SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X Annual Report Pursuant to Section 13 or 15(d) of
- --- The Securities Exchange Act of 1934
For the fiscal year ended December 31, 2001
Or
Transition Report Pursuant to Section 13 or 15(d) of
- --- The Securities Exchange Act of 1934
Commission file number 33-6534
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
(Exact name of registrant as specified in its charter)
Barbados Not Applicable
(State or other jurisdiction (I.R.S. employer identification
of incorporation or organization) number)
One Financial Place Not Applicable
Collymore Rock (Zip Code)
St. Michael, Barbados, W.I.
(Address of principal
executive offices)
Registrant's telephone number, including area code (246) 436-4895
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each
Exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
None
PAGE 2
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 1, 2002, was $1,875,000.*
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Class As of March 1, 2002
Common Stock, no-par value 2,000
Participating Stock, no-par value 25,000
* Based on current offering price of $75 per share.
PAGE 3
PART I
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 to 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 (each a "Franchise") 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. 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 in the
Asia-Pacific region. MIC consistently has been awarded A.M. Best Company's
insurance financial rating of A + (Superior), one of the highest possible
ratings.
PAGE 4
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 100% of the original gross premium, reduced by agents'
commissions, if any, and cancellations. The Company assumes 75% of the risk with
respect to these policies and MIC pays 75% 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 25% of the net premium as the premiums are earned. The Company pays MIC
a ceding commission in an amount equal to (i) 20% of net premium ceded to the
Company that is attributable to policies sold on or after October 1, 2001 and
(ii) 25% of net premium ceded to the Company that is attributable to policies
sold prior to October 1, 2001. 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
PAGE 5
Agreement, the unexpired liability with respect to 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. Coverages with respect to routine vehicle
maintenance are not assumed under the Agreement.
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,
2001, 2000, and 1999 were 73.4%, 74.9%, and 80.0%, respectively.
PAGE 6
The following table sets forth an analysis of changes in the loss reserves for
the years ended December 31, 2001, 2000 and 1999.
Year Ended
--------------------------------------------
12/31/01 12/31/00 12/31/99
Beginning balance in reserves for
losses .......................... $ 4,754,710 $ 4,725,239 $ 5,393,818
----------- ------------ ------------
Add-provision for losses incurred
related to:
Current claim year ........... 40,529,340 41,579,713 47,211,542
Prior claim years ............ (1,304,766) (877,045) (427,390)
----------- ------------ ------------
Total ............. 39,224,574 40,702,668 46,784,152
----------- ------------ ------------
Deduct-paid losses
attributable to:
Current claim ................ 36,590,250 36,837,642 43,514,155
Prior claim years ............ 3,439,444 3,835,555 3,938,576
----------- ------------ ------------
Total ............. 40,029,694 40,673,197 47,452,731
Ending balance in reserves ......
for losses ...................... $ 3,949,590 $ 4,754,710 $ 4,725,239
=========== ============ ============
As a result of change in estimates of losses incurred in prior years, the
provisions for losses incurred in 2001, 2000, and 1999 decreased by $1,304,766,
$877,045, and $427,390, respectively.
PAGE 7
The following table analyzes the development of losses and loss adjustment
expenses from January 1, 1996 through December 31, 2001.
Years Ended
------------------------------------------------------------------------------------------
12/31/96 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01
Liability for unpaid
claims and claims
adjustment expense ................. $4,284,304 $5,421,160 $5,393,818 $4,725,239 $4,754,710 $3,949,590
---------- ---------- ---------- ---------- ---------- ----------
Paid (cumulative) in
subsequent year(s) ................. $2,997,089 $4,812,150 3,938,576 3,835,555 3,439,444
Estimated unpaid
liability as of
year end* .......................... 541,191 318,463 1,027,852 12,639 10,500
---------- ---------- ---------- ---------- ----------
Cumulative Redundancy .............. $ 746,024 $ 290,547 $ 427,390 $ 877,045 $1,304,766
========== ========== ========== ========== ==========
*/ Because mechanical breakdown claims are generally paid within 90 days of when
they are incurred, the liability for unpaid claims incurred in prior years is
negligible. Accordingly, the liability for unpaid claims incurred in all prior
years has been combined at each year end.
PAGE 8
The table shows initial estimated reserves at December 31, 2001, 2000, 1999,
1998, 1997 and 1996 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
seven 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 for the payment of 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, 2001 and 2000, 82% and 81%, respectively, of the Company's
investment portfolio, based on fair market value, consisted of 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 $239 billion of assets
under management as of December 31, 2001. BlackRock, Inc. manages assets on
behalf of more than 2,700 institutions and 300,000 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
PAGE 9
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.
The Company's funds are invested in a manner consistent with investment
guidelines that are proposed by the Investment Committee for adoption by the
Company's Board of Directors (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. 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 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 addition to 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%, based on fair market value.
In June 1999, the Company invested $10 million in equity securities by
purchasing shares in the 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 market value of the
Company's equity portfolio at December 31, 2001 and 2000 was approximately $16.0
million and $17.1 million, respectively.
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
PAGE 10
and have like rights and liabilities. Shares are listed on the Luxembourg and
the Amsterdam Stock Exchanges. The Fund had $1,318 million in total net assets
as of December 31, 2001.
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.
