Registration No. 333-82365
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POST EFFECTIVE AMENDMENT NO. 4 TO
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
(Exact name of registrant as specified in charter)
Barbados Not Applicable
(State or other jurisdiction of incorporation or (I.R.S. employer
organization) identification number)
One Financial Place
Collymore Rock
St. Michael, Barbados, W.I.
(246) 436-4895
(Address, including zip code, and telephone number, including
area code, of principal executive office)
RONALD W. JONES, Vice-President, Finance
Motors Mechanical Reinsurance Company, Limited
One Financial Place
Collymore Rock
St. Michael, Barbados, W.I.
(246) 436-4895
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copy to:
George R. Abramowitz, Esq.
Douglas N. Beck, Esq.
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
1875 Connecticut Avenue, N.W.
Washington, D.C. 20009
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the Registration becomes effective.
In accordance with Rule 429 under the Securities Act of 1933, the prospectus
contained in this registration statement relates to securities previously
registered under Registration Statement on Form S-2, File No. 033-60105.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [X]
If the registrant elects to deliver its latest annual report to
security-holders, or a complete and legible facsimile thereof, pursuant to Item
11(a)(i) of this form, check the following box. [ ]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that the registrant statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the SEC, acting pursuant to section 8(a), may
determine. [ ]
P R O S P E C T U S
Motors Mechanical Reinsurance Company, Limited
12,000 Shares of Participating Stock
We are a Barbados company engaged in the business of reinsuring risks covering
motor vehicle mechanical repairs.
The participating shares being offered by this prospectus are divided into 120
series, and the authorized number of participating shares of each series is 100.
The offering price is $75.00 per participating share. All Amounts Of Currency
Shown In This Prospectus Are Stated In U.S. Dollars.
We will issue participating shares only to persons certified by the owners of
entities selling motor vehicles to be identified with that series and only if we
receive stock purchase agreements executed by such persons that are acceptable
to us in our sole discretion.
No underwriting discounts or commissions will be paid in connection with the
offering of participating shares. The participating shares are not listed on any
national securities exchange or the Nasdaq Stock Market.
Investing in our participating shares involves risks. See "Risk Factors" (page
2).
Neither The Securities And Exchange Commission Nor Any State Securities
Commission Has Approved Or Disapproved These Securities Or Passed Upon The
Accuracy Or Adequacy Of This Prospectus. Any Representation To The Contrary Is A
Criminal Offense.
The date of this Prospectus is June , 2002.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO DEALER, SALESMAN, OR OTHER PERSON IS
AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION
WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON.
FOR ARIZONA, MASSACHUSETTS AND MISSOURI INVESTORS
NO SHARES MAY BE OFFERED TO OR PURCHASED BY RESIDENTS OF ARIZONA, MASSACHUSETTS
OR MISSOURI UNLESS THE PURCHASER IS (I) AN OWNER OF THE ENTITY WITH RESPECT TO
WHICH THE PARTICIPATING SHARES ARE ISSUED, (II) A MEMBER OF THE FAMILY OF ONE OF
THE OWNERS OF THE ENTITY WITH RESPECT TO WHICH THE PARTICIPATING SHARES ARE
ISSUED, (III) A TRUST FOR THE BENEFIT OF PERSONS OTHERWISE ELIGIBLE TO PURCHASE
SHARES, (IV) A CORPORATION OR PARTNERSHIP CONTROLLED BY AN OWNER OF THE ENTITY
WITH RESPECT TO WHICH THE PARTICIPATING SHARES ARE ISSUED, OR (V) A KEY EMPLOYEE
WITH RESPECT TO SUCH ENTITY.
FOR FLORIDA INVESTORS
THE SECURITIES BEING OFFERED HEREBY HAVE NOT BEEN REGISTERED WITH THE FLORIDA
DIVISION OF SECURITIES. ANY SALE MADE PURSUANT TO THIS PROSPECTUS MAY BE VOIDED
BY THE PURCHASER WITHIN THREE DAYS OF THE FIRST TENDERING OF CONSIDERATION.
FOR MISSISSIPPI INVESTORS
THE COMMISSIONER OF INSURANCE OF THE STATE OF MISSISSIPPI (THE "MISSISSIPPI
INSURANCE COMMISSIONER") HAS NOT APPROVED OR DISAPPROVED THIS OFFERING, NOR HAS
THE MISSISSIPPI INSURANCE COMMISSIONER PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS.
FOR NEBRASKA INVESTORS
ALL NEBRASKA INVESTORS DESIRING TO PURCHASE PARTICIPATING STOCK SHALL FORWARD
THEIR EXECUTED STOCK PURCHASE AGREEMENTS, CERTIFIED OR CASHIER'S CHECK PAYABLE
TO MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED, AND CERTIFICATION OF
ELIGIBILITY TO:
GMAC SECURITIES CORPORATION
300 Galleria Officentre
Suite 200
Mail Code 480-300-206
Southfield, MI 48034
ATTENTION: ROBERT E. CAPSTACK
TABLE OF CONTENTS
SUMMARY........................................................................1
RISK FACTORS...................................................................2
ELIGIBILITY TO PURCHASE THE SHARES.............................................5
USE OF PROCEEDS................................................................5
DETERMINATION OF OFFERING PRICE................................................6
DIVIDENDS......................................................................6
OUR BUSINESS...................................................................7
SELECTED FINANCIAL DATA........................................................9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS........................................................10
MANAGEMENT....................................................................16
DIRECTORS AND OFFICERS.....................................................16
CERTAIN TRANSACTIONS..........................................................17
DESCRIPTION OF CAPITAL STOCK..................................................17
ALLOCATIONS TO SUBSIDIARY CAPITAL ACCOUNTS.................................17
VOTING RIGHTS..............................................................20
REDEMPTION.................................................................21
LIQUIDATION................................................................21
RESTRICTIONS ON TRANSFER...................................................21
COMMON STOCK...............................................................22
BARBADOS CORPORATE LAW PROVISIONS..........................................22
PLAN OF DISTRIBUTION..........................................................23
PURCHASE PROCEDURES........................................................23
TERMS OF SALE..............................................................23
CONDITIONS OF SALE.........................................................24
TERMINATION OF OFFERING....................................................24
UNITED STATES FEDERAL TAX CONSIDERATIONS......................................24
UNITED STATES-- BARBADOS INCOME TAX TREATY.................................24
UNITED STATES PREMIUM EXCISE TAX...........................................25
UNITED STATES FEDERAL INCOME TAX RISKS AND CONSEQUENCES TO US..............25
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES-- THE SHAREHOLDERS...........26
LEGAL MATTERS.................................................................27
EXPERTS.......................................................................27
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.............................27
ADDITIONAL INFORMATION........................................................28
SUMMARY
The following summary highlights important information about our business and
about this offering. Because it is a summary, it does not contain all the
information you should consider before investing in our participating shares.
You should read the entire prospectus, including the financial statements and
notes to the financial statements, before you decide to buy participating
shares.
OUR BUSINESS
We are a Barbados reinsurance company located at One Financial Place, Collymore
Rock, St. Michael, Barbados, and our telephone number is (246) 436-4895. We
assume risks with respect to motor vehicle repairs that are covered under motor
vehicle mechanical service agreements sold to purchasers of new and used motor
vehicles. These risks are initially insured under policies that are issued
either to General Motors Corporation or its affiliates, or to automobile
dealers, and reinsured by Motors Insurance Corporation. We then assume the risks
under these policies from Motors Insurance Corporation. (See "Our Business.")
THE OFFERING
Securities Being
Offered............................. Shares of participating stock, not to
exceed 12,000 shares, in series of 100
shares each, without nominal or par value.
(See "Description of Capital Stock.")
Offering Price...................... $75.00 per share, or $7,500 per series.
Terms of Offering................... We issue series of participating shares
with respect to specific MIC Mechanical
Accounts. An "MIC Mechanical Account"
refers to the record maintained by Motors
Insurance Corporation with respect to
motor vehicle mechanical service
agreements sold by one or more entities
that sell motor vehicles. Only one series
of participating shares will be issued
with respect to each MIC Mechanical
Account. To be eligible to purchase
participating shares, you must be
certified to purchase shares by the owners
of the entity for which the MIC Mechanical
Account is maintained. We will not issue
any participating shares of a series
unless all shares of that series are
purchased by you or other eligible
persons. (See "Eligibility to Purchase the
Shares.")
Offering Period..................... This offering commenced in May of 2000 and
participating shares will be offered and
sold on a continuous basis unless we
terminate the offering. All funds paid by
purchasers of participating shares will be
held in an escrow account at Barclays Bank
PLC in Bridgetown, Barbados until we
accept the purchaser's stock purchase
agreement. Once we accept the stock
purchase agreement, the funds will be paid
to us and shares will be issued.
Purchase Procedure.................. To purchase participating shares, you must
send the following to us: (1) two executed
stock purchase agreements; (2)a certified
or cashier's check in the amount of the
purchase price of the participating shares
payable to "Motors Mechanical Reinsurance
Company, Limited-- Escrow Account";and
(3)a certification of eligibility. (See
"Eligibility to Purchase the Shares.")
Restrictions on
Transfer............................ Generally, you will not be able to
transfer participating shares unless you
have first offered us the opportunity to
purchase the shares. In addition to
allowing us an option to purchase the
shares, if you want to transfer less than
all of the shares of a series, you will
generally need to obtain our prior written
consent. (See "Description of Capital
Stock -- Restrictions on Transfer.")
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Voting Rights....................... As a holder of participating shares, you
and the other holders of participating
shares will be entitled to elect one out
of six members of our board of directors.
Your right to vote on other matters will
be limited. (See "Description of Capital
Stock -- Voting Rights.")
Risk Factors........................ This investment is subject to significant
risks. (See "Risk Factors.")
Capital Structure................... As of May 1, 2002, there were 25,000
participating shares representing 250
series issued and outstanding and held by
448 shareholders. In addition, we have
issued 2,000 shares of our common stock to
Motors Insurance Corporation that remain
outstanding.
Use of Proceeds..................... We will add the proceeds of this offering
to our general funds and utilize these
funds in our reinsurance business.
(See "Use of Proceeds.")
Plan of Distribution................ The participating shares are being
offered, on a continuous basis, by
registered representatives of GMAC
Securities Corporation, a broker-dealer
affiliate of Motors Insurance Corporation.
No commissions are charged or paid in
connection with the sale of the
participating shares.
RISK FACTORS
An investment in our participating shares is subject to significant risk. Before
you decide to purchase participating shares, please carefully consider the
following risk factors:
We Are Controlled By and Dependent Upon Motors Insurance Corporation
Motors Insurance Corporation owns all of our common stock. This permits Motors
Insurance Corporation to control our board of directors and determine, among
other things, the selection of our officers, management company and investment
adviser. We have entered into a retrocession agreement with Motors Insurance
Corporation. Under this agreement, we assume (reinsure) risks of Motors
Insurance Corporation under insurance policies covering motor vehicle mechanical
service agreements. We rely exclusively on this retrocession agreement and,
thus, on Motors Insurance Corporation for our business. Therefore, any matters
adversely affecting Motors Insurance Corporation may have an adverse impact on
our business. In addition, under the retrocession agreement, Motors Insurance
Corporation has the ability to limit our reinsurance with respect to particular
MIC Mechanical Accounts. This could adversely affect the value of your
participating shares. (See "Our Business;" and "Description of Capital Stock.")
Under the retrocession agreement, we are required to reimburse Motors Insurance
Corporation for all claims paid by Motors Insurance Corporation with respect to
the motor vehicle mechanical service agreements that are covered by the
retrocession agreement. We may, at our own expense, participate with Motors
Insurance Corporation in the defense of any claim. However, Motors Insurance
Corporation generally has full authority to investigate and settle, or defend,
all claims.
The retrocession agreement does not specify a date upon which it will terminate.
The agreement may generally be terminated at any time by either Motors Insurance
Corporation or by us upon 30 days written notice. If the retrocession agreement
is terminated, we may not be able to continue to operate in the manner described
in this prospectus.
Restrictions Applicable to Motors Insurance Corporation's Ability to Retrocede
Risks to Us
Motors Insurance Corporation believes that there is no federal or state law or
regulation that limits its ability to retrocede (assign) to us its risks with
respect to the motor vehicle mechanical service agreements. However, certain
state insurance laws and regulations are imprecise and subject to varied
interpretations. Accordingly, it is possible that a state administrator could
attempt to limit the retrocession arrangement between Motors Insurance
Corporation
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and us on the grounds that we are a non-United States company or a company that
is affiliated with the ceding company (i.e. Motors Insurance Corporation) or its
producers (i.e. the entities selling the motor vehicle mechanical service
agreements). In addition, from time to time, there are legislative and
regulatory proposals that could, if adopted, affect the ability of Motors
Insurance Corporation to retrocede its liability under the motor vehicle
mechanical service agreements to us.
Extension of New Vehicle Warranties Could Adversely Affect Our Business
Our business is largely dependent upon sales of motor vehicle mechanical service
agreements. Therefore, our business could be adversely affected by changes in
warranties provided by manufacturers for new motor vehicles that limit the need
for, and sales of, motor vehicle mechanical service agreements. For example, if
warranties provided by manufacturers are expanded, there could be an adverse
effect on the sales of motor vehicle mechanical service agreements, and thus on
our business.
Losses Paid With Respect to Motor Vehicle Mechanical Service Agreements and
Other Expenses May Exceed Our Income
The amount of losses that are incurred under motor vehicle mechanical service
agreements are unpredictable and highly volatile. If the amount of losses and
expenses we incur under the motor vehicle mechanical service agreements combined
with our other expenses exceeds the amount of premium we earn and our investment
income, we would incur net losses. For the year ending December 31, 1999, we
incurred net losses of $3,534,968.
Each series of participating shares generally bears 100% of the losses incurred
with respect to motor vehicle mechanical service agreements sold by the entity
with respect to which the shares are issued. To the extent losses incurred with
respect to motor vehicle mechanical service agreements sold by the entity with
respect to which your participating shares are issued are substantial, you might
lose all or a portion of your investment even if other holders of participating
shares do not experience a similar loss. In addition, under certain
circumstances, losses incurred with respect to motor vehicle mechanical service
agreements other than those sold by the entity with respect to which your shares
are issued, may be allocated to the account maintained for your shares.
Investment Related Risks
Our profitability depends in part on the amount of income we earn on our
investments. There is a risk that we will not earn a net investment return
which, when added to our earned premium, will be sufficient to offset our
liability for claims and expenses. In addition, we could suffer investment
losses due to declines in the market values of securities in which we invest
which may be caused by, among other things, volatile interest rates or
conditions in equity markets.
We invest primarily in debt instruments that are not subject to U.S. withholding
tax. In addition, we are permitted to invest a portion, not to exceed 30%, of
our portfolio in equity securities, including securities issued by non-U.S.
issuers. Investing in securities issued outside the United States subjects us to
certain risks not generally associated with securities issued in the United
States. These risks include:
o fluctuations in currency exchange rates;
o lack of standard financial and accounting information; and
o lack of liquidity in such securities.
United States Tax Risks
We conduct a reinsurance business in Barbados. We execute and administer our
retrocession agreements and manage our business affairs from Barbados. On this
basis, we believe that we should not be deemed to be engaged in business within
the United States through a permanent establishment, and, therefore, we believe
we should not be subject to United States income tax. However, given the factual
nature of the questions involved and certain aspects of our treaty reinsurance
program related to the United States, there can be no assurance that for tax
purposes we
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ultimately will not be deemed to be engaged in business within the
United States through a permanent establishment. In such event, we would be
subject to United States income tax on business profits attributable to such
permanent establishment, as well as an additional 5% branch profits tax.
