SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the fiscal year ended December 31, 1995 Or [ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 Commission file number 33-6534 MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED (Exact name of registrant as specified in its charter) Barbados Not Applicable State or other jurisdiction of (I.R.S. employer incorporation or organization) identification number) Financial Services Centre Not Applicable Bishops Court Hill (Zip Code) St. Michael, Barbados, W.I. (Address of principal executive offices) Registrant's telephone number, including area code (809) 436-4895 Securities registered pursuant to Section 12(b) of the Act: Name of each Title of each class Exchange on which registered None None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] Aggregate market value of the voting stock held by non- affiliates of the registrant as of March 1, 1996, was $1,830,000*. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Class As of March 1, 1996 Common Stock, no-par value 2,000 Participating Stock, no-par value 24,400 * Based on current offering price of $75 per share. PART I Item 1. BUSINESS INTRODUCTION Motors Mechanical Reinsurance Company, Limited (the "Company") was incorporated in Barbados on June 12, 1986. It became registered in Barbados as an insurer on June 30, 1986 and commenced insurance operations on December 11, 1987. The business of the Company is the assumption of motor vehicle mechanical breakdown insurance risks arising under insurance policies reinsured by Motors Insurance Corporation ("MIC") to the extent such policies are attributable to an MIC agency account in respect of which a series of shares is issued and outstanding (the "Policies"). These policies are issued either to General Motors Corporation or affiliates ("GM") or to automobile dealers, reinsured by MIC, and retroceded to the Company. Shares of the Company's Participating Stock (the "Shares") are sold to persons designated by owners of motor vehicle sales franchises with respect to which MIC maintains an MIC Agency Account. A separate series is created for Shares relating to each MIC Agency Account, and a separate "Subsidiary Capital Account" is maintained for each such series. The profitability of the Company reflects both underwriting and investment experience, which is allocated among the Subsidiary Capital Accounts. THE RETROCESSION The Retroceding Company. MIC, the retroceding company under the Retrocession Agreement described below, is a stock insurance company organized under the laws of New York. All of MIC's outstanding stock is owned by General Motors Acceptance Corporation which, in turn, is a wholly owned subsidiary of GM. MIC, directly and through its subsidiaries, offers property and casualty coverages in all 50 states and the District of Columbia, as well as in Canada and Europe. MIC consistently has been awarded A.M. Best Company's insurance financial rating of A + (Superior), one of the highest possible ratings. MIC maintains MIC Agency Accounts in respect of Franchises to which the risks to be retroceded can be attributed. (A single MIC Agency Account may be established either for a single Franchise or in respect of a group of Franchises treated as a single business unit by MIC and its subsidiaries.) Currently, there are more than 6,800 MIC Agency Accounts in respect of Franchises through which mechanical insurance business is produced. The Retrocession Agreement -- Principal Agreement. The Company has entered into a "quota share" retrocession agreement (the "Agreement") which became effective as of December 11, 1987. Pursuant to the Agreement, MIC retrocedes to the Company, and the Company is obligated to assume, MIC's risks in respect of policies issued by any MIC subsidiary and reinsured by MIC that cover automobile mechanical breakdown risks, to the extent that risks under such policies are attributable to an MIC Agency Account in respect of which a series of Shares is issued and outstanding. MIC retrocedes 100% of the risk and the Company receives 75% of the original gross premium, reduced by agents' commissions, if any. The remaining 25% of the gross premium is retained by MIC as a ceding commission. The Company assumes 75% of the risk with respect to these policies and MIC pays 56.25% of the gross premium at the time the policies are written. The remaining 25% of the risk is ceded to the Company and MIC pays 18.75% of the gross premium as the premiums are earned. Settlements between the Company and MIC are made quarterly. The Agreement may be terminated at any time by mutual consent of the parties, or by either party upon 30 days written notice. Upon termination of the Agreement, MIC and the Company will remain bound by their respective obligations under the Agreement with respect to risks retroceded prior to the close of business on the date of termination. However, risks not yet retroceded to the Company under the Agreement shall remain risks of MIC. The Retrocession Agreement -- Supplemental Agreement. MIC from time to time enters into agreements with Franchise owners for which an MIC Agency Account is established, pursuant to which MIC, acting for itself and on behalf of certain of its subsidiaries, agrees to cede or retrocede to another insurance company mutually satisfactory to MIC and the respective Franchise owners the unexpired liability on service contracts, insured under the Policies, sold after the date specified in each such agreement. This liability can be ceded or retroceded to dealer-owned companies organized specifically with respect to a particular Franchise or, if a series of Shares is issued which relates to the Franchise, pursuant to an agreement between MIC and the Company (the "Supplemental Retrocession Agreement"). For this purpose, unexpired liability means MIC's liability in respect of the remaining period of coverage under the Policy as of the effective date of the cession. Under the Supplemental Retrocession Agreement, unexpired liability in respect of the Policies is assumed on the same basis as risks retroceded to the Company under the principal Retrocession Agreement. Types of Risks Subject to Retrocession. Coverages assumed under the Agreement are limited to service contracts or insurance policies insured or reinsured by MIC that provide indemnification against specific automobile mechanical breakdowns not covered by a manufacturer's new vehicle warranty. Such service contracts or insurance policies often provide additional coverages, such as towing and rental allowances. Loss Reserves. Reserves are balance sheet liabilities representing estimates of amounts needed in the future to pay claims with respect to insured events which have occurred as of the balance sheet dates. For purposes of establishing loss reserves, the Company relies upon the advice of MIC. Loss reserves are established after an annual actuarial review, based on judgments of the effects of technological change, manufacturers' warranties, and MIC's historical experience with automotive mechanical breakdown risks. Consequently, the determination of loss reserves is a process inherently subject to a number of highly variable factors. Any adjustments to reserves are reflected in the operating results for the periods in which they become known. The Company's incurred loss ratios (losses incurred as a percentage of net premium earned) on all mechanical business for the years ended December 31, 1995, 1994, and 1993 were 67.5%, 69.6% and 70.7% respectively. The following table sets forth an analysis of changes in the loss reserves for the years ended December 31, 1993, 1994 and 1995: Year Ended 12/31/93 12/31/94 12/31/95 Beginning balance in reserves for losses $1,622,855 $1,910,030 $2,660,270 _________ _________ _________ Add-provision for losses incurred related to: Current claim year 11,046,932 14,893,890 19,540,192 Prior claim years (134,249) (63,724) (109,160) _________ ________ _________ Total 10,912,683 14,830,166 19,431,032 __________ __________ __________ Deduct-paid losses attributable to: Current claim year 9,363,720 12,527,026 16,461,768 Prior claim years 1,261,788 1,552,900 2,149,200 _________ _________ _________ Total 10,625,508 14,079,926 18,610,968 __________ __________ __________ Ending balance in reserves for losses $1,910,030 $2,660,270 $3,480,334 The following table analyzes the development of losses and loss adjustment expenses from February 1, 1989 through December 31, 1995. 