The following selected financial data for the years ended December 31, 2000, 1999, 1998, 1997 and 1996 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, 2000 and 1999 and for each of the three years in the period ended December 31, 2000 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. The Company believes that such funds will be sufficient to meet its liquidity requirements in 2001 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 $91,915,465 as of December 31, 2000, and $93,941,365 as of December 31, 1999. This decrease in unearned premium is primarily attributable to the Company discontinuing accepting new business from certain unprofitable accounts. Unearned premium 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.
December 31, 1999 compared to December 31, 1998 is primarily attributable to the Redemption and Recapture discussed below under "Results of Operations". There were a total of 259 series outstanding at December 31, 2000 compared to 266 and 315 series of Shares outstanding at December 31, 1999 and 1998, respectively. During 2000, the Company issued 1 new series of Shares and redeemed 8 series of Shares for a net decrease of 7 series.
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, 2001, the Company's required minimum net assets computed in accordance with Barbados law was approximately $5,937,880 compared to total capital and retained earnings computed for purposes of Barbados law of $18,389,504.
Results of Operations. During the year ended December 31, 2000, the Company had net income of $3,678,373 compared to a net loss of $3,534,968 for the year ended December 31, 1999 and net income of $7,193,356 for the year ended December 31, 1998. The increase in net income in 2000 compared to 1999 arose from decreases in underwriting losses incurred combined with increases in investment income. As described below, the decrease in net income during 1999 compared to the previous year was primarily as a result of increases in underwriting losses incurred and decreases in investment income.
compared to $58,471,950 and $57,845,674 during 1999 and 1998, respectively. Premium income decreased primarily as a result of the Recapture as discussed below.
The Company incurred losses and administrative expenses during the year ended December 31, 2000 of $55,509,335 compared with $62,662,673 and $61,027,782 for the years ended December 31, 1999 and 1998, respectively. Expenses in 2000 were comprized of losses paid and provisions for losses incurred of $40,702,668, ceding commissions and excise taxes of $14,143,309 and operating expenses of $663,358. Losses incurred in 1999 and 1998 were $46,784,152 and $45,552,545, respectively. The loss ratio for the year ended December 31, 2000 was 74.9% compared to 80.0% and 78.8% for the years ended December 31, 1999 and 1998, respectively.
During 1999, as a result of its adverse underwriting results, the Company, working with MIC, took steps 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 favorable underwriting results in the future (the "Redemption"). Because the Subsidiary Capital Accounts for these series each had a balance of zero, the redemption price for the Shares was zero.
In addition to the Redemption, MIC agreed to commute the unearned premium and all unpaid losses as of the end of the second quarter of 1999 that were attributable to 37 series of Shares that the Board voted to redeem (the "Recapture"). In exchange for assuming these unearned premium and unpaid loss reserves, the Company paid $19,660,649 to MIC during the first quarter of 2000, which amount represented the unearned premium and unpaid losses as of
The Company incurred operating expenses during the year ended December 31, 2000 of $663,358 compared to $671,587 and $555,321 for the years ended December 31, 1999 and 1998, 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 2000 $98,992 of such costs were paid directly by MIC compared to $141,697 and $69,280 for the years ended December 31, 1999 and 1998, respectively.
The sale of investment securities for the year ended December 31, 2000 resulted in realized losses of $313,531 compared to realized losses of $5,255,474 and realized gains of $4,404,651 for the years ended December 31, 1999 and 1998, respectively. Interest earned for the year ended December 31, 2000 was $5,122,439 compared to $5,911,229 and $5,970,813 for the years ended December 31, 1999 and 1998, respectively. Interest earned during 2000 compared to 1999 decreased primarily as a result of the repayment during the first quarter of 2000 of premiums paid to MIC with respect to the Recapture, approximately 20% of the invested assets of the Company combined with the movement of funds into the equity fund. 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.
As a result of the investment return experienced by the Company, prior to December 31, 1999, the Company's Board of Directors appointed BlackRock to replace Rothschild as the investment manager of the Company's fixed income portfolio and the Board adopted new investment guidelines for the portfolio. (See "Item 1. BUSINESS - INVESTMENT INCOME.")
In June 1997, the Financial Accounting Standards Board ("FASB") issued a Statement of Financial Accounting Standards ("FASB") No. 130, Reporting Comprehensive Income, effective for fiscal years beginning after December 15,
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, effective for fiscal years beginning after June 15, 1999. In the second quarter of 1999, the FASB delayed implementation of SFAS No. 133 until fiscal years beginning on or after June 15, 2000. The new standard requires that all companies record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. Management is currently assessing the impact of SFAS No. 133 on the consolidated financial statements of the Company. The Company will adopt this accounting standard on January 1, 2001, as required.
