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 The 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.
The following selected financial data for the years ended December 31, 1997, 1996, 1995, 1994 and 1993 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, 1997 and 1996 and for each of the three years in the period ended December 31, 1997 is included elsewhere herein.
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 decreased to $17,304,385 in 1997 from $17,588,199 in 1996 and $16,871,927 in 1995. The Company believes that such funds will be sufficient to meet its liquidity requirements in 1998 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 $95,454,588 as of December 31, 1997, and $84,084,870 as of December 31, 1996. 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 limited exposure to risk of loss prior to expiration of the underlying manufacturer's warranty, most premium is not recognized as earned until such expiration. Since very little premium is recognized as earned until the expiration of the underlying warranty, most of the premium written in any year is recorded as unearned.
On February 27, 1998, the Board of Directors authorized the payment of dividends aggregating $5,171,956 to eligible holders of Participating Shares. 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.
Investment income in 1997 was $5,704,678 compared to $5,341,924 and $5,563,573 for the years ended December 31, 1996 and 1995, respectively. The increase in investment income during 1997 compared to 1996 was attributable to an overall increase in funds available for investment and somewhat higher yields available in the U.S. and other global bond markets. The decrease in investment income during 1996 compared to 1995 was attributable to the lower market yields that resulted from the sharp bond market rally of the previous year. The sale of investment securities for the year ended December 31, 1997 resulted in realized gains of $750,923 compared to realized gains of $64,244 and $1,404,232 for the years ended December 31, 1996 and 1995, respectively. The increases in realized gains during the year under review arise primarily as a result of increased sales of investment securities to take advantage of market opportunities presented by fluctuations in interest rates as well as the gains generated by the resumption of recent years trends of declining bond yields. Interest earned for the year ended December 31, 1997 was $4,953,755 compared to $5,277,680 and $4,159,341 for the years ended December 31, 1996 and 1995, respectively. The increase in interest earnings during 1996 compared to 1995 was largely a result of an increase in the amount of assets under management. The decrease from 1996 compared to 1997 resulted from lower available yields.
At December 31, 1997 and 1996, 100% of the Company's investments were in U.S. dollar-denominated fixed-income securities. The Company's investment manager seeks to identify non-U.S. dollar-denominated investments that offer a higher rate of return (net of currency hedging costs) than would be available in the market for similarly rated U.S. dollar-denominated bonds. 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. The Company's investment guidelines do not permit the use of derivatives in managing interest rate risk.
3. Statements of Income and Retained Earnings for the years ended December 31, 1997, 1996 and 1995 ............................... 34
Investments 3,7 $ 88,585,513 $ 66,647,930 Cash and cash equivalents 7 5,645,482 12,926,272 Accrued investment income 3,178,446 1,453,691 Due from Motors Insurance Corporation 841,927 3,158,064 Deferred acquisition costs 24,813,918 21,855,207 ------------ ------------ Total Assets $123,065,286 $106,041,164 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY
Authorized - 2,000 shares; Issued and outstanding - 2,000 shares 200,000 200,000
Reinsurance premiums assumed 6 $57,071,313 $47,410,037 $44,084,952 Increase in unearned premiums (11,369,718) (11,332,338) (15,284,263) ----------- ----------- ----------- Premiums earned 45,701,595 36,077,699 28,800,689 ----------- ----------- ----------- Investment income Interest earned 4,953,755 5,277,680 4,159,341 Realized gains on investments 750,923 64,244 1,404,232 ----------- ----------- ----------- Investment income - net 5,704,678 5,341,924 5,563,573 ---------- ----------- ----------- TOTAL INCOME 51,406,273 41,419,623 34,364,262 ----------- ----------- ----------- EXPENSES
(DEDUCT) ADD: REDEMPTION OF PARTICIPATING STOCK (3,465) (51,529) 7,500 ----------- ----------- ----------- RETAINED EARNINGS, end of year $18,615,768 $14,913,053 $11,517,542 =========== =========== ===========
CASH AND CASH EQUIVALENTS, beginning of year 12,926,272 7,093,106 3,303,060 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, end of year $ 5,645,482 $ 12,926,272 $ 7,093,106 ============ ============ ============ RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Net income $ 7,902,910 $ 7,454,523 $ 6,901,924 Realized gains on investments (750,923) (64,244) (1,404,232) Change in: Accrued investment income (1,724,755) 1,079,122 (973,618) Due from Motors Insurance Corporation 2,316,137 (62,477) 219,919 Deferred acquisition costs (2,958,711) (2,948,002) (3,975,738) Unearned premiums 11,369,718 11,332,338 15,284,263 Loss reserves 1,136,856 803,970 820,064 Accrued liabilities 13,153 (7,031) (655) ------------ ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES $ 17,304,385 $ 17,588,199 $ 16,871,927 ============ ============ ============
The Company is incorporated under the laws of Barbados and is a licensed insurer under the Exempt Insurance Act, 1983, and amendments thereto.
Investments, all of which are available for sale, 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.
Cost Fair Value ----------- ----------- Due after one year through five years $71,184,911 $72,109,353
Balance, December 31, 1994 $(1,896,089) Net appreciation 3,547,710 ----------- Balance, December 31, 1995 $ 1,651,621 Net depreciation (1,108,100) ----------- Balance, December 31, 1996 $ 543,521 Net appreciation 591,680 ----------- Balance, December 31, 1997 $ 1,135,201 ===========
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.
As a result of change in estimates of losses incurred in prior years, the provisions for losses incurred in 1997, 1996 and 1995 decreased by $746,024, $42,251 and $109,160 respectively, because of lower actual claims.
All of the Company's Common Stock is held by MIC. A prospectus dated April 21, 1997 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.
In the years ended December 31, 1997, 1996 and 1995, costs in the amount of $77,239, $64,484 and $171,079 respectively, were incurred in the sale of Participating Stock. The Common Stockholder reimbursed the Company directly for these expenses.
Under the provisions of the retrocession agreement, the Company will assume additional cessions of $31,818,196 ($28,028,290 at December 31, 1996) 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.
Net income for the year 18,627 6,883,297 6,901,924 Net transfers 23,732 (23,732) - Dividends 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
Net income for the year 14,131 7,440,392 7,454,523 Net transfers 6,147 (6,147) - Dividends paid - (4,007,483) (4,007,483) Redemption of participating stock - (51,529) (51,529) --------- ----------- -----------
Net income for the year 12,304 7,890,606 7,902,910 Net transfers (29,881) 29,881 - Dividends paid - (4,196,730) (4,196,730) Redemption of participating stock - (3,465) (3,465) --------- ----------- ----------- Balance (Deficit), December 31, 1997 $ (8,160) $18,623,928 $18,615,768 ========= =========== ===========