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:
PAGE 11
(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% 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, ceding commissions, any
ceding commissions or 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, 99% to the related Subsidiary Capital
Account and 1% 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.
PAGE 12
(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.
PAGE 13
(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 the portion 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
PAGE 14
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 under paragraph (a) above with
respect to the series of shares from which the reallocation is being made, which
have not been previously restored, 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 the other Shares. 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) (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 as
of the last day of the fiscal quarter in which the unearned portion of premiums
that have been ceded to the Company and allocated to such Account becomes zero.
Subsequent to the effective date of the redemption or repurchase, as the case
may be, any positive balance as of the last day of any calendar quarter for the
Subsidiary Capital Account of any repurchased or redeemed series of Shares,
after application of the provisions of paragraph 7(c) above, will be allocated
among the Subsidiary Capital Accounts of the existing series of Shares pro
PAGE 15
rata based upon relative earned premium attributable to such Accounts for the
calendar quarter then ending and any net deficit will be allocated in accordance
with the provisions of paragraph 7(a) above.
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 of Shares. During the year ended December 31, 2001, $329,335 of net
income from underwriting activities (which excludes administrative expenses) and
$749,181 of administrative expenses were allocated among the series of Shares
outstanding during the year ended December 31, 2001, and $6,150,764 of net
investment income was allocated among such series of Shares and the Common
Stock.
As of December 31, 2001, 169 series of Shares outstanding had Subsidiary Capital
Account balances greater than or equal to $7,500 (ranging from $8,008 to
$652,532) and 81 series had Subsidiary Capital Account balances less than $7,500
(ranging from $7,468 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, 2001, an aggregate of $5,236,206 had been
advanced from the Restricted Earned Surplus (which forms a portion of the
Account established for the Common Stock owned by MIC) to 114 Subsidiary Capital
Accounts and remained outstanding at that date, including net deficits of
$3,755,251 associated with 58 series of Shares that have been redeemed. As of
December 31, 2001, $8,052,563 of aggregate deficits had been reallocated among
the Subsidiary Capital Accounts of the Shares and remained outstanding. Of this
amount, $7,355,114 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
PAGE 16
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.
PAGE 17
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 franchised 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, 2001, the Company incurred
fees payable to the Manager in the amount of $255,338.
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.
PAGE 18
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, 2016. Until
December 31, 2001, the Company paid an annual licencing fee of $2,500 to obtain
such guarantee. Thereafter, the Company is 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.
PAGE 19
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. LEGAL PROCEEDINGS
The Company is not involved in any legal proceedings.
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, 2001.
PART II
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 outstanding Common Stock of the Company is held by MIC. As of
March 1, 2002, there were 448 holders of Shares of record, representing 250
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
2002, March of 2001, and May of 2000, the Company declared dividends of
$4,318,225, $3,083,096 and $673,134, respectively. These dividends were declared
as a varying percentage of earned surplus attributable to
PAGE 20
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.
PAGE 21
Item 6. SELECTED FINANCIAL DATA
The following selected financial data for the years ended December 31, 2001,
2000, 1999, 1998 and 1997 have been derived from the Company's audited financial
statements.
December 31
---------------------------------------------------------------------------------
2001 2000 1999** 1998 1997
Premiums
Assumed $ 51,131,226 $ 52,352,900 $ 67,104,475 $ 72,634,160 $ 57,071,313
============ ============ ============ ============ ============
Premiums
Returned $ 0 $ 0 $ 24,934,234 $ 0 $ 0
Premiums Earned $ 53,412,569 $ 54,378,800 $ 58,471,950 $ 57,845,674 $ 45,701,595
Net Investment
Income 6,150,764 4,808,908 655,755 10,375,464 5,704,678
------------ ------------ ------------ ------------ ------------
Total Income 59,563,333 59,187,708 59,127,705 68,221,138 51,406,273
Less Losses and
Expenses 53,832,415 55,509,335 62,662,673 61,027,782 43,503,363
Net Income
(Loss)* $ 5,730,918 $ 3,678,373 $ (3,534,968) $ 7,193,356 $7,902,910
============ ============ ============ ============ ============
Dividends Per
Common Share 0 0 0 0 0
Total Assets $116,131,055 $118,886,919 $132,504,762 $139,428,183 $123,065,286
Total Policy
Reserves and
Other
Liabilities 93,765,033 97,764,992 117,281,645 115,902,615 100,999,317
Stockholders'
Equity 22,366,022 21,121,927 15,223,117 23,525,568 22,065,969
Dividends Paid
on
Participa-
ting Shares 3,083,096 673,134 4,066,464 5,171,956 4,196,730
------------ ------------ ------------ ------------ ------------
*/ Information as to earnings per share is not provided inasmuch as the results
for each series of stock will vary with the underwriting experience attributable
to each Subsidiary Capital Account established with respect to that series. See
Note 2 to the Financial Statements.
**/ In 1999, MIC recaptured certain insurance business that had been previously
ceded to the Company. See Note 9 to the Financial Statements and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations."