1/31/90 12/31/90 12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 Liability for unpaid claims and claims adjustment expense $766,912 $1,075,123 $1,396,542 $1,622,855 $1,910,030 $2,660,270 $3,480,334 Paid (cumulative) in subsequent year(s) $666,866 $748,557 $ 912,465 $1,261,788 $1,552,900 $2,149,200 Estimated unpaid liability as of year end* 2,393 43,840 186,542 226,818 293,406 401,910 _____ ______ _______ ________ _______ _________ Cumulative Deficiency (Redundancy) $(97,653) $(282,726) $(297,535) $(134,249) $(63,724) $(109,160) */ Because mechanical breakdown claims are generally paid within 90 days of when they are incurred, liability for unpaid claims incurred in prior years is negligible. Accordingly, liability for unpaid claims incurred in all prior years has been combined at each year end. The table shows initial estimated reserves at December 31, 1994, 1993, 1992, 1991 and 1990 and January 31, 1990 and amounts paid on claims unsettled at each prior period end. Claims are typically processed for payment at the time the claim is reported. Therefore, the recorded claim liability at each year end represents the estimated incurred but not reported claims and claims in the process of payment. The cumulative deficiency or redundancy represents the total change in reserve estimates covering prior years. The policies reinsured by the Company are written for multiple years (up to six years) and losses do not occur equally over the period for which the policy is written but tend to be clustered in the later years. Therefore, loss experience for prior years may not be indicative of that for future years. INVESTMENT INCOME A major source of income to an insurance company is income earned on the investment of amounts not currently required to meet losses or expenses. The principal funds available for investment by the Company come from accumulated capital, and the cumulative excess of premiums collected over losses and operating expenses paid. The Company's funds are invested in a manner consistent with investment guidelines that are established by the Board. The Company invests primarily in U.S. dollar-denominated securities issued outside of the United States by non-United States private or governmental issuers, and U.S. dollar- denominated bank certificates of deposit issued by foreign banks and foreign branches of U.S. banks. Subject to the satisfaction of certain conditions, the Company may make limited investments in non-dollar denominated bonds, on a currency-hedged basis. The Company may invest only in securities and certificates which are rated at least Aa3 by Moody's or AA- by Standard & Poor's or the equivalent, or are guaranteed by such an issuer. However, certain unrated securities may also be held if, in the opinion of the investment manager, they have at least equivalent credit standing to the above rating standard. The Board reviews on a regular basis and, where appropriate, revises the investment objectives and guidelines for the Company's funds. There can be no assurance, however, as to whether a particular investment objective, once adopted, can be achieved or that adverse factors would not cause a decrease in the overall value of the Company's investment portfolio. Investments in non-U.S. securities, particularly those of non- governmental issuers, may involve considerations not ordinarily associated with investments in domestic issuers. These considerations include, but are not limited to, the possibility of expropriation, the unavailability of financial information or difficulty in interpreting such information when it is prepared under foreign accounting or regulatory standards, the possible negative impact of political, social or diplomatic developments, and the possible imposition of withholding taxes by foreign taxing authorities. Rothschild Asset Management Limited ("Rothschild") manages the investment and reinvestment of the Company's funds in accordance with the investment policies and guidelines established by the Board. Rothschild, which is one of the leading institutions engaged in the management of offshore fixed-income portfolios, and which has been providing this service since 1974, is an affiliate of NM Rothschild and Sons Limited, a prominent merchant bank in London which has been in the investment management business worldwide for more than 100 years. Rothschild charges a management fee of 0.3% per annum on the first $20,000,000 of assets under management based on the market value of the Company's investment portfolio at the end of each calendar quarter, and 0.15% per annum on the excess thereof. ALLOCATIONS TO SUBSIDIARY CAPITAL ACCOUNTS The Company has established a Subsidiary Capital Account with respect to the Common Stock as a class, and establishes such an account with respect to each series of Shares at the time a series is issued. Subsidiary Capital Accounts are maintained solely for the purpose of the allocations described below, and do not serve any other legal or accounting function. None of the Company's assets are segregated or earmarked with respect to those accounts. The consideration received by the Company upon the issuance of a particular series of Shares and the Common Stock as a class are allocated to the Subsidiary Capital Account for that series or class. Items of income and expense, and losses, attributable to insurance underwriting activities are determined and allocated to the Subsidiary Capital Accounts as of the end of each quarter. Investment experience, and other items of income and expense, gains and losses and distributions with respect to the Capital Stock, are determined and allocated to the Subsidiary Capital Accounts as of the end of each quarter. All such accounting determinations are made using accounting principles generally accepted in the United States, unless otherwise required by the Articles. For purposes of the following description, items shall be "related" to the Subsidiary Capital Account for the series identified with the MIC Agency Account to which such items can be attributed. (1) Allocations with respect to underwriting activities are made as follows: (a) With respect to premiums ceded by MIC to the Company, 100% to the related Subsidiary Capital Account; provided, however, that an amount equal to 1-1/3% of those premiums, net of related ceding commissions, are subtracted from such Subsidiary Capital Account and allocated to the Subsidiary Capital Account for the Common Stock. (b) With respect to any agents' or brokers' commissions, commissions recaptured, unearned premiums, reinsurance premiums ceded, and any United States excise tax, 100% to the related Subsidiary Capital Account. (c) With respect to losses incurred, and any amount of losses recovered through salvage, subrogation, reimbursement or otherwise: (i) ninety percent (90%) to the related Subsidiary Capital Account; and (ii) the remainder among all Subsidiary Capital Accounts of the Shares pro rata in accordance with the relative earned premiums attributable to those accounts for the quarter in which the losses are incurred. (d) With respect to return premiums, 98-2/3% to the related Subsidiary Capital Account and 1-1/3% to the Subsidiary Capital Account for the Common Stock. (2) Any expenses or liabilities attributable to day-to-day Company operations, excluding any United States Federal income taxes, are allocated among all Subsidiary Capital Accounts for the Shares pro rata in accordance with the relative earned premiums allocated to those accounts for the quarter in which the expense or liability is incurred. (3) Any United States Federal income tax liability (and any interest thereon or any penalties related thereto) is allocated among the Subsidiary Capital Accounts based upon the relative contribution of each of those accounts to the taxable income of the Company upon which the tax (or any interest or penalties) is imposed. (4) Any expenses or liabilities attributable to the sale and issuance of Shares, including but not limited to the costs of compliance with regulations and requirements of the Securities and Exchange Commission and state securities laws (but not including ongoing periodic reporting costs), are allocated to the Subsidiary Capital Account for the Common Stock; however, MIC may undertake to pay such expenses. (5) Any expenses or liabilities of the Company not allocable in the manner described in paragraphs 2 through 4 above are allocated among the Subsidiary Capital Accounts on the basis of the relative balances of those accounts as of the end of the quarter preceding the date on which the expense or liability is incurred. (6) (a) Investment income, net of any direct investment expense, is allocated among the Subsidiary Capital Accounts pro rata based upon