" for a discussion of dividends paid and legal restriction on the payment of dividends.
Capital Resources. Capitalization of the Company, as of December 31, 2000, was comprised of paid-in capital with respect to the Common Stock of $200,000, paid-in capital with respect to the Shares of $1,942,500 (compared with $1,995,000 and $2,362,500 as of December 31, 1999 and 1998, respectively), and earnings retained for use in the business of $16,247,004. The reduction in the amount of paid-in capital with respect to the Shares as of December 31, 2000 compared with December 31, 1999 is primarily attributable to redemption of Shares with nil unearned premiums. The decrease in paid-in capital as of
December 31, 1999 compared to December 31, 1998 is primarily attributable to the Redemption and Recapture discussed below under "Results of Operations". There were a total of 259 series outstanding at December 31, 2000 compared to 266 and 315 series of Shares outstanding at December 31, 1999 and 1998, respectively. During 2000, the Company issued 1 new series of Shares and redeemed 8 series of Shares for a net decrease of 7 series.
Barbados law requires that the Company's net assets equal at least the aggregate of $1,000,000 and 10% of the amount by which the earned premium exceeded $5,000,000 in the previous year. If the Company's net assets are less than mandated by Barbados law, the Company has the right to reduce the business related to a Subsidiary Capital Account by retrocession or any other means to the extent necessary to permit the Subsidiary Capital Account to meet its pro rata share of the Company's required capital and surplus. At January 1, 2001, the Company's required minimum net assets computed in accordance with Barbados law was approximately $5,937,880 compared to total capital and retained earnings computed for purposes of Barbados law of $18,389,504.
Results of Operations. During the year ended December 31, 2000, the Company had net income of $3,678,373 compared to a net loss of $3,534,968 for the year ended December 31, 1999 and net income of $7,193,356 for the year ended December 31, 1998. The increase in net income in 2000 compared to 1999 arose from decreases in underwriting losses incurred combined with increases in investment income. As described below, the decrease in net income during 1999 compared to the previous year was primarily as a result of increases in underwriting losses incurred and decreases in investment income.
The Company had a net underwriting loss of $1,130,535 in 2000 compared to net underwriting losses of $4,190,723 and $3,182,108 in 1999 and 1998 respectively. During 2000, the Company earned premiums of $54,378,800
compared to $58,471,950 and $57,845,674 during 1999 and 1998, respectively. Premium income decreased primarily as a result of the Recapture as discussed below.
The Company incurred losses and administrative expenses during the year ended December 31, 2000 of $55,509,335 compared with $62,662,673 and $61,027,782 for the years ended December 31, 1999 and 1998, respectively. Expenses in 2000 were comprized of losses paid and provisions for losses incurred of $40,702,668, ceding commissions and excise taxes of $14,143,309 and operating expenses of $663,358. Losses incurred in 1999 and 1998 were $46,784,152 and $45,552,545, respectively. The loss ratio for the year ended December 31, 2000 was 74.9% compared to 80.0% and 78.8% for the years ended December 31, 1999 and 1998, respectively.
During 1999, as a result of its adverse underwriting results, the Company, working with MIC, took steps to improve its underwriting performance. During 1999, the Company's Board of Directors voted to redeem 37 series of Shares that had consistently experienced adverse underwriting results and that the Board determined were unlikely to experience favorable underwriting results in the future (the "Redemption"). Because the Subsidiary Capital Accounts for these series each had a balance of zero, the redemption price for the Shares was zero.
In addition to the Redemption, MIC agreed to commute the unearned premium and all unpaid losses as of the end of the second quarter of 1999 that were attributable to 37 series of Shares that the Board voted to redeem (the "Recapture"). In exchange for assuming these unearned premium and unpaid loss reserves, the Company paid $19,660,649 to MIC during the first quarter of 2000, which amount represented the unearned premium and unpaid losses as of
June 30, 1999 that were attributable to the commuted business (after offset by the 25% ceding commission and 1% federal excise taxes previously paid by the Company with respect to the recaptured business). If MIC had not recaptured this business from the Company, the Company would likely have experienced larger underwriting losses and higher loss ratios for the years ended December 31, 2000 and 1999.