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Critical Accounting Policies The liability for losses and loss expenses
represents the accumulation of estimates for reported losses and a provision for
losses incurred but not reported, including claim adjustment expenses. For
PAGE 22
purposes of establishing loss reserves, the Company relies upon the advice of
MIC. Loss reserve projections are used to estimate loss reporting patterns, loss
payment patterns and ultimate claim costs. An inherent assumption in such
projections is that historical patterns can be used to predict future patterns
with reasonable accuracy. Because many variables can affect past and future loss
patterns, the effect of changes in such variables on the results of loss
projections must be carefully evaluated. The evaluation of these factors
involves complex, subjective judgments, which may significantly impact the
financial statements. Insurance liabilities are, therefore, necessarily based on
estimates, and the ultimate liability may vary from such estimates. These
estimates are regularly reviewed by management and adjustments to such are
included in income on a current basis. See Note 4 to the Financial Statements.
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 2002 and in future
years to which its reinsurance liabilities extend. No capital expenditures are
expected in the foreseeable future.
On March 5, 2002, the Board of Directors authorized the payment of dividends
aggregating $4,318,225 to eligible holders of Shares. See "Market for
Registrant's Common Equity and Related Stockholders Matters" for a discussion of
dividends paid and legal restrictions on the payment of dividends.
The Company had unearned premium reserves of $89,634,122 as of December 31,
2001, compared to $91,915,465 as of December 31, 2000. Unearned premium amounts
are attributable to the long-term nature of the contracts sold. Such contracts
may extend for up to 84 months from the 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 from the date that the vehicle is initially placed
into service. 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
PAGE 23
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.
The decrease in unearned premium reserves as of December 31, 2001 compared to
December 31, 2000 is primarily attributable to the Company placing certain
series of Shares in "run-off." When a series of Shares is placed in run-off, the
Company discontinues assuming any risk or receiving any premiums with respect to
automotive mechanical service contracts that are sold, after the date that the
series is placed in run-off, by the Franchise(s) with respect to which the
series of Shares is issued. When a series is placed in run-off, the premium that
had been previously ceded to the Company that is attributable to such series of
Shares continues to earn out and the unearned premium reserve decreases. As of
December 31, 2001, 132 series of Shares were in run-off compared to 129 series
as of December 31, 2000.
Capital Resources Capitalization of the Company, as of December 31, 2001, was
comprised of paid-in capital with respect to the Common Stock of $200,000
(compared to $200,000 at both December 31, 2000 and 1999), paid-in capital with
respect to the Shares of $1,875,000 (compared with $1,942,500 and $1,995,000 as
of December 31, 2000 and 1999, respectively), and earnings retained for use in
the business of $18,521,974 (compared with $16,247,004 and $13,190,576 as of
December 31, 2000 and 1999, respectively). The reduction in the amount of
paid-in capital with respect to the Shares as of December 31, 2001 compared with
December 31, 2000 is primarily attributable to redemption of Shares with nil
unearned premiums. There were a total of 250 series outstanding at December 31,
2001 compared to 259 and 266 series of Shares outstanding at December 31, 2000
and 1999, respectively. During 2001, the Company issued 1 new series of Shares
and redeemed 10 series of Shares for a net decrease of 9 series. During 2000,
the Company issued 1 new series of Shares and redeemed 8 series 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
PAGE 24
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, 2002, the Company's
required minimum net assets computed in accordance with Barbados law was
approximately $5,841,257 compared to total capital and retained earnings
computed for purpose of Barbados law of $20,596,974.
Results of Operations During the year ended December 31, 2001, the Company had
net income of $5,730,918 compared to net income of $3,678,373 for the year ended
December 31, 2000 and a net loss of $3,534,968 for the year ended December 31,
1999. The increase in net income in 2001 compared to 2000 is attributable to a
$710,689 improvement in underwriting results combined with a $1,341,856 increase
in investment income. The increase in net income in 2000 compared to 1999 is
attributable to a $3,060,188 improvement in underwriting results combined with a
$4,153,153 increase in investment income.
The Company had a net underwriting loss of $419,846 in 2001 compared to net
underwriting losses of $1,130,535 and $4,190,723 in 2000 and 1999, respectively.
During 2001, the Company earned premiums of $53,412,569 compared to $54,378,800
and $58,471,950 during 2000 and 1999, respectively. Premium income decreased in
both 2001 and 2000 compared to the prior year as a result of (i) the redemption
of additional series of Shares during the years ended December 31, 2001 and
2000, (ii) the placement of certain series of Shares in run-off as discussed
above, and (iii) the Recapture as discussed below.
The Company incurred losses and administrative expenses during the year ended
December 31, 2001 of $53,832,415 compared with $55,509,335 and $62,662,673 for
the years ended December 31, 2000 and 1999, respectively. Expenses in 2001 were
comprised of losses paid and provisions for losses incurred of $39,224,574,
ceding commissions and excise taxes of $13,858,660 and operating expenses of
$749,181. Losses incurred in 2000 and 1999 were $40,702,668 and $46,784,152,
respectively. The loss ratio for the year ended December 31, 2001 was 73.4%
compared to 74.9% and 80.0% for the years ended December 31, 2000 and 1999,
respectively. These decreases in losses incurred and loss ratios are primarily
attributable to the Recapture and the ongoing efforts by MIC to improve
underwriting results with respect to series of Shares that have produced
unprofitable business.
PAGE 25
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 which 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,
2001, 2000 and 1999.