the relative Investment Asset Balance (as defined in subparagraph (b) below) of each of those accounts as of the last day of the quarter preceding the quarter for which the investment income is being allocated. For these purposes, net investment income includes realized (but not unrealized) gains and losses. (b) The Investment Asset Balance of each Subsidiary Capital Account is equal to the capital and surplus of each account, increased by: (i) the unearned portions of the written premiums that have been collected by the Company attributable to those accounts as of the last day of the quarter preceding the quarter for which the income is being allocated, net of any applicable commissions and taxes; (ii) the outstanding loss reserves attributable to each of those accounts as of the last day of the quarter preceding the quarter for which the income is being allocated; and (iii) any other outstanding liability that has been charged to the account as of the last day of the quarter preceding the quarter for which the income is being allocated. (7) (a) If, after the credits and charges described in paragraphs 1-6 above are made to the Subsidiary Capital Accounts there exists a deficit in one or more of the accounts, then each such deficit is allocated to and charged against: (i) first, the Subsidiary Capital Account for the Common Stock to the extent of Restricted Earned Surplus (the phrase "Restricted Earned Surplus" refers to the portion of the earned surplus, if any, in the Subsidiary Capital Account for the Common Stock equal to that 1-1/3% of the premiums ceded to the Company during the immediately preceding five-year period which was subtracted from the Subsidiary Capital Accounts for the Shares pursuant to paragraph 1(a) above, net of losses allocated to that account during such period pursuant to the allocation procedure described in this paragraph 7 and net of return premiums allocated to that Account during such period pursuant to the allocation procedure described in paragraph (1)(d) above); (ii) then, the Subsidiary Capital Accounts for the Shares, pro rata, based upon the relative earned premiums allocated to each such account for the quarter for which the allocation is being made, provided, however, that only accounts which have positive balances are taken into account for purposes of this allocation; (iii) then, the remaining Subsidiary Capital Accounts for the Shares with positive balances as of the last day of the quarter for which the allocation is being made, pro rata, based upon such balances; and (iv) then, to the extent necessary, the Subsidiary Capital Account for the Common Stock. (b) If, as a result of an allocation of a deficit as described in subparagraph (ii) or (iii) of paragraph (a) above, a deficit is created in one or more of the Subsidiary Capital Accounts, then the resulting deficit(s) are further allocated in the manner provided in that subparagraph before applying a subsequent subparagraph. (c) Notwithstanding the foregoing, if any Subsidiary Capital Account for a series of Shares had a deficit that was allocated to and charged against the Restricted Earned Surplus or, after January 1, 1995, to the Subsidiary Capital Account for any series of Shares, then at the end of any succeeding quarter for which that account otherwise would show an account balance greater than zero, the balance is reallocated to the Restricted Earned Surplus until all reductions of that surplus attributable to that Subsidiary Capital Account have been restored and thereafter, to the Subsidiary Capital Accounts for the Shares, pro rata based on the relative amount of deficits allocated to such accounts, until all reductions of such Subsidiary Capital Accounts after January 1, 1995 have been restored. Thus, a loss in a Subsidiary Capital Account which exceeds the balance in that account is absorbed by other Subsidiary Capital Accounts, in general, as follows: The amount of such excess losses is charged first to the Restricted Earned Surplus portion of the Subsidiary Capital Account of the Common Stock. Any remaining losses, should the Restricted Earned Surplus be exhausted, is allocated among the Subsidiary Capital Accounts of other participating series. Any then unabsorbed losses are charged to the Subsidiary Capital Account of the Common Stock. Funds drawn from the Restricted Earned Surplus or the Subsidiary Capital Accounts for the Shares in the manner described above must be restored from the Subsidiary Capital Account that drew the funds if at any time it returns to a positive balance. (8) (a) Dividends, payments upon redemption or liquidation (described below), and any other distributions with respect to the 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 the Company pursuant to its right of first refusal or redeemed in accordance with the Company's procedures for redemption, the Subsidiary Capital Account for that series is terminated. Thereafter, all underwriting income and expenses, and losses that would have been allocated to the terminated account, are allocated among the Subsidiary Capital Accounts of the existing series of Shares pro rata based upon relative earned premiums attributable to each of those accounts for the calendar quarter in which the item was earned or incurred; provided, however, that a net deficit for any such period is allocated to the Subsidiary Capital Account for the Common Stock (to the extent of Restricted Earned Surplus) before allocating any remaining deficits to the Subsidiary Capital Accounts for the participating series. Using the procedures described above, the Company has allocated items of gain and loss to the Subsidiary Capital Account for each series. Initially each Account had a balance of $7,500 representing the amount paid for the Shares of that series. During the year ended December 31, 1995, $1,883,189 of net underwriting gains and $544,838 of administrative expenses were allocated among the 241 series of Shares outstanding as of December 31, 1995, and $5,563,573 of net investment income was allocated among such series of Shares and the Common Stock. As of December 31, 1995, 216 series of Shares outstanding had balances greater than $7,500 (ranging from $7,559 to $431,157) and 25 of such series had balances less than $7,500 (ranging from $6,762 to zero). (The amounts in the Subsidiary Capital Accounts can fluctuate substantially and therefore may not be indicative of future results.) At December 31, 1995, an aggregate of $1,281,396 had been advanced from the Restricted Earned Surplus (which forms a portion of the Account established for the Common Stock owned by MIC) to 22 Subsidiary Capital Accounts and remained outstanding at that date. In addition, at December 31, 1995, net deficits of $458,609 associated with 4 series of Shares that have been redeemed had been charged against Restricted Earned Surplus and remained outstanding at that date. As of December 31, 1995, $849,452 of aggregate deficits has been reallocated among the Subsidiary Capital Accounts of the Shares and remained outstanding. 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 resort to the Subsidiary Capital Account for the Common Stock will result, in the manner described above. The allocations of income and expense, gains and losses, and distributions described above are subject to approval by the Board, and when so approved are considered final and conclusive and will be binding on all holders of Shares for all purposes including without limitation any redemption of Shares pursuant to the Company's procedures for redemption. Barbados insurance law requires that the Company maintain certain levels of net assets, calculated without regard to unrealized gains or losses. The Company is currently in compliance with these requirements. However, in the event that the Company is unable to comply with such requirements in the future, it has the right to reduce the business related to a Subsidiary Capital Account by retrocession or any other means to the extent necessary to permit the Subsidiary Capital Account to meet its pro rata share of the Company's required capital and surplus. EMPLOYEES The Company does not have any full-time employees. Rather, the Company relies on Alexander Insurance Managers (Barbados) Ltd. (the "Manager") to handle its day-to-day operations. (See "Business of the Company -- Insurance Management Agreement," below.) In addition, corporate secretarial services for the Company are provided by Colybrand Company Services Limited of St. Michael, Barbados. The Board and the committees thereof, however, remain responsible for the establishment and