Under captive insurance company provisions contained in the Internal Revenue
Code, each holder of participating shares generally will be subject to United
States income tax currently on his or her pro rata share of our earnings,
whether or not such earnings are distributed. To the extent that we were subject
to United States income tax on our business profits, the holders of
participating shares would not be subject to current tax on such profits, but
the holders of participating shares would be subject to tax on our actual
distributions with respect to such profits. (See "United States Federal Tax
Considerations -- United States Federal Income Tax Consequences -- The
Shareholders.")
No representation is made as to the effect that any change in United States tax
laws or the interpretation thereof may have on us or holders of participating
shares.
Risks Related to Foreign Business Operations
Our business is conducted outside of the United States and may, consequently, be
affected by changes in foreign governments and by other political and economic
conditions. As a Barbados corporation, we are subject to the provisions of the
Barbados Companies Act, 1982. (See "Description of Capital Stock -- Barbados
Corporate Law Provisions.")
Competition and Loss of Business
The business of insuring risks under motor vehicle mechanical service agreements
is highly competitive, with many companies seeking to insure motor vehicle
mechanical service agreements sold by entities selling motor vehicles. Since all
of our business is currently derived from the retrocession agreement with Motors
Insurance Corporation, the volume of our business is dependent, to some extent,
upon the marketability of agreements and plans developed by General Motors
Corporation and its subsidiaries, including Motors Insurance Corporation, and
offered through motor vehicle dealers. In addition, General Motors may choose
not to insure its liability under mechanical repair plans with Motors Insurance
Corporation or its subsidiaries which would limit our business.
Barbados Regulatory Limitations May Restrict The Amount of Our Business
Barbados insurance law requires that we maintain certain levels of capital and
surplus in relation to the amount of premium we earn. To the extent that our net
asset value does not meet these minimum requirements and to the extent that the
capital and surplus attributable to a particular series of participating shares
does not support the business attributable to such series, we may reduce the
amount of our business attributable to such deficient series.
We Are Dependent on Outside Consultants
We do not have any full-time officers or employees. We rely on outside
consultants for insurance management, day-to-day administrative services, and
investment advice. In the event that our relationship with any of these
consultants were to terminate, we may have difficulty finding replacements. (See
"Our Business.")
Our Ability to Pay Dividends is Subject to Certain Restrictions
Although our articles of incorporation require that we pay a minimum annual
dividend to holders of participating shares under certain circumstances, we will
not be able to pay any dividend unless such payment is in compliance with
Barbados insurance regulatory requirements, the Barbados Companies Act and other
limitations provided in our articles. (See Appendix A; and "Dividends.")
There Is No Public Market For Our Stock and There are Restrictions on Transfers
There is no public market for the participating shares, and we don't expect one
to develop. In addition, the participating shares are subject to substantial
restrictions on transfer. Except for transfers to some members of a
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transferor's family, some trusts, some business affiliates, or estates, a
transfer of any series of shares is subject to our right of first refusal, and a
transfer of less than all of the shares of a series cannot be made without our
express written consent. All transferees must agree to be bound by the
provisions of a stock purchase agreement, including, among other things,
restrictions on the transfer of their shares. (See "Description of Capital Stock
- -- Restrictions on Transfer," "Eligibility to Purchase the Shares," and "Plan of
Distribution.")
We Have the Right to Redeem Shares
We have the right to redeem participating shares of any series at any time and
for any reason. This would permit us, among other things, to redeem your shares,
at our discretion, if loss experience with respect to the motor vehicle
mechanical service agreements sold by the entity or entities with respect to
which your participating shares are issued, is unsatisfactory. We also may
reject any request for redemption by a shareholder. (See "Description of Capital
Stock -- Redemption.")
ELIGIBILITY TO PURCHASE THE SHARES
Participating shares ("Shares") of a series may be purchased only by an
individual or entity certified by all the owner(s) of the entity or entities for
which an MIC Mechanical Account is maintained as a purchaser of all or part of a
series of Shares in respect of such MIC Mechanical Account ("Eligible
Purchaser"). An "MIC Mechanical Account" is the separate business record
maintained by Motors Insurance Corporation ("MIC") or any of its subsidiaries to
track volume, experience, and commissions with respect to motor vehicle
mechanical service agreements sold by one or more particular entities selling
new and/or used motor vehicles. There are no formal eligibility requirements for
certification. The owners of the entity or entities for which an MIC Mechanical
Account is maintained have complete discretion with respect to whom they choose
to certify as Eligible Purchasers (including themselves), provided that all
beneficial owners of the entity or entities for which an MIC Mechanical Account
is maintained consent to such designation. In addition, we have complete
discretion to accept or reject any offer to purchase Shares. No more than one
series of Shares is issued with respect to each MIC Mechanical Account. No
Shares of a series are issued unless executed stock purchase agreements (see
Appendix B) for all Shares of that series have been received and accepted by us.
A prospective purchaser is considered to be properly certified when we have
received a certificate in the form furnished by us (see Appendix C) from each
owner of the entity or entities for which an MIC Mechanical Account is
maintained stating that the prospective purchaser has been designated by such
owner(s) to be eligible to purchase the particular Shares and representing that
all beneficial owners of the entity or entities for which an MIC Mechanical
Account is maintained have consented to such designation. In addition, the
prospective purchaser must execute a stock purchase agreement, in the form
approved by us (see Appendix B) and forward that agreement, together with
payment for the Shares purchased, to us. Stock purchase agreements are subject
to acceptance by us. (See "Plan of Distribution.")
The transfer of Shares is subject to restrictions. If less than all the Shares
of a series are transferred, we must give our consent. In addition, we have a
right of first refusal to purchase any Shares which the holder attempts to
transfer. However, a transfer is not subject to either of the foregoing
restrictions if the transferee falls into one of the categories of designated
transferees set forth in our articles of incorporation. (See "Description of
Capital Stock -- Restrictions on Transfer.")
USE OF PROCEEDS
The offering of the Shares pursuant to this prospectus is being made on a
continuous basis. This means that it is not possible to predict how many series
of Shares will ultimately be purchased or the maximum net proceeds to be derived
by us from this offering.
The proceeds derived from this offering are added to our general funds to
provide a pool of funds for the payment of future claims in the event premiums
prove insufficient to cover such claims. Under Barbados law, we are required to
have minimum net assets, determined by reference to our annual earned premium.
All of our available capital, including the proceeds of this offering, is
invested in accordance with guidelines established by our board of directors. We
believe that the proceeds derived from this offering will be sufficient,
together with our other capital, to support our insurance operations for the
foreseeable future.
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We establish a bookkeeping record for each particular series of Shares or class
of stock which we maintain for the purpose of accounting for items of income and
expense, gains and losses, capital contributions, and shareholder distributions
which are allocated to the particular series of Shares or class of stock
("Subsidiary Capital Account"). The consideration we receive upon issuance of a
series of Shares is allocated to the Subsidiary Capital Account established with
respect to that series of Shares. (See "Description of Capital Stock -
Allocations to Subsidiary Capital Accounts.")
DETERMINATION OF OFFERING PRICE
There is no public trading market for the Shares nor is one expected to develop.
The price per Share reflects our projected capital needs and bears no
relationship to any valuation criteria.
DIVIDENDS
Dividends may be declared and paid at the discretion of our board of directors,
provided that, subject to the restrictions described in the following
paragraphs, each holder of Shares of a series will be entitled to receive a
minimum dividend, payable in the following year, equal to 20% of the annual net
income attributable to the Subsidiary Capital Account associated with that
series of Shares.
Pursuant to the general corporate laws of Barbados, dividends on the Shares are
payable only if after the payment: (a) we would be able to pay our liabilities
as they come due; and (b) the realizable value of our assets exceeds our
liabilities and stated capital. Dividends may not be paid out of unrealized
profits. Further, under Barbados insurance law, we are required to maintain a
minimum capitalization of $125,000 and, in addition, the recorded value of our
assets must exceed our liabilities by: (a) $125,000 where our earned premium in
the preceding financial year did not exceed $750,000; (b) an amount equal to 20%
of our earned premium for the preceding financial year, where such income
exceeded $750,000 but did not exceed $5,000,000; and (c) an amount equal to the
aggregate of $1,000,000 and 10% of the amount by which our earned premium for
the preceding financial year exceeded $5,000,000. (See "Description of Capital
Stock -- Barbados Corporate Law Provisions.")
In addition to the provisions of Barbados law, our articles of incorporation
place limitations on the payment of dividends. Dividends may be declared and
paid only out of our earned surplus and only if, after giving effect to the
distribution, we meet the Barbados margin of solvency requirements without
regard to any letters of credit. Further, dividends with respect to any series
of Shares may be paid only out of earned surplus attributable to the Subsidiary
Capital Account identified with those Shares, and only to the extent that, after
giving effect to the dividend, the capital and surplus identified with that
Subsidiary Capital Account (without regard to any guarantee or letter of credit)
would meet its pro rata share, based on allocable earned premium, of the minimum
margin of solvency required of us under Barbados law, as described in the
preceding paragraph. To the extent that we declare a dividend, other than a
minimum dividend, on the Shares, it will be declared and paid subject to the
foregoing limitations on all series of Shares as a percentage of the net income
and/or earned surplus attributable to each series, provided that such percentage
may vary with the level of net income and/or earned surplus.
In March of 2002 and 2001 and May of 2000, we declared dividends on the Shares
aggregating $4,318,225, $3,083,096 and $673,134, respectively. These dividends,
in each case, were declared as a varying percentage of earned surplus
attributable to each series of Shares with the percentage applicable to each
series depending on the amount of earned surplus attributable to such series.
The applicable percentages were 4% to 54% for dividends declared in 2002, 0% to
50% for dividends declared in 2001, and 3% to 25% for dividends declared in
2000.
The payment of dividends on our common stock (the "Common Stock"), all of which
is held by MIC, is also subject to the restrictions under Barbados law and our
articles of incorporation. In addition, our articles of incorporation provide
that dividends may not be declared or paid on the Common Stock unless and until
each holder of Shares of a series has received any minimum dividend to which he
is entitled for the current period and may be declared and paid only to the
extent that the earned surplus attributable to the Common Stock exceeds
Restricted Earned Surplus (as defined in "Description of Capital Stock --
Allocations to Subsidiary Capital Accounts").
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OUR BUSINESS
We were incorporated under the laws of Barbados on June 12, 1986. We became
registered as a licensee under the Barbados Exempt Insurance Act, 1983 to carry
on the business of an Exempt Insurance Company from within Barbados on June 30,
1986 and commenced operations in December, 1987. Our registered and principal
offices are located in St. Michael, Barbados. We were organized by MIC. All of
MIC's outstanding stock is owned by GMAC Insurance Holdings, Inc., a subsidiary
of General Motors Acceptance Corporation which, in turn, is a wholly owned
subsidiary of General Motors Corporation.
Our business is the assumption of risks arising under motor vehicle mechanical
service agreements sold to purchasers of motor vehicles. These plans provide
coverage against specific motor vehicle mechanical breakdowns during the
manufacturer's new vehicle warranty period that are not attributed to
manufacturing defects and coverage for certain specified mechanical breakdowns
(whether or not caused by manufacturing defects) beyond the period covered by
the manufacturer's warranty. The risk of loss under these plans is covered by
insurance policies that are issued either to General Motors or its affiliates,
or to automobile dealers, reinsured by MIC, and retroceded to us to the extent
that such policies are attributable to an MIC Mechanical Account in respect of
which a series of Shares is issued and outstanding, provided, that fleet
coverages, medium duty truck business and maintenance plans are not reinsured.
Reinsurance is a means of transferring the risk of loss arising under a contract
of insurance from the company that initially insured the risk to the reinsurer.
Retrocession is the transfer of the risk borne by the reinsurer (the
"retroceding company") to another company which, in turn, assumes such risk (the
"retrocessionaire"). Retrocession agreements are of numerous different types and
may be individually negotiated by the parties to meet particular needs. Under a
"quota share" indemnity retrocession agreement, such as the retrocession
agreement between MIC and us, the retrocessionaire (us) is paid ("ceded") a
certain percentage of the premiums collected by the retroceding company (MIC)
and, in return, agrees to indemnify the retroceding company for a certain
percentage of the losses in respect of those risks. Further, a "treaty"
arrangement, such as is involved here, covers all risks of a defined class.
Under the terms of the retrocession agreement with MIC, we assume 100% of each
risk retroceded to us by MIC in return for which we receive 100% of the gross
premium with respect to the risk. We pay a ceding commission to MIC in an amount
equal to (i) 20% of the premium ceded to us that is attributable to risks
arising under motor vehicle mechanical service agreements that are sold on or
after October 1, 2001, and (ii) 25% of the premium ceded to us that is
attributable to risks arising under motor vehicle mechanical service agreements
that are sold prior to October 1, 2001.
A major source of income to us is income earned on the investment of amounts not
currently required to meet claims or expenses. The funds available for
investment by us come primarily from accumulated capital and from unearned
premiums and are invested in accordance with investment policies and guidelines
adopted by our board of directors. Our investment portfolio consists of U.S.
dollar denominated fixed income securities and shares of a U.S. dollar
denominated international equity fund. In February of 2000, we implemented new
investment guidelines and entered into an agreement with BlackRock
International, Ltd. ("BlackRock") pursuant to which BlackRock manages the
investment and reinvestment of our fixed income investments. Permitted
investments under these new guidelines, which were fully implemented by the end
of 2000, include U.S. Treasury and agency securities, mortgage-backed securities
backed by loans secured by residential multifamily and commercial properties,
obligations of U.S. and non-U.S. corporations, asset backed securities, taxable
municipal securities, and money market instruments. In addition to our fixed
income investments, we may invest a portion of our portfolio, not to exceed 30%,
in equity securities, including securities issued by non-U.S. issuers. We have
purchased shares of a fund organized in Luxembourg that invests in such
securities. At December 31, 2001, based on fair market value, approximately 18%
of our investment portfolio was in equity securities and the remaining 82% was
held in cash and U.S. dollar denominated fixed-income securities.
For managing the investment and reinvestment of our non-equity investments,
BlackRock charges a management fee calculated as a percentage of the net asset
value of our portfolio that they manage. The applicable percentage is based on
the aggregate amount of assets managed by BlackRock on behalf of us 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.
7
We have entered into an Insurance Management Agreement (the "Management
Agreement") with Aon Insurance Managers (Barbados) Ltd. (the "Manager"),
pursuant to which the Manager collects and disburses funds on our behalf,
provides accounting, clerical, telephone, facsimile, information management and
other services for us, and advises and consults with us in regard to all aspects
of our retrocession activities. Under the terms of the Management Agreement, we
pay 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, we paid fees to the Manager in the amount of $255,338.
We are a resident of Barbados, as are some of our directors, and some experts
named herein, and all or a substantial portion of our assets and the assets of
such persons are or may be located outside the United States. As a result, it
may not be possible for investors to effect service of process within the United
States upon us or such persons, or to enforce against them judgments obtained in
United States courts predicated upon the civil liability provisions of the
Securities Act of 1933, as amended (the "1933 Act"). We have been advised by our
Barbados counsel, Peter R.P. Evelyn, that there is doubt as to whether Barbados
courts would (1) enforce judgments of United States courts obtained against us
or such persons predicated upon the civil liability provisions of the 1933 Act,
or (2) impose, in original actions in Barbados, liabilities against us or such
persons predicated upon the 1933 Act.