Notwithstanding the Redemption and the Recapture, there can be no assurances
that the Company will not experience significant adverse underwriting results in
the future and there can be no assurances that MIC would recapture additional
business from the Company if the Company does experience significant adverse
underwriting results.
The Company incurred operating expenses during the year ended December 31, 2001
of $749,181 compared to $663,358 and $671,587 for the years ended December 31,
2000 and 1999, respectively. Such amounts do not include expenses paid directly
by MIC. The increase in operating expenses for the year ended December 31, 2001
compared to the year ended December 31, 2000 is largely attributable to special
reviews of certain operations of the Manager that were performed by the
Company's auditors and increased legal fees. MIC has agreed to pay directly
certain costs relating to registering and issuing shares if such costs cannot be
allocated to the Subsidiary Capital Account for the Common Stock. For the year
ended December 31, 2001, $106,751 of such costs were paid directly by MIC
compared to $98,992 and $141,697 for the years ended December 31, 2000 and 1999,
respectively. The
PAGE 26
decrease in such costs for the year ended December 31, 2000 compared to the year
ended December 31, 1999 is largely attributable to the costs associated with the
Redemption and Recapture during 1999.
Investment income in 2001 was $6,150,764 compared to $4,808,908 and $655,755 for
the years ended December 31, 2000 and 1999, respectively. The increase in
investment income during 2001 compared to 2000 arose primarily as a result of
significant gains realized on the 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. Likewise, the increases in investment income
during 2000 compared to 1999 arose primarily as a result of reduced realized
losses on sale of investment securities which was also attributable to the
positive impact of lower interest rates on the value of the Company's fixed
income securities.
The sale of investment securities for the year ended December 31, 2001 resulted
in realized gains of $1,632,053, compared to realized losses of $313,531 and
$5,255,474 for the years ended December 31, 2000 and 1999, respectively.
Interest earned for the year ended December 31, 2001 was $4,518,711 compared to
$5,122,439 and $5,911,229 for the years ended December 31, 2000 and 1999,
respectively. Interest earned in 2001 compared to 2000, and in 2000 compared to
1999, decreased primarily as a result of the combination of (i) repayment during
the first quarter of 2000 of premiums paid to MIC with respect to the Recapture,
which represented approximately 20% of the invested assets of the Company, (ii)
the movement of investment funds into the equity fund, and (iii) lower interest
rates in 2001.
Unrealized gains on investment securities held at December 31, 2001 were
$1,769,048 compared to unrealized gains at December 31, 2000 of $2,732,423. The
decrease in unrealized gains as of December 31, 2001 compared to December 31,
2000 resulted primarily from a significant change in the unrealized position on
the Company's equity portfolio which was largely attributable to overall
negative performance of the equity markets during 2001.
At December 31, 2001 approximately 18% (2000-19%) of the Company's investment
portfolio was invested in a U.S. dollar denominated international equity fund
and the remaining 82% (2000 - 81%) was invested in U.S. dollar denominated
fixed-income securities (in each case, based on fair market value).
PAGE 27
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, 2001, the Company had furnished such a letter of credit in
the amount of $72,350,000.
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 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
SFAS 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. The
Company adopted this standard on January 1, 2001. The impact of the adoption of
this standard did not have a potential impact on the Company's financial
position or results of operation.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT 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.
PAGE 28
A discussion of the Company's accounting policies for derivative instruments is
included in Note 3 to the 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, 2001 and 2000, the net fair value asset
exposure to interest rate risk was approximately $74.4 million and $75.0
million, respectively. As of both December 31, 2001 and 2000, the potential loss
in fair value resulting from a hypothetical 10% increase in interest rates would
be approximately $1.5 million.
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, 2001 and 2000, 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, 2001 and December 31, 2000, the Company had approximately 18% and
19%, respectively, of its portfolio invested in an international equity fund. As
of December 31, 2001 and 2000, the net fair value asset exposure to equity price
risk was approximately $16.0 million and $17.1 million, respectively, and the
potential gain in fair value resulting from a hypothetical 10% increase in the
underlying equity prices would be approximately $1.6 million and $1.7 million,
respectively.
PAGE 29
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.
PAGE 30
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
1. Independent Auditors' Report 31
2. Balance Sheets, December 31, 2001 and 2000 32
3. Statements of Operations and Retained Earnings
for the years ended December 31, 2001,
2000 and 1999 33
4. Statement of Changes in Stockholders' Equity
for the years ended December 31, 2001,
2000 and 1999 34-35
5. Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999 36
6. Notes to Financial Statements 37-44
PAGE 31
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 of December 31, 2001 and 2000 and the
related statements of operations and retained earnings, changes in stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 2001. 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, 2001 and 2000 and the results of its operations,
changes in stockholders' equity and its cash flows for each of the three years
in the period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America.