Notwithstanding the Redemption and the Recapture, there can be no assurance that the Company will not experience significant adverse underwriting results in the future and there can be no assurance that MIC would recapture additional business from the Company if the Company does experience significant adverse underwriting results.
In addition to the Redemption and Recapture, the Company continues to work with MIC to evaluate ways for improving its underwriting performance. MIC continues to contact unprofitable accounts and implement procedures to improve profitability at those accounts. If unprofitable trends continue at some accounts, then steps are initiated to discontinue ceding new business into the Company with respect to such accounts. Additionally, MIC continues to place claims adjusters at some unprofitable accounts. Furthermore, claim approval empowerment levels have been significantly reduced or eliminated.
The Company incurred operating expenses during the year ended December 31, 2000 of $663,358 compared to $671,587 and $555,321 for the years ended December 31, 1999 and 1998, respectively, which amounts do not include expenses paid directly by MIC. MIC has agreed to pay directly certain such costs relating to registering and issuing shares if such costs can not be allocated to the Subsidiary Capital Account for the Common Stock. In 2000 $98,992 of such costs were paid directly by MIC compared to $141,697 and $69,280 for the years ended December 31, 1999 and 1998, respectively.
Investment income in 2000 was $4,808,908 compared to $655,755 and $10,375,464 for the years ended December 31, 1999 and 1998, respectively. The increase in investment income during 2000 compared to 1999 arose primarily as a result of reduced realized losses on sale of investment securities which was attributable to the positive impact of lower interest rates on the value of the Company's fixed income securities. The decrease in investment income during 1999 compared to 1998 arose primarily as a result of realized losses on sales of investment securities as Rothschild, the prior investment manager, attempted to minimize the impact of increasing interest rates.
The sale of investment securities for the year ended December 31, 2000 resulted in realized losses of $313,531 compared to realized losses of $5,255,474 and realized gains of $4,404,651 for the years ended December 31, 1999 and 1998, respectively. Interest earned for the year ended December 31, 2000 was $5,122,439 compared to $5,911,229 and $5,970,813 for the years ended December 31, 1999 and 1998, respectively. Interest earned during 2000 compared to 1999 decreased primarily as a result of the repayment during the first quarter of 2000 of premiums paid to MIC with respect to the Recapture, approximately 20% of the invested assets of the Company combined with the movement of funds into the equity fund. Interest earned during 1999 compared to 1998 was largely unchanged as a result of very little change in the amount of assets under management or their coupon rates.
Unrealized gains on investment securities held at December 31, 2000 were $2,732,423 compared to unrealized losses at December 31, 1999 of $162,459. The increase in unrealized gains as of December 31, 2000 compared to December 31, 1999 resulted primarily from the improved performance of the fixed income markets and the related increase in market value of the fixed income portfolio.
At December 31, 2000 approximately 19% (1999-10%) of the Company's investment portfolio was in a U.S. dollar denominated international equity fund and the remaining 81% (1999 - 90%) was held in cash and U.S. dollar denominated fixed- income securities.
As a result of the investment return experienced by the Company, prior to December 31, 1999, the Company's Board of Directors appointed BlackRock to replace Rothschild as the investment manager of the Company's fixed income portfolio and the Board adopted new investment guidelines for the portfolio. (See "Item 1. BUSINESS - INVESTMENT INCOME.")
Pursuant to the Retrocession Agreement, the Company must furnish to MIC collateral in the form of an irrevocable letter of credit of at least 12 months duration equal in amount to the unearned premium in respect of risks retroceded and unpaid loss reserves (including reserves for losses incurred but not reported) otherwise required to be maintained by MIC in respect of the Policies. As of December 31, 2000, the Company had furnished such a letter of credit in the amount of $76,050,000.
Forward Looking Statements
The foregoing Management Discussion and Analysis contains various forward looking statements within the meaning of applicable federal securities laws and are based upon Company's current expectations and assumptions concerning future events, which are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated.
Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued a Statement of Financial Accounting Standards ("FASB") No. 130, Reporting Comprehensive Income, effective for fiscal years beginning after December 15,
1997. Under this statement all items required to be recognized under accounting standards as components of comprehensive income must be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company has adopted this accounting standard in 1998. Adopting the accounting standard has no impact on reported net income of the Company.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, effective for fiscal years beginning after June 15, 1999. In the second quarter of 1999, the FASB delayed implementation of SFAS No. 133 until fiscal years beginning on or after June 15, 2000. The new standard requires that all companies record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. Management is currently assessing the impact of SFAS No. 133 on the consolidated financial statements of the Company. The Company will adopt this accounting standard on January 1, 2001, as required.