We are subject to the informational requirements of the Securities Exchange Act
of 1934 (the "Exchange Act"), and in accordance therewith file reports and other
information with the Securities and Exchange Commission (the "SEC"). Such
reports and other information can be inspected and copied at the offices of the
SEC, at Room 1024, 450 Fifth Street, N.W., Washington, D.C.; Room 1204,
Kluczynski Federal Building, 230 South Dearborn Street, Chicago, Illinois; and
Room 1102, Jacob K. Javits Building, 26 Federal Plaza, New York, New York.
Copies of such material can be obtained from the Public Reference Section of the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The
information we file with the SEC is also available through the SEC's Internet
site at "http://www.sec.gov."
We furnish to each holder of Shares annual reports containing financial
statements that reflect our overall results and condition and that have been
audited and reported upon by independent public accountants, and quarterly
reports for each of the first three quarters of each fiscal year containing
unaudited financial information. In addition, we furnish to each holder of
Shares of a series quarterly statements containing unaudited financial
information relating to such series. The reports furnished by us contain
information prepared in accordance with accounting principles generally accepted
in the United States.
8
SELECTED FINANCIAL DATA
The following selected financial data for the years ended December 31, 2001,
2000, 1999, 1998 and 1997 have been derived from our audited financial
statements. The data presented for the three months ended March 31, 2002 and
2001 are derived from unaudited financial statements presented elsewhere in this
prospectus and, in our opinion, include all adjustments, consisting of normal
recurring accruals, which are necessary for a fair presentation of the results
of these interim periods presented. The results for the three month period ended
March 31, 2002 are not necessarily indicative of the results to be expected for
the full fiscal year.
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 Unpaid Loss
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 4,167,460
-------------- ------------- ------------- ------------- -------------
*/ 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 the Subsidiary Capital Account established with respect to that series. See
Note 2 to the Financial Statements contained herein.
**/ In 1999, MIC recaptured certain insurance business that had been previously
ceded to us. See Note 9 to the Financial Statements contained herein and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations."
9
Three Months Ended March 31
(unaudited)
2002 2001
---- ----
Premiums Assumed $10,886,397 $12,703,111
----------- -----------
Premiums Earned $12,557,243 $13,529,309
Net Investment Income 1,413,919 1,590,884
----------- -----------
Total Income $13,971,162 $15,120,193
Less Losses and Expenses 12,628,688 13,860,803
----------- -----------
Net Income $ 1,342,474 $ 1,259,390
----------- -----------
March 31, 2002
--------------
Total Assets $111,411,279
Total Unpaid Loss Reserves and Other Liabilities 93,005,136
Stockholders' Equity 18,406,143
Dividends Paid on Participating Shares 4,381,225
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Critical Accounting Policies The reserves for unpaid losses represent the
accumulation of estimates for reported losses and a provision for losses
incurred but not reported, including claim adjustment expenses. For purposes of
establishing loss reserves, we rely 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, you
should carefully evaluate the effect of changes in such variables on the results
of loss projections. 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 contained herein.
Liquidity We expect to generate sufficient funds from operations to cover
current liquidity needs. Our liquidity requirements are related to payment of
insurance losses, administrative expenses, and dividends. Premiums generated by
our reinsurance business, combined with investment earnings plus proceeds from
the sale of Shares, will continue to be our principal sources of funds. We
believe that such funds will be sufficient to meet our liquidity requirements in
2002 and in future years to which our reinsurance liabilities extend. We do not
expect to make any capital expenditures in the foreseeable future.
On March 5, 2002, we authorized the payment of dividends aggregating $4,318,225
to eligible holders of Shares. See "Dividends" for a discussion of dividends
paid and legal restrictions on the payment of dividends.
We had unearned premium reserves of $87,963,276 as of March 31, 2002,
$89,634,122 as of December 31, 2001, and $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, our risk of loss 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 we have limited exposure to risk of
loss prior to expiration of the underlying manufacturer's warranty, most premium
is not recognized as earned until such expiration. Since very little premium is
recognized as earned until the expiration of the underlying warranty, most of
the premium written in any year is recorded as unearned.
The decreases in unearned premium reserves as of March 31, 2002 compared to
December 31, 2001, and in December 31, 2001 compared to December 31, 2000, are
primarily attributable to our placing certain series of
10
Shares into "run-off." When a series of Shares is placed into run-off, we
discontinue assuming any risk or receiving any premiums with respect to motor
vehicle mechanical service agreements that are sold after the date that the
series is placed in run-off, by the entity or entities 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 us that is attributable to such series of Shares
continues to earn out and the unearned premium reserve decreases. As of March
31, 2002, 134 series of Shares were in run-off compared to 132 series of Shares
as of December 31, 2001 and 129 series as of December 31, 2000.
Capital Resources Our capitalization, 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). As of March 31, 2002, our capitalization was
$2,052,500, comprised of paid in capital with respect to the Common Stock of
$200,000 and paid in capital with respct to the Shares of $1,852,500. In
addition, as of March 31, 2002, we had surplus from retained earnings in the
amount of $ $15,370,298. The net decrease in retained earnings form December 31,
2001 is attributable to the dividend payment on March 5, 2002.
The reductions in the amount of paid-in capital with respect to the Shares as of
March 31, 2002 compared with December 31, 2001, and December 31, 2001 compared
with December 31, 2000, are primarily attributable to the redemption of Shares
with no unearned premiums. There were a total of 247 series outstanding as of
March 31, 2002 compared with 250, 259 and 266 series of Shares outstanding at
December 31, 2001, 2000 and 1999, respectively. During 2001, we issued 1 new
series of Shares and redeemed 10 series of Shares for a net decrease of 9
series. During 2000, we issued 1 new series of Shares and redeemed 8 series for
a net decrease of 7 series. We did not issue any Shares during the quarter ended
March 31, 2002.
Barbados law requires that our 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 our net assets are less than mandated by Barbados law,
we have 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 our required capital
and surplus. At January 1, 2002, our 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
Fiscal Years Ended December 31, 2001 and 2000: During the year ended
December 31, 2001, we 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.
We 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,
we 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 into run-off as discussed above, and (iii)
the Redemption and Recapture as defined below.
We 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 (compared to
$40,702,668 and $46,784,152 for 2000 and 1999, respectively), ceding commissions
and excise taxes of $13,858,660 (compared to $14,143,309 and $15,206,934 for
2000 and 1999, respectively) and operating expenses of $749,181 (compared to
$663,358 and $671,587 for 2000 and 1999, 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. The decreases in losses incurred
and loss ratios are primarily attributable to the Redemption and
11
Recapture (as defined below) and the ongoing efforts by MIC to improve
underwriting results with respect to series of Shares that have produced
unprofitable business.
During 1999, as a result of our adverse underwriting results, working with MIC,
we took steps to improve our underwriting performance. In that year, our board
of directors voted to redeem 37 series of Shares that had consistently
experienced adverse underwriting results and that the board determined were
unlikely to experience favorable underwriting results in the future (the
"Redemption"). Because the Subsidiary Capital Accounts for these series each had
a balance of zero, the redemption price for the Shares was zero.
In addition to the redemption, MIC agreed to commute the unearned premium and
all unpaid losses as of the end of the second quarter of 1999 that were
attributable to the 37 series of Shares that the board voted to redeem. In
exchange for assuming these unearned premium and unpaid loss reserves, we 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 us, we would
likely have experienced larger underwriting losses and higher loss ratios for
the years ended December 31, 2001, 2000 and 1999. This redemption of Shares and
recapture of business attributable to such Shares is referred to herein as the
"Redemption and Recapture."
Notwithstanding the Redemption and Recapture, there can be no assurances that we
will not experience significant adverse underwriting results in the future and
there can be no assurances that MIC would recapture additional business from us
if we do experience significant adverse underwriting results.
In 2000 and 2001, we incurred deficits attributable to certain series of Shares
in aggregate amounts of $1,434,902 and $1,423,533, respectively, of which
$1,119,841 and $703,752, respectively, were allocated to profitable series. A
large portion of these deficits were attributable to series of Shares that
produced deficits in both years. There can be no assurance that such series of
Shares, or any other series of Shares will not produce, or continue to produce,
deficits in the future.
We 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 are net of expenses reimbursed 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 our independent
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
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 our
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 in 2000 which was also attributable to the
positive impact of lower interest rates on the value of our 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 our invested assets, (ii) the movement of
investment funds into the equity fund, and (iii) lower interest rates in 2001.
12
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
our 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 our 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).
Pursuant to the Retrocession Agreement, we 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, we had furnished such a letter of credit in the amount of $72,350,000.
Quarter Ended March 31, 2002: During the quarter ended March 31, 2002,
we had net income of $1,342,474, compared with net income of $1,259,390 for the
comparable period in 2001.
Premiums earned decreased slightly to $12,557,243 during the quarter ended March
31, 2002 compared to $13,529,309 for the comparable period in 2001. Expenses
incurred during the quarter ended March 31, 2002 were $12,628,688 compared to
$13,860,803 for the comparable period in 2001. We experienced a net underwriting
loss for the quarter ended March 31, 2002 of $71,445 compared to an underwriting
loss of $331,494 for the comparable period in 2001. The ratio of losses incurred
to premiums earned for the quarter under review was 73.7% compared to 75.0% for
the comparable period in 2001. The decrease in reserves for unpaid losses is
primarily attributable to a change in the estimate of the actuarially required
reserves as of December 31, 2001. Effective October 1, 2001, the ceding
commission charged by the ceding company was reduced from 25% to 20% on all new
business written on and after that date. Other than as noted above, there were
no significant items to report for the quarter ended March 31, 2002.
The moderate decrease in earned premium and expenses as noted above for the
quarter ended March 31, 2002 compared to the comparable period of 2001, was in
large part attributable to the fact that the number of active series of
Participating Shares has been declining over that period and the number of
policies in force is declining.
The reduction in the loss ratio for the quarter ended March 31, 2002 compared to
the comparable period of 2001 is attributable , in part, to the continuing
efforts made by the ceding company to control losses. Otherwise, fluctuations in
loss ratios reflect normal variations in loss experience, which are expected for
the type of business we underwrite.
Investment income for the quarter ended March 31, 2002 was $1,413,919 compared
to $1,590,884 for the comparable period of 2001. During the quarter ended March
31, 2002, we realized gains on the sale of investment securities of $259,176
compared to realized gains of $444,682 during the comparable period of 2001. We
realized gains on the sale of investment securities during the quarter ended
March 31, 2002 as a result of sales of fixed income securities, the value of
which had increased as a result of decreases in market interest rates.
The unrealized appreciation on investments was $983,345 at March 31, 2002
compared to $1,769,048 at December 31, 2001. This decrease is primarily due to a
fall in the market value of fixed income securities as interest rates rose
during March 2002 in response to strengthening economic indicators combined with
the sale of investment securities with unrealized appreciation.
For the quarter ended March 31, 2002, we had interest income of $1,154,743
compared to $1,146,202 for the comparable period of 2001. The total value of
interest earning investments and their related coupon rates remained relatively
unchanged for the periods under review.
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 ourcurrent 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.
13
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are 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 our
operations. We seek to manage our exposure to market risk generally by
monitoring the character of investments that are purchased or sold.
A discussion of our accounting policies for derivative instruments is included
in Note 2 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. We do not hold any financial instruments
for trading purposes.
Interest Rate Risk We have exposure to economic losses due to interest rate risk
arising from changes in the level or volatility of interest rates and we attempt
to mitigate that exposure through active portfolio management. Our 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 our 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, we had approximately 18% and 19%,
respectively, of our 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.
Overall Limitations and Forward-Looking Statements We have 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.
14
MANAGEMENT
DIRECTORS AND OFFICERS
Five of the current members of our board of directors were elected by MIC
through its ownership of the Common Stock at the annual shareholders meeting
held on May 8, 2002 and one director (Harvey J. Koning) was elected by the
holders of the Shares at such meeting. Our directors and officers are as
follows:
NAME AGE POSITION WITH US
(AND OTHER EMPLOYMENT DURING PAST FIVE YEARS)
William B. Noll 59 Chairman and Chief Executive Officer, President and
Director (President, Motors Insurance Corporation
("MIC"), 1999; Executive Vice President & Chief
Financial Officer, MIC, 1993-1999).
Mr. Noll became President and Director in 1995 and
became Chairman and Chief Executive Officer in 1996.
Thomas D. Callahan 49 Executive Vice-President and Director (Senior
Vice-President, MIC, 1998; Vice-President, MIC,
1994-1998).
Mr. Callahan became Executive Vice-President and
Director in 1999.
John J. Dunn, Jr 43 Vice-President and Director (Vice-President and
Treasurer, MIC, 1998; Assistant Treasurer, MIC,
1995-1998; manager, Coopers & Lybrand, L.L.P.)
Mr. Dunn became Vice-President and Director in 1996.
Robert E. Capstack 61 Vice-President and Director (Section Manager, MIC,
1994; Vice-President, GMAC Securities Corporation,
1999).
Mr. Capstack became Vice-President and Director in
1999.
Peter R. P. Evelyn 60 Director (Attorney, 2002; Partner, Evelyn, Gittens &
Farmer, a Barbados law firm, 1987-2002).
Mr. Evelyn has been a Director since 1986.
Harvey J. Koning 61 Director (President, Grand Oldsmobile Center Inc.,
Grand Rapids, Michigan, 1983).
Mr. Koning became a Director in 2002.
Ronald W. Jones 49 Vice-President, Finance (Deputy Chairman & Director,
Aon Insurance Managers (Barbados) Ltd. (formerly
Alexander Insurance Managers) 1987).
Mr. Jones has served as Vice-President, Finance
since 1987.
Michael R. Boyce 63 Secretary (Principal, Colybrand Company Services,
Limited, Barbados, since 1993; previously principal,
Price Waterhouse, Eastern Caribbean).
Mr. Boyce was elected Secretary in 1994. Mr. Boyce
previously served as our Assistant Secretary.
The directors and officers named above serve in those capacities until the
annual meeting of shareholders next following their election.
15
CERTAIN TRANSACTIONS
It is our policy not to make loans to any of our officers, directors, control
persons or other affiliates.
All transactions between us and our officers, directors, employees and
affiliates, will be on terms no less favorable to us than can be obtained from
unaffiliated third parties. Any such transactions will be subject to the
approval of a majority of the members of our board of directors who do not have
an interest in the transaction and who have had access, at our expense, to our
counsel or to independent counsel.
DESCRIPTION OF CAPITAL STOCK
We are currently authorized to issue 2,000 shares of Common Stock, without
nominal or par value per share, all of which have been issued to MIC and are
outstanding. In addition, we are currently authorized to issue 100,000 Shares,
also without nominal or par value per share (collectively, the Shares and the
Common Stock are referred to as the "Capital Stock"). The Shares are issued in
series of 100 shares. As of May 1, 2002, 25,000 Shares representing 250 series
had been issued and were outstanding and were held of record by 448
shareholders. All of the Capital Stock is, when issued and outstanding, fully
paid and nonassessable. No shares of Capital Stock have conversion, preemptive
or sinking-fund rights.
ALLOCATIONS TO SUBSIDIARY CAPITAL ACCOUNTS
We have established a Subsidiary Capital Account with respect to the Common
Stock as a class, and we establish 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 our assets are segregated
or earmarked with respect to those accounts.
The consideration we receive upon the issuance of a particular series of Shares
and the Common Stock as a class is 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 Capital Stock, are determined and allocated to
the Subsidiary Capital Accounts as of the end of each quarter.
For purposes of the following discussion, items shall be "related" to the
Subsidiary Capital Account for the series identified with the MIC Mechanical
Account to which such items can be attributed.