CHARTERED ACCOUNTANTS
Bridgetown, Barbados
February 15, 2002
PAGE 32
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
(Expressed in United States Dollars)
Notes 2001 2000
----- ---- ----
ASSETS
Investments 3,7 $ 90,433,369 $ 92,121,679
Cash and cash equivalents 7 142,992 1,736,235
Accrued investment income 789,199 903,734
Due from Motors Insurance Corporation 1,390,278 -
Deferred acquisition costs 22,810,217 23,898,021
Advances to shareholders 527,500 190,000
Prepayments 37,500 37,250
----------- -----------
Total Assets 116,131,055 118,886,919
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Unearned premiums 89,634,122 91,915,465
Reserves for unpaid losses 4 3,949,590 4,754,710
Accrued liabilities 181,321 125,953
Due to Motors Insurance Corporation - 968,864
----------- -----------
Total Liabilities 93,765,033 97,764,992
----------- -----------
COMMITMENTS AND CONTINGENCIES 7
STOCKHOLDERS' EQUITY 5
Share capital
-Common stock - no par value;
Authorized - 2,000 shares;
Issued and outstanding - 2,000 shares 200,000 200,000
-Participating stock - no par value;
Authorized - 100,000 shares;
Issued and outstanding -
25,000 shares at December
31, 2001 and 25,900 shares
at December 31, 2000 1,875,000 1,942,500
----------- -----------
2,075,000 2,142,500
Retained earnings 8 18,521,974 16,247,004
Accumulated other comprehensive income 1,769,048 2,732,423
----------- -----------
Total Stockholders' Equity 22,366,022 21,121,927
----------- -----------
Total Liabilities and Stockholders' Equity $116,131,055 $118,886,919
=========== ===========
The accompanying notes form an integral part of these financial statements.
APPROVED ON BEHALF OF THE BOARD
...............................
Director
PAGE 33
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(Expressed in United States Dollars)
Years Ended December 31,
----------------------------------------------
Notes 2001 2000 1999
----- ---- ---- ----
INCOME
Reinsurance premiums assumed 6 $51,131,226 $52,352,900 $67,104,475
Recapture of unearned reinsurance premiums 9 - - (24,934,234)
Decrease in unearned premiums 2,281,343 2,025,900 16,301,709
----------- ----------- -----------
Premiums earned 53,412,569 54,378,800 58,471,950
----------- ----------- -----------
Investment Income
Interest earned 4,518,711 5,122,439 5,911,229
Realized gains/(losses) on investments - net 1,632,053 (313,531) (5,255,474)
----------- ----------- -----------
Investment income 6,150,764 4,808,908 655,755
----------- ----------- -----------
TOTAL INCOME 59,563,333 59,187,708 59,127,705
----------- ----------- -----------
EXPENSES
Acquisition costs 13,858,660 14,143,309 15,206,934
Losses paid 40,029,694 40,673,197 47,452,731
(Decrease)/increase in loss reserves (805,120) 29,471 (668,579)
Administrative expenses
Related parties 273,592 245,953 252,299
Other 475,589 417,405 419,288
----------- ----------- -----------
TOTAL EXPENSES 53,832,415 55,509,335 62,662,673
----------- ----------- -----------
NET INCOME/(LOSS), for the year 5,730,918 3,678,373 (3,534,968)
RETAINED EARNINGS, beginning of year 16,247,004 13,190,576 20,629,009
LESS: DIVIDENDS (3,083,096) (673,134) (4,066,464)
(DEDUCT)/ADD REDEMPTION OF
PARTICIPATING STOCK (372,852) 51,189 162,999
----------- ----------- -----------
RETAINED EARNINGS, end of year $18,521,974 $16,247,004 $13,190,576
=========== =========== ===========
The accompanying notes form an integral part of these financial statements.
PAGE 34
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(Expressed in United States Dollars)
December 31, 2001
---------------------------------------------------------------------------------------------
Accumulated
Total Other
Shareholder's Comprehensive Retained Comprehensive Common Participating
Equity Income Earnings Income Stock Stock
------ ------ -------- ------ ----- -----
Balance at December 31, 2000 $21,121,927 $ -- $16,247,004 $2,732,423 $200,000 $1,942,500
Comprehensive income:
Net income 5,730,918 5,730,918 5,730,918 -- -- --
Other comprehensive income,
net of tax:
Unrealized loss on securities,
net of reclassification (963,375) (963,375) -- (963,375) -- --
-----------
Comprehensive income -- $ 4,767,543 -- -- -- --
===========
Dividends declared on
participating stock (3,083,096) (3,083,096) -- -- --
Participating stock
Issued 7,500 -- -- -- 7,500
Redeemed (447,852) (372,852) -- -- (75,000)
----------- ----------- ---------- -------- ----------
Balance at December 31, 2001 $22,366,022 $18,521,974 $1,769,048 $200,000 $1,875,000
=========== =========== ========== ======== ==========
Disclosure of reclassification amount
Unrealized holding gains arising
during period (2,595,428)
Less: reclassification adjustment
for gain included in net income 1,632,053
-----------
Net unrealized loss on securities$ $ (963,375)
===========
December 31, 2000
---------------------------------------------------------------------------------------------
Accumulated
Total Other
Shareholder's Comprehensive Retained Comprehensive Common Participating
Equity Income Earnings Income Stock Stock
------ ------ -------- ------ ----- -----
Balance at December 31, 1999 $15,223,117 $ -- $13,190,576 $ (162,459) $200,000 $1,995,000
Comprehensive income:
Net income 3,678,373 3,678,373 3,678,373 -- -- --
Other comprehensive income,
net of tax:
Unrealized gain on securities,
net of reclassification 2,894,882 2,894,882 -- 2,894,882 -- --
----------
Comprehensive income -- $6,573,255 -- -- -- --
==========
Dividends declared on participating
stock (673,134) (673,134) -- -- --
Participating stock
Issued 7,500 -- -- -- 7,500
Redeemed (8,811) 51,189 -- -- (60,000)
----------- ----------- ----------- -------- ----------
Balance at December 31, 2000 $21,121,927 $16,247,004 $2,732,423 $200,000 $1,942,500
=========== =========== =========== ======== ==========
Disclosure of reclassification amount
Unrealized holding gains arising
during period 3,208,413
Less: reclassification adjustment
for losses included in net income (313,531)
-----------
Net unrealized gain on securities$ $ 2,894,882
===========
The accompanying notes form an integral part of these financial statements.