implementation of policy decisions. COMPETITION The insurance business is extremely competitive. MIC management believes that at present, MIC and its subsidiaries are, as a group, one of the largest mechanical breakdown insurers of new GM vehicles in the United States. There are other major companies offering similar coverage. Because the insurance business of the Company is limited to the assumption of certain mechanical breakdown insurance business ceded by MIC, the profitability of the Company depends to a large degree on the success experienced by MIC and its affiliates in competing with those other insurers. Many commercial insurance groups are seeking to capture additional mechanical insurance business by offering to assist automobile dealers in the formation of their own dealer-owned reinsurance companies. MIC has assisted in the establishment of such companies for a number of qualified GM dealers. However, MIC believes that participation in the Company represents a more practical alternative for dealers who do not have the available capital, insurance management expertise or time for the personal involvement necessary for their own reinsurance company. INSURANCE MANAGEMENT AGREEMENT The Company has entered into an Insurance Management Agreement (the "Management Agreement") with the Manager, pursuant to which the Manager collects and disburses funds on behalf of the Company, provides bookkeeping, clerical, telephone, telex, and other services for the Company, and advises and consults with the Company in regard to all aspects of the Company's retrocession activities. Pursuant to the Management Agreement, the Manager has undertaken to maintain an office in Barbados to perform its duties. Further, during the term of the Management Agreement and generally for a period of one year thereafter, the Manager has agreed not to provide management or accounting services for any other company which, by the nature of its operations, is offering, insuring or reinsuring mechanical breakdown and/or extended warranty or related coverages on a multi-state basis in the United States or Canada with respect to motor vehicles sold by franchised GM dealerships. Under the terms of the Management Agreement, the Company pays the Manager a fee based on hourly rates for services performed. For the year ended December 31, 1995, the Company paid fees to the Manager in the amount of $168,577. The Manager is responsible for the payment of the salaries of its officers and employees and all office and staff overhead and other costs attributable to its services on the Company's behalf. However, out-of-pocket expenses, such as telephone, telex, postage, travel, and other items are borne by the Company on an expense reimbursement basis. The Manager was incorporated in Barbados in 1984, and is an affiliate of Alexander and Alexander, an international insurance brokerage and insurance consulting firm. The Manager performs services similar to those performed for the Company for several other entities. The Manager has ten employees. In addition, the Manager may draw upon the resources of its affiliates as needed to provide the services contemplated under the Management Agreement. No employee of the Manager devotes all of his or her time to the business of the Company. However, the Manager is obligated to devote all employee time necessary to ensure the performance of the Manager's duties under the Management Agreement. The Manager is subject to the control and direction of the Board. The Manager has served in that capacity since 1986. The current Management Agreement became effective on March 19, 1992 and may be terminated by either party as of the end of the then current year by the giving of written notice to the other party by September 1 of that year. BARBADOS REGULATION AND TAXES The Company's business is subject to regulation under the Barbados Exempt Insurance Act, 1983, as amended (the "Exempt Insurance Act"). The principal requirements of the Exempt Insurance Act require the Company to maintain its principal office in Barbados, appoint various professional advisors, and to meet certain capitalization and annual reporting requirements with respect to its operating activities and solvency requirements. Under the Exempt Insurance Act, no income tax, capital gains tax or other direct tax or impost is levied in Barbados on the results of the Company's operations, or transfers of securities or assets of the Company to any person who is not a resident of Barbados. The Company has received a guarantee from the Minister of Finance of Barbados that such benefits and exemptions will be available for a period ending December 31, 2016. Item 2. PROPERTIES The Company neither owns nor maintains any office space or facilities. Rather, the business office for the Company is provided by the Manager and is located at Financial Services Centre, Bishops Court Hill, St. Michael, Barbados. The Company believes that these facilities are adequate for its current and anticipated future needs. In addition, the Manager supplies all equipment for the Company, and maintains all insurance records for the Company. Item 3. LEGAL PROCEEDINGS The Company is not involved in any legal proceedings. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the quarter ended December 31, 1995. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) There is no public market for the Shares or the other capital stock of the Company, and none is expected to develop. Transfer of the Shares is restricted by the terms of a Stock Purchase Agreement. (b) All of the common stock of the Company is held by MIC. As of March 1, 1996 there were 422 holders of Shares of record, representing 244 series of Shares. (c) Under the Articles of Incorporation, the holders of Shares are entitled to receive minimum dividends equal to their pro-rata share of 20% of net income attributable to the associated Subsidiary Capital Account provided (i) the Company meets the Barbados regulatory requirements without regard to any letter of credit or guarantee, and (ii) the related Subsidiary Capital Account would also meet those requirements after giving effect to the dividend. In April of 1995, 1994 and 1993, the Company declared dividends of $1,188,614, $2,156,304 and $2,021,504. These dividends were declared as a varying percentage of earned surplus attributable to each series of Shares with the percentage applicable depending on the amount of earned surplus attributable to such series. Item 6. SELECTED FINANCIAL DATA The following selected financial data for the years ended December 31, 1995, 1994, 1993, 1992 and 1991 have been derived from financial statements audited by Deloitte & Touche, independent chartered accountants, whose report with respect to their audits of the financial statements as of December 31, 1995 and 1994 and for each of the three years in the period ended December 31, 1995 is included elsewhere herein. December 31 1995 1994 1993 1992 1991 Premiums Assumed $44,084,952 $38,371,896 $27,779,063 $19,386,455 $16,784,405 Premiums Earned $28,800,689 $21,316,685 $15,429,611 $13,005,184 $10,292,788 Net Investment Income 5,563,573 1,227,816 2,700,242 2,522,712 1,792,947 _________ _________ _________ _________ _________ Total Income 34,364,262 22,544,501 18,129,853 15,527,896 12,085,735 Less Losses and Expenses 27,462,338 20,825,943 15,425,146 12,020,682 10,165,350 __________ __________ __________ __________ __________ Net Income* $6,901,924 $1,718,558 $2,704,707 $3,507,214 $1,920,385 Dividends Per Common Share 0 0 0 0 0 Total Assets $91,526,976 $66,012,284 $50,359,633 $36,847,490 $28,124,056 Total Policy Reserves and Other Liabilities 76,350,313 60,246,641 42,430,269 29,777,783 23,148,003 Stock- holders' Equity 15,176,663 5,765,643 7,929,364 7,069,707 4,976,053 Dividends Paid on Particip- ating Shares 1,188,614 2,156,304 2,021,504 1,021,705 150,317 */ Information as to earnings per share is not provided inasmuch as the results for each series of stock will vary with the underwriting experience attributable to each Subsidiary Capital Account established with respect to that series. See Note 2 to the financial statements. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity. The Company expects to generate sufficient funds from operations to cover current liquidity needs. The Company's liquidity requirements are related to payment of insurance losses, administrative expenses, and dividends. Premiums generated by the Company's reinsurance business, combined with investment earnings plus proceeds from the sale of Shares, will continue to be the principal sources of funds for the Company. Although losses are expected to increase due to the increased level of premiums assumed in each preceding year and the anticipated incidence of claims following the expiration of manufacturers' warranties, available funds from the sources identified above have also grown. Net cash provided by operating activities has increased to $16,418,640 in 1995 and $14,960,494 in 1994 from $11,550,335 in 1993. The Company believes that such funds will be sufficient to meet its liquidity requirements in 1996 and in future years to which its reinsurance liabilities extend. No capital expenditures are expected during the next few years. The Company had unearned premium reserves of $72,752,532 as of December 31, 1995, and $57,468,269 as of December 31, 1994. These amounts are attributable to the long-term nature of the contracts sold. Such contracts may extend for up to 72 months from date of issue. In addition, the risk of loss to the Company under the contract arises primarily after the underlying manufacturer's warranty expires. For new vehicles, the warranty generally covers 36 months or 36,000 miles. For used vehicles, the applicable warranty period depends on the unexpired portion of the original manufacturer's warranty at the time of purchase of the vehicle. Because the Company has little risk of loss prior to expiration of the underlying manufacturer's warranty, most premium is not recognized as earned until such expiration. Since very little premium is recognized as earned until the expiration of the underlying warranty, most of the premium written in any year is recorded as unearned. On April 6, 1995, the Board of Directors authorized the payment of dividends to eligible holders of Participating Shares aggregating $1,188,614. See "Market For Registrant's Common Equity And Related Stockholder Matters" for a discussion of dividends paid and legal restrictions on the payment of dividends. Capital Resources. Capitalization of the Company, as of December 31, 1995, was comprised of paid-in capital with respect to the Common Stock of $200,000, paid-in capital with respect to the Shares of $1,807,500 (compared with $1,665,000 and $1,417,500 as of December 31, 1994 and 1993, respectively), and earnings retained for use in the business of $11,517,542. Barbados law requires that the Company's net assets equal at least the aggregate of $1,000,000 and 10% of the amount by which the earned premium exceeded $5,000,000 in the previous year. If the Company's net assets are less than mandated by Barbados law, the Company has the right to reduce the business related to a Subsidiary Capital Account by retrocession or any other means to the extent necessary to permit the Subsidiary Capital Account to meet its pro rata share of the Company's required capital and surplus. At January 1, 1996, the Company's required minimum net assets computed in accordance with Barbados law was approximately $3,380,069, compared to total capital and retained earnings computed for purpose of Barbados law of $ 13,525,042. Results of Operations. During the year ended December 31, 1995, the Company had net income of $6,901,924 compared to $1,718,558 and $2,704,707 for the years ended December 31, 1994 and 1993, respectively. As described below, the increase in net income during 1995 compared to the previous year was the result of realized gains on the sale of investments, increases in interest earned and improved underwriting results. The reduction in net income during 1994 compared to the previous year was the result primarily of realized losses on the sale of investments. The Company had net underwriting income of approximately $1,338,351 in 1995 compared to $490,742 and $4,465 for the years ended December 31, 1994 and 1993, respectively. The increase in underwriting income during 1995 was the result of an increase in the amount of premiums earned coupled with a modest improvement in the loss ratio (the ratio of losses incurred to premiums earned). During 1995, the Company had earned premiums of $28,800,689 compared to $21,316,685 and $15,429,611 during 1994 and 1993, respectively. Increased premium income has been generated by the issuance of additional series of Shares during the year ended December 31, 1995, and the continuing flow of reinsurance premiums from series issued in prior years. During 1995, the Company issued 20 new series of Shares and redeemed 1 series of Shares for a net increase of 19 series. There were a total of 241 series outstanding at December 31, 1995 compared to 222 and 189 series of Shares outstanding at December 31, 1994 and 1993, respectively. The Company incurred losses and expenses during the year ended December 31, 1995 of $27,462,338 compared with $20,825,943 and $15,425,146 for the years ended December 31, 1994 and 1993, respectively. Expenses in 1995 were comprised of provisions for losses incurred of $19,431,032, ceding commissions and excise taxes of $7,486,469 and operating expenses of $544,837. Losses incurred in 1994 and 1993 were $14,830,166 and $10,912,683 respectively. The loss ratio for the year ended December 31, 1995 was 67.5% compared to 69.6% and 70.7% for the years ended December 31, 1994 and 1993, respectively. The Company incurred operating expenses during the year ended December 31, 1995 of $544,837 compared to $455,238 and $503,178 for the years ended December 31, 1994 and 1993, respectively. MIC has agreed to pay directly certain costs of registering and issuing shares if such costs can not be allocated to the Subsidiary Capital Account for the Common Stock. In 1995 and 1994, $171,079 and $162,989, respectively, of such costs were paid directly by MIC. For the year ended December 31, 1993, $74,461 of such costs were paid by the Company and allocated to the Subsidiary Capital Account for the Common Stock. Investment income in 1995 was $5,563,573 compared to $1,227,816 and $2,700,242 for the years ended December 31, 1994 and 1993, respectively. The increase in investment income during 1995 compared to 1994 was attributable to realized gains on the sale of investment securities and an increase in interest earned. The decrease in investment income during 1994 compared to 1993 was primarily attributable to realized losses on the sale of investment securities which offset an increase in interest earned. The sale of investment securities for the year ended December 31, 1995 resulted in realized gains of $1,857,519 compared to realized losses of $1,543,358 for the year ended December 31, 1994, and realized gains of $872,313 for the year ended December 31, 1993. The realized gains during 1995 were due to increased sales of investment securities to take advantage of market opportunities presented by fluctuations in interest rates. The realized losses on the sale of investment securities during 1994 resulted from changes in interest rates which adversely affected the market values of the Company's investment portfolio. Interest earned for the year ended December 31, 1995 was $3,706,054 compared to $2,771,174 and $1,827,929 for the years ended December 31, 1994 and 1993, respectively. The increase in interest earnings during 1995 was largely a result of an increase in the amount of assets under management which offset the impact of lower interest rates. Unrealized appreciation on investment securities held at December 31, 1995 was $1,651,621 compared to unrealized depreciation at December 31, 1994 of $1,896,089. The unrealized appreciation as of December 31, 1995 compared to the unrealized depreciation as of December 31, 1994 is in large part attributable to lower long term interest rates in effect during 1995 which increased the market value of the Company's investment portfolio. At December 31, 1995, approximately 78.5% of the Company's investments are in U.S. dollar-denominated fixed-income securities. Approximately 21.5% of the Company's investments are in non-U.S. dollar-denominated bonds, on a currency-hedged basis. The Company's investment manager seeks to identify non-U.S. dollar-denominated investments that offer a higher rate of return (net of hedging costs) than would be available in the market for similarly rated U.S. dollar-denominated bonds. The Company's investment guidelines do not permit the use of financial instrument derivatives in managing interest rate risk. The instruments used to hedge non-U.S. dollar- denominated investments involve, to varying degrees, elements of credit risk in the event a counterparty should default on its obligation under the hedge instrument. Such credit risk is managed through the selection of financially sound counterparties and periodic monitoring of counterparty financial condition. Pursuant to the Retrocession Agreement, the Company must furnish to MIC collateral in the form of an irrevocable letter of credit of at least 12 months duration equal in amount to the unearned premium in respect of risks retroceded and unpaid loss reserves (including reserves for losses incurred but not reported) otherwise required to be maintained by MIC in respect of the Policies. As of December 31, 1995, the Company had furnished such a letter of credit in the amount of $58,050,000. Accounting Change. FASB Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities" is effective for years beginning after December 15, 1993 and required the Company to classify its securities holdings into three categories (trading, available for sale, and held to maturity). The Company adopted Statement No. 115 in 1994 and classified its securities portfolio as available for sale. Adoption of the statement did not have a material effect on the Company's financial position and results of operations. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page 1. Independent Auditors' Report................... 2. Balance Sheets, December 31 1995 and 1994................................ 3. Statements of Income and Retained Earnings for the years ended December 31, 1995, 1994 and 1993 ............ 4. Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993 ............ 5. Notes to Financial Statements.................. INDEPENDENT AUDITORS' REPORT To the Stockholders of Motors Mechanical Reinsurance Company, Limited Financial Services Centre Bishops Court Hill St. Michael, Barbados We have audited the accompanying balance sheets of Motors Mechanical Reinsurance Company, Limited as of December 31, 1995 and 1994 and the related statements of income and retained earnings and cash flows for each of the three years in the period ended December 31, 1995. 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, the financial statements referred to above present fairly, in all material respects, the financial position of Motors Mechanical Reinsurance Company, Limited as of December 31, 1995 and 1994 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 in conformity with accounting principles generally accepted in the United States of America. s/DELOITTE & TOUCHE CHARTERED ACCOUNTANTS Bridgetown, Barbados March 1, 1996 MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED BALANCE SHEETS DECEMBER 31, 1995 AND 1994 (Expressed in U.S. Dollars) 1995 1994 ASSETS Investments $59,898,265 $42,903,056 Cash and cash equivalents 7,093,106 3,303,060 Accrued investment income 2,532,813 1,559,195 Due from Motor Insurance Corporation 3,095,587 3,315,506 Deferred acquisition costs 18,907,205 14,931,467 __________ __________ Total Assets $91,526,976 $66,012,284 LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Unearned premiums $72,752,532 $57,468,269 Loss reserves 3,480,334 2,660,270 Accrued liabilities 117,447 118,102 _______ _______ Total Liabilities 76,350,313 60,246,641 __________ __________ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Share capital Common stock - no par value; Authorized - 2,000 shares; issued and outstanding - 2,000 shares 200,000 200,000 Participating stock - no par value; Authorized - 100,000 shares; issued and outstanding - 24,100 shares at December 31, 1995 and 22,200 shares at December 31, 1994 1,807,500 1,665,000 _________ _________ 2,007,500 1,865,000 Retained earnings 11,517,542 5,796,732 Unrealized appreciation (depreciation) on investments 1,651,621 (1,896,089) _________ ___________ Total Stockholders' Equity 15,176,663 5,765,643 __________ _________ Total Liabilities and Stockholders' Equity $91,526,976 $66,012,284 The accompanying notes form an integral part of these financial statements. MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED STATEMENTS OF INCOME AND RETAINED EARNINGS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (Expressed in U.S. Dollars) 1995 1994 1993 INCOME Reinsurance premiums assumed $44,084,952 $38,371,896 $27,779,063 Increase in unearned premiums (15,284,263) (17,055,211) (12,349,452) ____________ ____________ ____________ Premiums earned 28,800,689 21,316,685 15,429,611 __________ __________ __________ Investment income: Interest earned 3,706,054 2,771,174 1,827,929 Realized gains (losses) on investments 1,857,519 (1,543,358) 872,313 _________ ___________ _______ Investment income - net 5,563,573 1,227,816 2,700,242 _________ _________ _________ TOTAL INCOME 34,364,262 22,544,501 18,129,853 __________ __________ __________ EXPENSES Acquisition costs 7,486,469 5,540,539 4,009,285 Losses paid 18,610,968 14,079,926 10,625,508 Increase in loss reserves 820,064 750,240 287,175 Administrative expenses: Related Parties 174,443 171,135 168,933 Other 370,394 284,103 334,245 _______ _______ _______ TOTAL EXPENSES 27,462,338 20,825,943 15,425,146 __________ __________ __________ NET INCOME 6,901,924 1,718,558 2,704,707 RETAINED EARNINGS, beginning of year 5,796,732 6,211,978 5,528,775 LESS: DIVIDENDS (1,188,614) (2,156,304) (2,021,504) ADD: REDEMPTION OF PARTICIPATING STOCK 7,500 22,500 - _____ ______ ____ RETAINED EARNINGS, end of year $11,517,542 $ 5,796,732 $ 6,211,978 The accompanying notes form an integral part of these financial statements. MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993 (Expressed in U.S. dollars) 1995 1994 1993 CASH FLOWS FROM OPERATING ACTIVITIES: Reinsurance premiums collected $42,818,628 $35,580,944 $26,933,330 Losses and underwriting expenses paid (28,599,428) (22,168,851) (16,977,784) Administrative expenses paid (540,841) (527,767) (490,616) Investment income received 2,740,281 2,076,168 2,085,405 _________ _________ _________ Net cash provided by operating activities 16,418,640 14,960,494 11,550,335 __________ __________ __________ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investment securities (182,526,749) (70,748,944) (49,834,608) Sales and maturities of investment securities 170,936,769 54,189,043 45,038,810 ___________ __________ __________ Net cash invested (11,589,980) (16,559,901) (4,795,798) ____________ ____________ ___________ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of Participating Stock 150,000 270,000 345,000 Dividends paid (1,188,614) (2,156,304) (2,021,504) ___________ ___________ ___________ Net cash used in financing activities (1,038,614) (1,886,304) (1,676,504) ___________ ___________ ___________ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,790,046 (3,485,711) 5,078,033 CASH AND CASH EQUIVALENTS, beginning of year 3,303,060 6,788,771 1,710,738 _________ _________ _________ CASH AND CASH EQUIVALENTS, end of year $ 7,093,106 $ 3,303,060 $ 6,788,771 RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Net income $ 6,901,924 $ 1,718,558 $ 2,704,707 Realized losses (gains) on investments (1,857,519) 1,543,358 (872,313) Change in: Accrued investment income (973,618) (698,005) 254,177 Due from Motors Insurance Corporation 219,919 (983,528) 24,630 Deferred acquisition costs (3,975,738) (4,436,261) (3,213,352) Unearned premiums 15,284,263 17,055,211 12,349,452 Loss reserves 820,064 750,240 287,175 Accrued liabilities (655) 10,921 15,859 _____ ______ ______ NET CASH PROVIDED BY OPERATING ACTIVITIES $16,418,640 $14,960,494 $11,550,335 The accompanying notes form an integral part of these financial statements. MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED NOTES TO THE FINANCIAL STATEMENTS (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"). MIC is an indirect wholly-owned subsidiary of General Motors Corporation. The principal activity of the Company is the assumption of automobile mechanical breakdown risks arising under insurance policies reinsured by MIC and attributable to an MIC Agency Account in respect of which shares of Participating Stock are issued and outstanding. All premiums received were derived from MIC. Note 2. PRINCIPAL ACCOUNTING POLICIES Basis of Presentation The financial statements are stated in United States dollars and are prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Premium Income and Acquisition Costs Reinsurance premiums are based on the Company assuming (after ceding commission) 75% of the original policy premium written by the direct insurer. Of these reinsurance premiums, 75% is retroceded to the Company when written and 25% when earned. Premiums are taken into income on the basis of quarterly cessions and are related 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 are comprised of interest-bearing marketable securities 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 