Market Risk
The Company is exposed to market risk from changes in interest rates, foreign currency exchange rates, and certain equity security prices. Market risk is inherent to all financial instruments. Active management of market risk is integral to the Company's operations which seeks to manage its exposure to market risk generally by monitoring the character of investments that are purchased or sold.
A discussion of the Company's accounting policies for derivative instruments is included in Note 3 to the consolidated financial statements included herein.
The following analyses are based on sensitivity analysis tests that assume instantaneous, parallel shifts in exchange rates, interest rates, and interest rate yield curves. There are shortcomings inherent to the sensitivity analyses presented. The model assumes interest rate changes are instantaneous, parallel shifts in the yield curve. In reality, changes are rarely instantaneous or parallel. Although certain assets may have similar maturities or periods to repricing, they may not react correspondingly to changes in market interest rates. Also, the interest rates on certain types of assets may fluctuate with changes in market interest rates, while interest rates on other types of assets may lag behind changes in market rates. The Company does not hold any financial instruments for trading purposes.
Interest Rate Risk. The Company has exposure to economic losses due to interest rate risk arising from changes in the level or volatility of interest rates and attempts to mitigate that exposure through active portfolio management. The Company's investment guidelines do not permit the use of derivatives in managing interest rate risk. As of December 31, 2000 and 1999, the net fair value asset exposure to interest rate risk was approximately $75 million and $93.9 million, respectively. As of December 31, 2000 and 1999, the potential loss in fair value resulting from a hypothetical 10% increase in interest rates would be approximately $1.5 million and $2.1 million, respectively.
Foreign Exchange Risk. Foreign exchange rate risk arises from the possibility that changes in foreign currency exchange rates will impact the value of financial instruments. At December 31, 2000 and 1999, 100% of investments were denominated in U.S. dollars.
Equity Price Risk. Equity price risk results from changes in the level or volatility of equity prices which affect the value of equity securities. At December 31, 2000 and December 31, 1999, the Company had approximately 19% and 10% respectively of its portfolio invested in an international equity fund. As of December 31, 2000 and 1999, the net fair value asset exposure to equity price risk was approximately $17.1 million and $11.8 million, respectively, and the potential gain in fair value resulting from a hypothetical 10% increase in the underlying equity prices would be approximately $1.7 million and $1.2 million, respectively.
Overall Limitations and Forward-Looking Statements
The Company has developed fair value estimates by utilization of available market information or other appropriate valuation methodologies. However, considerable judgement is required in interpreting market data to develop estimates of fair value; therefore, the estimates are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange. The effect of using different market assumptions and/or estimation methodologies may be material to the estimated fair market value amounts. In addition, the above discussion and the estimated amounts generated from the sensitivity analyses referred to above include forward- looking statements of market risk which assume, for analytical purposes, that certain adverse market conditions may occur. Actual future market conditions may differ materially from such assumptions because the amounts noted previously are the result of analyses used for the purpose of assessing possible risks and the mitigation thereof. Accordingly, the forward-looking statements should be considered projections of future events or losses.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page
1. Independent Auditors' Report................... 38 --
2. Balance Sheets, December 31, 2000 and 1999.... 39 --
3. Statements of Income and Retained Earnings for the years ended December 31, 2000, 1999 and 1998 ............................... 40 --
4. Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 ............ 41 --
5. Statement of Changes in Shareholders Equity for the years ended December 31, 2000, 1999 and 1998 .............................. 42 - 43 -------
6. Notes to Financial Statements.................. 44 - 52 -------
INDEPENDENT AUDITORS' REPORT
To the Stockholders of Motors Mechanical Reinsurance Company, Limited One Financial Place Collymore Rock St. Michael, Barbados
We have audited the accompanying balance sheets of Motors Mechanical Reinsurance Company, Limited (the "Company") as at December 31, 2000 and 1999 and the related statements of income\(loss) and retained earnings, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of Motors Mechanical Reinsurance Company, Limited as of December 31, 2000 and 1999 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America.
s/DELOITTE & TOUCHE
CHARTERED ACCOUNTANTS
Bridgetown, Barbados March 16, 2001
The accompanying notes form an integral part of these financial statements.