PAGE 35
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (CONTINUED)
(Expressed in United States Dollars)
December 31, 1999
---------------------------------------------------------------------------------------------
Accumulated
Total Other
Shareholder's Comprehensive Retained Comprehensive Common Participating
Equity Loss Earnings (Loss)/Income Stock Stock
------ ------ -------- ------ ----- -----
Balance at December 31, 1998 $23,525,568 $ -- $20,629,009 $ 334,059 $200,000 $2,362,500
Comprehensive income:
Net loss (3,534,968) (3,534,968) (3,534,968) -- -- --
Other comprehensive income,
net of tax:
Unrealized loss on securities,
net of reclassification (496,518) (496,518) -- (496,518) -- --
-----------
Comprehensive loss -- $(4,031,486) -- -- -- --
===========
Dividends declared on participating
stock (4,066,464) (4,066,464) -- -- --
Participating stock
Issued 15,000 -- -- -- 15,000
Redeemed (219,501) 162,999 -- -- (382,500)
----------- ----------- ---------- -------- ----------
Balance at December 31, 1999 $15,223,117 $13,190,576 $ (162,459) $200,000 $1,995,000
=========== =========== ========== ======== ==========
Disclosure of reclassification amount
Unrealized holding losses arising
during period (5,751,992)
Add: reclassification adjustment
for losses included in net income 5,255,474
-----------
Net unrealized loss on securities$ $ (496,518)
===========
The accompanying notes form an integral part of these financial statements.
PAGE 36
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(Expressed in United States Dollars)
Years Ended December 31,
------------------------------------------------
2001 2000 1999
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Reinsurance premiums collected $ 48,312,795 $ 64,624,446 $ 54,936,354
Reinsurance premiums returned - (24,934,234) -
Losses and acquisition expenses paid (52,571,957) (59,203,627) (52,963,826)
Administrative expenses paid (791,054) (698,452) (672,060)
Investment income received 4,623,433 6,376,462 5,529,962
------------ ------------- -------------
Net cash (used in)/provided by operating activities (426,783) (13,835,405) 6,830,430
------------ ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investments (71,853,926) (173,786,271) (396,939,849)
Sales and maturities of investments 74,210,913 163,430,130 401,478,047
------------ ------------- -------------
Net cash from/(used in) investing activities 2,356,987 (10,356,141) 4,538,198
------------ ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of participating stock 7,500 7,500 15,000
Redemption of participating stock (447,851) (8,811) (219,501)
Dividends paid (3,083,096) (673,134) (4,066,464)
------------ ------------- -------------
Net cash used in financing activities (3,523,447) (674,445) (4,270,965)
------------ ------------- -------------
(DECREASE)/INCREASE IN CASH AND
CASH EQUIVALENTS (1,593,243) (24,865,991) 7,097,663
CASH AND CASH EQUIVALENTS,
beginning of year 1,736,235 26,602,226 19,504,563
------------ ------------- -------------
CASH AND CASH EQUIVALENTS, end of year $ 142,992 $ 1,736,235 $ 26,602,226
============ ============= =============
Years Ended December 31,
------------------------------------------------
2001 2000 1999
---- ---- ----
RECONCILIATION OF NET INCOME TO NET CASH
(USED IN)PROVIDED BY OPERATING ACTIVITIES:
Net income/(loss) $ 5,730,918 $ 3,678,373 $ (3,534,968)
Realized (gains)/losses on investments (1,632,053) 313,531 5,255,474
Change in:
Accrued investment income 114,535 1,350,045 (465,289)
Deferred acquisition costs 1,087,804 520,549 4,242,183
Advances to shareholders (337,500) - -
Prepayments (250) (181,250) (46,000)
Unearned premiums (2,281,343) (2,025,900) (16,301,709)
Reserves for unpaid losses (805,120) 29,471 (668,579)
Accrued liabilities 55,368 (150,163) 126,060
Due (from)/to Motors Insurance Corporation (2,359,142) (17,370,061) 18,223,258
------------ ------------- -------------
NET CASH (USED IN)/PROVIDED BY
OPERATING ACTIVITIES $ (426,783) $ (13,835,405) $ 6,830,430
============ ============= =============
The accompanying notes form an integral part of these financial statements.
PAGE 37
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(Expressed in United States 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 (the
"Common Shareholder") 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
prepared in conformity with accounting principles generally accepted
within the United States of America.
Reclassifications
Certain amounts from 2000 have been reclassified to conform with
2001 classifications.
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 prior to October 1, 2001 and 80% for policy premiums written
by the direct insurer, on and after October, 2001. 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.
Investments
Investments, all of which are available for sale, are comprised 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
PAGE 38
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(Expressed in United States Dollars)
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.