(1) Allocations with respect to underwriting activities are made as follows:
(a) With respect to premiums ceded by MIC to us, 100% to the related
Subsidiary Capital Account; provided, however, that an amount equal to
1% of those premiums 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 and any commissions or ceding 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, 100% to the
related Subsidiary Capital Account.
(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 our day-to-day operations,
excluding any United States Federal income taxes, are allocated among all
Subsidiary Capital Accounts for the Shares pro rata on the basis of the
number of series issued and outstanding at the end of 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
16
calendar months proceeding the end of the fiscal quarter in which the
expense of 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
our taxable income upon which the tax (or any interest or penalties) is
imposed.
(4) Any expenses or liabilities attributable to the sale and issuance of
Shares, including but not limited to the costs of compliance with
regulations and requirements of the SEC 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 of our expenses or liabilities 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 us 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
or which the income is being allocated.
(7) (a) If, after the credits and charges described in paragraphs 1-6 above
are made to the Subsidiary Capital Accounts there exists a deficit in
one or more of the accounts, then each such deficit is allocated to
and charged against:
(i) first, the Subsidiary Capital Account for the Common Stock to the
extent of Restricted Earned Surplus (the phrase "Restricted
Earned Surplus" refers to the portion of the earned surplus, if
any, in the Subsidiary Capital Account for the Common Stock equal
to the amount of premiums ceded to us 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 (to the extent such losses relate to premiums ceded
to such account) and 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;
17
(iii) then, the remaining Subsidiary Capital Accounts for the Shares
with positive balances as of the last day of the quarter for
which the allocation is being made, pro rata, based upon such
balances; and
(iv) then, to the extent necessary, the Subsidiary Capital Account for
the Common Stock.
(b) If, as a result of an allocation of a deficit as described in
subparagraph (ii) or (iii) of paragraph (a) above, a deficit is
created in one or more of the Subsidiary Capital Accounts, then the
resulting deficit(s) are further allocated in the manner provided in
that subparagraph before applying a subsequent subparagraph.
(c) Notwithstanding the foregoing, if any Subsidiary Capital Account for a
series of Shares had a deficit that was allocated to and charged
against the Restricted Earned Surplus or, after January 1, 1995, to
the Subsidiary Capital Account for any series of shares, then at the
end of any succeeding quarter for which that account otherwise would
show an account balance greater than zero, the balance is reallocated
to the Restricted Earned Surplus until all reductions of that surplus
attributable to that Subsidiary Capital Account have been restored and
thereafter, to the Subsidiary Capital Accounts for the Shares, pro
rata based on the relative amount of unrepaid deficits allocated to
such accounts after January 1, 1995, until all reductions after
January 1, 1995 with respect to the series of Shares from which the
reallocation hereunder is being made 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, are
allocated among the Subsidiary Capital Accounts of other participating series.
Any then -unabsorbed losses are charged to the Subsidiary Capital Account of the
Common Stock.
Funds drawn from the Restricted Earned Surplus or the Subsidiary Capital
Accounts for the shares in the manner described above must be restored from the
Subsidiary Capital Account that drew the funds if at any time it returns to a
positive balance.
(8) (a) Dividends, payments upon redemption or liquidation (described below),
and any other distributions with respect to the Capital 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 us pursuant to our
right of first refusal or redeemed in accordance with our procedures
for redemption, the Subsidiary Capital Account for that series will be
terminated as of the last day of the fiscal quarter in which unearned
premium allocated to such account becomes zero. Subsequent to the
repurchase or redemption, 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 paragraph 7(c) above, will be allocated among the
Subsidiary Capital Accounts of the existing series of Shares pro rata
based upon relative earned premiums attributable to such accounts for
the calendar quarter then ending and any net deficit for any such
period will be allocated in accordance with paragraph 7(a) above).
Using the procedures described above, we have allocated items of gain and loss
to the Subsidiary Capital Account for each series. Initially each Account had a
balance of $7,500 representing the amount paid for the Shares of that series.
During the year ended December 31, 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 balances greater
than or equal to $7,500 (ranging from $8,008 to $652,532) and 81 of such series
had 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
18
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 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 our board of directors, and when
finally 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 our procedures for redemption. (See
"Description of Capital Stock -- Redemption.")
Barbados insurance law requires that we maintain certain levels of net assets,
which for this purpose are calculated without taking into account unrealized
gains or losses. We are currently in compliance with these requirements.
However, in the event that we are unable to comply with such requirements in the
future, we have 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 our required capital
and surplus.
VOTING RIGHTS
Subject to the following, holders of Capital Stock are entitled to one vote for
each share held on any question on which the holder is entitled to vote. The
matters on which holders of Capital Stock are entitled to vote, and the relative
voting rights of each class of stock, are set forth below.
Election of Directors The holders of Shares as a class are entitled to elect one
member of our board of directors and one alternate director, and the holders of
Common Stock as a class are entitled to elect five directors and up to five
alternate directors. At least one of the directors must be resident in Barbados.
Cumulative voting is not permitted.
Proxies Any shareholder may appoint another person as his or her proxy to act on
behalf of the appointing shareholder at any of our annual meetings. The
appointment of a person as proxy for a shareholder must be in writing.
Liquidation We may be liquidated upon the vote of at least 75% of the
outstanding Shares. (See "Description of Capital Stock -- Liquidation.")
Changes in Articles and By-Laws No change may be made to our articles of
incorporation or by-laws unless a majority of the Shares, and a majority of the
Common Stock, present in person or by proxy and voting at a meeting at which a
vote on that issue is put forth for a vote, approve the change. In addition, no
amendment may vary the rights associated with any one series unless either the
rights associated with all other series are similarly changed or a majority of
the holders of the Shares of each series present in person or by proxy at a
meeting vote in favor of the amendment.
Other Matters Any matters other than those described above which call for a
shareholder vote require only approval by a majority of the outstanding shares
of Common Stock.
19
REDEMPTION
Pursuant to our articles of incorporation, the Capital Stock may be redeemed as
follows: We may redeem outstanding Shares of a series at any time for any reason
if the redemption of such Shares is approved by a majority of our board of
directors, provided that the director representing the Shares must vote in favor
of the action being taken. The Common Stock is nonredeemable in all
circumstances.
A redemption of Shares is effective as of the date specified by our board of
directors, but no later than the end of the calendar year in which the
redemption was approved by the board of directors. This date is referred to
hereinafter as the "Redemption Date." The consideration payable to the holders
of redeemed Shares will be the Subsidiary Capital Account balance ("Account
Balance") of those Shares as of the Redemption Date, as adjusted by the board of
directors to reflect any contingent liabilities allocable to such account. Each
holder of redeemed Shares will receive the pro rata portion of the Account
Balance that corresponds to the proportionate number of Shares of the series
owned. The Account Balance will be paid within five months of the Redemption
Date and bear interest from the Redemption Date until the date of payment at a
rate equal to the yield on 26-week U.S. Treasury Bills for the issue immediately
following the Redemption Date.
Upon the redemption of Shares on the Redemption Date, the redeemed Shares will
be cancelled and the holders thereof will no longer have any interest in the
Shares redeemed or in the Subsidiary Capital Account with respect to the
redeemed Shares.
LIQUIDATION
Subject to Barbados regulatory and judicial approvals, we may be liquidated upon
the vote of 75% of the outstanding Shares. In the event of liquidation, after
payment of all of our liabilities, each holder of Shares of a series is entitled
to receive his pro rata share of his respective Account Balance before any
distribution of our assets is made to the holder(s) of Common Stock. Thereafter,
the holders of Shares are not entitled to participate further in the
distribution of our assets. Each holder of Common Stock will be entitled to
receive his pro rata share of our remaining assets, if any.
RESTRICTIONS ON TRANSFER
There is no existing public market for the Shares, and it is not anticipated
that one will develop in the future. In addition, our articles of incorporation
set forth a number of restrictions on the manner in which the Shares may be
transferred. These restrictions and certain exceptions thereto are described
below.
Transfers of Less Than All Shares of a Series Subject to the exceptions
described below, transfers of less than all Shares of a series may not be made
unless the transfer is to us, or the holder(s) of the Shares sought to be
transferred has received our written consent. A request for consent must be made
in writing and set forth the name(s) and address(es) of the intended
transferee(s), the desired date of the transfer and the consideration to be
paid. No transfer may otherwise be made by a shareholder of less than all of the
Shares of a particular series that he owns. If we fail to give our written
consent, any subsequent transfer is void and of no effect.
Right of First Refusal Subject to the exceptions described below, transfers of
Shares of a series may not in any event be made unless the holder(s) has
furnished to us a written notice of the intended transfer which notice shall
identify the intended transferee. We may elect, at any time within 60 days of
the receipt of the notice of the proposed transfer, to purchase the Shares
sought to be transferred. If we elect to purchase the Shares, the price will be
the Account Balance for the series of Shares sought to be transferred. A
purchase made by us pursuant to this "right of first refusal" will be deemed
effective upon acceptance by us of the offer to purchase, although payment by us
may be deferred until the end of the quarter in which the offer to purchase is
accepted by us. Shares purchased by us pursuant to this right of first refusal
will be cancelled.
Exceptions for Certain Transfers A transfer of either all or a portion of the
Shares of a series is not subject to either our consent or right of first
refusal where our board of directors determines that the transferee of the
Shares is: (1) a member of the transferring shareholder's immediate family; (2)
a trust for the benefit of the transferring shareholder or for the benefit of
other exempted transferees described in this paragraph; (3) if the transferor is
a corporation, any of its shareholders; (4) if the transferor is a partnership,
any of its partners; (5) a corporation which is controlled by
20
or under common control with the transferor; (6) the estate of a deceased
shareholder and legatees or heirs of a deceased shareholder; (7) a charitable or
other qualifying organization described in section 170(c)(2) of the United
States Internal Revenue Code of 1986, or any successor provision thereto; (8) in
the case of a transfer of less than all the Shares of a series, a person who
immediately prior to such transfer is a holder of Shares of that series; or (9)
a key employee of an owner of the entity with respect to which the Shares held
by the transferor were issued.
Provisions Applicable to All Transfers No Shares may be transferred unless and
until our board of directors has received, from the holder of the Shares sought
to be transferred, assurances of compliance with all applicable laws and
regulations. Further, transferees of Shares must agree to abide by the
requirements set forth in the stock purchase agreement entered into by the
transferor. In addition, all transfers of Shares require the approval of the
Barbados Supervisor of Insurance.
Certificates representing the Shares will bear a legend noting the applicable
limitations on transfers.
COMMON STOCK
We are currently authorized to issue 2,000 shares of Common Stock, without
nominal or par value, all of which have been issued to MIC and are outstanding.
A Subsidiary Capital Account has been established for this class of stock, and
allocations of various items to such account are described above. (See
"Description of Capital Stock -- Allocations to Subsidiary Capital Accounts.")
Holders of Common Stock as a class are entitled to elect five directors, at
least one of whom must be resident in Barbados, and up to five alternate
directors. As a class, these holders generally have the sole right to vote on
matters not specifically reserved to the Shares. (See "Description of Capital
Stock -- Voting Rights.")
BARBADOS CORPORATE LAW PROVISIONS
The corporate law of Barbados was derived historically from that of England
prior to the coming into force in 1985 of the Companies Act Cap. 308 of the Laws
of Barbados, which is similar to the Canada Corporations Act. Barbados law may
differ in certain respects from comparable law in the United States. The
following is a summary of certain provisions of Barbados corporate law as
prepared by Peter R.P. Evelyn, our Barbados counsel. The summary does not
purport to contain all applicable provisions and does not purport to be complete
or cover all respects in which Barbados corporate law may differ from laws
generally applicable to United States corporations and their shareholders.
Dividends and Distributions Under Barbados law, a company may pay dividends only
if there are reasonable grounds for believing that (a) the company would be
able, after the payment of the dividends, to pay its liabilities as they become
due, and (b) the realizable value of the company's assets would be greater than
the aggregate of its liabilities and stated capital of all classes. Dividends
may not be paid out of unrealized gains.
Repurchase We are authorized by our articles, subject to certain approvals, to
repurchase our own shares. Such purchases may only be effected if we can satisfy
a similar solvency test as that described above under "Dividends and
Distributions."
Shareholders' Remedies Barbados corporate law contains wide protection for
minority shareholders and investors generally. A statutory right of action is
conferred on subscribers to shares of a Barbados company against the directors
and officers responsible for the issue of a prospectus, in respect of damages
suffered by reason of untrue statements therein. In addition, we may take action
against directors and officers for breach of their statutory duty to act
honestly and in good faith with a view to our best interests.
Enforcement of United States Judgments Except as mentioned below, a judgment of
a court in the United States, under which a sum of money is payable, will under
most circumstances be enforced as a debt by the courts of Barbados without
reexamination of the merits of the case. This will not apply where the judgment
is for payment of taxes, fines or penalties. There is also doubt as to whether a
Barbados court would enforce judgments of United States courts obtained against
us, or our directors and officers resident in Barbados, predicated on the civil
liability
21
provisions of the 1933 Act or, in original actions, impose liabilities against
us or such persons predicated upon that Act. (However, liability for violations
of the 1933 Act by us may be imposed directly on MIC in a United States court as
a result of MIC being a "control person" with respect to us under the 1933 Act.)
Indemnification Our by-laws provide for the indemnification of our directors and
officers against liabilities incurred in their capacities as such, but the
indemnity does not extend to any liability incurred in respect of wilful
negligence, wilful default, fraud or dishonesty in relation to us.
Inspection of Corporate Records Shareholders have the right to inspect and copy
our articles and by-laws, corporate register, security register, minutes of
shareholders meetings, any unanimous shareholder agreement, as well as our
audited financial statements, which must be presented to the annual meeting of
shareholders.
PLAN OF DISTRIBUTION
The Shares are being offered, on a continuous basis, by registered
representatives of GMAC Securities Corporation. GMAC Securities Corporation is
an affiliate of MIC and is registered as a broker-dealer under the Securities
Exchange Act of 1934 and in each of the states in which Shares are being
offered. It is also a member of the National Association of Securities Dealers,
Inc. No commissions are charged or paid in connection with the sale of Shares.
All sales of Shares are subject to our approval. (See "Eligibility to Purchase
the Shares.")
PURCHASE PROCEDURES
In order to purchase the Shares, the following documents must be sent to us in
Barbados:
(1) two duly executed stock purchase agreements (see Appendix B);
(2) all necessary certifications of the eligibility of prospective purchasers
by all the owner(s) of the entity or entities related to the MIC Mechanical
Account with respect to which the Shares will be issued (see "Description
of Capital Stock -- Allocations to Subsidiary Capital Accounts," and
Appendix C); and
(3) a certified or cashier's check payable to "Motors Mechanical Reinsurance
Company, Limited -- Escrow Account" in the amount of the aggregate cost of
the Shares to be purchased, based on the offering price of $75.00 per Share
("Purchase Payment").
None of the foregoing documents is to be executed or delivered until after a
final prospectus has been delivered to the offeree.
Once it is executed by a prospective purchaser, a stock purchase agreement is,
in effect, an offer to purchase the Shares described therein. That offer will be
deemed accepted only if we approve the offer and execute the agreement. (See
"Plan of Distribution--Conditions of Sale.")
Following execution of the stock purchase agreement by us, the prospective
purchaser has no right to withdraw the amount of the purchase payment or any
interest earned thereon. Amounts remain in the escrow account pending
satisfaction of the conditions set forth below under "Conditions of Sale."