stockholders' equity. Realized gains and losses on the sale of investments are included as investment income and are calculated based on average 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. Taxation The Company has received an undertaking from the Barbados Government exempting it from all local income, profits and capital gains taxes for a period ending December 31, 2016. Stockholders who are United States residents are taxed in the United States on their share of the Company's income on a deemed distribution basis. Earnings Per Share No amount has been reported as earnings per share as the earnings applicable to the Participating Stockholders vary with the underwriting results of each series. Retained earnings applicable to the Common Stockholder include allocated investment income and operating expenses and amounts restricted for advances to Participating Stockholders (see Note 8). Note 3. INVESTMENTS Effective January 1, 1994, the Company adopted the requirements of Financial Accounting Standards Board Statement No. 115 "Accounting for Certain Investments in Debt and Equity Securities" and the Company's investments have been classified as available for sale. The Company had previously accounted for its investment securities at market value, with the resulting unrealized gains and losses included as a separate component of stockholders' equity. Accordingly, the adoption of Statement No. 115 had no material effect on the Company's financial position and results of operations. The cost and fair value of investments in debt securities are as follows: Gross Gross Unrealized Unrealized Cost Appreciation Depreciation Fair Value December 31, 1995: Debt securities issued by foreign governments and their agencies $56,243,544 $1,711,611 $(135,765) $57,819,390 Debt securities issued by supra- nationals 2,003,100 75,775 -- 2,078,875 _________ ______ __ _________ Total $58,246,644 $1,787,386 $(135,765) $59,898,265 December 31, 1994: Debt securities issued by foreign governments and their agencies $31,233,934 $23,323 $(1,324,106) $29,933,151 Debt securities issued by supra- nationals 13,565,211 -- (595,306) $12,969,905 __________ __ _________ ___________ Total $44,799,145 $23,323 $(1,919,412) $42,903,056 Note 3. INVESTMENTS (Cont'd) The cost and fair value of debt securities at December 31, 1995, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Cost Fair Value Due after one year through five years $40,242,673 $41,233,791 Due after five years through ten years 18,003,971 18,664,474 ___________ ___________ $58,246,644 $59,898,265 In 1995, gross gains of $3,147,972 and gross losses of $1,290,453 were realized. In 1994, gross gains of $150,704 and gross losses of $1,694,062 were realized. In 1993, gross gains of $964,613 and gross losses of $92,300 were realized. The following summarizes net unrealized appreciation (depreciation) on investments: Balance, December 31, 1992 $ 268,432 Net depreciation (168,546) ___________ Balance, December 31, 1993 $ 99,886 Net depreciation (1,995,975) ___________ Balance, December 31, 1994 $(1,896,089) Net appreciation $ 3,547,710 ___________ Balance, December 31, 1995 $ 1,651,621 The investment portfolio is comprised of diverse debt securities which do not result in any concentration of credit risk. At December 31, 1995, approximately 78.5% of the Company's investments are denominated in U.S. dollars and 21.5% are in non- U.S. dollar denominated securities on a currency- hedged basis. The Company uses forward currency contracts to hedge its exposure to changes in currency exchange rates relating to its investments denominated in currencies other than the U.S. dollar. The contracts provide for settlement in U.S. dollars in the future. Credit risk is managed by dealing with financially-sound counterparties. Market risk is mitigated because the forward contracts hedge corresponding non-U.S. dollar investments. The notional amount of forward contracts outstanding at December 31, 1995, all of which mature in 1996, was $11,017,000. 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, 1995, 1994 and 1993: 1995 1994 1993 Beginning balance in reserves for losses $2,660,270 $1,910,030 $1,622,855 __________ __________ __________ Add-provision for losses incurred related to: Current claim year 19,540,192 14,893,890 11,046,932 Prior claim years (109,160) (63,724) (134,249) _________ ________ _________ Total 19,431,032 14,830,166 10,912,683 __________ __________ __________ Deduct-paid losses attributable to: Current claim year 16,461,768 12,527,026 9,363,720 Prior claim years 2,149,200 1,552,900 1,261,788 _________ _________ _________ Total 18,610,968 14,079,926 10,625,508 __________ __________ __________ Ending balance in reserves for losses $3,480,334 $2,660,270 $1,910,030 As a result of change in estimates of losses incurred in prior years, the provisions for losses incurred in 1995, 1994 and 1993 decreased by $109,160, $63,724 and $134,249, respectively, because of lower than expected claims. Note 5. STOCKHOLDERS' EQUITY All of the Company's Common Stock is held by MIC. A prospectus dated July 12, 1994 is offering 12,000 shares of Participating Stock to persons certified by owners of certain motor vehicle franchises. The offering consists of 120 series of 100 shares each at a price of $75 per share. During 1995, 20 additional series of 100 shares of Participating Stock were issued as compared with 36 for the year ended December 31, 1994. In addition, in 1995 the Board of Directors redeemed 1 series of 100 shares that had a substantial accumulated deficit. As a result of the redemption, $7,500 was transferred from the Participating Stock to retained earnings to eliminate the capital account and accumulated deficit of that series. In the years ended December 31, 1995, 1994 and 1993, costs in the amount of $171,079, $162,989 and $74,461, respectively, were incurred in the sale of Participating Stock. The Common Stockholder reimbursed the Company directly for these expenses in 1995 and 1994. During 1993, these amounts were expensed by the Company and allocated to the account of the Common Stockholder. The holder of Common Stock is entitled to elect five directors, at least one of whom must be a resident of Barbados. The holder of Common Stock has no right to vote with respect to liquidation of the Company. The holder generally has the sole right to vote on matters not specifically reserved to Participating Stock. The holders of Participating Stock as a class are entitled to elect one director. Generally, liquidation of the Company requires approval by at least 75% of the outstanding shares of this class. Any redemption of a series of shares requires a vote of the Board provided that the director representing holders of the Participating Stock votes in favor of the redemption. Any changes in the Company's Articles of Incorporation or By-Laws require the approval of a majority of the shares of Participating Stock present and voting together with a majority of the shares of Common Stock. From time to time, funds are held in escrow on account of Participating Stock applications. Such amounts are not included in cash and cash equivalents in the accompanying financial statements. At December 31, 1994, $7,500 was held in escrow. Note 6. REINSURANCE PREMIUMS Under the provisions of the retrocession agreement, the Company will receive additional cessions of $24,250,844 ($19,156,090 at December 31, 1994) relating to premiums written by Motors Insurance Corporation but unearned at the respective period ends. The amounts will be received as the premiums are earned, net of related acquisition costs. Note 7. LETTERS OF CREDIT The Company has provided an irrevocable letter of credit to MIC, in the amount of $58,050,000 to collateralize the amounts recoverable from the Company related to the business ceded. 