The Company had unearned premium reserves of $93,941,365 as of December 31, 1999, and $110,243,074 as of December 31, 1998. 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. The decrease in the amount of the unearned premium reserves in 1999 compared to 1998 is primarily attributable to the Recapture which is discussed in more detail below under "Results of Operations."
Capital Resources. Capitalization of the Company, as of December 31, 1999, was comprised of paid-in capital with respect to the Common Stock of $200,000, paid-in capital with respect to the Shares of $1,995,000 (compared with $2,362,500 and $2,115,000 as of December 31, 1998 and 1997, respectively), and earnings retained for use in the business of $13,190,576. The reduction in the amount of paid-in capital with respect to the Shares as of December 31, 1999 compared with December 31, 1998 and 1997 is primarily attributable to the Redemption and Recapture discussed below under "Results of Operations."
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, 2000, the Company's required minimum net assets computed in accordance with Barbados law was approximately $6,347,195, compared to total capital and retained earnings computed for purpose of Barbados law of $15,385,576.
The Company had a net underwriting loss of $4,190,723 in 1999 compared to net underwriting loss of $3,182,108 in 1998 and net underwriting income of $2,198,232 in 1997. During 1999, the Company earned premiums of $58,471,950 compared to $57,845,674 and $45,701,595 during 1998 and 1997, respectively. Premium income increased as a result of the issuance of additional series of Shares during the year ended December 31, 1999, and the continuing flow of reinsurance premiums from series issued in prior years, although this increase was offset, in part, by the Recapture as discussed below. During 1999, the Company issued 2 new series of Shares and redeemed 51 series of Shares (of which 37 were attributable to the Recapture) for a net decrease of 49 series. There were a total of 266 series outstanding at December 31, 1999 compared to
As a result of its adverse underwriting results, the Company, working with MIC, took steps during 1999 to improve its underwriting performance. During 1999, the Company's Board of Directors voted to redeem 37 series of Shares that had consistently experienced adverse underwriting results and that the Board determined were unlikely to experience favourable underwriting results in the future (the "Redemption"). Because the subsidiary capital account for these series had a balance of zero, the redemption price for the Shares was zero.
In addition to the Redemption and Recapture, the Company continues to work with MIC to evaluate ways for improving its underwriting performance. MIC continues to contact unprofitable accounts and implement procedures to discontinue ceding new business into the Company with respect to such accounts. Additionally, MIC continues to place claims adjusters at some unprofitable accounts. Furthermore, claim approval empowerment levels have been significantly reduced or eliminated.
The Company incurred operating expenses during the year ended December 31, 1999 of $671,587 compared to $555,321 and $503,020 for the years ended December 31, 1998 and 1997, respectively, which amounts do not include expenses paid directly by MIC. MIC has agreed to pay directly certain such costs relating to registering and issuing shares if such costs can not be allocated to the Subsidiary Capital Account for the Common Stock. In 1999 $141,697 of such costs were paid directly by MIC compared to $69,280 and $77,329 for the years ended December 31, 1998 and 1997, respectively.
Investment income in 1999 was $655,755 compared to $10,375,464 and $5,704,678 for the years ended December 31, 1998 and 1997, respectively. The decrease in investment income during 1999 arose primarily as a result of realized losses on sales of investment securities as Rothschild, the prior investment manager, attempted to minimize the impact of increasing interest rates.
The sale of investment securities for the year ended December 31, 1999 resulted in realized losses of $5,255,474 compared to realized gains of $4,404,651 and $750,923 for the years ended December 31, 1998 and 1997, respectively. Interest earned for the year ended December 31, 1999 was $5,911,229 compared to $5,970,813 and $4,953,755 for the years ended December 31, 1998 and 1997, respectively. Interest earned during 1999 compared to 1998 was largely unchanged as a result of very little change in the amount of assets under management or their coupon rates. The increase in interest earned during 1998 compared to 1997 was largely a result of an increase in the amount of assets under management combined with a slight increase in the overall rate of return.