TERMS OF SALE
Shares are sold only to Eligible Purchasers who have executed a stock purchase
agreement and returned it to us. Shares must be purchased by series, although
more than one person may buy the Shares of one series. Pursuant to the stock
purchase agreement, the purchaser must accept and agree to be bound by our
articles and by-laws, including the restrictions on transfer. (See "Description
of Capital Stock -- Restrictions on Transfer.") The stock purchase agreement
further provides that we may place on a certificate issued with respect to
Shares a legend stating that the transfer or other disposition of the Shares
evidenced thereby is restricted pursuant to our articles and by-laws.
22
Once it is accepted by us, the stock purchase agreement remains in effect as
long as the Shares purchased pursuant thereto remain outstanding. A stock
purchase agreement terminates only upon the redemption of the Shares or our
liquidation. Upon a transfer of Shares, the transferor is relieved of all
restrictions and obligations under the stock purchase agreement which the
transferor had entered into upon the purchase of those Shares and the
transferee, as a condition of the transfer, is required to agree to abide by all
of the provisions of the stock purchase agreement.
CONDITIONS OF SALE
We maintain an escrow account at Barclays Bank PLC in Bridgetown, Barbados (the
"Escrow Account"), into which checks from prospective purchasers are deposited
pending our decision to accept the purchase. This account bears interest at
prevailing rates, but is not subject to investment guidelines discussed above.
Each purchase of Shares must be accepted by us within 120 days from the date of
execution of the stock purchase agreement by the Purchaser. If we determine to
accept an offer to purchase Shares from an Eligible Purchaser, we execute both
copies of the stock purchase agreement remitted by such person and return one
copy to such person. If we determine not to approve an offer to purchase, we
return the stock purchase agreement without having executed it.
Pending approval of offers, each check for the purchase of Shares (which
ordinarily is received together with a stock purchase agreement) is deposited in
the Escrow Account. If a request to purchase is approved, Shares are issued and
the Eligible Purchaser receives a certificate evidencing ownership of the
Shares. Where we determine not to approve a sale of Shares to a prospective
purchaser, the purchase payment is returned, together with any interest earned
thereon. We have the right to reject any prospective purchaser for any reason
whatsoever.
TERMINATION OF OFFERING
Unless terminated sooner by our board of directors, this offering will terminate
on the date on which all of the Shares offered hereby have been sold.
UNITED STATES FEDERAL TAX CONSIDERATIONS
It is impractical to comment here on all aspects of the Federal, state, and
local tax laws that may affect the United States taxation of us and our
shareholders. The following is a discussion, based on the facts set forth herein
and existing law, of the material Federal tax consequences which, in the opinion
of our U.S. tax counsel, LeBoeuf, Lamb, Greene & MacRae, L.L.P., are associated
with an investment in Shares.
United States taxation of us and our shareholders involves a number of complex
questions of fact and law with respect to some of which there is no statutory,
administrative, or judicial authority directly on point. We have not requested
advance rulings on these questions from the Internal Revenue Service (the
"Service") and, at least as to certain matters, there is no assurance that
favorable rulings could be obtained. There is also no assurance that the laws in
existence as of the date of this prospectus will not be modified so as to alter
the tax consequences described below.
This discussion does not address all aspects of Federal income taxation that may
be relevant to a particular shareholder in light of his or her personal tax
circumstances. Nor does it address state, local, or foreign tax laws that may
affect taxation of shareholders. You Should Consult Your Own Tax Advisor
Concerning The Tax Implications Of Your Investment In Shares.
UNITED STATES-- BARBADOS INCOME TAX TREATY
The United States and Barbados have entered into an income tax treaty (the
"Treaty") that offers certain tax benefits (some of which are discussed below)
to those persons who qualify for its protection. As a Barbados corporation that
ultimately is owned more than 50% by U.S. persons, we are entitled to the
benefits of the Treaty provided that we are "resident" (that is, "managed and
controlled") in Barbados. We attempt to conduct our business in such a manner
that we will be considered to be "managed and controlled" in Barbados in order
to qualify for the benefits of the Treaty.
23
UNITED STATES PREMIUM EXCISE TAX
The United States imposes an excise tax at the rate of 1% of the gross premiums
paid to foreign insurance companies for reinsurance covering risks located
within the United States. Reinsurance premiums paid to us are subject to this
excise tax.
UNITED STATES FEDERAL INCOME TAX RISKS AND CONSEQUENCES TO US
Risks and Consequences of Carrying on a United States Reinsurance Business
Through a Permanent Establishment As a "resident" of Barbados, if we engage in
business within the United States through a permanent establishment, we will be
subject to United States Federal income tax at normal corporate tax rates on our
business profits that are attributable to such permanent establishment. Insofar
as is relevant hereto, all of our underwriting income and investment income
(such as dividends and interest) generally would be treated as business profits
attributable to such a permanent establishment. In addition, a Barbadian
resident corporation engaged in business in the United States through a
permanent establishment would be subject to a branch-level tax at the rate of 5%
(reduced by the Treaty from a 30% statutory rate that would apply generally to
foreign corporations engaged in business in the United States) on its after-tax
earnings attributable to its United States permanent establishment that are
considered remitted to the head office of the corporation.
All relevant facts and circumstances must be taken into account in any
particular case in determining whether a person is engaged in business within
the United States and, if so, whether the business is carried on through a
permanent establishment within the meaning of the Treaty. Under the Treaty, the
activities of both dependent and independent agents in some circumstances may be
deemed to create a permanent establishment of the principal that they represent.
As discussed elsewhere herein, we conduct reinsurance business in Barbados and
in that regard execute and administer our reinsurance agreements and manage our
business affairs from Barbados. On this basis, we believe that we should not be
deemed to be engaged in business within the United States through a permanent
establishment, and therefore we believe we should not be subject to United
States income tax. However, given the factual nature of the questions involved
and certain aspects of our treaty reinsurance program related to the United
States, and given the absence of any clear legal interpretation of the
application of the provisions of the permanent establishment standard under the
circumstances, there can be no assurance that for tax purposes we ultimately
will not be deemed to be engaged in business within the United States through a
permanent establishment.
United States Withholding Tax Applicable to Certain Investment Income Not
Attributable to a United States Permanent Establishment If we do not engage in
business within the United States through a permanent establishment, we
generally will be subject to a United States withholding tax on interest,
dividends, and certain other investment income derived from sources within the
United States (the 30% rate of United States withholding tax provided by statute
is reduced by the Treaty to 5% in the case of interest and 15% in the case of
dividends derived from portfolio investments). An exemption from the United
States withholding tax is provided for interest earned on amounts on deposit in
a bank, savings and loan association, or insurance company, and interest income,
termed "portfolio interest," on certain debt obligations of United States
issuers.
Under investment guidelines implemented in 2000, we expect to invest our funds
in the United States in circumstances whereby we do not incur a withholding tax.
(See "Our Business.")
Reallocations By Internal Revenue Service Under section 482 of the Internal
Revenue Code (the "Code"), the Service may allocate gross income, deductions,
and credits between or among two or more businesses, owned or controlled
directly or indirectly by the same interests, in order to prevent evasion of
taxes or to reflect clearly the true taxable income of such businesses. As
described elsewhere herein, MIC elects five of our six directors through its
ownership of all of our issued and outstanding Common Stock. Thus, if
transactions between MIC and us were determined not to reflect the true taxable
income of the parties, a reallocation of income or deductions between such
entities could result. However, as long as the transactions between MIC and us
are conducted on an "arm's-length" basis in a manner consistent with industry
standards and practices, section 482 should not provide a basis for
reallocations by the Service between MIC and us.
In addition, section 845 of the Code grants broad authority to the Service to
adjust items arising under certain reinsurance agreements (including
retrocession agreements), whether or not they involve related parties. If two or
more "related" parties enter into a reinsurance contract, the Service in general
may make any adjustment necessary
24
to reflect the "proper source and character" of the taxable income of each such
party. The Service also has broad authority to make proper adjustments where any
reinsurance contract between unrelated parties has a "significant tax avoidance
effect" on any party to the contract.
Because MIC is entitled to elect five of our six directors, we and MIC may be
considered "related" parties within the meaning of section 845 of the Code. To
date, there are no regulations under section 845 of the Code to aid in its
interpretation. However, the legislative history of section 845 suggests that
certain types of reinsurance transactions -- such as a coinsurance reinsurance
transaction that covers new business of the ceding company and that allocates
expenses and income items between the ceding company and the reinsurer in the
same proportion as the allocation of the risk reinsured -- generally should not
be subject to reallocations or adjustments. The ongoing quota share retrocession
agreement between MIC and us, in general, would seem to be similar to such
transactions for which adjustments generally should not be made, but there is
substantial uncertainty at the present time concerning the scope of section 845.
If the Service were successful in an effort to reallocate to MIC business
retroceded to us by MIC, MIC would likely be subject to tax on such business.
Since we have no obligation to indemnify MIC against such adverse tax
consequences, a reallocation of business to MIC should not directly affect us.
However, any such reallocation might contribute to the early termination of the
retrocession agreement between MIC and us.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES-- THE SHAREHOLDERS
Taxation of Our Income to Shareholders Under Subpart F of the Code Under the
so-called "Subpart F" provisions (sections 951-964) of the Code, current United
States income tax is imposed on each United States person who owns stock in any
25% or more U.S.-owned foreign insurance company with respect to "related person
insurance income," whatever the degree of ownership of the United States
shareholder. For this purpose, the term "related person insurance income" means
underwriting and investment income of a foreign insurer attributable to a policy
of insurance or reinsurance with respect to which the insured is a United States
shareholder of the foreign insurer or a person related to such a shareholder.
Under this provision, all of our income (as determined for tax purposes) will be
treated as "related person insurance income," and, as such, will be passed
through and taxed currently to all of our shareholders ("Shareholders") under
Subpart F of the Code.
The basis of the stock of a Shareholder will be increased by the amount required
to be included in the Shareholder's income with respect to such stock under
Subpart F. Further, a distribution from our earnings and profits attributable to
amounts that have been included in gross income of the Shareholders under
Subpart F would not be included again in gross income of the Shareholders, but
would reduce the adjusted tax basis of the stock with respect to which the
distribution is made. It should be noted that Subpart F income will be computed
for us as a single entity. The amount of Subpart F income attributable to one
series of Shares in these circumstances may be affected by results with respect
to other series. It also should be noted that our Subpart F income generally
will be computed under the same rules that govern the computation of taxable
income of domestic property and casualty insurance companies.
Although Subpart F income generally is allocated based on book income,
differences between the financial and tax accounting rules applicable to the
computation of our income may result in differences in any year between the
amount of income subject to pass-through to a Shareholder for United States tax
purposes and the amount of book income allocable to a Shareholder's Subsidiary
Capital account. Since the consideration payable to the holders of a series of
Shares upon redemption is based substantially on book income previously
allocated to the Shares being redeemed, such consideration may not reflect the
amount of income previously passed through and taxed to the holders of those
Shares.
To the extent that we were subject to United States income tax on our business
profits, the Shareholders generally would not be subject to current tax on such
profits under Subpart F, but would be taxed when profits were distributed by us.
(See "United States Federal Tax Considerations -- United States Federal Income
Tax Consequences To Us.")
Risk of Recharacterization of Reinsurance Profits on Business Retroceded to Us
As described elsewhere herein, a portion of the underwriting experience in
respect of insurance business retroceded to us is allocated to the series of
Shares issued in respect of the entity that is the source of such business. In
this connection, the Service could question whether profits on such business
should be treated as being related to equity ownership for tax purposes, or
25
whether the Shares should be treated, in whole or in part, as a means by which
the direct insurer pays additional income to certain of its business producers
or pays return premiums to certain policyholders, such that the producers or
policyholders (rather than the Shareholders) should be subject to ordinary
income tax on all or some of such profits. Although the issue is not free from
doubt, given, among other things, the significance of the Shareholders'
"at-risk" investment in us relative to the volume of our business, the degree of
pooling of risks among all series of Shares, the fact that distributions with
respect to Shares are, subject to certain "minimum dividends," within the
discretion of our board of directors, and the vote accompanying each Share,
there should be substantial arguments against the recharacterization of profits
with respect to the Shares.
Deductibility of Premiums Paid By Entities Selling Motor Vehicles for Certain
Coverages Reinsured by Us As discussed elsewhere herein, risks arising under
motor vehicle mechanical service agreements entered into with respect to a
particular entity selling motor vehicles ultimately may be retroceded to us and
allocated in part to a series of Shares owned by the owner(s) of such entity or
by persons closely related to such owner(s). The Service conceivably could seek
to deny any deductions taken by the obligor under the motor vehicle mechanical
service agreements for premiums paid by it with respect to its obligations
ultimately retroceded to us, relying on the theory, developed in cases dealing
with transactions involving wholly owned insurance companies, that no insurance
risk has been shifted in respect of such premiums. However, although the matter
is not free from doubt, given the degree of risk pooling among the series of
Shares, there should be substantial arguments in support of the treatment of
such premiums as deductible insurance premiums for tax purposes.
LEGAL MATTERS
The legality of the securities offered hereby is passed upon for us by our
Barbados counsel, Peter R.P. Evelyn, Hothersal House, St John, Barbados, West
Indies. LeBoeuf, Lamb, Greene & MacRae, L.L.P., 1875 Connecticut Avenue, N.W.,
Washington, D.C. 20009, will advise us as to certain matters pertaining to the
laws of the United States.
EXPERTS
The financial statements as of December 31, 2001 and 2000 and for each of the
three years in the period ended December 31, 2001, included and incorporated by
reference in this prospectus, have been audited by Deloitte & Touche,
independent chartered accountants, Bridgetown, Barbados, as stated in their
report, which is included and incorporated by reference herein, and has been so
included and incorporated in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
The matters of Barbados law referred to in this prospectus are set forth in
reliance upon the opinion of Peter R.P. Evelyn and upon his authority as an
expert in Barbados law. LeBoeuf, Lamb, Greene & MacRae, L.L.P. has passed upon
the statements concerning United States tax laws contained in the discussion
under "United States Federal Tax Considerations," which is included herein in
reliance upon their authority as experts with respect to such matters.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
Our Annual Report on Form 10-K for the year ended December 31, 2001 (the "Annual
Report") and our Quarterly Report on Form 10-Q for the quarter ended March 31,
2002 (the "Quarterly Report") filed by us (File No. 33-6534) with the SEC is
incorporated herein. Any statement contained in the Annual Report or Quarterly
Report shall be deemed to be modified or superseded for purposes of this
prospectus to the extent that a statement contained herein modifies or
supersedes such statement.
We undertake to provide without charge to each person to whom a copy of this
prospectus is delivered, upon written or oral request of such person, a copy of
any or all of the documents incorporated here by reference, other than exhibits
to such documents unless such documents are specifically incorporated by
reference in to such documents. Requests for such documents should be directed
to us at One Financial Place, Collymore Rock, St. Michael, Barbados, W.I.,
Attention Ronald W. Jones, Vice President, Finance, telephone number (246)
436-4895.
26
ADDITIONAL INFORMATION
A registration statement under the 1933 Act has been filed with the SEC with
respect to the Shares offered hereby. This prospectus does not contain all of
the information set forth in such registration statement, certain parts having
been omitted pursuant to the rules and regulations of the SEC. The omitted
information may be examined at the SEC's principal office at 450 5th Street,
N.W., Washington, D.C., or at the following regional offices: New York City, 26
Federal Plaza, Room 1102; Chicago, 219 South Dearborn Street, Room 1204; and Los
Angeles, 5757 Wilshire Boulevard, Suite 500 East. Copies may be obtained upon
payment of the fees prescribed from the public reference section of the SEC,
Washington, D.C. 20549.
Statements contained in this prospectus as to the contents of any contract or
other document are not necessarily complete and, in each instance, reference is
hereby made to the copy of the contract or other document filed as an exhibit to
the registration statement, of which this prospectus is a part, for a full
statement of the provisions, and each such statement in this prospectus is
qualified in all respects by such reference.