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 1-1/3 percent of assumed premiums (net of related ceding commissions) 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 shares 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 capitalization based generally on the amount of premiums earned in the preceding year. At January 1, 1996, the Company's required minimum capital computed in accordance with Barbados law was approximately $3,380,000. Retained earnings applicable to the Common and Participating Stockholders are comprised of the following: Common Participating Total Balance, December 31, 1992 $208,880 $5,319,895 $5,528,775 Net income (loss) for the year (41,909) 2,746,616 2,704,707 Net transfers (175,245) 175,245 -- Dividends paid -- (2,021,504) (2,021,504) _____ ___________ ___________ Balance (Deficit), December 31, 1993 (8,274) 6,220,252 6,211,978 Net income (loss) for the year (7,536) 1,726,094 1,718,558 Net transfers (37,410) 37,410 Dividends paid -- (2,156,304) (2,156,304) Redemption of participating stock -- 22,500 22,500 _____ ______ ______ Balance (Deficit) December 31, 1994 (53,220) 5,849,952 5,796,732 Net income (loss) for the year 18,627 6,883,297 6,901,924 Net transfers 23,732 (23,732) -- Dividend paid -- (1,188,614) (1,188,614) Redemption of participating stock -- 7,500 7,500 __ _____ _____ Balance (Deficit) December 31, 1995 $(10,861) $11,528,403 $11,517,542 PART III Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Five of the current directors of the Company were elected by MIC through its ownership of the Common Stock at the Annual Shareholders' Meeting held on April 6, 1995 and one director was elected by the holders of the Shares at such meeting. The directors and officers of the Company are as follows: POSITION WITH THE COMPANY (AND OTHER EMPLOYMENT NAME AGE DURING PAST FIVE YEARS) John D. Finnegan........... 47 Chairman and Chief Executive Officer and Director (Treasurer, General Motors Corporation, December 1995; Executive Vice President & Chief Financial Officer, General Motors Acceptance Corporation ("GMAC") June 1992; Assistant Treasurer and Funds Officer, GMAC, 1987-1992). Mr. Finnegan became Chairman and Chief Executive Officer and Director in April of 1995. William B. Noll............. 53 President and Director (Executive Vice President & Chief Financial Officer, Motors Insurance Corporation ("MIC") March 1993; Group Vice-President, MIC, 1991-1993; Vice President, MIC, 1989-1990). Mr. Noll became President and Director in April of 1995. Louis S. Carrio, Jr........ 52 Vice-President and Director (Vice-President, MIC). Mr. Carrio became a Director and was appointed Vice-President in 1991. Bernard J. Buselmeier....... 40 Vice-President and Director (Vice-President and Treasurer, MIC, March 1993; Treasurer, MIC, 1989-1993) Mr. Buselmeier became Vice- President and Director in April of 1995. Peter R. P. Evelyn ........ 54 Director (Attorney, Evelyn, Gittens & Farmer, a Barbados law firm). Mr. Evelyn has been a Director since 1986. Henry Faulkner, III......... 46 Director (President, Faulkner Saturn of Trevose) Mr. Faulkner became a Director in April of 1995. Ronald W. Jones ........... 43 Vice-President, Finance (Managing Director, Alexander Insurance Managers (Barbados) Ltd.). Mr. Jones has served as Vice-President, Finance since 1987. Michael B. Boyce........... 55 Secretary (Principal, Colybrand Company Services, Limited, Barbados, since 1993; previously principal, Price Waterhouse, Eastern Caribbean). Mr. Boyce has served as Secretary since 1994. Mr. Boyce served previously as Assistant Secretary to the Company. The directors and officers named above serve in those capacities until the annual meeting of shareholders next following their election. Item 11. EXECUTIVE COMPENSATION No director or officer of the Company is compensated directly for his services as such. However, each director and officer of the Company is reimbursed for expenses incurred for attendance at Board, committee, and shareholder meetings. In addition, Mr. Jones is an officer of the Manager, which receives management fees and compensation for data processing services. Mr. Evelyn is a member of the law firm of Evelyn, Gittens & Farmer, which serves as the Company's Barbados counsel; and Mr. Boyce is affiliated with Colybrand Company Services Limited, St. Michael, Barbados, which receives compensation for corporate secretarial services provided to the Company. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT MIC owns all of the issued and outstanding shares of the Common Stock of the Company, which consists of 2,000 shares. Henry Faulkner, III, a director, owns 80 shares of Participating Stock as a custodian. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See Item 1, THE RETROCESSION, INSURANCE MANAGEMENT AGREEMENT and Item 11, EXECUTIVE COMPENSATION Part IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Index to Document List (1) Financial Statements The following are included in Item 8: (i) Independent Auditors' Report. (ii) Balance Sheets, December 31, 1995 and 1994. (iii) Statements of Income and Retained Earnings for the years ended December 31, 1995, 1994 and 1993. (iv) Statements of Cash Flows for the years ended December 31, 1995,1994, and 1993. (v) Notes to Financial Statements. (2) Financial Statement Schedules. Schedules are omitted because of the absence of the conditions under which they are required or because the information required is presented in the financial statements or related notes. (3) Exhibits. The following exhibits are included in response to Item 14(c): 3(a) Restated Articles of Incorporation dated January 29, 1987, as amended, filed by reference to Exhibit 3(a) to Post Effective Amendment No. 7 to Registration Statement on Form S-1, File No. 33-6534, dated April 29, 1993. 3(b) By-laws of the Company dated June 6, 1986 filed by reference to Exhibit 3(b) of the Registration Statement on Form S-1, File No. 33-6534, dated June 18, 1986. 4 Specimen Participating Stock Certificate filed by reference to Exhibit 4 of Amendment No. 1 to Registration Statement on Form S-1, File No. 33-6534, dated February 12, 1987. 10(a) Form of Principal Retrocession Agreement between Motors Insurance Corporation and Registrant filed by reference to Exhibit 10(a) of the Registration Statement on Form S-1, File No. 33-6534, dated June 18, 1986. 10(b) Form of Supplemental Retrocession Agreement between Motors Insurance Corporation and Registrant filed by reference to Exhibit 10(b) of the Registration Statement on Form S-1, File No. 33-6534 dated June 18, 1986. 10(c) Specimen Stock Purchase Agreement filed by reference to Exhibit 10(c) to Amendment No. 2 to Registration Statement on Form S-1, File No. 33-6534, dated May 22, 1987. 10(d) Amended and Restated Stock Purchase Agreement between Registrant and Motors Insurance Corporation filed by reference to Exhibit 10(d) to Amendment No. 1 to Registration Statement on Form S-1, File No. 33-6534, dated February 12, 1987. 10(e) Insurance Management Agreement between Registrant and Alexander Insurance Managers (Barbados) Ltd., dated March 19, 1992, filed by reference to Exhibit 10(f) to Annual Report on Form 10-K, File No. 33-6534, for the year ended December 31, 1993. 20(a) Proxy solicitation materials sent to shareholders in connection with annual meeting held on April 6, 1995, filed by reference to Exhibit 20(b) to Annual Report on Form 10-K, File No. 33-6534, for the year ended December 31, 1994. 20(b) Proxy solicitation materials sent to shareholders in connection with annual meeting to be held on April 11, 1996. 27 Financial Data Schedule. 28(a) Certification Form filed by reference to Exhibit 28(a) to Amendment No. 2 to Registration Statement on Form S-1, File No. 33-6534, dated June 18, 1986. 28(b) Guarantee issued by the Minister of Finance of Barbados filed by reference to Exhibit 28(b) to Amendment No. 1 to Registration Statement on Form S-1, File No. 33-6534, dated June 18, 1986. 28(c) Certificate of Barbados Residency filed by reference to Exhibit 28(c) to Amendment No. 1 to Registration Statement on Form S-1, File No. 33-6534, dated June 18, 1986. (b) Reports on Form 8-K. No reports on Form 8-K for the quarter ended December 31, 1995 have been filed. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the under- signed, thereunto duly authorized. MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED (Registrant) By s/Ronald W. Jones Ronald W. Jones Vice-President, Finance Date: March 13, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated. Signature Title Date s/John D. Finnegan Chairman and Chief March 18, 1996 John D. Finnegan Executive Officer and Director s/William B. Noll President and March 18, 1996 William B. Noll Director s/Louis S. Carrio, Jr. Vice-President March 15, 1996 Louis S. Carrio, Jr. and Director s/Bernard J. Buselmeier Vice-President March 15, 1996 Bernard J. Buselmeier and Director s/Peter R. P. Evelyn Director March 14, 1996 Peter R. P. Evelyn s/Ronald W. Jones Vice-President, March 13, 1996 Ronald W. Jones Finance, Principal Financial and Accounting Officer SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANT WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT Proxy solicitation materials were sent to shareholders in connection with the annual meeting held on April 6, 1995, and in connection with the 1996 annual meeting, to be held on April 11, 1996.