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 -----------------------------------------------------
(Expressed in U.S. Dollars)
Note 1. OPERATIONS
The Company is incorporated under the laws of Barbados and is a licensed insurer under the Exempt Insurance Act, 1983, and amendments thereto.
All of the common stock of the Company is owned by Motors Insurance Corporation ("MIC"), a member of the GMAC Insurance Group. MIC is an indirect wholly-owned subsidiary of General Motors Corporation. The principal activity of the Company is the assumption of motor vehicle mechanical service agreements arising under insurance policies reinsured by MIC and attributable to an MIC Mechanical Account in respect of which shares of Participating Stock are issued and outstanding. All premiums received were assumed from MIC.
Note 2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements are stated in United States dollars and are prepared in conformity with accounting principles generally accepted within the United States of America.
Use of Estimates
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Premium Income and Acquisition Costs
Reinsurance premiums are based on the Company assuming (after ceding commission) 75% of the original policy premium written by the direct insurer. Of these reinsurance premiums, 75% is retroceded to the Company when written and 25% when earned.
Premiums are written on the basis of quarterly cessions and earned relative to anticipated loss exposures. Acquisition costs, consisting of ceding commissions and excise taxes, are taken into income on the basis of premiums earned.
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 -----------------------------------------------------
(Expressed in U.S. Dollars)
Note 2. SIGNIFICANT ACCOUNTING POLICIES (Cont'd) -------------------------------
Investments
Investments, all of which are available for sale, are comprized of interest- bearing marketable securities, and an investment in an international equity fund, which are carried at fair value based on quoted market prices and dealer quotes obtained from an external pricing service. Investments with original maturities of less than 90 days are classified as cash equivalents. Unrealized appreciation (depreciation) is included in accumulated other comprehensive income.
Realized gains and losses on the sale of investments are included as investment income and are calculated based on amortized costs.
Loss Reserves
The Company provides for unsettled, reported losses based on estimates of the final settlement, with an experience factor added to provide for losses incurred but not reported. The final settlement may be greater or less than the amounts provided. Any such differences, when they become known, are recognized in current operations and can potentially be significant to the financial statements.
Derivatives
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, effective for fiscal years beginning after June 15, 1999. In the second quarter of 1999, the FASB issued SFAS No. 138 which amends SFAS No. 133 and delayed implementation of statement No. 133 until fiscal years beginning on or after June 15, 2000. The new standard requires that all companies record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualified for hedge accounting. The Company adopted this accounting standard on January 1, 2001 as required. Adoption did not have a material impact on the financial position or result of operations of the Company.
Taxation
The Company has received an undertaking from the Barbados Government exempting it from all local income, profits and capital gains taxes for a period ending December 31, 2016. Thereafter and until December 31, 2031, the Company will be subject to tax at a rate of 2% on its taxable income provided that the amount of such tax will not exceed $2,500 per annum.
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 -----------------------------------------------------
(Expressed in U.S. Dollars)
Note 2. SIGNIFICANT ACCOUNTING POLICIES (Cont'd) -------------------------------
Stockholders who are United States residents are taxed in the United States on their share of the Company's income on a deemed distribution basis.
Earnings Per Share
No amount has been reported as earnings per share as the earnings applicable to the Participating Stockholders vary with the underwriting results of each series. Retained earnings applicable to the Common Stockholder include allocated investment income and operating expenses and amounts restricted for advances to Participating Stockholders (see Note 8).