27
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
28
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
BALANCE SHEETS
DECEMBER 31, 2001 AND 2000 AND MARCH 31, 2002
(Expressed in United States Dollars)
March 31, 2002
Notes 2001 2000 (unaudited)
------- ---------------- ------------------ -----------------
ASSETS
Investments 3,7 $ 90,433,369 $ 92,121,679 $ 88,152,591
Cash and cash equivalents 7 142,992 1,736,235 102,680
Accrued investment income 789,199 903,734 687,956
Due from Motors Insurance Corporation 1,390,278 -- 0
Deferred acquisition costs 22,810,217 23,898,021 21,991,177
Advances to shareholders 527,500 190,000 437,500
Prepayments 37,500 37,250 39,375
---------------- ------------------ -----------------
Total Assets 116,131,055 118,886,919 $ 111,411,279
================ ================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Unearned premiums 89,634,122 91,915,465 $ 87,963,276
Reserves for unpaid losses 4 3,949,590 4,754,710 3,795,869
Accrued liabilities 181,321 125,953 225,826
Due to Motors Insurance Corporation -- 968,864 1,020,165
---------------- ------------------ -----------------
Total Liabilities 93,765,033 97,764,992 93,005,136
================ ================== =================
COMMITMENTS AND CONTINGENCIES 7
STOCKHOLDERS' EQUITY 5
Share capital
-- Common stock - no par value;
Authorized - 2,000 shares;
anding - 2,000 shares 200,000 200,000 200,000
-- Participating stock - no par value;
Authorized - 100,000 shares;
Issued and outstanding -
25,000 shares at December
31, 2001, 25,900 shares
at December 31, 2000 and 24,700 as of March
31, 2002 1,875,000 1,942,500 1,852,500
---------------- ------------------ -----------------
2,075,000 2,142,500 2,052,500
Retained earnings 8 18,521,974 16,247,004 15,370,298
Accumulated other comprehensive income 1,769,048 2,732,423 983,345
---------------- ------------------ -----------------
Total Stockholders' Equity 22,366,022 21,121,927 18,406,143
---------------- ------------------ -----------------
Total Liabilities and Stockholders' Equity $ 116,131,055 $ 118,886,919 $ 111,411,279
================ ================== =================
The accompanying notes form an integral part of these financial statements.
29
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
AND THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(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.
30
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
AND THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(Expressed in United States Dollars)
Three Month Periods Ended March 31,
(unaudited)
------------------------------------
2002 2001
----------- -----------
INCOME
Reinsurance premiums assumed $10,886,397 $12,703,111
Decrease in unearned premiums 1,670,846 826,198
----------- -----------
Premiums earned 12,557,243 13,529,309
----------- -----------
INVESTMENT INCOME
Interest earned 1,154,743 1,146,202
Realized gains on investments-net 259,176 444,682
----------- -----------
Investment income 1,413,919 1,590,884
----------- -----------
TOTAL INCOME 13,971,162 15,120,193
----------- -----------
EXPENSES
Acquisition costs 3,207,604 3,538,394
Losses paid 9,405,810 10,171,113
Increase in reserves for unpaid losses (153,721) (28,633)
Administrative expenses
Related Parties 56,039 56,674
Other 112,956 123,255
----------- -----------
TOTAL EXPENSES 12,628,688 13,860,803
----------- -----------
NET INCOME 1,342,474 1,259,390
RETAINED EARNINGS, beginning of period 18,521,974 16,247,004
LESS: DIVIDENDS (4,381,225) (3,083,096)
REDEMPTION OF
PARTICIPATING STOCK (112,925) (130,144)
----------- -----------
RETAINED EARNINGS, end of period $15,370,298 $14,293,154
=========== ===========
The accompanying notes form an integral part of these financial statements.
31
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
AND THE THREE MONTHS ENDED MARCH 31, 2002
(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.
32
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
AND THE THREE MONTHS ENDED MARCH 31, 2002
(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, 1999 $ 23,525,568 $ -- $20,629,009 $ 334,059 $ 200,000 $ 2,362,500
Comprehensive income:
Net income (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)
==============
March 31, 2002 (unaudited)
----------------------------------------------------------------------------------------
Accumulated
Total Other
Shareholder's Comprehensive Retained Comprehensive Common Participating
Equity Income Earnings (Loss)/Income Stock Stock
-------------- ------------- ----------- -------------- --------- -------------
Balance at December 31, 2001 $ 22,366,022 $ -- $18,521,974 $ 1,769,048 $ 200,000 $ 1,875,000
Comprehensive income:
Net income 1,342,474 1,342,474 1,342,474 -- -- --
Other comprehensive income,
net of tax:
Unrealized loss on securities,
net of reclassification (785,703) (785,703) -- (785,703) -- --
-------------
Comprehensive income -- $ 556,771 -- -- -- --
=============
Dividends declared on participating
stock (4,381,225) (4,381,225) -- -- --
Participating stock
Issued -- -- --
Redeemed (135,425) (112,925) -- -- (22,500)
-------------- ----------- -------------- --------- -------------
Balance at March 31, 2002 $ 18,406,143 $15,370,298 $ 983,345 $ 200,000 $ 1,852,500
============== =========== ============== ========= =============
Disclosure of reclassification amount
Unrealized holding losses arising
during period 1,044,879
Add: reclassification adjustment
for losses included in net
income 259,176
Net unrealized loss on securities $ 785,703
==============
The accompanying notes form an integral part of these financial statements.
33
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
AND THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(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.
34
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
AND THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 (Cont'd)
(Expressed in United States Dollars)
Three Month Periods
Ended March 31,
2002 2001
(unaudited) (unaudited)
--------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Reinsurance premiums collected $ 14,094,604 $ 11,102,794
Losses and acquisition expenses paid (12,572,120) (12,090,711)
Administrative expenses paid (42,004) (136,885)
Investment income received 1,241,607 1,208,571
--------------- ----------------
Net cash provided by operating activities 2,722,087 83,769
--------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (35,744,063) (19,573,823)
Sales and maturities of investments 37,498,314 22,507,618
Net cash provided by investing activities 1,754,251 2,933,795
--------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Participating Stock 0 0
Redemption of Participating Stock (135,425) (145,144)
Dividends paid (4,381,225) (3,083,096)
--------------- ----------------
Net cash used in financing activities (4,516,650) (3,228,240)
--------------- ----------------
DECREASE IN CASH AND CASH EQUIVALENTS (40,312) (210,676)
CASH AND CASH EQUIVALENTS, beginning of period 142,992 1,736,235
--------------- ----------------
CASH AND CASH EQUIVALENTS, end of period $ 102,680 $ 1,525,559
=============== ================
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED
BY OPERATING ACTIVITIES:
Net income 1,342,474 1,259,390
Realized gains on investments (259,176) (444,682)
Change in:
Accrued investment income 101,243 75,369
Deferred acquisition costs 819,040 214,811
Advances to shareholders 90,000 0
Prepaid expenses (1,875) (4,177)
Unearned premiums (1,670,846) (826,198)
Reserves for unpaid losses (153,721) (28,633)
Accrued liabilities 44,505 23,213
Due to Motors Insurance Corporation, net 2,410,443 (185,324)
--------------- ----------------
Net cash provided by operating activities $ 2,722,087 $ 83,769
=============== ================
The accompanying notes form an integral part of these financial statements.
35
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited as to the information as of March 31, 2002 and for
the three month periods ended March 31, 2002 and 2001)
(Expressed in U.S. Dollars)
Note 1. OPERATIONS
The Company is incorporated under the laws of Barbados and is a
licensed insurer under the Exempt Insurance Act, 1983 and amendments
thereto.
All of the common stock of the Company is owned by Motors Insurance
Corporation (`MIC'), a member of the GMAC Insurance Group. MIC (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 2002
and 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 original maturities of less than 90
days are classified as cash equivalents. Unrealized appreciation
(depreciation) is included in accumulated other comprehensive income.
36
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited as to the information as of March 31, 2002 and for
the three month periods ended March 31, 2002 and 2001)
(Expressed in U.S. Dollars)
Note 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Realized gains and losses on the sale of investments are included as
investment income and are calculated based on amortized costs.
Loss Reserves
The Company provides for unsettled, reported losses based on estimates
of the final settlement, with an experience factor added to provide
for losses incurred, but not reported. The final settlement may be
greater or less than the amounts provided. Any such differences, when
they become known, are recognized in current operations and can
potentially be significant to the financial statements.
Derivatives
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133,
Accounting for Derivative Instruments and Hedging Activities,
effective for fiscal years beginning after June 15, 1999. In the
second quarter of 1999, the FASB issued SFAS No. 138 which amends SFAS
No. 133 and delayed implementation of 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).
Interim Financial Information
The financial statements as of March 31, 2002 and for the three month
periods ended March 31, 2002 and 2001, are unaudited, but in the
opinion of Management, reflect all adjustments, consisting of normal
recurring accruals, which are necessary for a fair presentation of the
results for the periods presented. Results for the three month period
ended March 31, 2002 are not necessarily indicative of the results to
be expected for the whole fiscal year.
37
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited as to the information as of March 31, 2002 and for
the three month periods ended March 31, 2002 and 2001)
(Expressed in U.S. Dollars)
Note 3. INVESTMENTS
The cost and fair value of investments in debt securities and equities
are as follows:
Gross Gross
Unrealized Unrealized
Cost Appreciation Depreciation Fair 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.
Cost Fair 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
============= =============
38
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited as to the information as of March 31, 2002 and for
the three month periods ended March 31, 2002 and 2001)
(Expressed in U.S. 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
Net appreciation (unaudited) (785,703)
--------------
Balance, March 31, 2002 (unaudited) $ 983,345
--------------
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
================ ================ ================
39
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited as to the information as of March 31, 2002 and for
the three month periods ended March 31, 2002 and 2001)
(Expressed in U.S. Dollars)
Note 4. RESERVES FOR UNPAID LOSSES (Continued)
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.
Note 5. STOCKHOLDERS' EQUITY
All of the Company's Common Stock is held by MIC.
During the quarter ended March 31, 2002, no shares of Participating
Stock were issued and the Board of Directors (the "Board") redeemed
three series of Participating Stock which had been previously placed
in run-off and had reached a fully earned position during the quarter
ended March 31, 2000. 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 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.
40
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.
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.
41
Note 8. RETAINED EARNINGS (Continued)
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
--------------- --------------- ---------------
Net income for the quarter 3,812 1,338,662 1,342,474
Dividend paid -- (4,381,225) (4,381,225)
Redemption at participating stock -- (112,925) (112,925)
--------------- --------------- ---------------
Balance, March 31, 2002 $ 49,631 $ 15,320,667 $ 15,370,298
=============== =============== ===============
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.
42
COMPANIES ACT OF BARBADOS APPENDIX A
(Section 205)
RESTATED ARTICLES OF INCORPORATION FORM 13
1. Name of Company
Motors Mechanical Reinsurance Company, Limited
2. Company No.
1485
3. THE CLASSES AND ANY MAXIMUM NUMBER OF SHARES THAT THE COMPANY IS AUTHORIZED
TO ISSUE
The annexed Schedule is incorporated in this form.
4. RESTRICTION IF ANY ON SHARE TRANSFERS
The annexed Schedule is incorporated in this form.
5. NUMBER (OR MINIMUM AND MAXIMUM NUMBER) OF DIRECTORS
There shall be a minimum of 5 and a maximum of 6 directors.
6. RESTRICTIONS IF ANY ON BUSINESS THE COMPANY MAY CARRY ON
The principal object and activity of the Company is to engage in Exempt
Insurance business within the meaning of the Exempt Insurance Act, 1983 of
Barbados and the business of the Company shall be restricted accordingly.
7. OTHER PROVISIONS IF ANY
The annexed Schedule is incorporated in this form.
8. Date Signatures Title
February 25, 2002 Peter R.P. Evelyn Director
FOR MINISTRY USE ONLY
COMPANY NO. FILED
COMPANIES ACT OF BARBADOS SCHEDULE TO ARTICLES OF INCORPORATION
3. The classes and any maximum number of shares that the Company is authorized
to issue:
The Company is authorized to issue:
(a) 2,000 shares of one class without nominal or par value to be designated
Common shares; and
(b) 100,000 shares of one class without nominal or par value to be designated
Participating shares which shall be divided into 1,000 series and issued in
series of 100 shares.
The rights, preferences and limitations of the said classes of shares are as
follows:
DEFINITIONS
In these Articles and any amendment thereto and in the Company's By-Laws the
following terms shall mean:
Board-- The Company's Board of Directors.
Company-- Motors Mechanical Reinsurance Company, Limited.
MIC -- Motors Insurance Corporation, a New York corporation with its
administrative offices in Detroit, Michigan.
MIC Mechanical Account -- The separate business record maintained by MIC or any
of its affiliates to track volume, experience, and commissions with respect to
motor vehicle mechanical service agreements sold by one or more particular
entities selling new and/or used motor vehicles.
Restricted Earned Surplus -- At any point in time, that portion of the earned
surplus, if any, in the Subsidiary Capital Account for the Common shares equal
to: (1) premiums allocated to the Subsidiary Capital Account of the Common
shares during the immediately preceding five-year period pursuant to Section
3(1)(1)(a), plus (ii) deficits restored to such Account during such period
pursuant to Section 3(1)(7)(c), less (iii) return premiums allocated to such
account during such period pursuant to Section 3(1)(1)(d), and less (iv)
deficits allocated to such account during such period pursuant to Section
3(1)(7)(a)(i) to the extent that they relate to amounts described in clauses (i)
and (ii) of this definition.
Shares -- Shares of the Participating Stock of the Company.
Stock Purchase Agreement -- The agreement entered into between the Company and
the purchaser of Shares, in the form approved by the Board.
Subsidiary Capital Account -- The subsidiary bookkeeping record established by
the Company for a particular series or class of shares and maintained for the
purpose of accounting for items of income and expense, gains and losses, capital
contributions, and shareholder distributions which are allocated to the
particular series or class of shares.
(1) ALLOCATIONS TO SUBSIDIARY CAPITAL ACCOUNTS
The Company will establish a Subsidiary Capital Account with respect to the
Common shares as a class, and to each series of Shares of the Company at the
time a series is issued.
The consideration received by the Company upon the issuance of a particular
series of Shares and the Common shares as a class will be allocated to the
Subsidiary Capital Account for that series or class. Items of income and
expense, and losses, attributable to insurance underwriting activities shall be
determined as of the end of each calendar quarter and shall be allocated to the
Subsidiary Capital Accounts as of the end of the fiscal quarter of the
Company in which the respective calendar quarter ends. Investment experience,
and other items of income and expense, gains and losses and distributions with
respect to shares of the Company will be determined and allocated to the
Subsidiary Capital Accounts as of the end of each fiscal quarter of the Company.
All such accounting determinations shall be made using United States generally
accepted accounting principles, unless otherwise required by these Articles. For
purposes of such allocations, items shall be "related" to a Subsidiary Capital
Account which is identified with the same MIC Mechanical Account to which such
items can be attributed.
(1) Items of income and expense, and losses, attributable to insurance
underwriting activities shall be allocated to the Subsidiary Capital Accounts in
accordance with the following paragraphs:
(a) With respect to premiums ceded to the Company, one hundred percent
(100%) shall be allocated to the related Subsidiary Capital Account;
provided, however, that an amount equal to one and one percent (1%) of such
premiums shall be subtracted from such Subsidiary Capital Account and
allocated to the Subsidiary Capital Account of the Common shares.