3. Statements of Income and Retained Earnings for the years ended December 31, 2000, 1999 and 1998 ............................... 40 --
4. Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 ............ 41 --
We have audited the accompanying balance sheets of Motors Mechanical Reinsurance Company, Limited (the "Company") as at December 31, 2000 and 1999 and the related statements of income\(loss) and retained earnings, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. 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, 2000 and 1999 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America.
All of the common stock of the Company is owned by Motors Insurance Corporation ("MIC"), a member of the GMAC Insurance Group. MIC is an indirect wholly-owned subsidiary of General Motors Corporation. The principal activity of the Company is the assumption of motor vehicle mechanical service agreements arising under insurance policies reinsured by MIC and attributable to an MIC Mechanical Account in respect of which shares of Participating Stock are issued and outstanding. All premiums received were assumed from MIC.
The financial statements are stated in United States dollars and are prepared in conformity with accounting principles generally accepted within the United States of America.
Realized gains and losses on the sale of investments are included as investment income and are calculated based on amortized costs.
MOTORS MECHANICAL REINSURANCE COMPANY, LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 -----------------------------------------------------
Supranationals 3,600,827 91,045 - 3,691,872 ------------ ----------- ----------- ----------- Sub Total Debt Securities 73,298,232 1,867,946 (138,769) 75,027,409
Capital International Fund 16,091,024 1,003,246 - 17,094,270 ------------ ----------- ----------- -----------
Gross Gross Fair Unrealized Unrealized Value Cost Appreciation Depreciation ------------ ------------ ------------ ----------- December 31, 1999
Supranationals 28,205,097 - (559,927) 27,645,170 ----------- ----------- ----------- ----------- Sub Total Debt Securities 69,332,399 - (1,997,014) 67,335,385
Capital International Fund 10,014,247 1,834,555 - 11,848,802 ----------- ----------- ----------- ----------- Total $79,346,646 $ 1,834,555 $(1,997,014) $79,184,187 =========== =========== =========== ===========
The cost and fair value of debt securities at December 31, 2000, 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 2000, gross gains of $$1,735,049 and gross losses of $2,048,580 were realized. In 1999, gross gains of $1,571,947 and gross losses of $6,827,421 were realized. In 1998, gross gains of $6,253,358 and gross losses of $1,848,707 were realized.
The investment portfolio is comprized of approximately 81% in diverse debt securities which do not result in any concentration of credit risk and 19% in an international equity fund. At December 31, 2000 and 1999, 100% of the Company's investments are denominated in United States dollars.
2000 1999 1998 Beginning balance in reserves for losses $4,725,239 $ 5,393,818 $ 5,421,160 ---------- ----------- -----------
Current claim year 41,579,713 47,211,542 45,843,093 Prior claim years ( 877,045) (427,390) (290,547) ---------- ----------- -----------
Current claim year 36,837,642 43,514,155 40,767,738 Prior claim years 3,835,555 3,938,576 4,812,150 ---------- ----------- -----------
Total 40,673,197 47,452,731 45,579,888 ---------- ----------- ----------- Ending balance in reserves for losses $4,754,710 $ 4,725,239 $ 5,393,818 ========== =========== ===========
As a result of change in estimates of losses incurred in prior years, the provisions for losses incurred in 2000, 1999 and 1998 decreased by $877,045, $427,390 and $290,547, respectively.
During 2000, 1 additional series of 100 shares of Participating Stock was issued as compared with 2 for the year ended December 31, 1999. In addition, in 2000 the Board of Directors redeemed 8 series of 100 shares which had been previously placed in run off and of which 7 series had reached a fully earned position during 2000 and 6 were redeemed for nil value. One series was redeemed for nil value due to unprofitable performance. During 1999 the Board of Directors also redeemed 37 series of 100 shares for nil value, and thereafter, MIC recaptured the unearned premium and loss reserves for those series. (See Note 9).
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, 2000, there were no in funds held in escrow.
Under the provisions of the retrocession agreement, the Company will assume future additional premiums in 2000 of $30,638,488 ($31,313,788 at December 31, 1999) 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\(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 ---------- ----------- -----------
During 1999, The Company entered into a recapture agreement with MIC for 37 series of Participating Shares. Under the agreement MIC recaptured premium of $24,934,234, which represents unearned premiums and an amount equal to $1,209,316 for losses incurred, but unpaid in respect to the recapture business as of June 30, 1999. Additionally, MIC has agreed to pay the Company a recapture commission of $6,482,901 which represents the deferred portion of the ceding commission previously paid by the Company.