Note 3. INVESTMENTS
The cost and fair value of investments in debt securities and equity are as follows: Gross Gross Fair Unrealized Unrealized Value Cost Appreciation Depreciation ------------ ------------ ------------ ----------- December 31, 2000
Governments and their agencies $ 9,486,283 $ 259,398 $ - $ 9,745,681
Corporations 60,211,122 1,517,503 (138,769) 61,589,856
Supranationals 3,600,827 91,045 - 3,691,872 ------------ ----------- ----------- ----------- Sub Total Debt Securities 73,298,232 1,867,946 (138,769) 75,027,409
Capital International Fund 16,091,024 1,003,246 - 17,094,270 ------------ ----------- ----------- -----------
Total $ 89,389,256 $ 2,871,192 $ (138,769) $92,121,679 ============ =========== =========== ===========
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 ----------------------------------------------------
(Expressed in U.S. Dollars)
Note 3. INVESTMENTS (Cont'd) -----------
Gross Gross Fair Unrealized Unrealized Value Cost Appreciation Depreciation ------------ ------------ ------------ ----------- December 31, 1999
Foreign governments and their agencies $18,175,335 $ - $ (799,400) $17,375,935
Corporations 22,951,967 - (637,687) 22,314,280
Supranationals 28,205,097 - (559,927) 27,645,170 ----------- ----------- ----------- ----------- Sub Total Debt Securities 69,332,399 - (1,997,014) 67,335,385
Capital International Fund 10,014,247 1,834,555 - 11,848,802 ----------- ----------- ----------- ----------- Total $79,346,646 $ 1,834,555 $(1,997,014) $79,184,187 =========== =========== =========== ===========
The cost and fair value of debt securities at December 31, 2000, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Cost Fair Value ----------- -----------
Due after one year through five years $29,635,354 $30,030,550 Due after five years through ten years $12,072,012 $12,518,465 Due after ten years through thirty years $31,590,866 $32,478,394 ----------- ----------- $73,298,232 $75,027,409 =========== ===========
In 2000, gross gains of $$1,735,049 and gross losses of $2,048,580 were realized. In 1999, gross gains of $1,571,947 and gross losses of $6,827,421 were realized. In 1998, gross gains of $6,253,358 and gross losses of $1,848,707 were realized.
The following summarizes net unrealized appreciation (depreciation) on investments:
Balance, December 31, 1997 $ 1,135,201 Net depreciation (801,142) -----------
Balance, December 31, 1998 $ 334,059 Net depreciation (496,518) -----------
Balance, December 31, 1999 $ (162,459)
Net appreciation $ 2,894,882 -----------
Balance December 31, 2000 $ 2,732,423 ===========
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 ----------------------------------------------------
(Expressed in U.S. Dollars)
Note 3. INVESTMENTS (Cont'd) -----------
The investment portfolio is comprized of approximately 81% in diverse debt securities which do not result in any concentration of credit risk and 19% in an international equity fund. At December 31, 2000 and 1999, 100% of the Company's investments are denominated in United States dollars.
Note 4. RESERVES FOR UNPAID LOSSES --------------------------
The following table sets forth an analysis of changes in the loss reserves for the years ended December 31, 2000, 1999 and 1998:
2000 1999 1998 Beginning balance in reserves for losses $4,725,239 $ 5,393,818 $ 5,421,160 ---------- ----------- -----------
Add/(deduct)-provision for losses incurred related to:
Current claim year 41,579,713 47,211,542 45,843,093 Prior claim years ( 877,045) (427,390) (290,547) ---------- ----------- -----------
Total 40,702,668 46,784,152 45,552,546 ---------- ----------- -----------
Deduct paid losses attributable to:
Current claim year 36,837,642 43,514,155 40,767,738 Prior claim years 3,835,555 3,938,576 4,812,150 ---------- ----------- -----------
Total 40,673,197 47,452,731 45,579,888 ---------- ----------- ----------- Ending balance in reserves for losses $4,754,710 $ 4,725,239 $ 5,393,818 ========== =========== ===========
As a result of change in estimates of losses incurred in prior years, the provisions for losses incurred in 2000, 1999 and 1998 decreased by $877,045, $427,390 and $290,547, respectively.
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 ----------------------------------------------------
(Expressed in U.S. Dollars)
Note 5. STOCKHOLDERS' EQUITY --------------------
All of the Company's Common Stock is held by MIC.
During 2000, 1 additional series of 100 shares of Participating Stock was issued as compared with 2 for the year ended December 31, 1999. In addition, in 2000 the Board of Directors redeemed 8 series of 100 shares which had been previously placed in run off and of which 7 series had reached a fully earned position during 2000 and 6 were redeemed for nil value. One series was redeemed for nil value due to unprofitable performance. During 1999 the Board of Directors also redeemed 37 series of 100 shares for nil value, and thereafter, MIC recaptured the unearned premium and loss reserves for those series. (See Note 9).