(b) With respect to any agents' or brokers' commissions, any commissions
recaptured, unearned premiums, reinsurance premiums ceded by the Company,
and any United States excise tax, one hundred percent (100%) shall be
allocated 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 this purpose, losses incurred includes both paid and unpaid
(reported and unreported) losses.
(d) With respect to return premiums, ninety-nine percent (99%) shall be
allocated to the related Subsidiary Capital Account and one percent (1%)
shall be allocated to the Subsidiary Capital Account for the Common shares.
(2) Any expenses or liabilities attributable to ordinary 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 on the basis of
the number of series issued and outstanding at the end of 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 the unearned premium is zero as of
such date, shall be excluded.
(3) Any United States Federal income tax liability (and any interest thereon or
any penalties related thereto) incurred by the Company shall be 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 (and any
interest or penalties) is imposed.
(4) Any expenses or liabilities attributable to the organization of the Company
or to the offer, sale or issuance of Shares, including but not limited to the
costs of compliance with regulations and requirements of the United States
Securities and Exchange Commission and the various states and other
jurisdictions of the United States as they pertain thereto, shall be allocated
to the Subsidiary Capital Account for the Common shares.
(5) Any expenses or liabilities of the Company not allocable in the manner
described in paragraphs (2) through (4) above shall be allocated among the
Subsidiary Capital Accounts on the basis of the relative balances of such
accounts as of the end of the fiscal quarter preceding the date on which the
expense or liability is incurred.
(6) (a) Investment income, net of any direct investment expense, shall be
allocated among the Subsidiary Capital Accounts pro rata based upon the relative
Investment Asset Balance (as defined in subparagraph (b) below) of each such
account as of the last day of the fiscal quarter preceding the quarter for which
the investment income is being allocated. For these purposes, net investment
income will include realized (but not unrealized) gains and losses.
(b) The Investment Asset Balance of each Subsidiary Capital Account shall
be equal to the capital and surplus allocated to such account, increased
by:
(i) the unearned portions of the written premiums that have been
collected by the Company and allocated to such account as of the last
day of the fiscal 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 such account as of
the last day of the fiscal quarter preceding the quarter for which the
income is being allocated; and
(iii) any other outstanding liability that has been charged to such
account as of the last day of the fiscal quarter preceding the quarter
for which the income is being allocated.
(7) (a) If, after the credits and charges described in paragraphs (1) through
(6) above are made to the Subsidiary Capital Accounts there exists a deficit in
one or more of such accounts, then each such deficit will be allocated to and
charged against:
(i) first, the Subsidiary Capital Account for the Common shares to the
extent of Restricted Earned Surplus;
(ii) then, any remaining unallocated deficit to the Subsidiary Capital
Accounts for the Shares, pro rata, based upon the relative earned
premiums allocated to each such account for the fiscal quarter for
which the allocation is being made; provided, however, that only
accounts which have positive balances will be taken into account for
the purposes of this allocation;
(iii) then, any remaining unallocated deficit to the remaining
Subsidiary Capital Accounts for the Shares with positive balances as
of the last day of the fiscal quarter for which the allocation is
being made, pro rata, based upon such balances; and
(iv) finally, to the extent necessary, the Subsidiary Capital Account
for the Common shares.
(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) will be further allocated in the manner provided in that
subparagraph.
(c) Although this paragraph (7) shall be applied in a manner that does not
result in a balance in any Subsidiary Capital Account for a series of
Shares that is less than zero, if any such account had a deficit that was
allocated to and charged against the Subsidiary Capital Account of the
Common shares pursuant to Section 3(1)(7)(a)(i) hereof, or to the
Subsidiary Capital Account for any series of Shares pursuant to Section
3(1)(7)(a)(ii) or (iii) hereof (after taking into account the provisions of
Section 3(1)(7)(b)) after January 1, 1995, then at the end of any
succeeding fiscal quarter for which that account otherwise would show an
account balance greater than zero, such balance will be reallocated and
credited:
(i) first to the Subsidiary Capital Account of the Common shares until
all reductions of such Subsidiary Capital Account for the Common
shares under Section 3(1)(7)(a)(i) hereof with respect to said series
of Shares have been restored, and
(ii) then, to the Subsidiary Capital Accounts for the Shares, pro
rata, based upon the relative amounts, through the end of the fiscal
quarter preceding the quarter for which the reallocation hereunder is
being made, of deficits that were allocated after January 1, 1995 to
those accounts (whether under Section 3(1)(7)(a)(ii) or (iii)) from
any Subsidiary Capital Account and that have not previously been
restored, until all Subsidiary Capital Account reductions after
January 1, 1995 under Section 3(1)(7)(a) with respect to the series of
Shares from which the reallocation hereunder is being made have been
restored.
(8) (a) Dividends, payments upon redemption or liquidation (described below),
and any other distributions with respect to shares of the Company will be
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 of Shares are repurchased by the Company
pursuant to Section 4 below, or redeemed in accordance with the Company's
procedures for redemption set forth in Section 3(6) below, the Subsidiary
Capital Account for such series shall be 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 Repurchase Date or Redemption Date (as those terms are defined in
Sections 4 and 3(6), respectively), 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 Section 3(1)(7)(c), will be allocated
among the Subsidiary Capital Accounts of the existing series of Shares pro
rata based upon relative earned premiums attributable to such accounts for
the calendar quarter then ending and any net deficit will be allocated in
accordance with the provisions of Section 3(1)(7)(a).
The allocations to the Subsidiary Capital Accounts described above shall be
approved by the Board, and when finally so approved all calculations,
allocations and determinations shall be final and conclusive and shall be
binding on all holders of shares of the Company for all purposes, including
without limitation any redemption of shares of the Company pursuant to the
Company's procedures for redemption. The Board is authorized to interpret
and apply the provisions of these Articles and to promulgate such
additional rules and guidelines as the Board deems appropriate to carry out
the intent of these Articles and such interpretations, rules and guidelines
shall be binding on all shareholders.
(9) For purposes of allocating expenses and liabilities (that are allocated
based on Subsidiary Capital Account balances) and investment income, and of
calculating the amount of dividends and of payments upon liquidation of the
Company or upon redemption or repurchase of Shares by the Company pursuant to
these Articles, the Subsidiary Capital Account for a series of Shares shall be
deemed to have been reduced by the outstanding amount of any advance of funds
made with respect to such series of Shares as of the applicable date for
determination of the balance of the Subsidiary Capital Account. For purposes of
this Section 3(1)(1)(9), an advance of funds is "made with respect to a series
of Shares" if the advance has been paid to one or more holders of Shares of that
series.
(2) PARTICIPATING SHARES
(a) If any Share shall be redeemed, repurchased or otherwise retired, it
shall return to the status of an authorized but unissued share of such
class.
(b) A series of Shares shall be issued with respect to a specific MIC
Mechanical Account. Only one series of Shares shall be issued with respect
to an MIC Mechanical Account. A series of Shares shall be issued only to
persons or entities acceptable to the Board and certified by the owner(s)
of the entity or entities to which the MIC Mechanical Account relates.
Certification will be effected in accordance with procedures adopted by the
Board from time to time. No share of any particular series of Shares shall
be issued unless all shares of such series are issued.
(c) Each outstanding Share shall entitle the registered holder of record of
such Share to dividends in accordance with the rules set forth in Section
3(5) of these Articles.
(d) The holders of Shares shall among them have the right to elect one
director of the Company and shall otherwise have only such voting rights as
are specifically provided herein. On all such matters each share shall
entitle the registered holder thereof to one vote.
(e) The rights associated with any Shares of a series shall be identical to
the rights associated with all other Shares of the same series.
(3) COMMON SHARES
(a) Each outstanding Common share shall entitle the registered holder of
such shares to dividends in accordance with the rules set forth in Section
3(5) of these Articles.
(b) Each outstanding Common share shall entitle the registered holder
thereof to one vote per share on all resolutions of the Company other than
as specifically provided herein.
(c) The holders of the Common shares shall be entitled to elect five
directors of the Company, one of whom must be a resident citizen of
Barbados.
(4) LIQUIDATION
The Company may be liquidated upon the vote of the holders of at least
seventy-five percent (75%) of the Shares. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Company, after payment of all liabilities of the Company, each holder of Shares
of a series shall be entitled to receive an amount equal to his share (based on
his proportionate ownership of such series) of the Subsidiary Capital Account
balance related to his series of Shares before any distribution of the assets of
the Company shall be made to holders of the Common shares. After such payment
shall have been made in full to the holders of the outstanding Shares, or funds
necessary for such payment shall have been set aside in trust for the account of
the holders of the outstanding Shares so as to be available therefor, the
holders of the outstanding Shares shall be entitled to no further participation
in the distribution of the assets of the Company, and the remaining assets of
the Company, if any, shall be divided and distributed among the holders of the
Common shares then outstanding pro rata based on their respective shares. A
consolidation or merger of the Company, or sale or transfer of all or
substantially all its assets, or any purchase or redemption of shares of the
Company of any class or series, shall not be regarded as a "liquidation,
dissolution, or winding up" within the meaning of this paragraph.
(5) DIVIDENDS
(a) Subject to the following paragraphs, dividends may be paid at the
discretion of the Board.
(b) Dividends, payable in cash or such other property as the Board may
determine, on a series of Shares or on Common shares, shall be declared and
payable only if the Company shall have, after giving effect to the
dividend, sufficient net assets, without regard to any Letter of Credit or
Guarantee, to meet the general business solvency margin prescribed by the
Exempt Insurance Act and Section 51 of the Act; provided that dividends
with respect to any series of Shares may be paid only out of earned surplus
attributable to the Subsidiary Capital Account identified with those
Shares, and only to the extent that, after giving effect to the dividend,
the capital and surplus identified with that Subsidiary Capital Account
(without regard to any Guarantee or Letter of Credit) would meet its pro
rata share, based on allocable premium income, of the minimum net assets
required of the Company under the Exempt Insurance Act. Subject to the
right of the holders of Shares to receive minimum dividends pursuant to the
following paragraph, to the extent a dividend is declared on the Shares, it
shall be declared and paid subject to the foregoing limitations for each
series of Shares as a percentage of the net income for the preceding
calendar year and/or earned surplus as of the end of the preceding calendar
year, attributable to each series, provided that such percentage may vary
among series of Shares with the level of net income and/or earned surplus.
Dividends shall only be declared and paid on Common shares to the extent
that the earned surplus attributable to Common shares exceeds Restricted
Earned Surplus.
(c) Subject to the preceding paragraph, the holders of the Shares of each
series shall be entitled to receive minimum annual dividends, payable
annually within each fiscal year, in cash or such other property as the
Board may determine. The minimum annual dividend payable on each Share
shall be such Share's pro rata portion of an amount equal to twenty percent
(20%) of the net income, if any, for the preceding fiscal year attributable
to the Subsidiary Capital Account associated with the series of which that
Share is a part. If a holder of Shares receives no dividend or a limited
dividend in any annual period as a result of the limitations set forth in
the preceding paragraph, any unpaid portion of the minimum dividend
otherwise payable pursuant to this paragraph shall not become payable
pursuant to this paragraph in any subsequent year.
(d) In no event shall any dividend whatever be paid upon or declared or set
apart for the Common shares, unless and until all minimum annual dividends
required to be paid on the then outstanding Shares for the then current
period shall have been paid or declared and set apart for payment.
(6) REDEMPTION
The Common shares are non-redeemable. Subject to compliance with any applicable
statute or act, the Company may redeem any of its issued and outstanding Shares
if all Shares of the series involved are redeemed and the redemption of such
Shares is approved by a majority of the Board, provided that the Director
representing holders of the Shares votes in favor of the redemption.
The redemption of Shares shall be effective on such future date as determined by
the Board, which shall be no later than the last business day of the calendar
year in which the redemption was approved by the Board. Such date is herein
called the "Redemption Date."
The consideration payable to the holders of redeemed Shares shall be the
Subsidiary Capital Account balance for the series of such Shares as of the
Redemption Date, as adjusted by the Board to reflect any contingent liabilities
allocable to such account. Such consideration shall be paid within five (5)
months of the Redemption Date, provided that the holder(s) of the redeemed
Shares shall have delivered to the Company, certificates representing the Shares
being redeemed duly endorsed and accompanied by such other documents as the
Company may require. Such consideration shall bear interest from the Redemption
Date until the earlier of the date of payment or the date that is five (5)
months from the Redemption Date, at a rate equal to the rate of interest paid on
26-week United States Treasury Bills for the issue following the Redemption
Date.
Upon redemption of the Shares as aforesaid, the holder(s) thereof shall cease to
have any further interest in the shares being redeemed. Shares redeemed pursuant
to this Section 3(6) shall return to the status of authorized but unissued
Shares.
4. Restrictions, if any, on share transfers:
(a) Subject to the exceptions listed below, Shares (whether owned by the
original or any subsequent holder thereof) shall not be transferred in any
manner unless the holder(s) has furnished written notice to the Company
which notice shall identify the proposed transferee of such Shares. The
Company may elect, at any time within sixty (60) days of receipt of the
notice of the proposed transfer, to purchase the shares identified in the
notice required by this Section 4(a). If the Company elects to purchase
such Shares, the price will be the balance of the Subsidiary Capital
Account related to such series of Shares as of the last day of the fiscal
quarter immediately preceding the date on which the offer to purchase was
accepted by the Company (the "Repurchase Date") (or if less than all such
Shares are offered, then the pro rata portion of such account attributable
to the Shares offered). Payment by the Company may be deferred until the
end of the fiscal quarter in which the offer to purchase was accepted by
the Company. Shares purchased by the Company pursuant to this paragraph
shall return to the status of authorized but unissued shares of such class.
If the Company does not elect to purchase the Shares pursuant to this
paragraph, they may be transferred to the party identified in the notice
referred to above within sixty (60) days, subject to the requirements of
the following paragraphs. After such further sixty (60) days, any attempted
transfer of the Shares shall be subject to all the requirements of this
paragraph.
(b) In addition to the requirements of the preceding paragraph and except
as provided in paragraph (d) below, transfers of less than all Shares of a
series shall not be made unless the holder(s) has received the written
consent of the Company thereto. A request for such consent must be made in
writing and set forth the name(s) and address(es) of the intended
transferee(s), the desired date of the transfer, and the consideration to
be paid. The Company shall have sixty (60) days from receipt of such
request to grant or withhold its consent to the intended transfer. If the
Company fails to give its written consent, any subsequent transfer shall be
void and of no effect.
(c) Shares may not be transferred unless and until the Board has received
such assurances of compliance with all applicable laws and regulations as
it may deem necessary and the transferee has agreed to abide by the
requirements set forth in the Stock Purchase Agreement entered into by the
transferor. Certificates representing shares of any class of the Company's
shares shall bear a legend substantially to the effect of this Section 4 of
these Articles.
(d) A sale, gift, assignment, pledge or other transfer of Shares shall be
exempt from the requirements of paragraphs (a) and (b) of this Section 4 if
the Board determines that the transferee or assignee of the shares is: (i)
a member of the transferring shareholder's immediate family; (ii) a trust
for the benefit of the transferring shareholder, or for the benefit of
other exempted transferees described in this paragraph; (iii) if the
transferor is a corporation, any shareholder of the transferor; (iv) if the
transferor is a partnership, any of its partners; (v) a corporation which
is controlled by or under common control with the transferor; (vi) the
estate of a deceased shareholder or legatees and heirs of such deceased
shareholder; (vii) a charitable or other qualifying organization described
in Section 170(c)(2) of the United States Internal Revenue Code of 1986;
(viii) in the case of a transfer of less than all of the Shares of a
series, a person who immediately prior to such transfer is a holder of
Shares of that series; or (ix) a key employee of the entity with respect to
which the Shares held by the transferor were issued.