To date, the Company has not experienced any material adverse effects on its business, results of operations or financial condition as a result of the Year 2000 Issue. Furthermore, because the Company does not own or licence any computers or computer software applications, it did not incur any expenses with respect to remediation of Year 2000.
The foregoing Management Discussion and Analysis contains various forward looking statements within the meaning of applicable federal securities laws and are based upon Company's current expectations and assumptions concerning future events, which are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated.
The Company is exposed to market risk from changes in interest rates, foreign currency exchange rates, and certain equity security prices. Market risk is inherent to all financial instruments. Active management of market risk is integral to the Company's operations which seeks to manage its exposure to market risk generally by monitoring the character of investments that are purchased or sold.
The following analyses are based on sensitivity analysis tests that assume instantaneous, parallel shifts in exchange rates, interest rates, and interest rate yield curves. There are shortcomings inherent to the sensitivity analyses presented. The model assumes interest rate changes are instantaneous, parallel shifts in the yield curve. In reality, changes are rarely instantaneous or parallel. Although certain assets may have similar maturities or periods to repricing, they may not react correspondingly to changes in market interest rates. Also, the interest rates on certain types of assets may fluctuate with changes in market interest rates, while interest rates on other types of assets may lag behind changes in market rates. The Company does not hold any financial instruments for trading purposes.
4. Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 ............ 41
We have audited the accompanying balance sheets of Motors Mechanical Reinsurance Company, Limited as of December 31, 1999 and 1998 and the related statements of (loss)\income and retained earnings, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. 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.
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, 1999 and 1998 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States of America.
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
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. Unrealised appreciation (depreciation) is included in accumulated other comprehensive income.
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.
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.
The cost and fair value of investments in debt securities and equity are as follows:
The cost and fair value of debt securities at December 31, 1999, 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.
In 1999, gross gains of $1,571,947 and gross losses of $6,827,421 were realized. In 1998, gross gains of $6,253,358 and gross losses of $1,848,707 were realized. In 1997, gross gains of $1,494,878 and gross losses of $743,955 were realized.
Current claim year 43,514,155 40,767,738 27,024,981 Prior claim years 3,938,576 4,812,150 2,997,089 ----------- ----------- ----------- Total 47,452,731 45,579,888 30,022,070 ----------- ----------- ----------- Ending balance in reserves for losses $ 4,725,239 $ 5,393,818 $ 5,421,160 =========== =========== ===========
During 1999, 2 additional series of 100 shares of Participating Stock were issued as compared with 37 for the year ended December 31, 1998. In addition, in 1999 the Board of Directors redeemed 14 series of 100 shares of which 7 series had been previously placed in run off and had reached a fully earned position during 1999 and 7 were redeemed for nil value. 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).
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, 1999, there were $7,500 in funds held in escrow.
Under the provisions of the retrocession agreement, the Company will assume additional cessions of $31,313,788 ($36,747,691 at December 31, 1998) 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.
The Company has provided an irrevocable letter of credit to MIC, in the amount of $90,000,000 to collateralize the amounts recoverable from the Company related to the business ceded to it. Cash equivalents and certain investments are assigned to collateralize the letter of credit.
Common Participating Total ------ ------------- ----- Balance, December 31, 1996 $ 9,417 $14,903,636 $14,913,053
Net income for the year 12,304 7,890,606 7,902,910 Net transfers (29,879) 29,879 0 Dividends paid 0 (4,196,730) (4,196,730) Redemption of participating stock 0 (3,465) (3,465) ----------- ----------- ----------- Balance (Deficit), December 31, 1997 $ (8,158) $18,623,926 $18,615,768
Net income\(loss) for the year 1,422 (3,536,390) (3,534,968) Dividends paid 0 (4,066,464) (4,066,464) Redemption of participating stock 0 162,999 162,999 ----------- ----------- ----------- Balance, December 31, 1999 $ 14,234 $13,176,342 $13,190,576 =========== =========== ===========