Less Losses and Expenses 27,462,338 20,825,943 15,425,146 12,020,682 10,165,350 __________ __________ __________ __________ __________
*/ 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.
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.
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.
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.
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED BALANCE SHEETS DECEMBER 31, 1995 AND 1994
Accrued investment income 2,532,813 1,559,195 Due from Motor Insurance Corporation 3,095,587 3,315,506
Accrued liabilities 117,447 118,102 _______ _______ Total Liabilities 76,350,313 60,246,641 __________ __________
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 _________ _________
Retained earnings 11,517,542 5,796,732 Unrealized appreciation (depreciation) on investments 1,651,621 (1,896,089) _________ ___________
ADD: REDEMPTION OF PARTICIPATING STOCK 7,500 22,500 - _____ ______ ____ RETAINED EARNINGS, end of year $11,517,542 $ 5,796,732 $ 6,211,978
Net cash provided by operating activities 16,418,640 14,960,494 11,550,335 __________ __________ __________
CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of Participating Stock 150,000 270,000 345,000
Net cash used in financing activities (1,038,614) (1,886,304) (1,676,504) ___________ ___________ ___________
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.
Realized gains and losses on the sale of investments are included as investment income and are calculated based on average costs.
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 ___________ ___________
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 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.
The following table sets forth an analysis of changes in the loss reserves for the years ended December 31, 1995, 1994 and 1993:
Beginning balance in reserves for losses $2,660,270 $1,910,030 $1,622,855 __________ __________ __________
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.
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.
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.
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.
Redemption of participating stock -- 7,500 7,500 __ _____ _____ Balance (Deficit) December 31, 1995 $(10,861) $11,528,403 $11,517,542