7. Other provisions if any:
No holder of shares of the Company of any class, now or hereafter authorized,
shall have any preferential or preemptive right to subscribe for, purchase or
receive any shares of the Company of any class, now or hereafter authorized, or
any options or warrants for such shares, or any rights to subscribe for or
purchase such shares, or any securities convertible into or exchangeable for
such shares, which may at any time be issued, sold or offered for sale by the
Company.
Amendment of Articles and By-Laws:
The Company's Articles and By-Laws shall not be altered, amended or repealed and
no provision inconsistent therewith shall be adopted, without the affirmative
vote of the holders of a majority of the Common shares and of the Shares
present; provided that the rights associated with any series of Shares shall not
be varied, unless the rights associated with all other series are similarly
changed, without the affirmative vote of the holders of a majority of the Shares
of each series present.
APPENDIX B
STOCK PURCHASE AGREEMENT
BETWEEN
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
AND
(Certified Purchaser)
-----------------
(Month/Date/Year)
Motors Mechanical Reinsurance
Company, Limited
One Financial Place
Collymore Rock
St Michael, Barbados
Gentlemen:
The undersigned Shareholder (as more fully described below) hereby offers to
purchase certain shares of stock of Motors Mechanical Reinsurance Company,
Limited, a Barbados Corporation (the "Company"), upon the terms and conditions
set forth herein. The Shareholder hereby tenders a check in the amount of the
Purchase Payment (as defined herein), to be held in an escrow account with
Barclays Bank PLC (the "Escrow Account"). This offer shall expire on the 120th
day after the date hereof if the Company has not accepted it prior to such
expiration date. The Shareholder acknowledges receipt of a prospectus dated June
__, 2002 with respect to the stock described herein.
1. DEFINITIONS
1.1 MIC The term "MIC" means Motors Insurance Corporation, a Michigan
corporation.
1.2 MIC Mechanical Account The term "MIC Mechanical Account" means the separate
business record maintained by MIC or any of its subsidiaries or affiliates to
track volume, experience and commissions with respect to motor vehicle
mechanical service agreements sold by:
(insert names and addresses of particular entity or entities selling new and/or
used motor vehicles with respect to which the applicable MIC Mechanical Account
is maintained).
1.3 Purchase Payment The term "Purchase Payment" means the $ ($75 (U.S.) x
number of shares) paid hereunder as consideration for the purchase of the
Shares.
Shareholder The term "Shareholder" means ________________________, taxpayer
identification number ____________________, who is a citizen of
_____________________________, and who resides at
______________________________________________________ .
1.5 Shares The term "Shares" means ____________ shares (number of shares) of the
authorized shares of a series of the participating stock of the Company, which
series consists of 100 shares, and which is issued in respect of the MIC
Mechanical Account.
1.6 The masculine gender is to be construed to include a female or an entity
where the context of this Agreement so requires.
2. REPRESENTATIONS
2.1 Representation of Shareholder The Shareholder represents that he has been
duly certified (on the form furnished by the Company and attached hereto) by the
owner(s) of the entity or entities with respect to which the MIC Mechanical
Account is maintained and meets the requirements for this purchase and sale as
set forth in the Articles of Incorporation of the Company (the "Articles"),
copies of which are attached to the prospectus. (It is understood that, if more
than one person owns the entity or entities referred to in the foregoing
sentence, all such persons must join in the certification of the Shareholder.)
2.2 Representation of Company The Company represents that the issuance and sale
of the Shares pursuant to this Agreement has been duly authorized by the Board
in accordance with the Articles, and is consistent with the applicable
provisions of Barbados law.
3. PURCHASE AND SALE OF SHARES
Upon acceptance of this Agreement by the Company, the Company agrees to sell and
issue to the Shareholder, and the Shareholder agrees to purchase, the Shares in
consideration of the Purchase Payment.
4. ESCROW OF PURCHASE PAYMENT
Subject to the following sentence, the Purchase Payment will remain on deposit
in the Escrow Account until the Shares are issued by the Company. If this
Agreement is not executed by the Company within 120 days of the date hereof, the
Purchase Payment shall be refunded promptly together with any interest earned
thereon. Following execution by the Company, the Shareholder shall have no right
to withdraw the amount of the Purchase Payment or any interest earned thereon.
5. COVENANTS OF THE COMPANY
5.1 Series of Participating Stock No more than 100 shares of the same series of
participating stock as the Shares shall be issued by the Company, and no other
series of such stock shall be issued with respect to the MIC Mechanical Account.
5.2 Reinsurance Business The business of the Company shall be limited to the
reinsurance of motor vehicle mechanical breakdown risks underwritten by MIC or
its subsidiaries or affiliates and identified with the MIC Mechanical Account
and similar MIC accounts maintained with respect to entity or entities for which
series of participating stock of the Company are issued and outstanding.
6. LIMITATIONS BASED ON INADEQUATE CAPITAL
The Shareholder and the Company agree that if the Company cannot meet the
minimum margin of solvency requirements under Barbados insurance law, then, to
the extent the net asset value attributable to the Subsidiary Capital Account
(the "Account") for the shares issued pursuant to this Agreement is less than
its pro rata share (based on proportionate earned premium) of the Company's
required net asset value, the Company shall reduce the business attributable to
the Account, on a pro rata basis with such other accounts that are similarly
deficient, by retrocession or some other means acceptable to the Company, to the
extent necessary to permit the Company to meet the Company's required minimum
margin of solvency.
7. RESTRICTIONS ON TRANSFER
The Shareholder agrees to be bound by and shall be subject to all provisions in
the Articles (including without limitation those with respect to the ownership
and transfer of the Shares) that are in effect as of the date of this Agreement
or that may be added in the future, and any amendments to such provisions. It is
understood that the Company may place on the certificate for the Shares a legend
stating in substance:
The sale, transfer, or other disposition of the shares evidenced by this
certificate is restricted pursuant to provisions of the Articles of Motors
Mechanical Reinsurance Company, Limited ("Company"), and the Stock Purchase
Agreement ("Agreement") between the Company and the Shareholder, [dated],
pursuant to which the shares were issued. Copies of the Articles and the
Agreement may be examined at the registered office of the Company.
8. MISCELLANEOUS
8.1 Severability If for any reason any provision of this Agreement shall be
invalid or unenforceable, the validity of any or all of the remaining provisions
shall not be affected thereby; provided, however, that the absence of such
illegal or invalid provisions does not so materially alter the purpose of this
Agreement such that the continuation of the arrangement contemplated by this
Agreement would no longer be mutually beneficial to the Shareholder and the
Company.
8.2 No Waiver The failure of any party to insist upon strict performance of any
obligation hereunder shall not be a waiver of the party's right to demand strict
compliance therewith in the future.
8.3 Governing Law This Agreement shall be governed by and construed in
accordance with the laws of Barbados.
8.4 Counterparts This Agreement has been executed in multiple copies, each of
which shall for all purposes constitute one Agreement, binding on the parties.
8.5 Assignment This Agreement is personal to the parties and, except as
contemplated herein and in the Articles, no party shall have any right to assign
any right or to delegate any duty hereunder, either voluntarily or
involuntarily, or by operation of law.
8.6 Term of Agreement Except as herein expressly provided, this Agreement shall
remain in force as long as the Shares remain outstanding. If not terminated
sooner, this Agreement shall terminate upon the earlier of the redemption of the
Shares or the liquidation of the Company.
8.7 Effect of Transfer The Shareholder shall be relieved of all restrictions and
obligations and shall not be entitled to any further benefits under this
Agreement upon transfer of all the Shares and upon the agreement of the
transferee to be bound by the terms and conditions of this Agreement.
8.8 Amendment No change, modification, or amendment to this Agreement shall be
valid or binding upon the parties hereto unless such change, modification, or
amendment shall be in writing signed by all of the parties.
8.9 Integration This Agreement constitutes the full and complete agreement
between the Shareholder and the Company.
8.10 Captions Titles or captions of sections, paragraphs or exhibits contained
in or made a part of this Agreement are inserted only as a matter of convenience
and for reference, and in no way define, limit, extend or describe the scope of
this Agreement or the intent of any provision hereof.
8.11 Notices Any and all notifications permitted or required to be made under
this Agreement shall be in writing, signed by the party giving such
notification, and shall be sent by registered or certified mail, postage prepaid
(1) if to the Shareholder, at the address set forth in Section 1.5 of this
Agreement or at such other address as may have been furnished by the Shareholder
to the Company in writing; or (2) if to the Company, in care of Motors
Mechanical Reinsurance Company, Limited, One Financial Place, Collymore Rock,
St. Michael, Barbados, W.I. For purposes of computing a time period, the date of
mailing shall be the date of notification.
8.12 Survival of Representations and Warranties All agreements, representations,
and warranties contained herein or made in writing by the Shareholder or the
Company in connection with the transactions contemplated hereby shall survive
the execution and delivery of this Agreement, and the sale and purchase of the
Shares under this Agreement.
8.13 Relationship to Articles The provisions of the Articles are incorporated
herein to the extent relevant to this Agreement.
If the authorized representative of the Company executes this Agreement on its
behalf, then this Agreement shall become a binding contract, subject to the
terms and conditions set forth herein, between the Company and the Shareholder
as of the date of the execution on behalf of the Company.
Very truly yours,
______________________________________
Print Name of Shareholder
Title_________________________________
Date__________________________________
The foregoing Agreement is hereby accepted and agreed to as of the date set
forth below. Series P-_______ is hereby designated for the Shares described in
this Agreement.
MOTORS MECHANICAL REINSURANCE
COMPANY, LIMITED
By____________________________________
Title_________________________________
Date__________________________________
Note: Upon acceptance by the Company, a duly signed copy of this Agreement shall
be sent to the Shareholder.
APPENDIX C
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED
CERTIFICATION FORM
The undersigned represent(s) that he (she)(they) is (are) the owner(s) of the
entity or entities selling new and/or used motor vehicles doing business as
____________________________________________ (name of dealership(s)), with
respect to which MIC Mechanical Account___ is maintained. The undersigned hereby
designate(s) ______________________________________________________________
(name of purchaser), who resides at _________________________________________
(address of purchaser), to be deemed eligible to purchase shares of a series of
the participating stock of Motors Mechanical Reinsurance Company, Limited (the
"Company") pursuant to the Articles of Incorporation of the Company. The
undersigned further represent(s) that all beneficial owners of the dealership
have consented to this designation.
_________________________ ______________________________________
Date Signature of Dealership Owner
______________________________________
Print Name of Dealership Owner
(Names of Co-Owners, if any)
_________________________ ______________________________________
Date Signature of Co-Owner
______________________________________
Print Name of Co-Owner
_________________________ ______________________________________
Date Signature of Co-Owner
______________________________________
Print Name of Co-Owner
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses, all of which were paid by
Motors Insurance Corporation, in connection with the initial offering described
in the Registration Statement:
Registration Fee -- Securities and
Exchange Commission.................................. $ 188
State "Blue Sky" fees..................................... $ 25,000
Accountants Fees and Expenses ............................ $ 10,000
Legal Fees and Expenses .................................. $ 30,000
Printing and Engraving ................................... $ 8,000
Miscellaneous ............................................ $ --
-------
Total Expenses ........................................... $ 64,786
-------
- --------------------------------------------------------------------------------
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Paragraph 10 of Registrant's By-Laws provides for the indemnification of
Registrant's officers and directors (and such persons' heirs, executors and
administrators) against any and all judgments, fines, amounts paid in settlement
and reasonable expenses, including attorneys' fees, incurred by such person in
connection with any claim, action, suit or proceeding, whether civil, criminal,
administrative or investigative by reason of the fact that such person is or was
a director or officer of the Company, or is or was serving at the request of the
Company as a director, officer, employee, fiduciary or member of any other
corporation, partnership, joint venture, trust, enterprise or organization,
except with respect to any matter for which indemnification would be void
pursuant to the Companies Act, 1982 of Barbados (the "Companies Act").
Under the Companies Act, indemnification of Registrant's officers and directors
against any liability which would attach by reason of any contract entered into
or act or thing done or omitted to be done by them in performance of their
office or in any way in the discharge of their duties, if the same happens
through their not acting in good faith and in the best interest of the
Registrant is void.
The position of the Securities and Exchange Commission regarding indemnification
for liabilities arising under the Securities Act of 1933 is set forth under Item
17, paragraph 4 of this Part II.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
A. Exhibits:
4 Restated Articles of Incorporation (filed as Appendix A to the
Prospectus).
5 Opinion of Peter R.P. Evelyn filed by reference to Exhibit 5 to
Amendment No. 3 to Registration Statement on Form S-2, File No.
333-82365.
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.
(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.
(c) Specimen Stock Purchase Agreement (filed as Appendix B to the
Prospectus).
(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.
(e) Insurance Management Agreement between Registrant and Aon
Insurance Managers (Barbados) Ltd. (previously Alexander
Insurance Managers (Barbados) Ltd.) effective January 1, 1996,
filed by reference to Exhibit 10(e) to Annual Report on From
10-K, File No. 33-6534, for the year ended December 31, 1996.
(f) Investment Management Agreement between Registrant and BlackRock
International, Ltd. filed by reference to Exhibit 10(f) to Annual
Report on Form 10-K, File No, 33-6354 for the year ended December
31, 1999.
23 (a) Consent of Peter R.P. Evelyn.
(b) Consent of LeBoeuf, Lamb, Greene & MacRae, L.L.P.
(c) Consent of Deloitte & Touche, Independent Chartered Accountants.
99 (a) Certification Form (filed as Appendix C to the Prospectus).
(b) Guarantee issued by the Ministry of Finance of Barbados filed by
reference to Exhibit 99(b) to Amendment No. 2 to Registration
Statement on Form S-2, File No. 33-6534.
(c) Certificate of Barbados Residency filed by reference to Exhibit
28(c) of Amendment No. 1 to Registration Statement on Form S-1,
File No. 33-6534, dated February 12, 1987.
B. Financial Statement Schedules:
No financial statement schedules are submitted herewith because the information
is included elsewhere in the financial statements or the notes thereto or such
schedules are not applicable.
ITEM 17. UNDERTAKINGS
The Company hereby undertakes:
(1) To file, during any period in which offers or sales of the securities being
registered are being made, a post-effective amendment to this Registration
Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement;
(2) That, for the purpose of determining any liability under the Securities Act
of 1933 (the "1933 Act"), each such post-effective amendment shall be deemed to
be a new Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof;
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
(4) Insofar as indemnification for liabilities arising under the 1933 Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of St. Michael, Barbados, on
June 20, 2002.
MOTORS MECHANICAL REINSURANCE COMPANY,
LIMITED
By s/Ronald W. Jones
-----------------------
Ronald W. Jones, Vice-President, Finance
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
s/William B. Noll Chairman and Chief Executive June 24, 2002
- ----------------------- Officer and Director
William B. Noll (Principal Executive Officer)
s/Ronald W. Jones Vice-President (Principal June 20, 2002
- ----------------------- Financial and Accounting Officer)
Ronald W. Jones
s/Thomas D. Callahan Executive Vice-President and Director June 21, 2002
- -----------------------
Thomas D. Callahan
s/John J. Dunn, Jr. Vice-President and Director June 21, 2002
- -----------------------
John J. Dunn, Jr.
s/Robert E. Capstack Vice-President and Director June 24, 2002
- -----------------------
Robert E. Capstack
s/Peter R. P. Evelyn Director June 21, 2002
- -----------------------
Peter R. P. Evelyn
- ----------------------- Director
Harvey J. Koning