In the years ended December 31, 2000, 1999 and 1998, costs in the amount of $98,992, $141,696 and $69,280 respectively, were incurred in the sale of Participating Stock. The Common Stockholder reimbursed the Company directly for these expenses.
The holder of Common Stock is entitled to elect five directors, at least one of whom must be a resident of Barbados. The holder of Common Stock has no right to vote with respect to liquidation of the Company. The holder generally has the sole right to vote on matters not specifically reserved to Participating Stock.
The holders of Participating Stock as a class are entitled to elect one director. Generally, liquidation of the Company requires approval by at least 75% of the outstanding shares of this class. Any redemption of a series of shares requires a vote of the Board of Directors provided that the director representing holders of the Participating Stock votes in favor of the redemption. Any changes in the Company's Articles of Incorporation or By-Laws require the approval of a majority of the shares of Participating Stock present and voting together with a majority of the shares of Common Stock.
From time to time, funds are held in escrow on account of Participating Stock applications. Such amounts are not included in cash and cash equivalents in the accompanying financial statements. At December 31, 2000, there were no in funds held in escrow.
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 ----------------------------------------------------
(Expressed in U.S. Dollars)
Note 6. REINSURANCE PREMIUMS --------------------
Under the provisions of the retrocession agreement, the Company will assume future additional premiums in 2000 of $30,638,488 ($31,313,788 at December 31, 1999) relating to premiums written by Motors Insurance Corporation but unearned at the respective period ends. The amounts will be received as the premiums are earned, net of related acquisition costs.
Note 7. LETTER OF CREDIT ----------------
The Company has provided an irrevocable letter of credit to MIC, in the amount of $76,050,500 to collateralize the amounts recoverable from the Company related to the business ceded to it. Cash equivalents and investments are assigned to collateralize the letter of credit.
Note 8. RETAINED EARNINGS -----------------
Items of income or loss and premiums and expenses attributable to insurance underwriting activities are determined as of the end of each calendar quarter and are allocated to the Participating Stockholders' capital accounts.
An amount equal to 1 percent of assumed premiums is allocated to the capital account of the Common Stockholder. Such allocations accumulate as restricted retained earnings and may be used to advance capital to any Participating Stockholders who incur a deficit in their capital accounts; any such advances are repayable out of future profitable operations of the respective Participating Stockholder. Amounts allocated to the Common Stockholder, net of advances to Participating Stockholders, are presented in the table below as "net transfers."
Dividends may be declared and paid at the discretion of the Company's Board of Directors subject to the right of holders of participating stock to receive minimum dividends. The minimum annual dividend payable on each share shall be such share's pro rata portion of an amount equal to twenty percent of the net income, if any, for the preceding year attributable to the subsidiary capital account associated with the series of which that share is part.
Barbados law requires that the Company maintain a minimum margin of solvency based generally on the amount of premiums earned in the preceding year. At January 1, 2001, the Company's required minimum stockholders' equity computed in accordance with Barbados law was approximately $5,937,880.
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 ----------------------------------------------------
(Expressed in U.S. Dollars)
Note 8. RETAINED EARNINGS (Cont'd) -----------------
Retained earnings applicable to the Common and Participating Stockholders are comprized of the following:
Common Participating Total ---------- ------------- ----------- Balance (Deficit), December 31, 1997 $ (8,158) $18,623,926 $18,615,768
Net income for the year 20,970 7,172,386 7,193,356 Dividends paid 0 (5,171,956) (5,171,956) Redemption of participating stock 0 (8,159) (8,159) ---------- ----------- -----------
Balance, December 31, 1998 $ 12,812 $20,616,197 $20,629,009
Net income\(loss) for the year 1,422 (3,536,390) (3,534,968) Dividends paid 0 (4,066,464) (4,066,464) Redemption of participating stock 0 162,999 162,999 ---------- ----------- -----------
Balance, December 31, 1999 $ 14,234 $13,176,342 $13,190,576
Net Income for the year 11,717 3,666,656 3,678,373 Dividends paid 0 (673,134) (673,134) Redemption of participating 0 51,189 51,189 stock ---------- ----------- -----------
Balance December 31, 2000 $ 25,951 $16,221,053 $16,247,004 ========== =========== ===========
Note 9. RECAPTURE OF UNEARNED REINSURANCE PREMIUMS ------------------------------------------
During 1999, The Company entered into a recapture agreement with MIC for 37 series of Participating Shares. Under the agreement MIC recaptured premium of $24,934,234, which represents unearned premiums and an amount equal to $1,209,316 for losses incurred, but unpaid in respect to the recapture business as of June 30, 1999. Additionally, MIC has agreed to pay the Company a recapture commission of $6,482,901 which represents the deferred portion of the ceding commission previously paid by the Company.