PAGE 39
MOTORS MECHANICAL REINSURANE COMPANY, LIMITED
NOTES TO THE FINANIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(Expressed in United States Dollars)
Note 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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 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 of fifteen years expiring December 31, 2001.
Thereafter, and until December 31, 2016 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.
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).
PAGE 40
MOTORS MECHANICAL REINSURANE COMPANY, LIMITED
NOTES TO THE FINANIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(Expressed in United States Dollars)
Note 3. INVESTMENTS
The cost and fair value of investments in debt securities and
equities are as follows:
Gross Gross
Unrealized Unrealized Fair
Cost Appreciation Depreciation Value
---- ------------ ------------ -----
December 31, 2001:
Governments and
their agencies $45,182,051 $1,221,744 $ -- $46,403,795
Corporations 18,886,693 401,564 -- 19,288,257
Supranationals 8,347,098 405,162 -- 8,752,260
----------- ---------- --------- -----------
Sub-total debt securities 72,415,842 2,028,470 -- 74,444,312
Capital International Fund 16,248,479 -- (259,422) 15,989,057
----------- ---------- --------- -----------
Total $88,664,321 $2,028,470 $(259,422) $90,433,369
=========== ========== ========= ===========
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
=========== ========== ========= ===========
The cost and fair value of debt securities at December 31, 2001, by
contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the
right to call on prepay obligations with or without call or
prepayment penalties.
Fair
Cost Value
Due after one year through five years $16,921,135 $17,591,225
Due after five years through ten years 21,285,275 21,475,038
Due after ten years through thirty years 34,209,432 35,378,049
----------- -----------
$72,415,842 74,444,312
=========== ===========
PAGE 41
MOTORS MECHANICAL REINSURANE COMPANY, LIMITED
NOTES TO THE FINANIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(Expressed in United States Dollars)
Note 3. INVESTMENTS (CONTINUED)
In 2001, gross gains of $2,067,143 and gross losses of $435,090 were
realized. 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 realised.
The following summarizes net unrealized appreciation (depreciation)
on investments:
Balance, December 31, 1998 $ 334,059
Net depreciation (496,518)
----------
Balance, December 31, 1999 $ (162,459)
Net appreciation 2,894,882
----------
Balance at December 31, 2000 $2,732,423
Net depreciation (963,375)
----------
Balance at December 31, 2001 $1,769,048
==========
The investment portfolio is comprised of approximately 82% in
diverse debt securities which do not result in any concentration of
credit risk and 18% in an international equity fund. At December 31,
2001 and 2000 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, 2001, 2000 and 1999:
2001 2000 1999
---- ---- ----
Beginning balance in reserves
for losses $ 4,754,710 $ 4,725,239 $ 5,393,818
---------- ---------- ----------
Add/(deduct) provision for losses
incurred related to:
Current claim year 40,529,340 41,579,713 47,211,542
Prior claim years (1,304,766) (877,045) (427,390)
---------- ---------- ----------
Total 39,224,574 40,702,668 46,784,152
---------- ---------- ----------
Deduct paid losses attributable to:
Current claim year 36,590,250 36,837,642 43,514,155
Prior claim years 3,439,444 3,835,555 3,938,576
---------- ---------- ----------
Total 40,029,694 40,673,197 47,452,731
---------- ---------- ----------
Ending balance in reserves
for losses $ 3,949,590 $ 4,754,710 $ 4,725,239
=========== =========== ===========
As a result of change in estimates of losses incurred in prior
years, the provisions for losses incurred in 2001, 2000 and 1999
decreased by $1,304,766, $877,045 and $427,390 respectively.
PAGE 42
MOTORS MECHANICAL REINSURANE COMPANY, LIMITED
NOTES TO THE FINANIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(Expressed in United States Dollars)
Note 5. STOCKHOLDERS' EQUITY
All of the Company's Common Stock is held by MIC.
During each of the years 2001 and 2000, 1 additional series of 100
shares of Participating Stock was issued. In addition, during 2001
the Board of Directors (the "Board") redeemed ten series of 100
shares which had been previously placed in run off and had reached
fully earned position during 2001. During 2000 the Board redeemed
eight series of 100 shares, which had been previously placed in run
off, of which seven series had reached a fully earned position
during 2000. 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, 2001, 2000 and 1999 costs in the
amount of $106,751, $98,992, and $141,696 respectively, were
incurred in the sale of Participating Stock. The Common Stockholder
reimbursed the Company directly for these expenses.
The Common Stockholder is entitled to elect five directors, at least
one of whom must be a resident of Barbados. The Common Stockholder
has no right to vote with respect to liquidation of the Company. The
Common Stockholder 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 favour 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, 2001 and 2000, there were no funds held in escrow.
Note 6. REINSURANCE PREMIUMS
Under the provisions of the retrocession agreement, the Company will
assume future additional premiums of $29,878,041 ($30,638,488 at
December 31, 2000) 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 $72,350,000 ($76,050,500 at December 31, 2000) 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.
PAGE 43
MOTORS MECHANICAL REINSURANE COMPANY, LIMITED
NOTES TO THE FINANIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(Expressed in United States Dollars)
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, 2002, the Company's required minimum
stockholders' equity computed in accordance with Barbados law was
approximately $5,841,257.