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 ----------------------------------------------------
(Expressed in U.S. Dollars)
Note 10. SUBSEQUENT EVENT
At March 21, 2001 the Board of Directors declared and paid dividends in the amount of $3,083,096 to the participating stockholders on record as at December 31, 2000.
PART III
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Five of the current directors of the Company were elected by MIC through its ownership of the Common Stock at the Annual Shareholders' Meeting held on May 10, 2000 and one director was elected by the holders of the Shares at such meeting. The directors and officers of the Company are as follows:
POSITION WITH THE COMPANY (AND OTHER EMPLOYMENT DURING NAME AGE PAST FIVE YEARS)
William B. Noll.......... 58 Chairman, Chief Executive Officer, President and Director (President, Motors Insurance Corporation ("MIC"), 1999; Executive Vice- President & Chief Financial Officer, MIC, 1993-1999).
Mr. Noll became President and Director in 1995.
Thomas D. Callahan ..... 48 Executive Vice-President and Director (Senior Vice President, MIC, 1998; Vice-President, MIC, 1994-1998).
Mr. Callahan became Executive Vice-President and Director in April of 1999.
John J. Dunn, Jr......... 42 Vice-President and Director (Vice-President and Treasurer, MIC, 1998; Assistant Treasurer, MIC, 1995-1998; manager, Coopers & Lybrand, L.L.P.).
Mr. Dunn became Vice-President and Director in 1996.
Robert E. Capstack ..... 60 Vice-President and Director (Section Manager, MIC, 1994; Vice-President, GMAC Securities Corporation, 1999).
Mr. Capstack became Vice-President and Director in April of 1999.
Peter R. P. Evelyn ..... 59 Director (Attorney, Evelyn, Gittens & Farmer, a Barbados law firm).
Mr. Evelyn became a Director in 1986.
Haywood Hyman Jr. ...... 48 Director (Haywood-Clarke Automotive Group)
Mr. Hyman became a Director in May of 2000.
Ronald W. Jones ........ 48 Vice-President, Finance (Deputy Chairman, Aon Insurance Managers (Barbados) Ltd.).
Mr. Jones has served as Vice-President, Finance since 1987.
Michael B. Boyce........ 61 Secretary (Principal, Colybrand Company Services, Limited, Barbados, since 1993; previously principal, Price Waterhouse, Eastern Caribbean).
Mr. Boyce was elected Secretary in 1994. Mr. Boyce served previously as our Assistant Secretary.
The directors and officers named above serve in those capacities until the annual meeting of shareholders next following their election.
Item 11.
Item 11. EXECUTIVE COMPENSATION
No director or officer of the Company is compensated directly for services as such. However, each director and officer of the Company is reimbursed for expenses incurred for attendance at Board, committee, and shareholder meetings. In addition, Mr. Jones is an officer of the Manager, which receives management fees and compensation for financial and administrative services. Mr. Evelyn is a member of the law firm of Evelyn, Gittens & Farmer, which serves as the Company's Barbados counsel; and Mr. Boyce is affiliated with Colybrand Company Services Limited, St. Michael, Barbados, which receives compensation for corporate secretarial services provided to the Company.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
MIC owns all of the issued and outstanding shares of the Common Stock of the Company, which consists of 2,000 shares. Haywood Hyman, Jr., a director, owns 100 shares of Participating Stock.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Item 1, THE RETROCESSION, INSURANCE MANAGEMENT AGREEMENT and Item 11, EXECUTIVE COMPENSATION
Part IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Index to Document List
(1) Financial Statements
The following are included in Item 8:
(i) Independent Auditors' Report.
(ii) Balance Sheets, December 31, 2000 and 1999.
(iii) Statements of Income and Retained Earnings for the years ended December 31, 2000, 1999 and 1998.
(iv) Statements of Cash Flows for the years ended December 31, 2000, 1999, and 1998.
(v) Statement of Changes in Shareholders' Equity for the years ended December 31, 2000, 1999 and 1998.
(vi) Notes to Financial Statements.
(2) Financial Statement Schedules. Schedules are omitted because of the absence of the conditions under which they are required or because the information required is presented in the financial statements or related notes.
(3) Exhibits. The following exhibits are included in response to Item 14(c):
3(a) Restated Articles of Incorporation and amendments thereto filed by reference to Exhibit 3(I) to Quarterly Report on Form 10Q File No. 33-6534 for the quarterly period ended June 30, 1996.
3(b) By-laws of the Company dated June 6, 1986 filed by reference to Exhibit 3(b) of the Registration Statement on Form S-1, File No. 33-6534, dated June 18, 1986.
4 Specimen Participating Stock Certificate filed by reference to Exhibit 4 of Amendment No. 1 to Registration Statement on Form S-1, File No. 33-6534, dated February 12, 1987.
10(a) Form of Principal Retrocession Agreement between Motors Insurance Corporation and Registrant filed by reference to Exhibit 10(a) of the Registration Statement on Form S-1, File No. 33-6534, dated June 18, 1986.
10(b) Form of Supplemental Retrocession Agreement between Motors Insurance Corporation and Registrant filed by reference to Exhibit 10(b) of the Registration Statement on Form S-1, File No. 33-6534 dated June 18, 1986.
10(c) Specimen Stock Purchase Agreement filed by reference to Exhibit 10(c) to Amendment No. 2 to Registration Statement on Form S-1, File No. 33-6534, dated May 22, 1987.
10(d) Amended and Restated Stock Purchase Agreement between Registrant and Motors Insurance Corporation filed by reference to Exhibit 10(d) to Amendment No. 1 to Registration Statement on Form S-1, File No. 33-6534, dated February 12, 1987.
10(e) Insurance Management Agreement between Registrant and Aon (formerly Alexander) Insurance Managers (Barbados) Ltd., effective January 1, 1996 filed by reference to Exhibit 10(e) to Annual Report on Form 10K, File No. 33-6534 for the year ended December 31, 1996.
10(f) Investment Management Agreement between Registrant and BlackRock International, Ltd. filed by reference to Exhibit 10(f) to Annual Report on Form 10-K, File No. 33-6534, for the year ended December 31, 2000.
27 Financial Data Schedule.
28(c) Certificate of Barbados Residency filed by reference to Exhibit 28(c) to Amendment No. 1 to Registration Statement on Form S-1, File No. 33-6534, dated June 18, 1986.
99(a) Certification Form filed by reference to Exhibit 28(a) to Amendment No. 2 to Registration Statement on Form S-1, File No. 33-6534, dated June 18, 1986.
99(b) Guarantee issued by the Minister of Finance of Barbados filed by reference to Exhibit 99(b) to Amendment No. 2 to Registration Statement on Form S-2, File No. 33-60105, dated April 23, 1996.
(b) Reports on Form 8-K. No reports on Form 8-K for the quarter ended December 31, 2000 have been filed.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED (Registrant)
By s/Ronald W. Jones ------------------------ Ronald W. Jones Vice-President, Finance
Date: March 30, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.
Signature Title Date
s/William B. Noll Chairman, Chief Executive April 2, 2001 - ------------------------- William B. Noll Officer, President and Director
s/Thomas D. Callahan Executive Vice-President and April 2, 2001 - ------------------------- Thomas D. Callahan Director
s/John J. Dunn, Jr. Vice-President and April 2, 2001 - ------------------------- John J. Dunn, Jr. Director
s/Robert E. Capstack Vice-President and April 2, 2001 - ------------------------- Robert E. Capstack Director
Director - ------------------------- Haywood Hyman Jr.
s/Peter R. P. Evelyn Director March 30, 2001 - ------------------------- Peter R. P. Evelyn
s/Ronald W. Jones Vice-President March 30, 2001 - ------------------------- Finance, Principal Ronald W. Jones Financial and Accounting Officer
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANT WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT
Proxy solicitation materials will be sent to shareholders in connection with an annual meeting to be held May 9th, 2001.