Retained earnings applicable to the Common and Participating
Stockholders are comprised of the following:
Common Participating Total
------ ------------- -----
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)
Dividend paid -- (4,066,464) (4,066,464)
Redemption of participating stock -- 162,999 162,999
-------- ----------- -----------
Balance, December 31, 1999 $ 14,234 $13,176,342 $13,190,576
-------- ----------- -----------
Common Participating Total
------ ------------- -----
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
Dividend paid -- (673,134)
(673,134)
Redemption of participating stock -- 51,189 51,189
-------- ----------- -----------
Balance, December 31, 2000 $ 25,951 $16,221,053 $16,247,004
Net income for the year 19,868 5,711,050 5,730,918
Dividend paid -- (3,083,096) (3,083,096)
Redemption of participating stock -- (372,852) (372,852)
-------- ----------- -----------
Balance, December 31, 2001 $ 45,819 $18,476,155 $18,521,974
======== =========== ===========
PAGE 44
MOTORS MECHANICAL REINSURANE COMPANY, LIMITED
NOTES TO THE FINANIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(Expressed in United States Dollars)
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 paid the Company a recapture commission of
$6,482,901 which represents the deferred portion of the ceding
commission previously paid by the Company.
PAGE 45
PART III
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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 9,
2001 and one director was elected by the holders of the Shares at such meeting.
The directors and officers of the Company are as follows:
NAME AGE POSITION WITH THE COMPANY
(AND OTHER EMPLOYMENT DURING
PAST FIVE YEARS)
William B. Noll 59 Chairman, Chief Executive Officer, President and Director
(President, Motors Insurance Corporation ("MIC"), 1999 to
present; Executive Vice-President & Chief Financial Officer,
MIC, 1993-1999).
Mr. Noll became President and Director in 1995.
Thomas D. Callahan 49 Executive Vice-President and Director
(Senior Vice President, MIC, 1998 to present;
Vice-President, MIC, 1994-1998).
Mr. Callahan became Executive Vice-President
and Director in April of 1999.
John J. Dunn, Jr. 43 Vice-President and Director (Vice-President and Treasurer,
MIC, 1998 to present; Assistant Treasurer, MIC, 1995-1998;
manager, Coopers & Lybrand, L.L.P.).
Mr. Dunn became Vice-President and
Director in 1996.
Robert E. Capstack. 61 Vice-President and Director (Section Manager,
MIC, 1994 to present; Vice-President, GMAC Securities
Corporation, 1999).
Mr. Capstack became Vice-President and Director in April of
1999.
Peter R. P. Evelyn 60 Director (Attorney, 2002 to present; Partner, Evelyn,
Gittens & Farmer, a Barbados law firm (1986-2002).
Mr. Evelyn became a Director in 1986.
PAGE 46
J. Theodore Linhart 54 Director (Chairman and CEO, Dominion Auto group, 1995 to
present).
Mr. Linhart became a Director in May of 2001.
Ronald W. Jones 49 Vice-President, Finance (Deputy Chairman, Aon Insurance
Managers (Barbados) Ltd. (1986 to present)).
Mr. Jones has served as Vice-President, Finance since 1987.
Michael B. Boyce 62 Secretary (Principal, Colybrand Company Services, Limited,
Barbados, 1993 to present; 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 next
annual meeting of shareholders following their election.
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
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. 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. J. Theodore Linhart, a director, owns
100 shares of Participating Stock.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Item 1, THE RETROCESSION, INSURANCE MANAGEMENT AGREEMENT and Item 11,
EXECUTIVE COMPENSATION.
PAGE 47
PART IV
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, 2001 and 2000.
(iii) Statements of Operations and Retained Earnings for the
years ended December 31, 2001, 2000 and 1999.
(iv) Statements of Cash Flows for the years ended December
31, 2001, 2000 and 1999.
(v) Statement of Changes in Stockholders' Equity for the
years ended December 31, 2001, 2000 and 1999.
(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.
PAGE 48
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.
20(a) Proxy solicitation materials sent to shareholders in
connection with annual meeting held on April 22, 1999,
filed by reference to Exhibit 20(b) to Annual Report
on Form 10-K, File No. 33-6534, for the year ended
December 31, 1996.
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, 2001 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 15, 2002
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 March 27, 2002
William B. Noll Officer, President and
Director
PAGE 49
s/ Thomas D. Callahan Executive Vice-President and March 25, 2012
Thomas D. Callahan Director
s/ John J. Dunn, Jr. Vice-President and March 25, 2002
John J. Dunn, Jr. Director
s/ Robert E. Capstack Vice-President and March 22, 2002
Robert E. Capstack Director
Director
J. Theodore Linhart
s/ Peter R. P. Evelyn Director March 25, 2002
Peter R. P. Evelyn
s/ Ronald W. Jones Vice-President March 15, 2002
Ronald W. Jones Finance, Principal
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
No annual report with respect to 2000 was distributed to shareholders. The
proxy solicitation materials that were sent to shareholders in connection with
the Registrant's annual meeting held May 9th, 2001 have been previously filed
with the Commission. The Registrant does not intend to send an annual report
with respect to 2001 to shareholders and the Registrant has not sent proxy
solicitation materials with respect to the Registrant's annual meeting to be
held May 8, 2002, as of the filing of this report.